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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
Form 10-Q
______________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended June 30, 2002
0-15066
Commission file Number
______________
VERTEX INTERACTIVE, INC.
(Exact name of registrant as specified in its charter)
______________
New Jersey 22-2050350
(State of Incorporation) (I.R.S. Employer Identification No.)
140 Route 17 North, Suite 250
Paramus, New Jersey 07652
(Address of Principal Executive Offices) (Zip Code)
(973) 777-3500
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Common stock, par value $.005 per share: 37,201,978 shares
outstanding as of September 25, 2002.
Preferred stock, Series "A", par value $.01 per share: 1,356,852
shares outstanding as of September 25, 2002.
Preferred stock, Series "B", par value $.01 per share: 1,000
shares outstanding as of September 25, 2002.
Preferred stock, Series "C", par value $.01 per share: 997 shares
outstanding as of September 25, 2002.
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
FORM 10-Q
June 30, 2002
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 2002 and
September 30, 2001 3
Consolidated Statements of Operations - Three and
nine months ended June 30, 2002 and 2001 5
Consolidated Statements of Changes in
Stockholders' Equity (Deficit) - For the year ended
September 30, 2001 and nine months ended June 30,
2002. 6
Consolidated Statements of Cash Flows - Nine
months ended June 30, 2002 and 2001 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis Of
Consolidated Financial Condition and
Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 34
PART II OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 2. Changes in Securities and Use of Proceeds 36
Item 4. Submission of Matters to a Vote of Security
Holders 38
Item 6. Exhibits and Reports on Form 8-K 38
2
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, 2002 September 30, 2001
------------- ------------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,186,543 $ 1,411,222
Accounts receivable, less allowance
for doubtful accounts of $878,405
and $380,568 at June 30, 2002 and
September 30, 2001 1,834,060 11,224,533
Inventories, net 1,421,236 5,065,214
Prepaid expenses and other current assets 355,491 1,521,730
--------- ----------
Total current assets 4,797,330 19,222,699
PROPERTY, EQUIPMENT, AND CAPITAL LEASES
Property and Equipment 1,405,226 6,283,848
Capital Leases - 350,168
--------- ----------
Total property, equipment and capital leases 1,405,226 6,634,016
Less: Accumulated depreciation and amortization (1,158,497) (2,270,097)
---------- ----------
Net property, equipment and capital leases 246,729 4,363,919
OTHER ASSETS:
Intangible Assets, net of amortization of
$2,498,833 at June 30, 2002 and $3,866,959
at September 30, 2001 18,963,796 28,349,587
Capitalized software, net of amortization
of $86,817 at June 30, 2002 and $24,426
at September 30, 2001 260,452 420,554
Other assets 511,319 1,082,524
---------- ----------
Total other assets 19,735,567 29,852,665
---------- ----------
Total assets $ 24,779,626 $ 53,439,283
============= =============
See notes to consolidated financial statements.
3
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
June 30, 2002 September 30, 2001
------------- -----------------
(Unaudited)
CURRENT LIABILITIES:
Current portion of obligations under
capital leases $ 115,650 $ 163,425
Bank credit lines 1,337,813 1,824,528
Senior credit facility 904,176 -
Notes payable 1,602,500 2,677,517
Notes payable - related parties 2,476,775 359,375
Mortgage notes payable current portion - 75,793
Accounts payable 4,107,539 8,432,386
Liabilities associated with assets held for sale 7,122,470 -
Litigation related accruals 4,723,074 3,856,948
Other accrued expenses and liabilities 4,661,742 10,617,604
Advances from customers 320,563 612,077
Deferred revenue 1,679,279 5,739,843
---------- ----------
Total current liabilities 29,051,581 34,359,496
LONG-TERM LIABILITIES:
Obligations under capital leases 18,704 106,201
Mortgage notes payable - 1,392,858
Convertible notes payable - related parties 7,718,717 5,500,000
Other long term liabilities - 130,201
---------- ---------
Total long-term liabilities 7,737,421 7,129,260
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Series A preferred stock, par value $.01 per
share; 2,000,000 shares authorized, 1,356,852
issued and outstanding($10,000,000 aggregate
liquidation preference) 13,569 13,569
Series B preferred stock, par value $0.01 per
share;1,000 shares authorized, 1,000 issued and
outstanding ($1,000,000 aggregate liquidation
preference) 10 -
Series C preferred stock, par value $0.01 per
share;10,000 shares authorized, 997 issued and
outstanding ($997,000 aggregate liquidation
preference) 10 -
Common stock, par value $.005 per share;
75,000,000 shares authorized; 36,791,674 and
34,909,506 shares issued at June 30, 2002 and
September 30, 2001, respectively 183,959 174,548
Additional paid-in capital 154,757,767 149,321,766
Deferred compensation - (180,557)
Accumulated deficit (164,742,801) (135,907,323)
Accumulated other comprehensive loss (2,176,721) (1,426,307)
------------ -------------
(11,964,207) 11,995,696
Less: Treasury stock, 40,055 shares (at cost) (45,169) (45,169)
------------ -------------
Total stockholders' equity (deficit) (12,009,376) 11,950,527
------------ -------------
Total liabilities and stockholders'
equity (deficit) $24,779,626 $ 53,439,283
============= =============
See notes to consolidated financial statements.
4
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Nine Months Ended June 30,
-------------------------- -------------------------
2002 2001 2002 2001
------------ ------------- ---------- ----------
OPERATING REVENUES $9,959,263 $14,128,256 $34,462,006 $44,216,326
COST OF SALES 6,652,146 8,369,764 22,694,985 28,757,955
----------- ------------- ---------- ----------
GROSS PROFIT 3,307,117 5,758,492 11,767,021 15,458,371
----------- ------------- ---------- ----------
OPERATING EXPENSES:
Selling and administrative 6,008,035 9,543,110 20,170,027 26,296,312
Research and development 809,080 1,988,587 3,807,825 5,541,072
Depreciation and amortization
of intangibles 288,443 4,473,051 1,169,909 11,243,866
In-process R&D write-off and
merger related expenses - - - 3,600,000
---------- ------------- ----------- ----------
Total operating expenses 7,105,558 16,004,748 25,147,761 46,681,250
---------- ------------- ----------- ----------
OPERATING LOSS (3,798,441) (10,246,256) (13,380,740) (31,222,879)
OTHER INCOME AND (EXPENSES):
Interest income 27,874 46,610 93,855 136,824
Interest expense (501,190) (157,985) (2,468,787) (552,145)
Loss on assets held for sale (5,339,932) - (9,194,685) -
Provision for litigation (3,120,000) - (3,120,000) -
Other 296,346 (50,064) (630,278) (24,727)
----------- ----------- ------------ -----------
Net other income (expense) (8,636,902) (161,439) (15,319,895) (440,048)
----------- ----------- ------------ -----------
LOSS BEFORE INCOME TAXES (12,435,343) (10,407,695) (28,700,635) (31,662,927)
Income Tax Provision 32,690 59,059 134,843 104,335
------------ ------------ ------------ ------------
NET LOSS $(12,468,033) $(10,466,754) $(28,835,478) $(31,767,262)
============ ============ ============ ============
Net loss per share of
Common Stock:
Basic and diluted ($.35) ($.31) ($.82) ($1.06)
====== ====== ====== =======
Weighted Average Number of
Shares Outstanding:
Basic and diluted 35,754,249 33,523,078 35,227,651 30,086,701
See notes to consolidated financial statements.
