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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 (FEE REQUIRED)
For the fiscal year ended July 31, 1997
Commission file number 0-15066
VERTEX INDUSTRIES, INC.
(Exact name of Company as specified in its charter)
New Jersey 22-2050350
(State of incorporation) (I.R.S. Employer Identification No.)
23 Carol Street, Clifton, New Jersey 07014
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (973) 777-3500
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.
As of October 23, 1997 the aggregate market value of the voting stock held
by non-affiliates of the Company was $ 3,215,135 (based upon the closing
price of the common stock as reported on the NASDAQ system as of October
22, 1997).
As of October 23, 1997 the Company had 5,130,107 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Exhibits to 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, its Registration Statement on Form 8-A filed under the
Securities Act of 1934 as amended, its Annual Reports on Form 10-K filed on
or about October 31, 1986 through October 31, 1996 and Current Reports
filed on Form 8-K dated January 14, 1987, July 22, 1987 and April 10, 1996
and Registration Statements on Form S-8 filed on November 2, 1992, March 1,
1993, March 24, 1993, April 27, 1993, October 2, 1993, October 22, 1993,
February 25, 1994, September 23, 1994, January 23, 1997, and July 8, 1997
S-4 filed on July 20, 1994, and 10KA filed on June 14, 1996.
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PART I
Item 1. Business
General
Vertex Industries, Inc. ("Vertex" or "the Company") produces and
sells systems, having both software and hardware components, that are
utilized in the collection and processing of data, the identification of
goods, services and individuals, and solutions for the automation of
warehouse operations. The primary technologies related to these systems and
their devices involve computers as well as bar-code and credit/debit card
scanners, readers, decoders, and terminals. These devices may be wired
directly to the host computer or transmit the data via Radio Frequency
technology. Such devices generally read pre-set encoded information and
transmit it to a computer for processing by existing or new applications
and/or storage. The software packages, may be developed by Vertex or
purchased from a third party and resold by Vertex as part of the solution.
The Company also manufactures and markets precision weighing equipment and
weights.
The Company's systems and devices are used for the automatic
sorting and tracking of inventory, routing and instructions for personnel
as well as the collection of data in factories, warehouses, hospitals and
other commercial establishments on a real time basis. Many of Vertex's
solutions for its current warehouse customers involve the picking and
packing of orders for customers with specific label compliance and EDI
requirements and the receiving, put-away of goods being received from
outside suppliers. Other applications of Vertex's devices may involve
verifying an individual's identity for security access and attendance in
commercial, academic and industrial settings and to facilitate the
operation of automated factory equipment.
The Company's business focus is currently undergoing a
transformation from primarily producing hardware devices to developing
sophisticated, easy-to-use software products designed for data collection
and computer networking and software resold from third parties. These
systems may also contain hardware devices manufactured by third parties
which Vertex resells as part of the solution for the customer. In the
software area, Vertex has developed and enhanced its BridgeNet Data
Collection Management System ("BridgeNet") and is developing other related
software. BridgeNet performs real time data collection and transaction
processing involving simple to complex systems and interfaces with a wide
variety of dissimilar equipment. An application program development
package for unskilled programmers is part of the system. BridgeNet can be
used with other manufacturer's hardware as well as with Vertex's own
devices. The Company continues to increase the different types of
computers on which BridgeNet can reside.
The Company is also producing and selling a semi-automated coin
collection system for pay public telephones that utilizes BridgeNet as its
operating software. This system enables automatic communication and
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processing of data concerning collectors' routes, scheduling and individual
telephones. It usually makes the collection process more efficient and
productive and reduces manual record keeping and administration. To date,
the Company has sold coin-collection systems to Bell Atlantic for the
states of New Jersey, Pennsylvania, Delaware, Maryland and West Virginia
and to Ameritech for the states of Ohio, Illinois, Michigan, Wisconsin and
Indiana.
Vertex is producing and marketing a student attendance and
access control system for urban public schools. This system also employs
BridgeNet and provides automatic identification of students and minimizes
the entry of unauthorized persons in public schools for safety and other
concerns. To date, the Company has sold numerous attendance/access control
systems to the New York City and Chicago Public School Systems.
Vertex has enhanced its software product offering with the
addition of a product called NetWeave through a licensing arrangement with
the NetWeave Corporation. NetWeave is a software middleware product that
allows disparate computing systems to interoperate with each other.
NetWeave allows programmers to connect their applications which may be
residing on separate major host systems, including those from IBM, Digital,
Unisys, Tandem and large UNIX systems. Although there are competing
products, NetWeave has a unique advantage in that it runs on some of the
major legacy systems which are not covered by the competition such as
Unisys and Tandem. In addition to its own marketplace, NetWeave brings
added capability to BridgeNet. With the addition of NetWeave to the Vertex
product offering, the customer now has the ability to bring data from the
factory or warehouse directly to their legacy database.
The Company's offices are located at 23 Carol Street, Clifton,
New Jersey 07014-0996 and its telephone number is (973) 777-3500. The
Company was organized as a corporation in the State of New Jersey in
November 1974.
History
When originally organized, the Company was designed to be a
holding company which would acquire, own and manage a series of related
businesses. In December 1975, Vertex acquired the shares of the Torsion
Balance Company, a manufacturer of precision weighing instruments and
weights and later merged that company into it. In July 1976, the Company
acquired the assets relating to a magnetic card reader line from the Cramer
Timer Division of Conrac Corporation. This acquisition was the beginning
of its card reader and writer product line. In April 1983 the Company
purchased the assets of Identicon Corp. ("Identicon") pertaining to its
existing bar code scanners and terminals. In June 1983, Vertex also
acquired the existing magnetic stripe, optical and static card product line
of Amp Incorporated.
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On or about July 10, 1987, Vertex purchased approximately 56.9%
of all the issued and outstanding shares of Common Stock of Computer
Transceiver Systems, Inc. ("CTSI") in consideration of a certain amount of
cash, its guarantee of a four-year bank loan in the principal amount of
approximately $490,000 made to CTSI, and other arrangements. The guarantee
of the remaining bank loan was later fully settled by the payment of
$100,000 in cash and the issuance of 100,000 shares of Vertex's Common
Stock on December 16, 1991 to such bank.
CTSI had been engaged in the business of developing,
manufacturing and marketing computer terminals and label generating systems
for use in the bar code industry. The Company assisted CTSI with the
promotion and marketing of its Execuport 2400 intelligent printing system.
This was accomplished both in conjunction with the sale of related Vertex
products as well as on a stand-alone basis. CTSI common stock is publicly
held, and it has been a reporting company under the Securities Exchange Act
of 1934, as amended. CTSI moved its total operations into Vertex's facility
at 23 Carol Street, Clifton, New Jersey and became a subtenant of Vertex.
The Company has subsequently purchased the assets of CTSI and
assumed its liabilities, under the terms of an asset purchase agreement
between the two companies. This transaction was approved by the requisite
number of CTSI shareholders at a special shareholders meeting held on
August 29, 1994. The transaction was closed on August 31, 1994. The
agreement provided for (a) the purchase by Vertex of the primary assets of
CTSI, including inter alia, patent rights, machinery, equipment,
inventories, receivables, cash, bank deposits, books, records and goodwill
and, (b) the assumption of all its liabilities. The base purchase price of
$1,600,000 which, after adjustment for CTSI's cash, receivables and
payables became $1,699,580, was offset against CTSI's indebtedness of
$1,257,001 owed to Vertex, based upon an effective date of June 30, 1994.
The difference of $442,579 was paid by the issuance of Vertex Common Stock.
The value of the Vertex Common Stock as of June 30, 1994 (as calculated
pursuant to the Asset Purchase Agreement) was $1.875 per share. Therefore,
the Company issued 236,042 shares of its Common Stock to CTSI which were
registered by an S-4 Registration Statement filed with the Securities and
Exchange Commission effective July 28, 1994 (Registration No. 33-76378).
The shares were distributed in an exchange offer to minority shareholders
of CTSI with an expiration date of October 14, 1994 which was subsequently
extended to November 14, 1994.
On June 17, 1996 two wholly-owned inactive subsidiaries, Versci, Inc.
and Sentry One were merged into the Company.
Industry Background
Automated Identification involves the utilization of specialized
machines that automatically read predetermined and generally encoded
information contained on various media and transmit it to computers for
processing and storage. The Automated Identification industry encompasses
a number of technologies. These include, among others, magnetic stripe,
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laser and smart cards, bar code, optical character and pattern recognition,
and radio frequency identification. Vertex's operations cover only a
portion of these technologies and relate to pattern recognition, magnetic
stripe cards and bar code technologies.
As currently applied, the Company's technologies function in
several ways. They serve to identify an individual for security access,
financial transactions and time and attendance employment records. In
addition, they can provide identification, sorting and tracking of
inventory and products in a variety of industrial and commercial settings.
All of these functions are performed automatically by special equipment,
devices and software. Each of such technologies usually perform some, but
not all, of these functions.
Bar codes are configurations of parallel lines or bars and
spaces of differing widths, printed or etched on a package, label or tag.
Specific sequences and groupings of the lines or bars and spaces represent
in coded form a series of numbers, letters or graphic symbols. These codes
are placed on forms, inventory, finished products, tools and plastic cards
to identify the specific item or individual concerned. With regard to
products and inventory, these codes contain information related to their
identification number, routing, origin and composition. Affixed to goods,
tools or cards carried by individuals, bar codes are an organizational tool
that permit an end user, on an automatic and real-time basis, to identify
them, obtain specific information about them, and to apply that data in
their processing or employment as well as for record keeping purposes.
The primary equipment utilized in bar code technology are
printing devices, scanners, terminals and decoders. The Company markets
scanners, terminals, printers and decoders. The scanner is a device that
machine-reads the bar code. Printers generally print bar codes. On the
other hand, terminals and decoders interpret the data received from the
scanner, convert it into standard computer language, store and then
transmit it to a computer.
Bar coding has several significant advantages as a data
collection and entry system over visual observation and manual recordation.
Machine readability generally affords rapid and accurate readings even in
harsh industrial environments. Moreover, data is transmitted quickly and
directly to the user's computer for storage or implementation, thus
enhancing management's control.
The Company does not manufacture or sell any devices that
interpret or encode laser cards or smart cards. Vertex has manufactured
and marketed card readers and encoders (writers) pertaining only to
magnetic stripe, which are based on older technology, but the only sales
which are currently being made are for the repair of units and the supply
of spare parts for existing customers.
6
Products
Bar Code Products
Vertex manufactures, sells and distributes a line of bar code
scanners, printers and data collection terminals, both portable and fixed.
Offered in many different models, these devices are used mainly in
factories, warehouses and hospitals.
The Company's bar code scanners fall into both contact and non-
contact categories. Vertex offers a bar code label generating system. It
is a microprocessor-based stand-alone device that furnishes a variety of
standard format labels.
In prior years, the Company has manufactured less and less of
the terminals that it sells. The nature of Vertex's product offering is
changing from that of selling hardware devices to that of selling solutions
to customer's needs which is accomplished mainly through software
offerings. The hardware requirements of these solutions can be supplied by
offering products which best fill the need from a variety of manufacturers
under terms of resellers agreements. Vertex has such agreements with
manufacturers which allow the purchase of these devices at a discount of
25-50% from the list price of the item.
The Company's Data Collection BridgeNet Transaction Processor
has the capability of accepting simultaneous input from up to 32 terminals
and allows such terminals to communicate with the host computer bi-
directionally through a single host port. In systems applications, this
device is used as a preprocessor to handle a large number of terminals in
order to off-load the host in time critical applications.