5
VERTEX INTERACTIVE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
(Fiscal 2002 unaudited)
Preferred Stock Common Stock Additional
--------------- ------------------- Paid-In
Shares Amount Shares Amount Capital
------ ------ ------- ------ -----------
Balance September 30, 2000 - $ - 26,267,947 $131,340 $ 99,563,198
Exercise of stock options 437,481 2,187 908,297
Issuance of stock in connection with
new investors, net of expenses 4,186,754 20,933 7,830,033
Stock options issued to non-employees 1,465,756
Issuance of stock in connection with
retirement of debt and other obligations 576,501 2,883 2,496,009
Issuance of stock and stock options
in connection with acquisitions 1,356,852 13,569 3,440,823 17,205 37,014,273
Deferred compensation 44,200
Amortization of deferred compensation
Other Comprehensive income (loss),
net of tax:
Net loss
Change in unrealized foreign
exchange translation
gains/losses
Comprehensive income (loss)
---------- ------- ---------- ------- -----------
Balance September 30, 2001 1,356,852 13,569 34,909,506 174,548 149,321,766
---------- ------- ---------- ------- -----------
Issuance of common stock 34,404 172 68,844
Issuance of Series B preferred
stock, net of expenses 1,000 10 960,990
Issuance of stock in connection
with acquisitions 1,676,168 8,381 930,667
Issuance of stock and stock
options in connection with retirement
of debt and other obligations 171,596 858 1,809,625
Conversion of notes payable into
Series C Preferred Stock 997 10 996,990
Amortization of deferred compensation
Cancellation of common stock (1,676,168) (8,381) (930,667)
Exercise of stock options 1,676,168 8,381 930,667
Settlement of acquisition related escrow (500,000)
Non cash interest expense 1,168,885
Other Comprehensive income (loss),
net of tax:
Net loss
Change in unrealized foreign
exchange translation
gains/losses
Comprehensive income (loss) --------- ------- ---------- --------- -------------
Balance June 30, 2002 1,358,849 $13,589 36,791,674 $183,959 $ 154,757,767
========= ======= ========== ========= =============
Accumulated
Other
Deferred Accumulated Comprehensive Comprehensive Treasury
Compensation Deficit Loss Income/(Loss) Stock Total
----------- ----------- ------------ ------------- ------- -----
Balance September 30, 2000 $(461,012) $(12,955,221) $(1,825,411) $(45,169) $84,407,725
Exercise of stock options 910,484
Issuance of stock in
connection with new
investors, net of expenses 7,850,966
Stock options issued to
non-employees 1,465,756
Issuance of stock in
connection with retirement
of debt and other obligations 2,498,892
Issuance of stock and
stock options in connection
with acquisitions 37,045,047
Deferred compensation (44,200) -
Amortization of deferred
compensation 324,655 324,655
Other Comprehensive
income (loss), net of tax:
Net loss (122,952,102)$(122,952,102) (122,952,102)
Change in unrealized
foreign exchange
translation
gains/losses 399,104 399,104 399,104
-----------
Comprehensive income (loss) $(122,552,998)
-------- ------------- =========== ----------- -------- ----------
Balance September 30, 2001 (180,557)(135,907,323) (1,426,307) (45,169) 11,950,527
Issuance of common stock 69,016
Issuance of
Series B preferred
stock, net of expenses 961,000 Issuance of stock in
connection with acquisitions 939,048
Issuance of stock and stock
options in connection with
retirement of debt and
other obligations 1,810,483
Conversion of notes payable
into Series C Preferred Stock 997,000
Amortization of deferred
compensation 180,557 180,557
Cancellation of common stock (939,048)
Exercise of stock options 939,048
Settlement of acquisition
related escrow (500,000)
Non cash interest expense 1,168,885
Other Comprehensive
income (loss), net of tax:
Net loss (28,835,478) $(28,835,478) (28,835,478)
Change in unrealized
foreign exchange
translation
gains/losses (750,414) (750,414) (750,414)
------------
Comprehensive income (loss) $(29,585,892)
-------- ------------- ============ ----------- -------- ------------
Balance June 30, 2002 $ - $(164,742,801) $(2,176,721) $(45,169) $(12,009,376)
======== ============= =========== ====== ==============
See notes to consolidated financial statements.
6
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended June 30,
---------------------------
2002 2001
------------- ------------
Cash Flows from Operating Activities:
- -------------------------------------
Net Loss $(28,835,478) $(31,767,262)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation and amortization 1,169,909 11,243,866
Net loss on disposal of assets 9,153,898 3,411
Provision for litigation 3,120,000 -
Stock and stock options issued in
consideration for services - 1,431,017
Non cash interest expense 1,168,885 -
Amortization of deferred compensation costs 180,557 257,581
In-process R&D write-off - 3,600,000
Changes in assets and liabilities, net of
effects of acquisitions and disposals:
Accounts receivable, net 3,495,437 (827,173)
Inventories, net 449,472 557,454
Prepaid expenses and other current assets 358,447 (830,124)
Other assets 980,405 (617,651)
Accounts payable (724,811) 797,188
Accrued expenses and other liabilities 1,993,947 (839,569)
Advances from customers (136,822) 877,686
Deferred revenue (210,228) 854,845
------------ -------------
Net cash used for operating activities (7,836,382) (15,258,731)
------------ -------------
Cash Flows from Investing Activities:
- ------------------------------------
Additions to property and equipment (172,458) (567,159)
Proceeds from sale of assets 1,282,775 12,536
Acquisition of businesses, net of cash acquired - (3,694,733)
------------ -------------
Net cash provided by (used for) investing
activities 1,110,317 (4,249,356)
Cash Flows from Financing Activities:
- -------------------------------------
Loans payable bank, net (614,497) (167,043)
Proceeds from senior credit facility and
notes payable 8,303,400 5,500,000
Payment of senior credit facility and
notes payable (2,175,205) -
Payment of long term liabilities (177,220) (405,424)
Proceeds from long term borrowing - 437,816
Net proceeds from issuance of stock 1,030,168 8,673,373
Proceeds from exercise of stock options - 881,832
------------ ------------
Net cash provided by
financing activities 6,366,646 14,920,554
------------ ------------
Effect of exchange rate changes on cash 134,740 (56,869)
------------ ------------
Net Decrease in Cash and Cash Equivalents (224,679) (4,644,402)
Cash and Cash Equivalents at Beginning of Period 1,411,222 7,892,774
------------ ------------
Cash and Cash Equivalents at End of Period $1,186,543 $3,248,372
============ ============
See notes to consolidated financial statements.
7
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Background
Vertex Interactive, Inc. ("Vertex" or "we" or the "Company") is a
global provider of supply chain management ("SCM") technologies,
including enterprise software systems and applications, advance
planning and scheduling capabilities, software integration,
solutions that enable our customers to manage their order,
inventory, warehouse and transportation needs, consultative
services, and software and hardware service and maintenance. We
serve our clients through three (3) general product and service
lines: (1) enterprise solutions; (2) point solutions; and, (3)
service and maintenance for our products and services, including
service and maintenance of software and hardware we resell for
third parties. Our enterprise solutions include a suite of Java
(TM) architected software applications, applications devoted to
the AS/400 customer base, advance planning and scheduling
modules, as well as a portfolio of "light-directed" systems for
inventory, warehouse and distribution center management. Our
point solutions provide an array of products and services
designed to solve more specific customer needs from managing a
mobile field workforce, mobile data collection, distributed bar
code printing capabilities, compliance labeling applications,
automated card devices, software development tools and
proprietary software serving SAP R/3 users. We provide a full
range of software and hardware services and maintenance on a 24-
hour, 7-days a week, 365-days a year basis, including the
provision of wireless and wired planning and implementation
services for our customers' facilities. As a result of various
acquisitions beginning in September 1999, as described in detail
in the Company's Annual Report on Form 10-K, Vertex substantially
increased its portfolio of products and services that it can
provide to customers through its operations in North America and
Europe.
In early 2002, the Company announced its intention to focus
primarily on enterprise solutions. As of September 15, 2002, the
Company has sold or is in the process of selling or closing the
majority of its point solutions and services operations
(See Note 2).
Recent Developments
On March 4, 2002, the NASDAQ advised the Company that for the
preceding 30 consecutive trading days, the price of the
Company' s common stock had closed at under $1.00 per share.
Pursuant to NASDAQ Rule 4450(e)(2), the Company was provided
90 calendar days or until June 3, 2002 to regain compliance.
On July 18, 2002, the Company had an oral hearing before
a NASDAQ Listing Qualifications Panel for continued inclusion
on the NASDAQ National Market, and on August 20, 2002, the Company
was notified that the NASDAQ Listing Qualifications Panel had
determined that the Company had failed to comply with the $1.00 minimum
closing bid price and the minimum stockholders'equity or the market value
of publicly held shares requirements for continued listing and
determined to delist the Company's securities from the NASDAQ
Stock Market effective with the open of business on August 21,
2002. The Company's securities are currently trading on the NASDAQ
OTC Bulletin Board under the symbol "VETX".
8
Since June 30, 2002, Wayne L. Clevenger, Joseph R. Robinson and
L.G Schafran have resigned from the Company's Board of Directors.
Going Concern
Based upon our current rate of cash consumption, the uncertainty
of liquidity-related initiatives described in detail below, and
the reasonable possibility of on-going negative impacts on our
operations from the overall economic environment for a further
unknown period of time and from our own limited capital resources,
there is substantial doubt as to our ability to continue as a going
concern.
The successful implementation of our business plan has required,
and will require on a going forward basis, substantial additional
funds to finance (i) the growth of our operations,
(ii)further development of our software to keep it technologically
current, (iii) historic and expected future operating losses, and
(iv) additional selective acquisitions to achieve the scale we believe
will be necessary to remain competitive in the global SCM industry.
Background
In the fiscal year ended September 30, 2001, the overall decline in the
enterprise applications software and telecommunications industries had
a substantial negative impact on our results of operations. These
factors, in combination with the substantial additional
investment incurred in completing our enterprise suite of products
and our continuing negative operating cash flows, placed
significant pressures on our financial condition and liquidity
position. Operating and investing activities resulted in cash
consumption of $21.5 million in 2001. During fiscal 2001, the
Company completed a series of transactions to fund its cash
needs arising from the foregoing, including private placement sales
of common shares resulting in approximately $8.8 million of proceeds
(net of cash transaction costs totaling $0.8 million) and the
issuance of convertible notes in an aggregate principal amount
of $5.9 million. In addition, the exercise of stock options during
the period totaled $0.9 million. At September 30, 2001, the above
activities resulted in a net cash balance of $1.4 million (a decrease
of $6.5 million) and a negative working capital balance of $15.1
million.
From October 1, 2001 through June 30, 2002 we have raised
approximately $9.3 million (net of cash transaction costs)
through the issuance of: (1) Series "B" Convertible Preferred
Stock to Pitney Bowes valued at $1 million; (2) $3 million in
notes payable convertible into Series "C" Convertible Preferred
Stock to Midmark Capital II, LP; (3) $3.1 million of demand notes
payable from Pitney Bowes and Midmark Capital II L.P. and (4)
$2.4 million in a senior credit facility collateralized by North
American accounts receivable. During the same period, we sold
the source code, documentation and all related rights to the TMS
product line to Pitney Bowes in exchange for $1.65 million, which
included the cancellation of the $1.0 million Pitney Bowes
promissory note and related accrued interest; sold the Netweave
product line for approximately $0.5 million of cash and the
assumption of $0.4 million of liabilities; sold certain of the
Irish product lines for approximately $0.2 million; paid various
debt obligations ($3.0 million) and approximately $7.8 million
was used for operating activities. At June 30, 2002, the above
activities resulted in a net cash balance of $1.2 million
(a decrease of $0.2 million) and a negative working capital
balance of $24 million.
Outlook
In light of current economic conditions and the general expectation
that there will be no significant upswing in the economy or technology
capital expenditures until the second half of 2003, we do not now
anticipate reaching the point at which we generate cash in
excess of our operating expenses until June 2003 at the earliest,
about which there can be no assurance. We previously
estimated that we would require significant additional funds
aggregating approximately $7 million for the period from April 1,
9
2002 through September 30, 2002 to meet accrued non-operating
obligations, working capital to fund operating losses, interest,
capital expenditures, expenses related to cost-reduction
initiatives, and potential liabilities related to pending
litigation (see Note 10 to Consolidated Financial Statements).
Since that time despite certain cost cutting measures and
additional fund raising, the delays in the closing of most of the
asset sales has caused the Company to continue to generate
operating losses. As a result, the amount of additional funds
now needed from July 1 to December 31 is estimated to be
approximately $3 to $5 million, assuming the Company is able to
settle certain of its current liabilities with non-cash transactions.
Our sources of ongoing liquidity include the cash flows of our
operations, cash available from various existing credit lines,
potential new credit facilities, potential additional equity
investments, and sales of our remaining non-core assets.
Consequently, Vertex continues to aggressively pursue additional
debt and equity financing, restructure certain existing debt
obligations, reduce its operating expenses, and is structuring its
overall operations and resources around high margin enterprise products
and services. However, in order to remain in business, the
Company must complete the successful sale of the remaining non-core
assets and raise additional cash in a timely fashion.
Subsequent to June 30, 2002 the following initiatives have
been completed or are in process to raise the required funds,
settle liabilities and/or reduce expenses:
(i) MidMark Capital Partners loaned Vertex an
additional $444,500 in the form of a demand note.
(ii) We sold various components of our European business,
including (a) the German point solutions business; (b)the
UK hardware maintenance business; (c) the French based advanced
planning software business; (d) the Benelux point solutions and
maintenance businesses; and (e) the French hardware
maintenance business for a total consideration of
approximately $7.1 million (of which $0.7 million was cash
and the remainder was an assumption or forgiveness of debt).
(iii) We have ceased trading in our Italian and Irish businesses
to reduce operating losses. In September 2002, after being
unsuccessful in attempting to sell its three (3) Italian and
three (3) remaining Irish businesses, and based on the continuing
cash drain from these operations the respective boards of
directors determined that in the best interest of their
shareholders that they would seek the protection of the respective
courts in Milan and Ireland, which have agreed to an orderly
liquidation of these companies for the benefit of their respective
creditors.
(iv) We are currently reviewing our options with respect to
those business units for which there is no current buyer,
with the intent of minimizing the future cash outlays.
(v) We are aggressively pursuing additional capital raising
initiatives.
(vi) We have continued to reduce headcount (to approximately 70
employees in our continuing North American business at
September 15,2002), consolidate facilities, and generally reduce costs.
(vii) We are seeking to settle certain of our current liabilities
through non-cash transactions.
10
While we are continuing our efforts to reduce costs, gain scale,
sell non-core business operations, resolve lawsuits on favorable
terms and settle certain liabilities on a non-cash basis there
is no assurance that we will achieve these objectives.
In addition, we continue to pursue opportunities to raise both
debt and equity financing. However, there can be no assurance
that we will be able to raise additional financing in the
timeframe necessary to meet our immediate cash needs, or if
such financing is available, whether the terms or conditions would
be acceptable to us.
The financial statements have been prepared on a basis that
contemplates Vertex's continuation as a going concern and the
realization of assets and liquidation of liabilities in the
ordinary course of business. The financial statements do not
include any adjustments, with the exception of the provision
to reduce the carrying values of the non-core assets held for sale
or divestiture to their estimated net realizable value (see Note 2),
relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities
that might be necessary should we be unable to continue as
a going concern. If Vertex fails to raise capital when needed,
the lack of capital will have a material adverse effect on
Vertex's business, operating results, and financial condition.
Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of
normal recurring accruals and charges related to the carrying
value of net assets currently held for sale or divestiture and
litigation) considered necessary for a fair presentation have
been included. Operating results for the three and nine month
periods ended June 30, 2002 are not necessarily indicative of
the results that may be expected for the year ending
September 30, 2002.
The balance sheet at September 30, 2001 has been derived from the
audited financial statements at that date but does not include
all of the information and footnotes required by accounting
principles generally accepted in the United States for complete
financial statements. Certain amounts previously reported in the
2001 financial statements have been reclassified to conform to
the 2002 presentation.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended September 30, 2001.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 142 provides that separable
intangible assets that have finite lives will continue to be
amortized over their useful lives and that goodwill and
indefinite-lived intangible assets will no longer be amortized
but will be reviewed for impairment annually, or more frequently
if impairment indicators arise. Under the provisions of SFAS 142,
any impairment loss identified upon adoption of this standard is
recognized as a cumulative effect of a change in accounting
principle. Any impairment loss recognized subsequent to initial
adoption of SFAS 142 will be recorded as a charge to current
period earnings. The provisions of SFAS 142 are required to be
applied starting with fiscal years beginning after December 15,
2001 and must be applied as of the beginning of a fiscal year.
11
Early adoption is permitted for companies with fiscal years
beginning after March 15, 2001. We have elected to adopt the
provisions of SFAS 142, including the provisions for
nonamortization of intangible assets, as of October 1, 2001. Pre-
tax amortization was approximately $414,000 and $10.4 million
during the nine months ended June 30, 2002 and 2001,
respectively. Application of the nonamortization provisions of
SFAS 142 resulted in a decrease in amortization expense of
approximately $1.3 million in the nine months ended June 30, 2002.
As a result of our analysis of the fair market value of
intangible assets at September 30, 2001 and the resulting charge
for impairment recorded at that time, the transitional goodwill
impairment provisions of SFAS 142, did not have a significant
impact on our consolidated financial statements.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"),
that is effective for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years, with early
adoption permitted. These new rules on asset impairment supersede
FASB Statement 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and portions
of APB Opinion 30, "Reporting the Results of Operations." This
Standard provides a single accounting model for long-lived assets
to be disposed of and significantly changes the criteria that
would have to be met to classify an asset as held-for-sale.
Classification as held-for-sale is an important distinction since
such assets are not depreciated and are stated at the lower of
fair value and carrying amount. This Standard also requires
expected future operating losses from discontinued operations to
be displayed in the period(s) in which the losses are incurred,
rather than as of the measurement date as presently required. We
are currently evaluating the potential impact, if any, that the
adoption of SFAS 144 will have on our financial position,
results of operations and financial reporting upon adoption
effective October 1, 2002.