Software Products
The Company's main software product, BridgeNet, performs data
collection and transactional processing functions. It is a complete Data
Collection Management System for real time data collection providing
connectivity of dissimilar equipment and compatibility with most major
networks. It includes a development system which allows the creation of
application programs by persons not highly skilled as programmers.
While originally conceived and implemented for personal
computers running on DOS operating system, BridgeNet has been expanded to
run on UNIX-based machines such as Sun Sparc, Hewlett Packard's HP/9000,
AT&T 3B2, DEC VAX and IBM RS 6000 platforms plus the IBM AS/400. BridgeNet
also runs on most of the popular portable data terminals on the market and
has been recently implemented on Windows 95 and Windows NT.
BridgeNet also has communication network support that allows
different types and brands of computers to communicate with one another and
to transfer information between them. It connects different software
operating systems as well as different hardware platforms that were
otherwise incompatible. While other networking systems allow simple
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communication links between different computer platforms, unlike BridgeNet,
they generally do not permit the development and writing of application
software on one operating system for use on other operating systems. Once a
BridgeNet application program has been written, it can run on any computer
hardware platform on which BridgeNet is resident.
Due to its open architecture, corresponding flexibility and
scope, BridgeNet enlarges the number and type of individuals who can write
and implement applications software for specific data collection and
processing functions. This expansion of use gives the user quicker and
less expensive means of resolving certain data collection and processing
tasks along with ease of software maintenance in the future.
Recent releases of BridgeNet have included direct access to all
major SQL databases and support for radio frequency ("RF") terminals.
Remote terminals (direct connection or radio frequency) running on a Vertex
data collection system can have direct access to host databases such as
Oracle, Informix, Access, Sybase and others. Powerful new RF terminals are
being manufactured by such companies as Symbol Technologies, Intermec,
Norand and Telxon. These terminals allow applications to be developed
where an operator can be in direct contact with a host computer database
from a remote location in a factory or warehouse while he is picking and
packing an order, checking inventory status or a similar function. In these
instances, BridgeNet would be resident on both the RF terminal and the
host. It would handle the application on the RF portable, communications
with the host and the access to the host database.
BridgeNet serves as the necessary software component in several
of Vertex's hardware systems, including its school attendance/access
control and its public telephone, coin-collection systems.
On February 17, 1997, the Company entered into a license
agreement with Netweave Corporation to develop, market, and support the
NetWeave product worldwide. Vertex will pay NetWeave Corporation a royalty
on the initial licenses sold and on the annual license fees paid by the
customer for maintenance and support of the NetWeave product.
The NetWeave product lets companies integrate their otherwise
incompatible IBM, Digital, Unisys, Tandem, UNIX, and PC systems into a
seamless whole. The NetWeave product has been used as a means of managing
information by customers such as The New York Stock Exchange, Amtrak,
Credit Agricole(France), Generale Bank(Belgium) and The Hungarian National
Railway. The synergy that exists between the NetWeave product and
BridgeNet, provides Vertex with access to new customers with legacy systems
and the need for direct data collection solutions without having to change
computer platforms or databases.
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Student Identification, Attendance/Access Control System
Vertex has designed a special student identification, attendance
and access control system (the "School System") for urban public schools.
The major purpose of such system is to automate identification and record
attendance of students on site and, in so doing, restrict the access of
unauthorized persons to school facilities. The system is designed to
promote a safer environment for students and teachers.
To date, Vertex has sold and installed one School System in each
of 60 New York City public high schools. In addition, it has sold and
installed 6 School Systems to Chicago, Illinois, and is currently
attempting to interest numerous other cities in purchasing this system.
Utilizing bar code technology, the School System is a complex
network of computers, printers, uninterrupted power supply units, terminals
and other ancillary devices which communicate through the building's
standard AC (Alternating Current) power lines.
Telephone Coin Collection System
In conjunction with several other companies, Vertex has
developed a system to semi-automate the collection of coins from public pay
telephones (the "Telephone System"). The Telephone System is designed to
reduce manual record keeping, improve efficiency of coin collections and
telephone repairs, and enhance data collection and processing. The
Telephone System operates with computer hardware and software components
and bar code technology.
To date, the Company has sold the Telephone Systems to Bell
Atlantic for installation in the states of New Jersey, Pennsylvania,
Delaware, Maryland, West Virginia and Virginia and to Ameritech for use in
the states of Ohio, Michigan, Illinois, Wisconsin and Indiana. Vertex is
discussing the sale of its Telephone System to other telephone companies.
Card Products
Vertex has manufactured and sold many different models of
magnetic stripe card readers, encoders (writers) and decoders. Recently,
the Company has deemphasized sales of new card devices. Presently, the only
sales being made in this area is for repair of previously sold units and
for spare parts. There have been no significant expenditures in either
marketing or R&D for the card products in the fiscal year ending July 31,
1997.
9
Precision Weighing Equipment and Weights
The Company manufactures and/or sells mechanical precision
weighing equipment, weight sets and accessories under the trade name of
"Torbal". Operating on the torsion principle, these devices are utilized
to weigh small amounts of materials from a minute fraction of a gram to
4,500 grams. The items weighed by this equipment include drugs, medicine,
powders, grains, dairy products, inks, gemstones, ball bearings and other
materials.
The Company produces and sells mainly pharmaceutical balances
and weight sets. Vertex enjoys a good reputation in the pharmacy market.
There have been no significant R&D or marketing expenditures for these
products for the fiscal year ending July 31, 1997.
Label Generating Systems
The Model 2400 Label Generating System("2400") was acquired as
part of the asset purchase agreement with Computer Transceiver Systems
Inc.("CTSI") in August 1994. Prior to the sale of its assets to Vertex,
CTSI supplied and supported an intelligent bar code system, the Execuport
2400, intended for various applications within the automatic identification
market. Vertex has been manufacturing the 2400 for CTSI.
The 2400 is a computerized, thermal bar code printing system
intended for inventory and document control and for use in connection with
warehousing, distribution and processing in a variety of markets. The
built-in microprocessors and print head used in the 2400 allow the unit to
produce high density, high resolution bar codes at relatively low cost. It
utilizes fan-fold thermal label stock up to 8 1/2 inches wide, is capable
of printing individual labels up to 8 1/2 inches in width, and can generate
thousands of labels an hour.
The 2400's bar code character sets are resident within the
printer, and label formats are generated by a replaceable, programmable
cartridge, permitting the unit to operate independently of, to be
controlled by or interfaced with each customer's computer system. In its
stand alone mode, the 2400 prompts the customer with instructions given on
a built in display screen, using simple data entry through the 2400's own
keyboard. When the 2400 is interfaced with a computer system, the host
computer need only transmit variable data, while the fixed formats and the
character sets required for making customized bar code labels are generated
by the 2400 itself.
During Fiscal Year 1996, the Company developed the capability of
printing thermal bar code labels in a similar manner to the Model 2400
Label Generating Systems except that the label stock used is 4 inches wide
instead of 8 1/2 inches. Unlike, the Model 2400, the Company does not
actually manufacture the printer mechanism, but instead has developed and
manufactured a computerized printed circuit board. This board can be
mounted within any one of several different manufacturers' printers and
provide that printer with the capability to connect to different computer
systems and print labels based upon formats which are stored within a
replaceable module mounted on the printed circuit board. As with the Model
2400, the host computer need only transmit the variable data, while the
label formats and character sets are stored within the printed circuit
board itself.
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Product Prices and Revenues
The prices of the Company's products range as follows: (a) Bar
code products from $110 to $5,000; (b) Card products from $40 to
$200(repairs and parts); (c) weighing equipment and weights from $50 to
$1,200; (d) Label Generating Systems from $100 to $5600 and (e) Software
Products pricing varies with the individual application.
The following table sets forth the contribution to revenues of
each of the Company's principal product lines during the periods indicated:
Year Ended July 31,
Product Lines(1) 1997 1996 1995
Bar Code Equipment(2) $ 488,827 $ 756,039 $1,025,762
Card Devices $ 49,806 $ 64,674 $ 105,737
Weighing Equipment
and weights $1,291,054 $1,100,382 $1,291,377
Label Generating
Systems $ 688,195 $1,015,295 $ 724,533
Software (3) $ 710,716 $ 848,090 $ --
(1) All of the above product lines include revenues from repair
services.
(2) Includes revenue from software for 1995.
(3) Includes revenue of $104,533 from the NetWeave Licensing
agreement for 1997.
Manufacturing and Supply
Vertex's manufacturing operation runs on a batch basis in which
a group of products move from station to station for processing and testing
at irregular intervals. Manufacturing is not accomplished on a continuous
flow or conventional production line basis. Generally, the Company
manufactures its products pursuant to specific customer orders. It usually
purchases a major portion of its related inventory upon receiving such
orders.
Vertex designs and assembles its own printed circuit boards and
other devices and builds its wiring assemblies and enclosures. It then
assembles the components into finished products. The Company also designs
and develops its own software. Vertex inspects and tests its products
prior to and/or during assembly and then has each finished product undergo
a complete test prior to shipment.
The Company acquires raw materials used in its products from
third-party sources. Most supplies, materials and parts required for the
manufacture of its products, including those custom-made for it, are
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available from many sources. In the past, the Company has been able to
adjust its stocking and procurement procedures to mitigate the effects of
slow delivery of parts. However, it is not certain that shortage of parts
may not have an adverse impact on its operations in the future.
As the nature of the Company's business continues to change to
that of a system solutions provider, the manufacturing portion of the
business continues to decrease in size. Presently, the major item
manufactured is the pharmaceutical balance. This business has remained
constant over the past ten years.
Maintenance and Service
Depending on the product concerned, the Company offers a ninety
day to one-year warranty which includes parts and labor regarding hardware.
To date, warranty costs have been immaterial. All other repair work is
performed at standard quoted rates, which are adjusted from time to time,
and which is generally accomplished in the Company's factory. Products
sold by the Company but manufactured by others are covered by the
manufacturers' standard warranty and service agreements.
Vertex encourages its customers to purchase annual maintenance
contracts on software purchased from the Company. The normal fee for the
maintenance contract is 15-18% of the original purchase price of the
software package. For this fee, the customer is entitled to "bug" fixes and
updates to his software which are released by the company during the period
of the contract. The contract does not include major revisions.
Marketing and Sales
The Company sells its BridgeNet products through a direct sales
force, distributors and value added resellers in the United States. In
recent months, the Company has placed more emphasis on direct sales of
systems utilizing its software to end users. The Company entered into a
Master Distribution Agreement with NetWeave Europe, Ltd. ("NWE") in July
1996 for distribution of its BridgeNet product in Europe. NWE ceased
operations in September of 1996 and the contract was terminated with no
sales having been achieved.
The NetWeave product is sold through sales representatives and
through direct channels in the United States. Vertex has a Master
Distributor, SX Consultancy LTD., based in the UK which is responsible for
sales of NetWeave in Europe, the Middle East and Asia. They in turn have
distributors for the product in most of the countries in Europe and
Australia and New Zealand.
The Model 2400 Label Generating System has been marketed and
sold directly to end users and through value added reseller channels. In
recent years MedPlus, Inc. a company in Cincinnati, Ohio and Time-Med, a
company in Burr Ridge, Illinois have been the primary distributors. Most
of Label Generating System sales during the Fiscal Year ending July 31,
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1997 were made to customers in the medical and healthcare fields, and 62.4%
and 72.4% of all sales of the Model 2400 in fiscal 1997 and 1996,
respectively, were made to MedPlus. On June 5, 1997 Time-Med terminated
its contract with the Company whereby the Company received $75,000 in cash
and all of the label generating systems which Time-Med purchased from the
Company as consideration for terminating the contract.