2. ACQUISITIONS AND DISPOSALS
Acquisitions
In October 2001, the Company acquired Euronet Consulting S.r.l.
("Euronet"), an Italian software applications consulting firm.
The value of the transaction was approximately $1.1 million. The
Company acquired all of the outstanding shares of Euronet for
684,620 shares of Vertex common stock, which at the date of
acquisition had a fair market value of approximately $625,000,
and obligations of approximately $450,000 to issue additional
shares of common stock. In settlement of the obligations, the
Company issued approximately 232,000 shares with an estimated
fair market value of $.44 per share in February 2002 and
approximately 760,000 shares with a fair market value of $.27 per
share in April 2002. The accompanying consolidated financial
statements assume the Euronet acquisition closed effective
October 1, 2001 and accordingly include the results of
operations of Euronet from October 1, 2001.
12
The following table presents unaudited pro forma results of
operations of the Company as if the above described acquisition
together with the purchase method acquisitions completed in
fiscal 2001 (including Applied Tactical Systems, Transcape, and
DynaSys, as described in the Company's Annual Report on Form 10-
K), had occurred at October 1, 2000:
Nine months ended June 30, 2001
-------------------------------
Revenues.............................. $ 50,319,638
Net loss.............................. (33,196,777)
Net loss per share.................... (1.04)
The unaudited pro forma results of operations are not necessarily
indicative of what the actual results of operations of the
Company would have been had the acquisitions occurred at the
beginning of fiscal 2001, nor do they purport to be indicative of
the future results of operations of the Company.
The pro forma amounts reflect the following:
- - The estimated amortization of the excess of the purchase
price over the fair value of net assets acquired for the nine
months ended June 30, 2001 for acquisitions closed prior to
June 30, 2001 and accounted for in accordance with APB 16,
which amounted to approximately $11.3 million.
- - The approximate number of shares issued to complete the
acquisitions.
The estimated purchase price for each acquisition may be subject
to certain purchase price adjustments. During the quarter ended
June 30, 2001, the Company filed a claim against the sellers for
all of the 263,000 shares held in escrow for one of the
acquisitions completed in fiscal 2000. The claim has not yet been
settled and thus the full amount of shares held in escrow remain
outstanding and no accounting adjustments have been made.
Abandoned Merger
During the quarter ended March 31, 2002, the Company terminated
a proposed transaction with Plus Integration Supply Chain
Solutions, BV, ("Plus") a private supply chain management
software and solutions provider headquartered in Haarlem,
the Netherlands, and charged to other expense approximately
$960,000 of deferred acquisition costs (primarily legal,
accounting and other professional service fees) incurred with
respect to the proposed transaction.
Sales or Divestitures of Non-Core Businesses
The Company developed and initiated a plan in the quarter
ended June 30, 2002 that, if consummated in its entirety,
would result in the sale or divestiture of assets or
closings of businesses that are not part of the Company's
current strategic plan or have not achieved an acceptable
level of operating results or cash flows. In connection with
this plan, the Company has ceased operations or sold (or has
reached agreements to sell) certain businesses and assets and
is actively seeking buyers for the remaining assets and businesses
13
that are not considered part of its plan. Accordingly, such net
assets and liabilities of these businesses are classified as
Liabilities Associated with Assets Held for Sale in the
accompanying June 30, 2002 balance sheet.
In the quarter ended June 30, 2002, a provision of approximately
$5.4 million has been recorded to reduce the carrying values of
these net assets to their estimated net realizable values
and to record estimated transaction and closing costs of
this plan. Retained liabilities are generally carried at
their contractual or historical amounts. The ultimate
amounts required to settle these retained liabilities will
differ from estimates, based on contractual negotiations and
the outcome of certain legal actions and filings. Severance
benefits, if any, will be recorded in the period that the
formal notification and communication of the terminations
occur.
The following is a summary of net assets and retained
liabilities as of June 30, 2002:
Receivables, net $ 5,448,172
Inventories,net 3,343,470
Property and equipment, net 2,645,280
Intangible assets (goodwill) 2,390,395
Other assets 1,263,552
Accounts payable (4,196,182)
Accrued liabilities (12,095,559)
Advances to customers and deferred revenue (3,902,064)
Mortgage notes payable (932,516)
Other liabilities (1,087,018)
-------------
Net liabilities retained on non core businesses $ (7,122,470)
=============
Bank debt totaling $1,337,813 at June 30, 2002
that arose from these operations is not classified as a
component of the "Liabilities Associated with Assets Held
for Sale".
The results of these businesses and assets for the three and
nine months ended June 30, 2002 are not segregated from other
businesses in the accompanying statements of operations as
they are not considered distinct segments or discontinued
operations.
In addition, the Company expects to record a nonrecurring
aggregate net gain in the three months ending September 30, 2002
related to the sales of those European businesses completed in
July and August 2002 (see Note 11).
14
DISPOSALS
During the three months ended June 30, 2002, the Company
completed the sale of three product lines:
1) In April 2002 the Company sold the source code,
documentation and all related rights to the TMS product
line to Pitney Bowes in exchange for $1.65 million,
which included the cancellation of the $1.0 million Pitney
Bowes promissory note and related accrued interest (see Note 8).
In connection with this sale, Vertex eliminated 34 positions.
2) In May 2002 the Company sold a portion of its mobile
computing solutions business in Ireland in exchange for
approximately $0.2 million of cash and the assumption
of approximately $0.2 million of liabilities.
3) In June 2002 the Company sold the source code,
documentation and all related rights to the NetWeave
software product line to a company established by
former employees of the Company. The proceeds included
approximately $0.5 million in cash and the assumption of
approximately $0.4 million of deferred revenue liabilities.
The aggregate net loss of approximately $3.8 million on
these three transactions is included in the Loss on
Assets Held for Sale component of other income (expense),
most of which had been accrued at March 31, 2002.
3. INVENTORIES
Inventories consist of the following:
June 30, September 30,
2002 2001
---------- ------------
Raw materials $903,381 $1,032,603
Work in process 207,643 754,146
Finished goods and parts 310,212 3,278,465
---------- ------------
$1,421,236 $5,065,214
========== ============
At June 30, 2002 inventories of the European operations held for
sale amounted to approximately $3.3 million and are presented on
the balance sheet in Liabilities Associated with Assets Held for Sale.
15
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
Subject to Amortization
Additions/
Estimated September 30, Amortization June 30,
Life 2001 Expense Disposals 2002
Gross Cost
Covenant Not To Compete 2 yrs $ 300,000 - ($ 300,000)(1) $ -
Technology 5 yrs 2,800,000 - ( 2,800,000)(2) -
Capitalized Software 3 yrs 444,980 - (97,711)(3) 347,269
Software License 5 yrs 1,028,890 - (1,028,890)(3) -
--------- ----------- -------
4,573,870 - (4,226,601) 347,269
Accumulated Amortization
Covenant Not To Compete 237,500 62,500 (300,000)(1) -
Technology 466,664 349,998 (816,662)(2) -
Capitalized Software 24,426 103,101 (40,710)(3) 86,817
Software License 222,924 154,332 (377,256)(3) -
--------- ------- ------------- ------
951,514 669,931 (1,534,628) 86,817
Net Book Value
Covenant Not To Compete 62,500 (62,500) - -
Technology 2,333,336 (349,998) (1,983,338)(2) -
Capitalized Software 420,554 (103,101) (57,001)(3) 260,452
Software License 805,966 (154,332) (651,634)(3) -
--------- --------- ------------- -------
$ 3,622,356 ($ 669,931) ($ 2,691,973) $ 260,452
=========== =========== ============ ========
(1) The Covenant Not To Compete became fully amortized in February of 2002.
(2) The Technology intangible asset was sold in April 2002.
(3) The software license and certain capitalized software was
sold in June 2002.
Total aggregate amortization expense for each of the fiscal years
ending 2002, 2003, 2004 and 2005 are estimated to be $700,000,
$100,000, $100,000 and $26,000, respectively. No amortization is
currently anticipated beyond 2005.
Not Subject to Amortization
September 30, Additions/ Disposals/ June 30,
2001 Foreign Exchange Reclasses 2002
Carrying Value
Goodwill $ 24,632,970 $1,571,266(5) ($ 7,240,440)(4)(6) $ 18,963,796
Acquired Workforce 520,000 - (520,000)(4)(6) -
------------ ---------- ------------- ------------
$ 25,152,970 $1,571,266 ($ 7,760,440) $ 18,963,796
============ ========== ============= ============
(4) Goodwill of approximately $3.0 million and Acquired
Workforce related to the Transcape acquisition were written
off in connection with its sale in April 2002 (see Note 2).
(5) The additions to goodwill during the nine months ended June
30, 2002 relate primarily to the acquisition of Euronet (see
Note 2), as well as foreign exchange translation adjustments
on European goodwill.
(6) Goodwill disposals/reclasses of approximately $4.2 million relate
to European assets held for sale at June 30, 2002 and are
classified in the accompanying June 30, 2002 balance sheet in
Liabilities Associated with Assets Held for Sale.
16
5. BANK LINES OF CREDIT
The Company maintains lines of credit with several banks in
Europe, which allow it to borrow in the applicable local
currency. These lines of credit total approximately $1.9 million
and are concentrated in Italy, France and the Netherlands. The
Company's lines of credit generally are collateralized by the
accounts receivable of the respective subsidiary. As of June 30,
2002 the Company had outstanding balances of approximately $1.3
million on these foreign lines of credit. These loans bear
interest at rates ranging from 5.5% to 10.8%.
6. SENIOR CREDIT FACILITY
In November 2001, the Company closed on a $2.0 million, 7%
convertible note payable with Laurus Master Fund, Ltd (Laurus),
collateralized by certain North American accounts receivable,
with a maturity date of November 30, 2003. The Note was
convertible into Vertex common shares, which the Company was
required to register, at the lower of (i) $0.85 per share
(2,352,941 shares) or (ii) 88% of the eight lowest closing prices
during the thirty days prior to the conversion date. These
conversion rates were subject to certain antidilution provisions.
In February 2002, the Company and Laurus amended and restated the
convertible note payable and entered into a Senior Credit
Facility with a maximum borrowing availability of $2,405,000.
The borrowings under this facility ($904,176 at June 30, 2002)
are collateralized by all of the North American accounts
receivable of the Company. In addition, such borrowings
are collateralized by all of the tangible and intangible
assets of the Company and its North American subsidiaries,
subordinated to the security interests under certain Notes
Payable of Midmark Capital and affiliates. Interest accrues on
the outstanding balance at 1.67% per month and the Company pays
a management fee equal to 1.5% of all purchased invoices under
the Accounts Receivable Purchase Agreement.
In the event the aggregate borrowings exceed the maximum
borrowings available under the agreement, such overadvance shall
be due and payable on demand and shall be evidenced by a
Convertible Note Payable to Laurus. Interest will accrue at an
annual rate of 7%. Laurus shall have the right to convert the
principal amount and interest due under this note into shares of
the Company's common stock. Subject to anti-dilution
adjustments, the conversion price per share shall be the lower
of (i) 92% of the closing price for the common stock on the day
the overadvance is created or (ii) 88% of the average of the
three lowest closing prices for the common stock for the thirty
trading days prior to the conversion date.
In connection with the original agreement, the Company also
issued options to purchase 180,000 of the Company's Common Stock
at $1.284 per share to the lender valued at $162,000 (See Note
9). The fair market value of the options, together with the cash
costs ($219,000) associated with the closing of these
transactions, are included in Other Assets as deferred financing
costs, and will be amortized to interest expense over the three
year life of the facility. As a result of an imbedded beneficial
conversion feature, the Company incurred a non-cash interest
charge of approximately $1.2 million in November 2001.
17
7. NOTES PAYABLE - RELATED PARTIES
Long-Term:
On June 19, 2001 and subsequently amended in November 2001 and
again in January 2002, the Company issued in the aggregate
$5,500,000 of convertible notes payable to Midmark Capital L.P.,
Midmark Capital II L.P., and certain individuals related to these
two entities (collectively "Midmark Capital"). These notes were
to automatically convert into shares of Vertex common stock on
the day that the Company obtains the requisite shareholder
approval for the issuance of shares to Midmark Capital. In the
event that shareholder approval was not obtained by September 30,
2003, the principal amount plus any accrued interest (at prime
rate, which was 4.75% at June 30, 2002) will become immediately
due and payable. The notes were to convert, subject to future
events, into (i) Vertex common stock at a future market price no
higher than $1.31 per share or (ii) 5,500 shares of Series "C"
Preferred Stock, which were convertible into 6,545,000 common
shares at $0.84 per share. The Company was required to register
the underlying common shares. In the event of a shareholder
rejection, or prepayment prior to shareholder approval, the
interest rate on the notes would have increased retroactively to
14%.
In March 2002, the Company agreed to amend the $5.5 million of
convertible notes payable issued in June 2001. The amendment
removed both the requirement for shareholder approval and
the automatic conversion feature, and set the maturity date for
September 30, 2003. Concurrent with the amendment of these notes,
Midmark Capital elected to convert approximately $782,000 of
principal and $218,000 of accrued interest into 997 shares of
Series "C" preferred stock. The amended convertible notes payable
of $4,718,717 accrue interest at prime and are convertible
into Series" "C" preferred shares at a conversion price of $1,000
per share. The Series "C" preferred shares in turn are convertible
into Common Shares at $0.84 per share.
In November 2001, the Company issued $3,000,000 of 10%
convertible notes payable, with a maturity date of September 30,
2003, to Midmark Capital II, LP ("Midmark II") that can convert
into 3,000 shares of Vertex Series "C" Preferred Stock at the
option of Midmark II on the day that the Company obtains the
requisite shareholder approval for the issuance of Series "C"
Preferred Stock to Midmark II. Midmark II can convert the Series
"C" Preferred Shares into 3,570,026 shares of Vertex common stock
at $0.84 per share. The Company is required to register the
underlying common shares. In the event of a shareholder
rejection, or prepayment prior to shareholder approval, the
interest rate on the notes would increase retroactively to 14%.
Collectively, the $7,718,717 of convertible notes at June 30, 2002
described above are collateralized by all tangible and intangible
property of the Company, except that the holders have executed in
favor of certain senior lenders a subordination of their right
of payment under the Notes and the priority of any liens on
certain assets, primarily accounts receivable. Subsequent to
June 30, 2002, these convertible notes were reduced by $6.0
million with the sale of the French based advanced planning
software business to MidMark (See Note 11).
18
Current:
In August 2001, the Company issued a $359,375 convertible note
payable to PARTAS AG, which is owned by one of its Directors.
This note will automatically convert into 250,000 shares of
Vertex common stock on the day that the Company obtains the
requisite shareholder approval for the issuance of shares to
PARTAS AG. Since shareholder approval was not obtained by
February 22, 2002, the principal amount plus any accrued interest
(at prime rate which was 4.75% at June 30, 2002) became
immediately due and payable. Subsequent to June 30, 2002, this
convertible note payable was fully settled with the sale of the
German point solutions business (See Note 11).
During 2002, the Company has borrowed $2,117,400 from Midmark
Capital II L.P. These notes are payable on demand, bear interest
at 10% per annum and are secured by the same collateral in which
the Company previously granted a security interest to Midmark
under the long-term convertible notes payable above. Subsequent
to June 30, 2002, the Company borrowed an additional $444,500
from Midmark II L.P. under the same terms and conditions as the
prior Midmark demand notes.
The conversion rates of all the above Midmark notes are subject
to certain antidilution provisions.
8. NOTES PAYABLE
The Company has a note payable with a remaining balance of
approximately $540,000 bearing interest at 8% for the September
1999 acquisition of ICS International AG (ICS) in Germany. This
note and a non-interest bearing loan of approximately $350,000
are currently past due. Subsequent to June 30, 2002, the interest
bearing and non-interest bearing notes were fully settled with
the sale of the German point solutions business (See Note 11) and
are included in the Liabilities Associated with Assets Held for Sale.
The Company had approximately $1.5 million in promissory notes
payable, bearing interest at 8%, related to the September 2000
acquisition of Renaissance Software, Inc., which were originally
due on June 30, 2001. On August 9, 2001, the Company renegotiated
the terms of these notes and in return for 147,000 shares of
stock (valued at approximately $162,000), the notes were payable
in two installments: $250,000 due on August 15, 2001, and the
remaining balance, plus accrued interest from June 30, 2001, due
on September 30, 2001. The Company paid the August 15, 2001
installment and has not paid the remaining past due $1.25 million
obligation (See Note 10).
In October 2000 the Company purchased the assets and business of
three former European service and maintenance divisions of Genicom
International (collectively referred to as "ESSC") for approximately
$2 million in cash at closing and a deferred cash payment of $500,000
due on September 1, 2001. The Company paid $125,000 in December 2001
and has not paid the remaining $375,000 balance. At June 30, 2002,
263,158 shares of Vertex common stock collateralize the unpaid balance.