Sales of Vertex's weighing equipment and weights are made
through approximately 60 laboratory supply distributors and wholesale drug
suppliers in the United States and Canada. The Company has no written
contract other than purchase orders with any of these distributors or
suppliers of this line and thus such distribution arrangements are non-
exclusive and cancelable at will. The Company usually grants discounts
ranging from 10% to 35%, depending on the product and quantity sold to such
distributors and suppliers.
The Company promotes the sales of some or all of its products
through national advertising, direct mailings, distributors' catalogs,
trade shows and product literature. Its marketing effort has been designed
to support and promote the sales of its bar code products, software and
systems solutions.
Customers
The Company sells its products, directly or indirectly, to
numerous customers, ranging in size from small companies to Fortune 100
corporations. Its customers are end users, original equipment
manufacturers as well as distributors. Many of its customers are repeat
purchasers. Vertex's business is generally not seasonal.
Backlog
As of July 31, 1997 the Company's backlog, was approximately
$703,794 as compared with a backlog of approximately $646,818 as of July
31, 1996. The Company currently anticipates manufacturing and delivering
substantially all of such total backlog during the current fiscal year,
which ends July 31, 1997. Backlog figures generally include those orders
that are in writing and executed by the customer and are for both products
and services. On most orders, payment is due within 30 days of shipment.
Research and Development
The Company intends to continue its research and development
activities mainly in the area of its BridgeNet and NetWeave software
products and considers these efforts vital to its future business and
prospect. It anticipates the continuation and expansion of such efforts
primarily directed toward the improvement of existing products and the
development of new products and applications in the Automatic
Identification area. For the fiscal years ended July 31, 1997 and 1996 the
Company spent $496,862 and $377,318 respectively, for research and
development.
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Patents
The Company holds approximately 7 active patents all of which
relate to its card reader product line in the United States and abroad.
Approximately 3 products of Vertex are covered by these patents. Vertex is
currently de-emphasizing this product line. The Company believes, however,
that it is possible that a number its competitors and potential competitors
could develop, produce and market products similar to the Company's if they
so chose.
Employees
As of July 31, 1997 the Company had 32 full time employees,
including its officers, of whom 11 were engaged in manufacturing, 13 in
administration, 7 in engineering and research and development, and 1 in
repair services. As of July 31, 1996, Vertex had a total of 31 full time
employees.
All production and maintenance employees of the Company are
covered by a collective bargaining agreement between the Company and Local
262 of the New Jersey AFLCIO which runs through November 5, 1999. Other
Company's employees, including clerical, administration, sales and
marketing and engineering, are not covered by such an agreement. The
Company considers its relations with its employees to be satisfactory.
Designing and manufacturing the Company's equipment 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 manufacturers, 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.
Competition
In all its products lines, Vertex faces competition from
numerous foreign and domestic manufacturers of various sizes. In the
Company's opinion, dominant companies with which it competes are Manhattan
Associates, Kronos and Epic Data in data collection software, Intermec
Corporation and Zebra Technologies Corporation in Label Generating Systems
and Mettler and Sartorius in precision weighing equipment. Many of its
competitors have greater financial, technical and marketing resources than
the Company. Competition in these areas is further complicated by possible
shifts in market shares due to technological innovation, changes in product
emphasis and applications and new entrants with greater capabilities or
better prospects.
In the Company's opinion, its weighing equipment and weights
business is part of a maturing industry that offers little or no prospects
for long-term growth. As a consequence, Vertex is placing greater emphasis
14
and more of its resources on the development of its bar code and software
products. For all its products, the Company generally competes on the
basis of price, product performance and features.
Item 2. Properties
The Company leases from an unrelated third party a 40,000 square
foot building in Clifton, New Jersey for its manufacturing facilities and
executive offices. This lease runs from May 31, 1993 to May 31, 1998 at an
annual rental of $130,680 for the first 3 years and $142,560 for the next
two years.
On May 20, 1993 the Company entered into a 2-1/2 year sublease
with Thea & Schoen, Inc., regarding its Clifton facility which covers
approximately 13,200 square feet for use as a storage/warehouse space. The
annual rent approximates $33,000 plus pro rata or percentage charges for
taxes, heat and electricity. Under the sublease, the sublessee had an
option to renew for an additional 2-1/2 years at such annual rent to be
increased by rises in a certain consumer price index. On October 12, 1995
the Company amended its sublease agreement with Thea & Schoen, Inc.,
whereby Thea & Schoen exercised its renewal option and leased an additional
3,900 square feet from the Company bringing Thea & Schoen's total square
footage to approximately 17,100 square feet for an annual rent of
approximately $45,657.
Pursuant to the NetWeave Licensing Agreement the Company leases
from a related party a 2,000 square foot office building in Philadelphia,
Pennsylvania at a monthly rent of $2,200 plus utilities. The lease term is
from February 17, 1977 to August 15, 1997. The Company has not extended
the lease and is currently on a month to month basis.
The Company's facilities are considered adequate for present and
expansion purposes.
Item 3: Legal Proceedings
The Company is not aware of any material litigation, whether
pending or threatened, to which it is or may become a party.
Item 4: Submission of Matters to a Vote of Security Holders
The Company did submit matters involving the election of
directors, approval of an increase in the number of shares in its qualified
incentive stock option plan, and approval of its selection of certified
independent accountants to a vote of security holders through the
solicitation of proxies or otherwise during the second quarter of the
fiscal year covered by this report.
15
PART II
Item 5: Market for Company's Common Equity and Related
Stockholder Matters
The principal market for the Company's shares of Common Stock,
par value $.005 per share is the over-the-counter market. Such shares are
quoted in the NASDAQ system under the symbol VETX.
The following table sets forth, for the periods shown, the high
and low sale prices concerning such shares of Common Stock as furnished by
NASDAQ:
High Low
1996
First Quarter 1 3/8 3/4
Second Quarter 1 1/16 1/2
Third Quarter 2 1/4 3/4
Fourth Quarter 3 5/16 1
1997
First Quarter 1 3/4 1 1/16
Second Quarter 1 1/2 15/16
Third Quarter 1 1/4 1
Fourth Quarter 1 3/16 11/16
(1) The Company split its common stock on a 2 for 1 basis
on April 19, 1993.
The approximate number of holders of record of the Company's shares
of Common Stock, par value $.005 per share as of September 30, 1997 was
252. 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 October 23, 1997. There were no holders of
record of the Company's shares of Preferred Stock, par value $.01 per
share.
The Company has not paid any cash dividends on its Common Stock and
does not intend to do so in the foreseeable future.
16
Item 6. Selected Consolidated Financial Data
A SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
For the Years Ended July 31, Are As Follows:
1997 1996 1995 1994 1993
Revenues $ 3,228,598 $ 3,784,480 $ 3,147,409 $ 4,013,619 $ 4,701,177
Net Income (Loss) $ (473,060) $ 237,748 $(1,219,339) $ (607,840) $ 390,881
Average Number of
Shares Outstanding 5,102,003 5,360,763 5,060,832 4,805,401 4,402,662
Net Income or
(Loss) Per Share $ (.09) $ .04 $ (.24) $ (.13) $ .09
Working Capital $ 1,184,762 $ 1,489,689 $ 1,077,890 $ 1,924,166 $ 2,305,317
Current Ratio 3.03:1 4.81:1 2.93.1 6.17:1 5.64:1
Property, Equipment
and Capital Leases $ 1,895,152 $ 1,867,259 $ 1,725,122 $ 2,235,478 $ 2,067,048
Less: Accumulated
Depreciation
& Amortization $ 1,545,071 $ 1,393,102 $ 1,268,462 $ 1,730,566 $ 1,635,047
Property, Equipment
Capital Leases and
Leased Equipment
-Net $ 350,081 $ 474,157 $ 456,660 $ 504,912 $ 432,001
Total Assets $ 2,433,455 $ 2,715,856 $ 2,663,031 $ 3,304,595 $ 3,542,614
Long-Term Debt $ 17,065 $ 32,875 $ 38,926 $ 68,382 $ 75,642
Stockholder's Equity $ 1,831,412 $ 2,285,377 $ 2,033,251 $ 2,815,546 $ 2,883,791
17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Year ended July 31, 1997 compared with Year Ended July 31, 1996
Operating Revenues
Operating revenues decreased $555,882 or 15% to
$3,228,598 for the fiscal year ended July 31, 1997 as compared to
$3,784,480 for the same period in 1996. Revenue for the weighing
equipment product line increased 17% or $190,672 to $1,291,054 for
the year ended July 31, 1997 as compared to $1,100,382 in 1996. The
increase is due to an increase in product demand. Revenue for the bar
code product line decreased $267,212 or 35% to $488,827 for 1997 as
compared to $756,039 for fiscal 1996. The decrease is due to a lack
of orders for bar code hardware products. Revenue for the Card Reader
product line decreased to $49,806 in 1997 from $64,674 for the same
period in 1996. Management does not expect revenue from this product
line to increase and currently the company is supporting its existing
customer base.
Revenue for the software product line which includes the
Company's BridgeNet software product decreased $137,374 or 16% to
$710,716 in fiscal 1997 as compared to $848,090 for the same period in
1996. BridgeNet continues to be the Company's main focus and the
product of the future. The Company did not generate as many custom
application projects as it had forecasted for 1997. Management
expects revenue from the BridgeNet product line coupled with the
NetWeave product line to increase in future years. Revenue from the
Label Generating Systems ("LGS") product line decreased $327,100 or
32% to $688,195 for the year ended July 31, 1997 as compared to
$1,015,295 for the same period in 1996. The decrease is due to a
decrease in demand for the Model 2400 Label Generating System. The
decrease is also due to Time-Med terminating its contract to purchase
the Model 2400 LGS.
Operating Expenses
Cost of Sales increased to 55% of revenues 1997 as
compared to 46% in 1996. The increase is attributed to a reserve for
obsolete inventory of $132,000 and in cost of sales of $155,000 for
the NetWeave Licensing agreement.
Selling and administrative expenses increased $226,411 or
18% to $1,511,949 as compared to $1,285,538. The increase is
primarily due to the NetWeave Licensing Agreement which generated
$123,000 in selling and administrative expenses for fiscal 1997. The
increase is also due to a $50,000 contingency reserve for the
restructuring of the NetWeave Licensing Agreement in addition to a
$80,000 reserve for the NetWeave note receivable and factored
receivables.
Research and development expenses increased 32% or
$119,544 to $496,862 for the year ended July 31, 1997 as compared to
$377,318 for the same period in 1996. The increase is due to
18
$68,000 from the NetWeave Licensing Agreement in addition to $51,000
from the Company's R&D department. The Company did not
generate sufficient custom programming jobs so programmers spent more
time on enhancing the Company's software products.
Operating Income (Loss)
The Company recorded an operating loss of $580,489 for
fiscal 1997 as compared to operating income of $392,566 in fiscal
1996. The operating loss in 1997 is due to a number of factors such as
a decrease in revenue of $555,882 coupled with an increase in
operating expenses of $417,173. The operating loss is also due to
$262,000 in non-recurring changes for fiscal 1997. Management expects
to increase revenues and keep operating expenses constant in 1998.
Other income
Interest income increased from $21,961 to $38,801 in 1997
as compared to $16,840 in 1996. The increase is due to additional
funds available which the Company invested and generated interest
income. Interest expense decreased $4,462 in fiscal 1997 to $6,372 as
compared to $10,834 in fiscal 1996. The decrease is due to the
Company's reduction in capital leases.
In 1997 the Company recorded $75,000 in other income.
The $75,000 pertains to the termination of Time-Med's contract to
purchase label generating systems from the Company. The Company
received $75,000 in cash and all of the previously purchased LGS from
Time-Med in settlement on the contract.