In September 2001, in connection with its acquisition of DynaSys,
the Company assumed certain notes payable to banks and their
entities. These notes payable had an aggregate balance of
$435,000 at September 30, 2001 and were principally due by
December 31, 2001 with no interest. Approximately $90,000 of
these notes were settled through the issuance of 68,933 shares of
Vertex common stock in December 2001.
19
On February 1, 2002, the Company closed on a $1.0 million
promissory note with Pitney Bowes Inc., payable on demand after
February 15, 2002, with interest at 12%. This note was
collateralized by all tangible and intangible property of the
Company, except that the holders had executed (i) in favor of
certain senior lenders a subordination of their right of payment
under the note and the priority of any liens on certain assets,
primarily accounts receivable and (ii) an Intercreditor Agreement
with Midmark Capital, which was entered into in connection with
this promissory note. In April 2002, this note was fully settled
with the sale of source code, documentation and all related
rights to the TMS product line to Pitney Bowes (see Note 2).
9. STOCKHOLDERS' EQUITY (DEFICIT)
In January 2002, the Company issued 102,663 shares valued at
$122,000 to an employee to settle an obligation for deferred
compensation. Also in January 2002, the Company granted options
to purchase an aggregate 1,800,000 common shares at $.80 per
share in connection with the settlement of certain litigation.
The Company also placed an equivalent number of common shares
into escrow to be available upon exercise of these options. Of
the 1,800,000 shares issued into escrow, 1,500,000 were
unregistered shares. The settlement agreement also required the
Company to register these shares by April 30, 2002, or an
additional monthly cash payment would be required until the
shares are registered. The Company has not registered these
shares and has not made additional monthly cash payments and, as
part of the settlement agreement, three consent judgements have
been entered against Vertex (See Note 10).
In April 2002, the Company sold 34,404 shares to its Chief Executive
Officer at a price of $2.18 per share.
During the nine months ended June 30, 2002, the Company issued
1,676,168 unregistered shares of common stock to the selling
shareholders of Euronet in consideration for the purchase of
Euronet (See Note 2).
In November 2001, the Company granted options to Laurus, the
senior credit facility lender, to purchase an aggregate of
180,000 common shares at $1.284 per share. The fair market value
of these options was approximately $162,000, and was determined
in accordance with the Black-Scholes formula. This amount was
recorded as additional paid in capital, as well as a deferred
financing cost, which will be amortized to interest expense over
the life of the note.
During the nine months ended June 30, 2002, the Company granted
1,841,168 stock options to employees and directors, at fair
market values ranging from $.27 to $1.07 per share. Also during
the period, 1,056,000 expired stock options were cancelled.
During the nine months ended June 30, 2002, options for 1,676,168
shares of common stock were exercised in return for an equivalent
number of previously issued shares, which were then cancelled.
Preferred Stock
Series "A"
In connection with the Transcape acquisition in February 2001
(See Note 1 to the Consolidated Financial Statements in the
Annual Report on Form 10-K), the Company issued 1,356,852 shares
of Series "A" Preferred Stock. The Series "A" Preferred Stock is
convertible, at the option of the holder, into common stock on a
one for one basis. All of the common shares issuable on
conversion of the Series "A" Preferred Stock must be registered
by the Company.
20
Series "B"
In October 2001, the Company raised $1,000,000 in cash through
the issuance and sale of 1,000 shares of Series "B" Convertible
Preferred Stock to Pitney Bowes, with each share of Series "B"
Preferred being convertible into 1,190 shares of common stock at
a price of $0.84 per share. The Company must register all of the
common shares issuable on conversion of the Series "B" Preferred
Stock. In connection with this transaction Pitney Bowes had
nominated Michael Monahan to Vertex's Board of Directors. He
served as a Director from November 15, 2001 until his resignation
on February 21, 2002.
Series "C"
In March 2002, the Company issued 997 shares of Series "C"
Convertible Preferred Stock to Midmark Capital upon conversion of
approximately $997,000 of convertible notes payable and accrued
interest (See Note 7). Each share of Series "C" Preferred is
convertible into 1,190 shares of common stock at a price of $0.84
per share. The Company must register all of the common shares
issuable on conversion of the Series "C" Preferred Stock.
All of the preferred stockholders are entitled to vote their
shares as though such conversion had taken place. In addition,
preferred stockholders are not entitled to preferred dividends,
but are entitled to their pro rata share of dividends, if any,
declared on common stock under the assumption that a conversion
to common stock had occurred.
Pursuant to certain acquisition agreements and private placement
offerings, the Company committed to register the common shares
issued or issuable pursuant to options issued within specified
periods of time. The Company has been unable to register the
shares on a timely basis for certain of the transactions. The
Company's present intent is to file a registration statement on
Form S-1 as soon as possible. At June 30, 2002, the Company's
obligation was to register all of the common shares issuable on
conversion of preferred shares, approximately 8.5 million common
shares and approximately 2.7 million shares underlying options
(See Note 10).
10. CONTINGENT LIABILITIES
We are party to certain judicial actions and an arbitration
proceeding, the outcomes of which may, together, or individually,
have a material negative impact on our financial condition and
liquidity if we do not prevail. The items of litigation
are summarized as follows:
a) On October 31, 2001, an action was commenced against Vertex
alleging the default in payment of certain unsecured promissory
notes in the principal aggregate sum of $1,225,000 (United States
District Court; Southern District of New York, Docket #01 CIV.
9600(PKL)). The noteholders demand $1,225,000, together with
interest accruing at the rate of 8% per annum from June 30, 2001.
21
b) On September 28, 2001 Vertex filed a Demand for Arbitration
with the American Arbitration Association ("AAA") against Russell
McCabe, Daniel McCabe and David Motovidlak (the "ATS Shareholders"),
the former shareholders of Applied Tactical Systems, Inc., an
entity which merged with Vertex pursuant to a Merger Agreement
dated December 29, 2000, seeking damages resulting from the
McCabe's interference with Vertex's employees and customers.
The ATS Shareholders also filed a Demand for Arbitration seeking
$25,000,000 in damages based on, among other things, Vertex's
alleged failure to register the ATS Shareholders' stock in Vertex
by a certain date. At present, discovery is almost concluded and
the ATS Shareholders' Motion for Default and/or Summary Judgment
is pending. The arbitration is scheduled for trial on October 28,
2002.
In a related action, on December 10, 2001 the ATS Shareholders
filed a complaint in the United States District Court for the
District of New Jersey (Docket #01-5747(WHW)) entitled Russell
McCabe, et al. v. Ernst & Young, LLP et al., against Ernst &
Young LLP, Nicholas R.H. Toms, Hugo Biermann, Gregory Thomas,
Edwardstone & Company, Inc., Wayne Clevenger, Joseph Robinson,
MidMark Capital, LP, Otto Leistner, Bunter B.V.I., Ltd.,
George Powch, Stephen M. Duff, The Clark Estates, Inc., Raymond
Broek, Donald Rowley, Douglas L. Davis, Barbara H. Martorano
and Jacqui Gerrard. Vertex itself is not a defendant in this
action. The defendants are our former auditors, and certain
shareholders, officers and directors individually. The ATS
Shareholders are seeking damages in the amount of $40,000,000 plus
punitive and statutory treble damages based upon, among other
things, allegations that Vertex failed to register stock of the
ATS Shareholders by a certain date. Counsel has been retained and
we understand that the defendants intend to contest the ATS
shareholders' claims vigorously. The ATS Shareholders have
voluntarily dismissed defendants Donald Rowley, Douglas L. Davis,
Barbara H. Martorano and Jacqui Gerrard. A Motion to dismiss
the ATS Shareholders' claims against the remaining defendants
is pending.
c) We also continue to defend two subsidiary customer claims
resulting from projects that were in process at the time of our
acquisition of the respective subsidiary. Management believes
that any potential exposure with respect to these two matters
would be covered by accruals established at the time of the
respective acquisition.
d) On May 7, 2002 an action was commenced in the Supreme Court of
the State of New York, County of New York entitled Harris Hoover
& Lewis, Inc., d/b/a Harris, Hoover and Lewis LLC ("Harris Hoover")
vs. Vertex Interactive, Inc. Index no. 601722 in which Harris Hoover
alleges that the Company breeched a financial advisory contract.
The claim seeks damages in the amount of $250,000. The Company
has filed a counter claim alleging breech of contract, breech of
fiduciary duty and intentional misrepresentation and seeks damages
in an amount not less than $2,050,000 plus punitive damages.
e) As part of the settlement entered into between the Company
and three former principals of a company acquired by Vertex
in 2000, consent judgments in the amount of approximately $1.0
million each were entered against Vertex on July 19, 2002.
The incremental liability has been included in other expense for
the three and nine months ended June 30, 2002. The Company is
currently negotiating with the former owners to accept forms of
22
payment other than cash and there can be no assurance that
this matter will be settled at this time. In July 2002, the
former owners have obtained a court levy upon several of the
Company's bank accounts, placing a hold on approximately $70,000
of the Company's funds. The Company, together with its secured
lenders, is objecting to the turnover of these funds.
f) On November 20, 2001, an action was commenced in the Superior
Court of California, County of Los Angeles, SouthWest District
entitled Reichman et al. v. Vertex Interactive, Inc. et al.
(the "Plaintiffs"). Plaintiffs were former shareholders of
a company we acquired in 2000. In June 2002, this matter was settled
on mutually agreeable terms with minimal cash outlay and no impact
on results of operations. The suit is awaiting a formal dismissal.
11. SUBSEQUENT EVENTS
During July and August, 2002, the Company has completed the sale
of various components of its European business, including (a) the
UK hardware maintenance business; (b) the Benelux point solutions
and hardware maintenance businesses and (c) the French hardware
maintenance business for a total consideration of approximately
$0.3 million.
In July, the Company sold the German point solutions business
to Partas AG, which is owned by one of its Directors, and a related
entity, in consideration for approximately $0.4 million, including
the cancellation of the Partas note payable (see Note 7) and
related accrued interest.
In August, the Company sold DynaSys S.A., its French based
advanced planning software business to MidMark Capital in
consideration for the cancellation of $6.0 million of convertible
notes payable. As part of this transaction, Vertex retains
the right to repurchase on February 9, 2003 20% of the shares
of DynaSys held by MidMark at the original purchase price of
$1.2 million paid by MidMark. The purchase price for such
shares can be paid for in newly issued 10% senior secured
notes or cash, at Vertex's option. This right of repurchase
is subject to among other things, an initial public offering
of DynaSys common stock in the six months following the closing
and that the total market capitalization of DynaSys shall
be not less than $9 million at the time of repurchase.
The Company expects to recognize an aggregate net gain
on the sales of these European businesses in the fourth quarter.
In July and August, 2002, the Company borrowed an additional
$444,500 million from MidMark Capital II, L.P. increasing
the demand note payable (See Note 7 - current) to $2,561,900.
In September 2002, after being unsuccessful in attempting to
sell its three (3) Italian and three (3) remaining Irish
businesses, and based on the continuing cash drain from these
operations the respective boards of directors determined that
in the best interest of their shareholders that they would seek
the protection of the respective courts in Milan and Ireland,
which have agreed to an orderly liquidation of these companies
for the benefit of their respective creditors.
23
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains, in addition to
historical information, certain forward-looking statements that
involve significant risks and uncertainties. Such forward-looking
statements are based on management's belief, as well as
assumptions made by and information currently available to,
management pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Our actual
results could differ materially from those expressed in or
implied by the forward-looking statements contained herein.
Factors that could cause or contribute to such differences
include, but are not limited to, those discussed herein and in
Item 1: "Business", included in our Annual Report on Form 10-K
for the year ended September 30, 2001. Vertex undertakes no
obligation to release publicly the result of any revisions to
these forward-looking statements that may be made to reflect
events or circumstances after the date of this Quarterly Report
or to reflect the occurrence of other unanticipated events.
This discussion and analysis should be read in conjunction with
the unaudited consolidated financial statements and related notes
of the Company contained elsewhere in this report. In this
discussion, the years "2002" and "2001" refer to the three and
nine months ended June 30, 2002 and 2001, respectively.
Overview
Purchase Acquisitions:
As discussed in Note 1 to the Consolidated Financial Statements,
included in the Annual Report on Form 10-K and Note 2 to the
Consolidated Financial Statements included herein, we have
completed a number of acquisitions since October 2000, which have
substantially expanded our portfolio of products and services,
as well as our geographic reach throughout North America and
into Europe. The magnitude of these acquisitions had a
significant impact on the comparability of our results of
operations between 2001 and 2002. The following summary of
the more significant purchase acquisitions closed during the
last year is segregated by those first impacting operations
in fiscal 2001 ("Fiscal 2001 Acquisitions") and those first
impacting operations in fiscal 2002 ("Fiscal 2002
Acquisitions").
Fiscal 2001 Acquisitions:
In October 2000, we purchased the assets and business of three
former European service and maintenance divisions of Genicom
International (collectively referred to as "ESSC"), which
expanded our ability to provide hardware and software maintenance
to our European customers.
Effective December 31, 2000, Vertex completed a merger with
Applied Tactical Systems, Inc. ("ATS"), a provider of point
solution connectivity software for SAP installations.
24
Effective February 7, 2001, Vertex purchased from Pitney Bowes
its Transportation Management Software and certain engineering
assets (the Transcape Division, or "Transcape"), which broadened
our portfolio of enterprise level applications.
On February 13, 2001, we acquired all of the capital stock of
Binas Beheer B.V. ("Binas") a European IT consulting practice.
Fiscal 2002 Acquisitions:
Effective September 30, 2001, we acquired all of the outstanding
stock of DynaSys, a software developer of enterprise level
advance planning and scheduling applications.
In October 2001, Vertex acquired Euronet Consulting S.r.l
("Euronet"), an Italian software applications consulting firm
that expanded our professional services capabilities in Europe.
Vertex has accounted for each of these acquisitions using the
purchase method of accounting. Accordingly, the financial
statements include the results of operations from November 1,
2000 for ESSC, from January 1, 2001 for ATS, from February 1,
2001 for Binas, from February 7, 2001 for Transcape, from October
1, 2001 for DynaSys and from October 1, 2001 for Euronet
(collectively, the "Purchase Acquisitions").
Results of Operations
Three months ended June 30, 2002 ("2002") compared to three
months ended June 30, 2001 ("2001").
Operating Revenues:
Operating revenues decreased by approximately $4.2 million (or
30%) to $10.0 million in 2002.
Products and Services
Sales to external customers by the three significant
product and service line groupings for the three months
ended June 30, 2002 and 2001 (in thousands) are as
follows:
June 30
----------------
2002 2001
------- ------
Point Solutions........................... $ 3,934 $ 7,055
Enterprise Solutions...................... 1,899 2,455
Service and Maintenance................... 4,126 4,618
------ -------
$ 9,959 $14,128
======= =======
Point solutions products and services revenues decreased
approximately $3.1 million, to $3.9 million in 2002 from $7.0
million in 2001, primarily as a result of our strategy of de-
emphasizing lower margin product sales, together with the impact
of the downturn in the economy, especially post-September 11 in
both North America and Europe.
25
Enterprise solutions revenues decreased approximately $0.6
million to $1.9 million in 2002 from $2.5 million in 2001.
Enterprise solutions revenues increased by approximately $0.8
million as a result of the acquisition of the advanced
planning and scheduling software in September 2001. The revenues
generated by our eSuite of Java (TM)architected products and
services acquired in 2001 were $0.1 million higher than the
revenues generated last year. Offsetting these increases,
our light directed order fulfillment systems revenues
decreased $1.4 million in 2002. Sales of these products have
been severely impacted by the general economic slowdown and
the hesitancy of customers to commit to large systems
purchases. We expect this slowdown to have a negative impact
on the fiscal 2002 and 2003 light directed revenues, at least
into the first half of fiscal 2003. In addition, the sale of the
transportation management systems software to Pitney Bowes in
April 2002 reduced revenues by $0.2 million.
Service and maintenance revenues have decreased approximately
$0.5 million from 2001. European service and maintenance revenues
decreased by approximately $0.2 million in 2002. Our North
American service and maintenance revenues decreased
approximately $0.4 million in 2002 resulting primarily from the
reduction in the broadband cabling market, as a result of the
downturn in the general economy last year.
Gross Profit:
Gross profit decreased by approximately $2.5 million (or 43%) to
$3.3 million in 2002. As a percent of operating revenues, gross
profit was 33.2% in 2002 as compared to 40.8% in 2001. The
decrease in the gross profit margin in 2002 was impacted by
certain higher margin sales in point solutions in 2001 that did
not repeat in 2002 and the significant decrease in the
higher margin enterprise solutions revenues, principally the
light directed order fulfillment systems. The gross profit
percentage was favorably impacted by a higher percentage
of professional services revenues and higher product margins
generated by the entities acquired during 2002, mitigating the
impact of the significant reduction in light directed order
fulfillment systems revenues.