Net Income (Loss)
The Company recorded a net loss of $473,060 in 1997 as
compared to net income of $237,748 in 1996. The net loss in 1997 is
attributed to a decrease in operating revenues, and an increase in
operating expenses. The Company recorded $262,000 in non-recurring
charges in fiscal 1997. The non-recurring charges relate to inventory
reserve, reserve for notes receivable and factored receivables and the
restructuring of the NetWeave Licensing Agreement.
The Company continues to focus on its BridgeNet Data
Collection Management System and the NetWeave middleware product. The
majority of the Company's R&D expenditures are spent on BridgeNet and
NetWeave. The Company continued its R&D effort on porting BridgeNet
to Windows 95 and Windows NT and expects to generate future revenue
from this effort.
In addition the Company has hired a new Vice President of
Sales and Marketing in August, 1997 and has hired an additional sales
person in October 1997. The Company anticipates increased revenues
from the above two hires.
The Company continues to expand its customer base which
includes: AMP, Inc., Bell Atlantic, Lucent Technologies,
19
Gemini Industries, P.C. Richards and Tommy Hilfiger. The Company
anticipates future custom application projects with the above
mentioned companies.
Results of Operations
Year ended July 31, 1996 compared with Year Ended July 31, 1995
Operating Revenues
Operating revenues increased to $3,784,480 or 20.2% for
the year ended July 31, 1996 compared to $3,147,409 for fiscal year
ended July 31, 1995. Sales of Bar Code equipment (including
software) increased 56% to $1,604,129 for the current year due to an
increase in direct sales and the Company's focus of increasing sales
in these product lines. Sales of the other product lines, except
the LGS product line, decreased over the prior year (see Product
lines in Part I).
Revenue for the weighing equipment line decreased 15% to
$1,100,382 for fiscal 1996. This decrease was due to a decrease in
volume. Revenue for the Card Reader product line decreased to
$64,674 from $105,737 for the same period last year. Management does
not expect revenue from this product line to increase. Revenue for
the LGS product line (formerly CTSI subsidiary) increased to
$1,015,295 compared to $724,533 a year ago. This 40% increase is
due to an increase in product demand.
Operating Expenses
Cost of sales as a percentage of revenue decreased to 46%
in 1996 as compared to 55% a year ago. The decrease is largely due
to more efficient operations in addition to better pricing of the
Company's product lines.
Selling and administrative expenses decreased 21% to
$1,285,538 in 1996 as compared to $1,625,508 in 1995. The decrease
is primarily due to the closing of the Company's Ohio sales office,
reduced health insurance costs and reduced professional fees. The
decrease is also due to the Company's effort to streamline
operations and an overall operating strategy to reduce
administrative expenses.
Research and development expenses increased $27,543 or 8%
to $377,318 compared to $349,775 in fiscal 1995. The increase is due
to a combination of factors. The Company closed its Massachusetts
R&D facility in May 1995 and subsequently paid lease termination
fees and other relocation costs in fiscal 1996. The Company hired
additional personnel for the R&D department in fiscal 1996 to
support the research and development on the BridgeNet product line.
In the fourth quarter of fiscal 1995 the Company recorded
a $800,765 restructuring charge. This amount included the write off
of $500,000 of goodwill which primarily resulted from the purchase
20
of the Company's subsidiary, CTSI. This amount also included a
$300,765 charge for obsolete inventory related to product lines
which the Company is deemphasizing.
Operating Income (Loss)
The Company recorded operating income of $392,566 for
fiscal 1996 as compared to an operating loss of $1,346,003 in fiscal
1995. The operating income in fiscal 1996 is attributed to
increased operating revenues, increased profit margins as well as a
decrease in operating expenses. The operating loss in fiscal 1995
was primarily due to a restructuring charge of $800,765.
Other Income (Expenses)
Interest income increased in fiscal 1996 as compared to
1995 due to higher cash balances which were invested in money market
accounts. Interest expense decreased in 1996 as compared to 1995
due to a decrease in interest expense on capital leases.
Income Tax Provision (Benefit)
The Company recorded an income tax provision of $162,500
for fiscal 1996 as compared to an income tax benefit of $121,895 in
fiscal 1995. See Footnote 9 on page F-13.
Net Income (Loss)
The Company recorded net income of $237,748 in 1996 as
compared to a net loss of $1,219,339 in 1995. Net income in 1996 is
primarily attributed to increased operating revenues, increased
profit margins and a decrease in operating expenses. The net loss
of $1,219,339 in 1995 is primarily attributed to a non-recurring
restructuring expense of $800,765 as well as a reduction in
operating revenues.
Vertex's major focus continues to be the development of
its BridgeNet Data Collection Management System and related
products. The majority of its R&D expenditures are spent in this
effort. The Company expended significant time in porting BridgeNet
to Windows '95 and Windows NT, which did not significantly
contribute to this year's revenue but is expected to contribute to
next year's revenue.
The Company has increased its direct sales and marketing
efforts with the hiring of an additional sales person in fiscal 1996
and anticipates that this will have an impact in fiscal 1997. The
Company also expanded its Value Added Reseller (VAR) channel, and
has trained many members of their technical staff on Vertex's
products.
21
Vertex continues to expand and service the systems
installed at Bell Atlantic. They are a prime customer for the
Windows NT port as mentioned above.
The Company has developed the capability of printing
thermal bar code labels for the health care industry on a 4 inch
wide label stock. This capability can be adapted to multiple
printers.
Capital Resources and Liquidity:
Working capital decreased to $1,184,762 at July 31, 1997
from $1,489,689 on July 31, 1996. The decrease is primarily due to
a decrease in accounts receivable, notes receivable and in
inventory, coupled with an increase in accrued expenses and other
liabilities and an increase in deferred revenue in 1997 as compared
to 1996. The Company's cash position increased from $394,344 at
July 31, 1996 to $608,553 at July 31, 1997 due to the above factors.
Management believes that cash and working capital are at sufficient
levels to meet the short term needs of the Company. The Company is
looking for additional financing and is formulating a business plan
to deal with the long term needs of the Company.
Capital expenditures were approximately $28,000 and
$118,000 for the fiscal years ended July 31, 1997 and 1996,
respectively. The Company upgraded its computer hardware and
software systems in fiscal 1996.
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
Not applicable.
22
PART III
Item 10. Directors and Executives Officers of the Company
Certain information about directors and officers of the
Company is contained in the following table:
Name Age Position
James Q. Maloy(1) 65 Chairman
and Director
Ronald C. Byer(1) 64 President, CEO
and Director
Robert T. McLaughlin 35 Chief Financial
Officer and
Treasurer
Barbara H. Martorano 40 Secretary
Wilbur Highleyman(2) 64 Director
George Powch(2) 49 Director
Irwin Dorros(2) 68 Director
(1) Members of Stock Option Committee and Trustees under the
401(K)Plan.
(2) Members of Audit Committee.
All directors hold office until the next annual meeting of
shareholders of the Company or until their successors have been
elected and qualified. Officers serve at the discretion of the
Board of Directors. Directors who are not officers receive $1,000
annual compensation, paid quarterly, for attending director's
meetings and are reimbursed for all related expenses.
Mr. Maloy, a co-founder of the Company, has been its Chairman
of the Board of Directors and a director on a full-time basis since
its inception in 1974. In 1983, he became President and chief
executive officer as well. From 1962 to 1974, Mr. Maloy served as
executive vice president, as well as marketing and engineering
managers for Datascan, Inc., a publicly-held company that was
acquired by Dymo Industries, Inc. in 1972. Datascan was a designer
and manufacturer of electro-mechanical equipment. From 1955 to 1962
Mr. Maloy was employed by Bendix Aviation Corp. rising to a project
manager and heading a major group. At Bendix he was involved in the
design and manufacture of electronic test equipment for the
23
military. Mr. Maloy is a graduate of City College of New York with
a bachelor's degree in electrical engineering. On July 31, 1995 Mr.
Maloy stepped down as President of the Company and on January 17,
1996 he stepped down as Chief Executive Officer, but remains
Chairman of the Board, and a Director.
Mr. Byer joined the Company in 1975 and has served as Vice
President of Marketing and Sales since 1979, Treasurer since 1983,
Executive Vice President since 1985 and a Director since 1976. From
1963 to 1975, Mr. Byer held various positions at Datascan, Inc.
After its acquisition by Dymo Industries, Inc., he became manager of
its newspaper computer systems group. From 1958 to 1972 Mr. Byer
was employed by Bendix Aviation Corp. Mr. Byer has a bachelor's
degree in electrical engineering from Rensselaer Polytechnic
Institute ("RPI"). Mr. Byer was promoted to President of the
Company on July 31, 1995 and to Chief Executive Officer on January
17, 1996.
Mr. McLaughlin joined the Company in November, 1995 and has
served as Chief Financial Officer and Treasurer. Mr. McLaughlin is
a Certified Public Accountant and started his career in public
accounting with the firm of Peat Marwick Mitchell & Co. From 1988
to 1992 he was Vice President, Treasurer and Controller of Valley
Savings Bank (NASDAQ:VSB). From 1992 to 1994 he was Assistant
Controller of Hanover Direct, Inc. (AMEX:HDI). From 1994 until he
joined the Company Mr. McLaughlin operated his own public accounting
firm. Mr. McLaughlin has a Bachelor of Science degree in accounting
from Manhattan College.
Mrs. Martorano joined the Company in June, 1990 and has served
in a variety of positions, including Sales Coordinator, Office
Administrator, Assistant to the Secretary, President and Chairman of
the Board, as well as, Corporate Secretary as of January 17, 1996.
Mrs. Martorano is a graduate of Berkeley, Garret Mountain Campus.
Dr. Highleyman was elected to the Company's Board of Directors
in 1985. He is currently chairman of NetWeave, a network software
vendor. From 1962 to date he founded and has served as chairman of
the board of directors of the Sombers Group, a supplier of turnkey
software packages. He founded Mini Data Services, Inc., a data
processing services supplier in 1969 and served as its chairman of
the board from that date until 1991. He was also a director of
Science Dynamics, Inc., a publicly-held company. From 1962 to 1968
he was co-founder and vice-president of Data-Trends, a publicly-held
supplier of turnkey realtime computer systems. He holds a bachelor
of electrical engineering from RPI, a masters of electrical
engineering from Massachusetts Institute of Technology and a
doctorate of electrical engineering from Brooklyn Polytechnic
Institute.
24
Mr. Powch has served as a Director of the Company since 1987.
He is President & CEO of Huber + Suhner (North America) Inc.,
responsible for the North American units of Huber + Suhner AG of
Switzerland. These include Champlain Cable Corporation, a
manufacturer of specialty wire and cable, Huber + Suhner, Inc. a
manufacturer and reseller of RF and microwave components for
telecommunications, and Huber + Suhner (Canada) Ltd. He was
previously Vice President & General Manager of Cinch Connectors, a
division of Labinal Components & Systems, Inc. From 1987 to 1993,
Mr. Powch was President of BFI-IBEXSA International Inc., a
distributor of electronic components. Prior to that, he held a
variety of positions including President of Diffracto Ltd.(1984-
1986) and VP & General Manager of Bendix's Robotics Division (1981-
1983). Mr. Powch has an MBA degree from Harvard Business School, an
M.S. degree from Stanford University and a B.S. from MIT, both in
Electrical Engineering.
Dr. Dorros was elected to Vertex's Board of Directors in 1987.
He is currently retired and a consultant in telecommunications.
From 1982 to July 1993 Dr. Dorros served as Executive Vice President
and Director of Bell Communications Research ("Bellcore"). He was
responsible for all the Bellcore's technical programs including
research, development and engineering. From 1978 to 1982, he served
as an Assistant Vice President of AT&T for network planning. From
1956 to 1978, Dr. Dorros was employed by Bell Telephone Laboratories
in various capacities, including Director of Systems Engineering
programs. His current consulting work pertains to management and
mergers and acquisitions in telecommunications. Dr. Dorros holds
Bachelor and Master of Science degrees from the Massachusetts
Institute of Technology and a Doctorate in Electrical Engineering
from Columbia University. He is a member of the National Academy of
Engineering.
25
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 July 31, 1995, 1996 and 1997
of those persons who were, at July 31, 1997, executive officers of
the Company earning annually $100,000 or more:
SUMMARY COMPENSATION TABLE
All Other
Annual Compensation Long-Term Compensation Compensation
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted All
Name and Annual Stock LTIP Other
Principal Salary Bonus Compensation Award(s) Options/ Payouts Compensation
Position Year ($) ($) ($) ($) SARs (#) ($) $)
James Q. 1997 $ 54,571 - $ 2,765 - - - -
Maloy 1996 $ 56,520 - $ 5,210
Chairman 1995 $ 96,852 - $ 6,506 - - - -
Ronald C. 1997 $115,000 - $ 6,150
Byer 1996 $106,480 - $ 6,055 - - - -
CEO, 1995 $ 87,901 - $ 6,506 - - - -
President
(1) All Officers and non-union employees of Vertex are covered by
a pension plan that is financed by voluntary employee and Company
contributions. See "401(k) Savings and Retirement Plan" and Note 8
of Notes to Financial Statements.
(2) Messrs. Maloy and Byer are each provided with an automobile by the
Company; a portion of which may represent the personal use thereof
estimated at $2,500 per year and is excluded.
On November 13, 1995 Mr. McLaughlin was granted 50,000 stock options
at an exercise price of $.75 which vest over five years and expire on
November 13, 2005. These shares were granted under the Company's
Incentive Stock Option Plan. Stock appreciation rights are not
granted under the Incentive Stock Option Plan. The Company does not
currently have in effect a Long-Term Incentive Plan ("LTIP") and,
consequently, no such awards were granted to Vertex's executive
officers in fiscal years covered above.
There were no unexercised options, under the incentive stock
option plan to purchase the Company's common stock in fiscal 1996 by
the above named officers. On March 31, 1997 Mr. McLaughlin exercised
an option for 10,000 shares of common stock.
The Company had no other executive officers other than Mr. Maloy,
Mr. Byer, Mr. McLaughlin and Mrs. Martorano.
26
The Company entered into a three (3) year employment contract
with Carlo Pastore commencing on May 14, 1993 to serve as its Sales
and Marketing Director. Under this contract, Mr. Pastore is to
receive as compensation: (a) an annual salary of $80,000 plus one
percent (1%) commission on all Vertex's bar code product sales; (b)
reimbursement of business expenses incurred; (c) grant of a five (5)
year stock option to purchase up to 75,000 shares of Vertex's Common
Stock under its Incentive Stock Option Plan at an exercise price of
$7.625; (d) the same group benefits received by other Vertex
executives and (e) use of a leased automobile costing up to $750 per
month and a right of first refusal to purchase such vehicle at the end
of the lease term. On October 6, 1995 the Company terminated Mr.
Pastore's employment. Among other things Mr. Pastore received
fourteen weeks compensation, 35,000 non-qualified stock options at
$1.25 per share which expire October 6, 2000, the use of a Company
paid auto with the option to buy at the end of the lease term,
reimbursement for medical coverage through December 31, 1995 and a
line of credit with Vertex Industries to establish his own value added
reseller business. The Company presently has no obligation to supply
Mr. Pastore with a line of credit.
On May 19, 1993, Vertex also entered into a three (3) year
employment contract with Kevin R. Halloran, its Technical Director.
Pursuant to the terms of this agreement, Mr. Halloran will earn an
annual base salary of $95,000, which increases by 3% on each November
6th from 1993 through 1995. Under this contract, Mr. Halloran
receives reimbursement for business expenses and normal group benefits
available to other Company executives. This contract also provides
Mr. Halloran with the grant of a 10 year non-qualified stock option
agreement to purchase up to 300,000 shares of Vertex's common stock at
an exercise price of $7.875 per share. Such options may be exercised
in 75,000 share increments on or after each November 6th from 1993
through 1996. Should the market price for the Company's common stock
decline below the exercise price of the options, the Employee may
chose to retire all unexercised options and have new ones granted to
the extent of the number of unexpired options outstanding with a new
exercise price at the then market price. On December 29, 1995 Mr.
Halloran retired all unexercised options (300,000 options) and had new
options granted at $.50, the market price of the common stock on
December 29, 1995. On April 3, 1997 Mr. Halloran terminated his
employment with the Company. The Company waived the 30 day
termination clause on the above mentioned options.
Under the Company's Incentive Stock Option Plan ("The Plan"),
options to purchase a maximum of 1,500,000 shares of its Common Stock
may be granted to officers and other key employees of the Company.
Options granted under the Plan are intended to qualify as incentive
stock options under the Economic Recovery Tax Act of 1981 (the "1981"
Act) as amended.
The Plan is administered by the Board of Directors and a
committee presently consisting of two members of the Board which
determines which persons are to receive options, the number of shares
27
that may be purchased under each option and the exercise prices. In
the event an optionee voluntarily terminates his employment with the
Company, he has the right to exercise his accrued options within 30
days of such termination. However, the Company may redeem any accrued
options held by each optionee by paying him the difference between the
option price and the then fair market value. If an optionee's
employment is involuntarily terminated, other than because of death,
he also has the right to exercise his accrued options within 30 days
of such termination. Upon death, his estate or heirs have one year to
exercise his accrued options. The maximum term of any option is ten
years and the option price per share may not be less than the fair
market value of the Company's shares on the date the option is
granted. However, options granted to persons owning more than 10% of
the voting shares of the Company may not have a term in excess of five
years and the option price per share may not be less than 110% of the
fair market value on the date the option is granted.
If the aggregate fair market value of the shares of Common Stock
(determined at the time the option is granted) with respect to which
incentive stock options are exercisable for the first time by such
optionee during any calendar year (under all such plans) exceeds
$100,000, then only the first $100,000 of such shares so purchased
will be treated as exercised under the Plan and any excess over
$100,000 so purchased shall be treated as options which are not
incentive stock options. This rule shall be applied by taking options
into account in the order or sequence in which they are granted.
Options must be granted within ten years from the effective date of
the Plan.
Options granted under the Plan are not transferable other than by
will or by the laws of descent and distribution. Options granted
under the Plan are protected by anti-dilution provisions increasing
the numbers of shares issuable thereunder and reducing the exercise
price of such options, under certain conditions. The Plan expires on
October 9, 2005. Any option outstanding at the termination date will
remain outstanding until it expires or is exercised in full, whichever
occurs first. At the Company's annual meeting in the second quarter
of fiscal 1997 the Company's shareholders approved an additional
500,000 shares of common stock to be issued under the incentive stock
option plan for a total of 1,500,000 shares of common stock in the
plan.
As of July 31, 1997 options to acquire 966,000 shares of the
Company's Common Stock at exercise prices of $.475 to $8.12 per share
have been granted under the Plan to 13 employees and three directors of
the Company. As of July 31, 1997 298,400 options have been exercised
and 667,600 options are outstanding, with 144,600 options presently
exercisable.
During fiscal 1997 the Company granted 140,000 options to two
service firms as partial payment for financial, legal and consulting
services. The options are exercisable at 20,000 options at $1.00,
20,000 options at $1.25, 20,000 options at $1.75, 40,000 at $3.00 and
40,000 options at $4.00 and expire at various dates through February,
2001. These options are currently exercisable. These stock options
28
have been registered under the Securities Act of 1933 on form S-8.
During fiscal 1996 the Company granted 35,000 options to two service
firms as partial payment for financial, legal and consulting services.
The options are exercisable at 20,000 options at $.91 and 15,000
options at $.75 and expire on February 14, 2001 and January 26, 1999.
Vertex maintains a 401(k) savings plan (the "401(k) Plan") for
the benefit of all employees age 18 or over who have worked for at
least six 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.
Under the current terms of the 401(k) Plan, employees may elect
to defer from Federal income tax from 1% 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. In addition, Vertex
makes a contribution of up to 3% of a contributing employee's salary.
The salary deferrals are fully vested, while the Company's
contributions vest 20% upon the completion of the second year of
service with the Company or its subsidiaries, 20% upon completion of
the third year of service, 20% upon the completion of the fourth year
of service, 20% upon the completion of the fifth year of service and
the remaining 20% upon the completion of the sixth 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 assets accumulated by the 401(k) Plan are held in a trust,
the trustees of which are Messrs. Maloy and Byer, who are officers and
directors of the Company. Under the terms of the 401(k) Plan, Vertex
has agreed to indemnify the trustees to the fullest extent permitted
by law against any liability whatsoever for any action taken or
omitted by them in good faith in connection with the 401(k) Plan
unless it results from their own willful misconduct.
The charge against income for matching contributions for fiscal
1997, 1996 and 1995 were $5,787, $14,865, and $5,342, respectively.
29
The following directors of Vertex were granted qualified stock
options in the amounts specified opposite their names, at the exercise
prices so indicated and on the dates specified:
Name of Number of Exercise Price Date of
Director Option Shares (1) Per Option (1) Grant
Wilbur Highleyman 32,000 $ 4.25 1/20/93
10,000 1.00 6/11/97
Irwin Dorros 32,000 $ 4.25 1/20/93
10,000 1.00 6/11/97
George Powch 24,000 $ 4.25 1/20/93
10,000 1.00 6/11/97
(1) Adjusted for 2 for 1 stock split effective April 19, 1993.
(2) No options were granted to Directors in Fiscal 1996 and 1995.
(3) The above options were granted under the incentive stock option plan
as discussed above.
Item 12: Security Ownership of Certain Beneficial Owners and
Management
The following information table sets forth certain information regarding
the Company's Common Stock owned on September 30, 1997 by (i) each who is
known by the Company to own beneficially more than 5% of its outstanding
Common Stock, (ii) each director and officer, and (iii) all officers and
directors as a group:
Names and Address of
Directors, Officers and Shares Owned (1) (2)
5% Shareholders Number Percent
James Q. Maloy 1,202,208 23.4
23 Carol Street
Clifton, New Jersey
Ronald C. Byer 448,422 8.7
23 Carol Street
Clifton, New Jersey
All officers and director 1,700,630 33.2
as a group (6 persons)
(1) Does not give effect to the issuance of up to 1,500,000 shares of
Common Stock reserved for issuance under the Company's incentive
stock option plan, 522,000 shares under non-qualified stock
options.
(2) Gives effect to a 2 for 1 stock split effective April 19, 1993
(3) Includes 8,000 shares of Common Stock owned by Dr. Dorros, 40,000
shares of common stock owned by Mr. Powch and 2,000 shares of
Common Stock owned by Dr. Highleyman's pension plan
30
Item 13. Certain Relationships and Related Transactions
On May 23, 1996, the Company entered into a contingent and
conditional Memorandum of Agreement (the "Memorandum"), as amended by
letters of July 15, 1996 and Board Resolution of September 25, 1996,
with Netweave Corp. ("NetWeave"), pursuant to which the parties could
enter into a business combination, proposed generally as an exchange
of all of Netweave's stock for a portion of the Company's common stock
and warrants to purchase the Company's common stock. The proposed
business combination was subject to fulfillment of certain conditions
set forth in the Memorandum relating principally to the achievement of
specific business goals and objectives by Netweave Corp. NetWeave did
not attain the necessary financial ratios and operating results
required within the Memorandum for the Company to acquire NetWeave. In
connection with the planned transaction the Company advanced NetWeave
$100,000 for working capital purposes and received a promissory note.
The note bears interest at 6%. In July 1996 the Company entered into
a factoring agreement with NetWeave whereby the Company would factor
certain accounts receivable of NetWeave. NetWeave has defaulted on
the $100,000 note and no interest has been paid. NetWeave has
defaulted on the factored receivables which have a balance of $81,369
as of July 31, 1997. The Company is in the process of restructuring
the repayment of the note and the factored receivables amounts from
NetWeave.
On February 17, 1997 the Company entered into a License Agreement
with NetWeave Corporation to develop, market, sell and support the NetWeave
product worldwide. The Company will pay NetWeave a royalty on the
initial licenses sold and on annual license fees paid by the customer
for maintenance and support of the NetWeave product. Under terms of
the License Agreement, NetWeave Corporation assigns its existing
customer base to The Company along with the existing sales
representative agreements in the U.S. and the master distributor
agreement with SX Consultancy for Europe and Asia. SX Consultancy is
a European software distributor and developer of custom software based
in the UK with ties to distributors in Asia. The Company will
maintain the current NetWeave Corporation facility in Philadelphia
along with existing employees. Vertex leases the facility for $2,200
from Dr. Wilbur Highleyman. The License Agreement replaces the
Conditional Acquisition Agreement which the Company announced in May,
1996. The Sombers Group, Inc. custom software portion of the original
agreement remains part of NetWeave Corporation. For the year ended
July 31, 1997, the NetWeave License Agreement generated revenues of
$105,000. For the year ended July 31, 1997 the Company paid NetWeave
Corporation $20,000 in royalty payments.
With the addition of Netweave applications, BridgeNet
software could increase its potential consumer base, due to the
expanding number of host systems that could be connected through
NetWeave. Netweave could provide the underpinning to allow BridgeNet
terminals to work with host systems not currently supported.
Additionally, broader BridgeNet applications could be supported in
31
which BridgeNet hosts communicate with other hosts and databases via
Netweave applications.
Dr. Wilbur H. Highleyman, Chairman of Netweave Corp., has
been a director of Vertex since 1985 and presently owns 25.5% of
Netweave Corp. Ronald C. Byer, Jr., the President of Netweave Corp.,
is the son of Ronald C. Byer, the President of the Company. Ronald C.
Byer, Jr., presently owns 2.1% of Netweave Corp.
32
PART IV
Item 14. 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 Consolidated Financial Statements
Reports of Independent Public Accountants
Consolidated Balance Sheets as of July 31, 1997 and 1996
Consolidated Statements of Operations for the Years Ended
July 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended July 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
July 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Schedules for the Years Ended July 31, 1997, 1996 and 1995.
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.
Separate financial statements for Vertex Industries, Inc.
are not required. Vertex Industries, Inc. total assets at
July 31, 1997, constitute more than 75% of total
consolidated assets at the same date.
33
3. Exhibits:
The following list of exhibits are incorporated by reference
from the Company's Registration Statement filed under the Securities
Act of 1933, as amended (File No. 33-897-NY) and those filed pursuant
to Registration Statement on Form 8-A under the Securities Exchange
Act of 1934.
1.1 Form of Underwriter's Warrant Agreement and Warrant.
2.1 Form of Common Stock Certificate.
3.1 Articles of Incorporation and Amendment.
3.2 Amended By-laws (See also Registration Statement on
Form 8A referred to above).
5.1 Opinion of Cascone & Rapaport, including its consent.
10.1 Assets Purchase Agreement between the Company and
Identicon Corp. dated April 25, 1983.
10.2 Assets Purchase Agreement between the Company and Amp
Incorporated dated June 2, 1983.
10.3 License Agreement between the Company and Speed Queen
Company dated March 16, 1985 and amendment thereto.
10.4 Distributor Agreement between the Company and Saab
Automation AB dated September 4, 1984 and amended June
17, 1986.
10.5 Incentive Stock Option Plan dated October 10, 1985 and
Form of Agreement.
10.6 Union Contract between the Company and Local 2262 of
New Jersey dated November 6, 1984.
10.9 Lease between the Company and Ninth Avenue Equities
Co., dated May 9, 1983.
10.10 Agreements between the Company and Robert L.
Richardson dated August 1, 1981.
10.11 Agreement between the Company and Calvin S. Wesley
dated December 20, 1984.
10.12 Promissory Notes of the Company issued to Messrs.
Maloy and Byer dated December 15 and 16, 1975.
10.13 Forms of Agreement between the Company and its Sales
Representatives.
34
10.14 Purchase Agreement between Vertex, VBM and Dicom,
Amendment and certain schedules thereto.
10.15 Purchase Agreement between Vertex and CTSI and certain
schedules thereto.
10.16 401(k) Retirement and Savings Plan.
10.17 OEM Agreement between Vertex and Scientific Games,
Inc. dated November 2, 1987.
10.18 Employment Agreement between the Company and
Carlo Pastore dated May 14, 1993.
10.19 Employment Agreement between the Company and
Kevin R. Halloran dated May 19, 1993.
10.19 Lease Agreement between the Company and
KHIP Associates dated August 20, 1993.
10.20 Sublease Agreement between the Company and
Thea & Schoen, Inc. dated May 20, 1993.
10.21 Consulting Agreement between the Company and
Kearney Systems, Inc. dated September 24, 1993.
10.21 Royalty Agreement between the Company and
Kearney Systems, Inc. dated September 24, 1993.
10.22 Commission Agreement between the Company and
Tri-State Telecomputers, Inc. dated June 7, 1993.
10.23 Employment Termination Agreement between the Company
and Carlo Pastore dated September 26, 1995.
10.24 Sublease Agreement between the Company and Thea &
Schoen, Inc. dated October 12, 1995.
10.25 Retainer agreement between Company and Jeffrey Marks,
Esq. Dated January 26, 1996.
10.26 Consulting and Stock Option agreement between Company
and Vamcom Corporation dated February 15, 1996.
10.27 Indemnity Agreement between Company and Robert T.
McLaughlin dated April 3, 1996.
10.28 Letter Agreement between Company, Computer
Transceiver Systems, Inc and Seymour H. Bucholz and
Rosner, Bresler, Goodman & Bucholz dated May 1, 1996.
35
10.29 Memorandum of Agreement and Amendment between Company
and NetWeave Corporation and Somber Group Inc. dated
May 23, 1996.
10.30 Loan Agreement and Promissory Note between Company and
NetWeave Corporation dated May 30, 1996.
10.31 Certificate of Merger of Sentry One into Vertex
Industries, Inc. dated June 17, 1996.
10.32 Certificate of Merger of Versci, Inc. into Vertex
Industries, Inc. dated June 17, 1996.
10.33 Master Distribution Agreement between Company and
NetWeave (Europe) dated July 1, 1996.
10.34 Factoring Agreement between Company and NetWeave
Corporation dated July 18, 1996.
10.35 Assignment and Amendment to Factoring Agreement Dated
October 8, 1996. (Filed herewith)
10.36 Agreement with Davis Sauders Associates, LLC. Dated
November 1, 1996. (Filed herewith)
10.37 Amendment to Assignment and Amendment to Factoring
Agreement dated November 6, 1996. (Filed herewith)
10.38 Retainer Agreement between Company and Law Offices of
Jeffrey D. Marks, Esq. P.C. dated January 9, 997.
(Filed herewith)
10.39 Pre-License Agreement between Company and NetWeave
Corporation dated February 18, 1997.(Filed herewith)
10.40 License Agreement between NetWeave Corporation and
Vertex Industries, Inc. dated February 19, 1997
(Filed herewith)
10.41 Consulting Agreement between Company and Summit
Marketing & Public Relations, Inc. dated July 7, 1997.
(Filed herewith)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fiscal year ended July
31, 1997.
36
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS:
Reports of Independent Public Accountants F-2, F-3
Consolidated Balance Sheets as of July 31, 1997 and 1996 F-4, F-4a
Consolidated Statements of Operations for the Years Ended
July 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended July 31, 1997, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the Years Ended
July 31, 1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-8 to F-18
SUPPLEMENTAL SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts for the Years
Ended July 31, 1997, 1996 and 1995 F-19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vertex Industries, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Vertex
Industries, Inc. and subsidiary (a New Jersey Corporation) as of July 31,
1997 and 1996 and the related consolidated statements of operations, changes
in stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial position of Vertex
Industries, Inc. and subsidiary as of July 31, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in
the index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
October 7, 1997
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Vertex Industries, Inc. and Subsidiary:
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity, and cash flows of Vertex Industries,
Inc. and Subsidiary for the year ended July 31, 1995 and have also
audited the supplemental schedule for the year ended July 31, 1995 listed in
the index on page F-1 of this Form 10-K. These financial statements and the
supplemental schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
and the supplemental schedule based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. 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 consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
results of operations and cash flows of Vertex Industries, Inc. and
Subsidiary for the year ended July 31, 1995 in conformity with
generally accepted accounting principles. In addition, in our opinion,
the supplemental schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents
fairly, in all material respects, the information required to be
included therein.
s/Sax, macy, Fromm & Co., PC
Sax Macy Fromm & Co., PC
Certified Public Accountants
Clifton, New Jersey
October 3, 1995
F-3
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JULY 31, 1997 AND 1996
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $608,553 $394,344
Accounts receivable, less allowance for doubtful
accounts of $75,985 July 31, 1997 and 1996 450,266 608,164
Note and other receivables, net 95,451 170,755
Inventories, net 582,609 693,179
Prepaid expenses and other current assets 32,861 13,885
------- -------
Total current assets 1,769,740 1,880,327
PROPERTY, EQUIPMENT AND CAPITAL LEASES 1,895,152 1,867,259
Less- Accumulated depreciation and amortization (1,545,071) (1,393,102)
---------- ---------
Net property, equipment and capital leases 350,081 474,157
---------- ---------
OTHER ASSETS:
Cost in excess of net assets of companies acquired,
net of amortization (accumulated amortization of
$350,395 and $301,016 at July 31, 1997 and 1996, respectively) 63,492 112,872
Deferred tax asset 195,000 195,000
Other assets 55,142 53,500
---------- ---------
Total other assets 313,634 361,372
Total assets $2,433,455 $2,715,856
========== ==========
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets.
F-4
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JULY 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
CURRENT LIABILITIES:
Current portion of long-term debt $2,567 $2,800
Current portion of obligations under capital leases 14,516 32,849
Accounts payable 129,622 169,632
Accrued expenses and other liabilities 170,643 99,237
Deferred Revenue 267,630 86,120
------- -------
Total current liabilities 584,978 390,638
------- -------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 0 2,567
Obligations under capital leases, net of current portion 17,065 30,308
-------- -------
Total long-term liabilities 17,065 32,875
-------- -------
EXCESS OF NET ASSETS OF COMPANIES ACQUIRED OVER COST, net
of amortization (accumulated amortization of $486,131 and $479,165
at July 31, 1997 and 1996, repectively) 0 6,966
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; 2,000,000 shares authorized;
none issued an outstanding 0 0
Common stock, par value $.005 per share; 20,000,000 shares authorized;
5,137,979 and 5,108,979 issued at July 31, 1997 and 1996, respectively 25,690 25,545
Additional paid-in captial 5,201,138 5,182,188
Accumulated deficit (3,344,847) (2,871,787)
---------- -----------
1,881,981 2,335,946
Less-Treasury stock, 12,872 shares at cost at July 31, 1997
and 1996, respectively (50,569) (50,569)
---------- -----------
Total stockholders' equity 1,831,412 2,285,377
---------- -----------
Total liabilities and stockholders' equity $2,433,455 $2,715,856
========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets.
F-4a
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended July 31
1997 1996 1995
OPERATING REVENUES $3,228,598 $3,784,480 $3,147,409
---------- ---------- ----------
OPERATING EXPENSES:
Cost of sales 1,800,276 1,729,058 1,717,364
Selling and administrative 1,511,949 1,285,538 1,625,508
Research and development 496,862 377,318 349,775
Restructuring expenses 0 0 800,765
--------- --------- ---------
Total operating expenses 3,809,087 3,391,914 4,493,412
--------- --------- ---------
Operating income (loss) (580,489) 392,566 (1,346,003)
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 38,801 16,840 15,038
Interest expense (6,372) (10,834) (14,468)
Other 75,000 1,676 4,199
--------- ---------- ----------
107,429 7,682 4,769
--------- ---------- ----------
Income (loss) before income taxes (473,060) 400,248 (1,341,234)
--------- ---------- ----------
INCOME TAX PROVISION (BENEFIT):
Federal 0 138,287 (88,100)
State 0 24,213 (33,795)
--------- ---------- ----------
Income tax provision (benefit) 0 162,500 (121,895)
--------- ---------- ----------
Net income (loss) ($473,060) $237,748 ($1,219,339)
========= ========== ============
NET INCOME (LOSS) PER SHARE OF COMMON STOCK ($.09) $.04 ($.24)
========= ========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 5,102,003 5,360,763 5,060,832
========= ========== ===========
The accompanying notes to consolidated financial statements are an integral part of these
consolidated statements.
F-5
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1997, 1996 AND 1995
Additional
Common Stock Paid-In Accumulated Treasury
Shares Amount Capital Deficit Stock Total
BALANCE, July 31, 1994 4,844,837 $24,224 $4,726,687 ($1,890,196) ($45,169) $2,815,546
Issuances of common stock-
Consideration for CTSI assets 236,042 1,180 441,399 0 0 442,579
2,872 shares of parent common stock acquired
by subsidiary 0 0 0 0 (5,400) (5,400)
Overpayment on stock options refunded 0 0 (135) 0 0 (135)
Net loss 0 0 0 (1,219,339) 0 (1,219,339)
-------- ------- --------- ---------- -------- -----------
BALANCE, July 31, 1995 5,080,879 25,404 5,167,951 (3,109,535) (50,569) 2,033,251
Exercise of stock options 28,100 141 14,237 0 0 14,378
Net income 0 0 0 237,748 0 237,748
--------- ------- ---------- ---------- -------- -----------
BALANCE, July 31, 1996 5,108,979 25,545 5,182,188 (2,871,787) (50,569) 2,285,377
Exercise of stock options 24,000 120 14,600 0 0 14,720
Issuance of stock in consideration for services 5,000 25 4,350 0 0 4,375
Net loss 0 0 0 (473,060) 0 (473,060)
--------- ------- ----------- ----------- ------- ----------
BALANCE, July 31, 1997 5,137,979 $25,690 $5,201,138 ($3,344,847) ($50,569) $1,831,412
========= ======== =========== =========== ======== ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
F-6
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended July 31
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($473,060) $237,748 ($1,219,339)
Adjustments to reconcile net income (loss) to net cash ---------- -------- ------------
provided by (used for) operating activities-
Depreciation and amortization 194,382 147,347 142,899
Deferred taxes 0 162,500 (165,100)
Gain on sale of fixed assets 0 2,000 (1,524)
Stock issued in consideration for services 4,375 0 0
Noncash restructuring charge 0 0 800,765
(Increase) decrease in assets-
Accounts receivable, net 157,898 (145,552) 280,368
Inventories 110,570 129,863 (105,268)
Prepaid expenses and other current assets (18,976) 15,490 11,040
Note and other receivables 75,304 (170,755) 0
Increase (decrease) in liabilities-
Accounts payable (40,010) (9,245) 16,293
Accrued expenses and other liabilities 71,406 (51,859) (32,279)
Deferred revenue 181,510 (113,370) 199,490
--------- --------- -------
Net adjustments 736,459 (33,581) 1,146,684
--------- --------- ---------
Net cash provided by (used for)
operating activities 263,399 204,167 (72,655)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (27,892) (117,720) (76,968)
Proceeds from sale of fixed assets 0 3,166 6,858
Deferred acquisition costs -- CTSI 0 0 31,564
Increase in other assets (1,642) (3,791) (1,625)
------- -------- ---------
Net cash used for investing activities (29,534) (118,345) (40,171)
------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt (2,800) (2,800) (2,800)
Repayment of obligations under capital lease (31,576) (24,937) (23,374)
Purchase of treasury stock 0 0 (5,400)
Overpayment on stock option refunded 0 0 (135)
Proceeds from exercises of stock options 14,720 14,378 0
------- ------- ---------
Net cash used for financing activities (19,656) (13,359) (31,709)
------- -------- ----------
Net increase (decrease) in cash 214,209 72,463 (144,535)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 394,344 321,881 466,416
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $608,553 $394,344 $321,881
======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
F-7
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
This summary of significant accounting policies of Vertex Industries, Inc.
and Subsidiary (the Company) is presented to assist in understanding the
Company's consolidated financial statements.
Nature of Business-
The Company sells and distributes bar code scanners, printers, data collection
terminals, software, automated card devices and precision weighing equipment
to customers located primarily within the United States. Sales of bar code
printers are primarily to the health care industry. Sales of precision
weighing equipment are primarily to retail pharmacies. The Company also
provides systems integration for turnkey automated data collection solutions
in real-time systems.
Use of Estimates in the
Preparation of Financial Statements-
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Actual results could differ from those estimates.
Principles of Consolidation and Reporting-
The consolidated financial statements include the accounts of Vertex
Industries, Inc. (Vertex), and its majority-owned subsidiary, Computer
Transceiver Systems, Inc. (CTSI). All significant intercompany transactions
have been eliminated.
Revenue Recognition-
The Company recognizes revenues related to software sales in compliance with
the American Institute of Certified Public Accountants (AICPA) Statement of
Position No. 91-1 "Software Revenue Recognition." Product revenue is
recorded at the time of shipment provided that no significant vendor and
post contract support obligations remain outstanding and collection of the
resulting receivable is deemed probable of collection by management.
Maintenance and support service agreements are recognized on a straight-line
basis over the life of the service agreement, generally twelve months, and
is reflected in deferred revenue in the accompanying consolidated balance
sheets.
F-8
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-
Machinery and equipment 12 years
Tools, dies and patterns 12 years
Office furniture and equipment 5-10 years
Computer equipment 3 years
Exhibit equipment 3 years
Capital leases 5 years
Cost in Excess of Net Assets
of Companies Acquired-
The excess of cost of purchased businesses over the fair value of their
assets at the acquisition date is being amortized on the straight-line method
over 5 years.
Excess of Fair Value of Net Assets
of Companies Acquired Over Cost-
The excess of fair value of net assets of companies acquired over cost on
the date of acquisition is being amortized on the straight-line method over
a period of 20 years.
Net Income (Loss) Per Share of Common Stock-
Net income (loss) per share is computed based on the weighted average
number of common stock and common stock equivalents, if dilutive, outstanding
during each period.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" which makes
certain changes to the manner in which earnings per share is reported.
The Company is required to adopt this standard for the year ending July 31,
1998. The adoption of this standard will require restatement of prior years'
earnings per share. If the Company had adopted the new standard in 1997,
there would have been no change in the per share or weighted average shares
reflected in the accompanying consolidated statements of operations for the
fiscal year ended July 31, 1997.
F-9
Cash Equivalents-
The Company considers all investments with an original maturity period within
three months to be cash equivalents.
Long-Lived Assets-
During 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets" (SFAS 121). SFAS 121 requires, among other things, that an entity
review 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. As a result of its review, the Company
does not believe that any impairment currently exists related to the long-
lived assets.
Stock Based Compensation-
The Financial Accounting Standards Board issued a standard, "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 11).
(2) PURCHASE OF SUBSIDIARY'S ASSETS:
On August 31, 1994, pursuant to an "Asset Purchase Agreement" dated May 1,
1993 and with the approval by the respective Boards of Vertex and CTSI and
the shareholders of CTSI, Vertex, which owned approximately 56.9% of CTSI
shares, acquired all of CTSI's assets and assumed all of its liabilities.
The purchase included inventory, equipment, receivables, proprietary tech-
nology, goodwill and other intangibles. The agreed purchase price of
$1,699,580 was paid by Vertex through the cancellation of CTSI's indebtedness
to Vertex in the amount of $1,257,001, with the balance of $442,579 being
paid through the issuance of 236,042 shares of Vertex common stock. Vertex
common stock in the amount of 233,170 shares exchanged in this transaction
were subsequently distributed to the subsidiary's shareholders in exchange
for certain outstanding shares of common stock of the subsidiary which have
since been retired.
In connection with the acquisition, the Company recorded $535,017 of costs
in excess of net assets acquired (goodwill) which includes the market value
of the shares issued plus $92,438 in legal and accounting costs incurred.
Because of a declining demand for the CTSI product line, the Company, during
fiscal 1995, recognized a $500,000 impairment in the carrying value of the
goodwill recorded in this and earlier acquisitions and revised the estimated
useful life over which future benefits are expected to be realized to five
years. As of July 31, 1997 and 1996, unamortized goodwill in connection with
the CTSI acquisition of $62,860 and $77,085 is included in the accompanying
consolidated balance sheets, respectively. The $500,000 charged to operations
is included in restructuring expenses as disclosed in Note 14.
F-10
(3) INVENTORIES:
Inventories consist of the following-
July 31
1997 1996
Raw materials $7,071 $7,432
Work in process 40,605 67,028
Finished goods and parts, net of obsolescence reserves of
$139,419 and $34,619 in 1997 and 1996, respectively 534,933 618,719
------- -------
$582,609 $693,179
======== ========
(4) PROPERTY, EQUIPMENT
AND CAPITAL LEASES:
Details of property, equipment and capital leases are as follows-
July 31
1997 1996
Property and equipment-
Leasehold improvements $283,926 $282,228
Machinery and equipment 223,911 223,911
Tools, dies and patterns 451,682 451,682
Office furniture and equipment 561,898 561,898
Computer equipment 111,802 93,565
Exhibit equipment 120,176 112,218
--------- ---------
Total 1,753,395 1,725,502
Less- Accumulated depreciation
and amortization (1,427,119) (1,310,489)
----------- -----------
Net property and equipment 326,276 415,013
----------- -----------
Capital leases-
Office equipment 86,448 86,448
Automobiles 55,309 55,309
----------- ---------
Total 141,757 141,757
Less-Accumulated amortization (117,952) (82,613)
----------- --------
Net capital leases 23,805 59,144
----------- --------
Net property, equipment and capital leases $350,081 $474,157
============ ==========
Depreciation and amortization of property, equipment and capital leases for
the fiscal years ended July 31, 1997, 1996 and 1995 was $151,969, $122,835
and $119,761, respectively.
F-11
(5) LONG-TERM DEBT:
Long-term debt consists of the following-
July 31
1997 1996
Note payable to bank, due in monthly principal installments
of $233 plus interest at 1.25% above the prime rate $2,567 $5,367
Less- Current portion of long-term debt 2,567 2,800
-------- -------
Long-term debt $0 $2,567
======== ========
The long term debt matures on Jun 30, 1998 and is secured by telephone equipment
of the Company.
(6) NOTE AND OTHER RECEIVABLES:
In 1996 the Company advanced NetWeave Corp., a related party, $100,000 for
working capital purposes and received a promissory note. The note bears
interest at 6%. NetWeave Corp. has defaulted on the note and no interest has
been paid. The Company is in the process of restructuring repayment of the
note and has recorded a reserve of $50,000 against the note (see Note 15).
In 1996, the Company entered into a factoring agreement with NetWeave Corp.
whereby certain accounts receivable were to be factored by the Company.
As of July 31, 1997 the Company had a gross factored receivable balance of
$81,369 and an allowance for doubtful accounts reserve of $35,918 related to
the factored receivables. The Company is in the process of restructuring the
repayment of the factored receivables.
(7) ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued expenses and other liabilities consist of the following-
July 31
1997 1996
Professional fees $37,384 $30,690
Vacation salaries 1,366 17,003
Sales tax 20,979 20,569
Commissions 10,194 986
Payroll and deductions 48,910 27,026
Income taxes payable 1,810 2,963
Accrued contingency reserve 50,000 0
------ -------
$170,643 $99,237
======== =======
The accrued contingency reserve relates to the estimated costs associated
with the restructuring of the NetWeave licensing agreement.
F-12
(8) PENSION PLANS:
The Company maintains a 401(k) plan, which is a defined contribution plan
covering substantially all of the nonunion employees. Eligible employees
can contribute up to 17% of their compensation not to exceed Internal Revenue
Code limits. The Company will match 50% of the amount contributed by
employees, up to 3% of compensation as defined. Company contributions for
the years ended July 31, 1997, 1996 and 1995 was $5,787, $14,865 and $5,342,
respectively.
(9) INCOME TAXES:
Deferred income taxes are recognized for tax consequences of temporary
differences by applying enacted statutory tax rates to differences between
the financial reporting and the tax basis of existing assets and liabilities.
The net deferred tax assets in the accompanying consolidated balance sheets
consist of the following-
1997 1996
Deferred tax assets-
Allowance for accounts, note and other receivables $62,000 $30,000
Deductible goodwill amortization 206,000 212,000
Inventory 55,000 9,000
Deferred revenue 107,000 21,000
Net operating loss carryforwards 1,759,000 1,496,000
--------- ---------
Total deferred tax assets 2,189,000 1,768,000
Deferred tax liabilities -- Depreciation (97,000) (77,000)
Valuation allowance (1,897,000) (1,496,000)
----------- -----------
Net deferred tax asset $195,000 $195,000
=========== ===========
Deferred tax assets arise from the tax benefit of net operating loss carry-
forwards which are expected to be utilized to offset taxable income and from
timing differences between the recognition in financial statement and tax
returns of certain inventory costs, bad debt reserve allowances on receiv-
ables, depreciation on fixed assets and amortization of certain intangible
assets.
A valuation allowance on the deferred tax assets has been provided based on
the Company's assessment of ability to realize such assets in the future.
F-13
The components of the income tax provision (benefit) included in the
consolidated statements of operations for the fiscal years ended July 31,
1997, 1996 and 1995 consist of the following-
1997 1996 1995
Current-
Federal $0 $0 $18,600
State 0 0 24,605
Deferred 0 162,500 (165,100)
--------- -------- ---------
Total income tax provision
(benefit) $0 $162,500 ($121,895)
========= ======== ==========
At July 31, 1997, the net operating loss carryforwards available to offset
future taxable income consist of approximately $4,532,000 in Federal net
operating losses which will expire in various amounts through 2012, and
state net operating losses of approximately $3,633,000 which will expire
in various amounts through 2004.
A reconciliation of income tax at the statutory rate to the Company's
effective rate is as follows-
1997 1996 1995
Statutory rate (34.0%) 34.0% (34.0%)
Effect of-
Valuation allowance 34.0 0.0 10.9
Federal graduated rates 0.0 0.0 7.3
Permanent differences 0.0 0.6 0.8
State income taxes, net of
Federal tax effect 0.0 6.0 (2.1)
Alternative minimum tax 0.0 0.0 1.4
Other, net 0.0 0.0 6.6
------ ------ -----
Effective income tax rate 0.0% 40.6% (9.1%)
======= ======= ======
(10) COMMITMENTS AND
CONTINGENT LIABILITIES:
Leases-
The Company leases certain equipment under capital leases with expiration
dates through April 2001.
The Company leases its plant and office facilities located in Clifton,
New Jersey. The lease expires on May 31, 1998. Annual rental is $142,560.
In addition, the Company is obligated to pay applicable real estate taxes,
repairs and insurance.
In 1993, the Company began subleasing under a 30-month renewable lease a
portion of its plant in Clifton, New Jersey. During 1996, the lease was
renewed for an additional 30-month period and expires in May 1998. Under
the terms of the sublease, the tenant is required to pay annual rent of
$45,657, plus a proportionate share of utilities. The Company leases office
space in Philadelphia Pennsylvania from a related party under a month-to-month
lease for $2,200 per month plus utilities.
F-14
Rent expense for the years ended July 31, 1997, 1996 and 1995 was $154,660,
$121,032 and $135,500, respectively.
Minimum lease payments and sublease rental income are as follows-
Equipment Sublease
Capital Operating Rental
Year Ended July 31 Leases Leases Income
1998 $15,642 $130,047 $38,048
1999 7,180 10,800 0
2000 7,180 9,000 0
2001 5,385 0 0
------- -------- -------
Total 35,387 $149,847 $38,048
========= =======
Less- Amount representing interest (3,806)
-------
Present value of net
minimum lease payments 31,581
Less- Current portion of obligations
under capital leases 14,516
-------
Long-term portion of obligations
under capital leases $17,065
=======
Employment Agreements-
The Company had an employment agreement with one individual through November
1996 which provided for annual compensation of approximately $103,000 and
stock options.
Other-
In June 1997, a customer terminated an agreement to purchase certain product
from the Company. The agreement was originally for a two-year period. The
customer paid $75,000 to terminate the agreement. This amount is reflected
as other income in the accompanying consolidated statements of operations.
(11) STOCKHOLDERS' EQUITY:
Incentive Stock Options-
The Company has an Incentive Stock Option Plan which provides for the
granting of options to officers and other key employees to purchase shares
of the Company's common stock. The maximum number of shares to be issued as
part of the plan is 1,500,000. The maximum term of any option is ten years
and the option 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 less than 110% of fair market
value.
F-15
July 31
1997 1996 1995
Options outstanding, beginning of year 341,600 338,200 255,700
Granted 450,000 159,000 95,500
Exercised (24,000) (28,100) 0
Canceled (100,000) (127,500) (13,000)
--------- --------- --------
Options outstanding, end of year 667,600 341,600 338,200
========= ========= ========
Options price range $.475-$8.12 $.475-$8.12 $.475-$8.12
Options exercisable 144,600 99,400 123,100
Options available for grant 534,000 384,000 415,500
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation.
In accordance with the provisions the Company accounts for its stock option
plans under 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 grant date as prescribed by SFAS 123, net
income (loss) and earnings (loss) per share would have been reduced to the
pro forma amounts indicated in the table below-
1997 1996
Net income (loss) - as reported ($473,060) $237,748
Net income (loss) - pro forma ($499,529) $229,479
Earnings (loss) per share - as reported ($.09) $.04
Earnings (loss) per share - pro forma ($.10) $.04
The weighted average fair value at date of grant for options granted in 1997
and 1996 were $.46 and $.50, respectively. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model based on the weighted average market price of $0.85 in 1997 and 1996
using the following assumptions-
Expected stock price volatility 91%
Risk-free interest rate 6.67%
Weighted average expected life of options 3 years
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.
F-16
Other Stock Options-
In connection with an employment agreement, the Company granted an employee
an option to purchase up to 300,000 shares of common stock, at an option
price of $7.875 per share, expiring the earlier of June 29, 2003, one year
after death, or 30 days after termination. The agreement allowed the employee
to retire these options at their original grant price, should the market price
of the Company's common stock drop below the exercise price of the options,
and have the options granted again at the then market price. During 1996, the
employee retired all 300,000 options exercisable at $7.875 and was
subsequently granted 300,000 at an exercise price of $.50 per option the then
market value of the common stock. During 1997, the employee left the Company
and the Company agreed to waive the termination clause in the agreement.
During 1997, the Company granted 140,000 options to two service firms as
partial payment for legal, financial and consulting services. The options
are exercisable at prices between $1.00 and $4.00 and expire at various dates
through January 1, 2000. These options are currently exercisable. During
1996, the Company granted 35,000 options to two services firms as partial
payment for financial and consulting services. The options are exercisable at
prices between $.75 and $.91 and expire at various dates through February
2001. These options are currently exercisable.
(12) MAJOR CUSTOMERS:
The Company had no customer which accounted for more than 10% of revenue for
the fiscal year ended July 31, 1997.
During July 31, 1996, the Company had two customers which accounted for 13.5%
and 12.5% of revenue. At July 31, 1996, approximately $229,000 and $101,000,
respectively, of accounts receivable were from those customers.
The Company had one customer that accounted for 16.5% of revenue during the
year ended July 31, 1995.
(13) SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
July 31
1997 1996 1995
Interest paid $6,372 $10,834 $14,468
Stock issued in consideration for services 4,735 0 0
Noncash investment and financing activities-
Capitalized lease and note payable transactions
related to purchases of property and equipment 0 27,778 0
======== ====== =======
F-17
During the year ended July 31, 1997, the Company issued 5,000 shares of its
stock to a public relations firm for services valued at $4,375.
(14) RESTRUCTURING EXPENSES:
In the fourth quarter of fiscal 1995, the Company recorded a restructuring
charge. This amount includes the write-off of $500,000 of goodwill acquired
in the purchase of assets of the Company's subsidiary, CTSI and $300,765 of
obsolete inventory.
(15) LICENSE AGREEMENT WITH
NETWEAVE CORPORATION:
On February 17, 1997 the Company entered into a license agreement
(the "Agreement") with NetWeave Corporation (NetWeave) to develop, market,
sell and support the NetWeave product worldwide. The Company will pay NetWeave
a royalty on the initial licenses sold and on annual license fees paid by the
customer for maintenance and support of the NetWeave product. Under terms of
the Agreement, the NetWeave Corporation assigns its existing customer base to
the Company along with the existing sales representative agreements in the
U. S. and the master distributor with SX Consultancy for Europe and Asia.
SX Consultancy is a European software distributor and developer of custom
software based in the UK. Under the Agreement, the Company is responsible
for rental payments of the current NetWeave Corporation facility in
Philadelphia along with existing employees. The Agreement replaces the
Conditional Acquisition Agreement which the Company announced in May, 1996.
For the year ended July 31, 1997, the NetWeave Licensing agreement generated
revenues of $105,000. During 1997, the Company paid $20,000 of royalties to
NetWeave Corporation.
F-18
SCHEDULE II
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JULY 31, 1997, 1996 AND 1995
Balance at Additons Deductions Balance at
Beginning Charged to From End of
of Period Expense Allowances Period
Year Ended July 31, 1997-
Deducted from accounts receivable for
doubtful accounts $75,985 $0 $0 $75,985
Deducted from inventory as valuation
allowance 34,619 204,000 99,200 139,419
Year Ended July 31, 1996-
Deducted from accounts receivable for
doubtful accounts 75,985 0 0 75,985
Deducted from inventory as valuation
allowance 59,444 48,000 72,825 34,619
Year Ended July 31, 1995-
Deducted from accounts receivable for
doubtful accounts 15,000 71,015 10,030 75,985
Deducted from inventory as valuation
allowance 50,000 74,500 65,056 59,444
F-19
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.
Date: October 27, 1997 VERTEX INDUSTRIES, INC.
s/Ronald C. Byer
Chief Executive Officer, President
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:
October 27, 1997 s/James Q. Maloy
Chairman of the Board,
and Director
October 27, 1997 s/Ronald C. Byer
Chief Executive Officer,
President and Director
October 27, 1997 s/Robert T. McLaughlin
Chief Financial Officer
and Treasurer
October 27, 1997 s/Irwin Dorros
Director
October 27, 1997 s/Wilbur Highleyman
Director
October 27, 1997 s/George Powch
Director
37