Operating Expenses:
Selling and administrative expenses decreased $3.5 million (or
37%) to $6.0 million in 2002. At the end of 2001 we initiated
various cost reduction measures, including a 33% reduction
in the number of our employees, facilities consolidations, as
well as reductions in other expenses deemed redundant such as
marketing and advertising, non essential travel and other
headcount-related expenses. As a result, we reduced our selling
and administrative expenses by approximately $3.8 million.
Offsetting this decrease, the 2002 acquisitions accounted for
approximately $0.3 million of additional selling and administrative
expenses.
26
Research and development expenses have decreased approximately
$1.2 million (or 59%) to $0.8 million in 2002 from $2.0 million
in 2001. In 2001, following our acquisition of the core eSuite
functionality in September 2000, we invested substantially in the
completion of the eSuite of Java (TM) architected products in
order to achieve commercial stability. While ongoing research and
development continued in 2002, the R&D expenditures related to
these products have decreased approximately $0.4 million from the
prior year. In addition, approximately $0.6 million was incurred
on the transporation management systems (which product was sold
in April 2002) and $0.4 million was incurred in 2001 in the
development of warehouse management products. Offsetting these
decreases, the R&D expenditures on projects associated with
the products acquired with DynaSys in 2002 increased R&D by
approximately $0.2 million in 2002.
The decrease in the amortization of intangibles to zero in 2002,
as compared to $4.1 million in 2001 is the direct result of two
factors: (i) the write-off of intangible assets in the fourth
quarter of fiscal 2001, based on an assessment of the fair market
value of these assets as of September 30, 2001; and (ii) the
adoption of SFAS 142 as of October 1, 2001, which
substantially reduced the intangibles that are to be amortized in
the future (See Note 4). Last year these intangibles were being
amortized over their estimated lives ranging from 2 to 25 years.
At September 30, 2001 we wrote off approximately $78.4 million,
as the result of an assessment of the carrying values of our
intangible assets recorded in connection with all of our
acquisitions. Management undertook this assessment because of the
significant negative economic trends impacting our current
operations, lower expected future growth rates, a decline in our
stock price, and significantly lower valuations for companies
within our industry. At the time of our analysis, the net book
value of our assets exceeded our market capitalization. Based on
our evaluation of these factors, our belief that the decline in
market conditions within our industry was significant and
permanent, the consideration of all other available evidence, we
determined that the Fair Market Value of our long-lived assets
was less than their carrying value.
Interest expense increased by approximately $0.3 million to $0.5
million in 2002. This increase is due to increased working
capital borrowings at the end of fiscal 2001 and early in fiscal
2002, including approximately $9 million of convertible notes
payable and a $2.4 million senior credit facility in North
America.
Other expenses increased approximately $8.1 million in 2002
primarily as a result of (1) a $5.4 million disposition/impairment
charge for certain non-core assets primarily in Europe (see Note
2) and (2) a $3.1 million increase in our provision for litigation
(see Note 10).
The income tax provision is negligible in both years due
primarily to operating losses. The income tax provision is
comprised primarily of foreign taxes provided on the profit of
certain subsidiaries for which no net operating losses are
available or where the utilization of the pre-acquisition net
operating losses are an adjustment of goodwill.
27
Nine months ended June 30, 2002 ("2002") compared to nine months
ended June 30, 2001 ("2001").
Operating Revenues:
Operating revenues decreased by approximately $9.8 million (or
22%) to $34.5 million in 2002.
Products and Services
Sales to external customers by the three significant
product and service line groupings for the nine months
ended June 30, 2002 and 2001 (in thousands) are as
follows:
June 30
2002 2001
Point Solutions...........................$14,827 $21,989
Enterprise Solutions...................... 6,430 6,199
Service and Maintenance................... 13,205 16,028
------- -------
$34,462 $44,216
======= =======
Point solutions products and services revenues decreased
approximately $7.2 million, to $14.8 million in 2002 from $22.0
million in 2001, primarily as a result of our strategy of de-
emphasizing lower margin product sales, together with the impact
of the downturn in the economy, especially post-September 11 in
both North America and Europe. Sales of our mobile computing
products, principally in the U.K., decreased approximately $1.8
million, as revenues in 2001 included two large contracts.
Enterprise solutions revenues increased to $6.4 million in 2002
from $6.2 million in 2001. Enterprise solutions revenues
increased by approximately $2.6 million as a result of the
acquisition of advanced planning and scheduling software in
September 2001. The revenues generated by our eSuite of Java (TM)
architected products and services and transportation management
systems acquired in 2001 were $0.5 million higher than the
revenues generated last year. This year reflects progress in
recognition of license revenues, as they have previously been
well below expectations, both as a result of delays in the
development (now substantially complete) and roll out of the
eSuite of products and the downturn in the economy. Offsetting
these increases, our light directed order fulfillment systems
revenues decreased $3.0 million in 2002. Sales of these products
have been severely impacted by the general economic slowdown and
the hesitancy of customers to commit to large systems purchases.
We expect this slowdown to have a negative impact on the fiscal
2002 and 2003 light directed revenues, at least into the first
half of fiscal 2003.
28
Service and maintenance revenues have decreased approximately
$2.8 million from 2001. European service and
maintenance has resulted in an additional $0.3 million of revenue
in 2002. Hoever, our North American service and maintenance
revenues decreased approximately $3.1 million in 2002, resulting
primarily from a large $2.2 million cable installation project
in 2001 and the reduction in the broadband cabling market,
as a result of the downturn in the general economy last year.
Gross Profit:
Gross profit decreased by approximately $3.7 million (or 24%) to
$11.8 million in 2002. As a percent of operating revenues, gross
profit was 34.1% in 2002 as compared to 35.0% in 2001. The
gross profit percentage has increased due to the higher margin
software and system sales, principally from the enterprise
solutions products and services, which represented 19% of total
revenues in 2002 and 14% in 2001. The gross profit percentage was
also favorably impacted by a higher percentage of professional
services revenues and higher product margins generated by the
entities acquired during 2001 and 2002. Offsetting these
increases to the gross profit percentage, point solution sales
have decreased substantially, impacting the ability of the
company to cover non variable costs and therefore reducing the
gross profit percentage in 2002.
Operating Expenses:
Selling and administrative expenses decreased $6.1 million (or
23%) to $20.2 million in 2002. At the end of 2001 we initiated
various cost reduction measures, including a 33% reduction
in the number of our employees, facilities consolidations, as
well as reductions in other expenses deemed redundant such as
marketing and advertising, non essential travel and other
headcount-related expenses. As a result, we reduced our selling
and administrative expenses by approximately $7.0 million.
Offsetting this decrease, the 2001 and 2002 acquisitions
accounted for approximately $0.9 million of additional selling
and administrative expenses.
Research and development expenses have decreased approximately
$1.7 million (or 31%) to $3.8 million in 2002 from $5.5 million
in 2001. In 2001, following our acquisition of the core eSuite
functionality in September 2000, we invested substantially in the
completion of the eSuite of Java (TM) architected products in
order to achieve commercial stability. While on going research
and development continued in 2002, the R&D expenditures related
to these products have decreased approximately $1.7 million from
the prior year. In addition, approximately $0.6 million was
incurred in 2001 in the development of warehouse management
products. Offsetting these decreases, the R&D expenditures on
projects associated with the products acquired with our
purchase of DynaSys in 2002 increased R&D by approximately
$0.5 million in 2002.
The decrease in the amortization of intangibles to $0.4 million
in 2002, as compared to $10.4 million in 2001 is the direct result
of two factors: (i) the write-off of intangible assets in the
fourth quarter of fiscal 2001, based on an assessment of the fair
market value of these assets as of September 30, 2001; and (ii)
the adoption of SFAS 142 as of October 1, 2001, which
substantially reduced the intangibles that are to be amortized in
29
the future (See Note 4). Last year these intangibles were being
amortized over their estimated lives ranging from 2 to 25 years.
At September 30, 2001 we wrote off approximately $78.4 million,
as the result of an assessment of the carrying values of our
intangible assets recorded in connection with all of our
acquisitions. Management undertook this assessment because of the
significant negative economic trends impacting our current
operations, lower expected future growth rates, a decline in our
stock price, and significantly lower valuations for companies
within our industry. At the time of our analysis, the net book
value of our assets exceeded our market capitalization. Based on
our evaluation of these factors, our belief that the decline in
market conditions within our industry was significant and
permanent, the consideration of all other available evidence, we
determined that the Fair Market Value of our long-lived assets
was less than their carrying value.
In 2001, as a result of the February 2001 acquisition of
Transcape, $3.6 million of the purchase price was charged
directly to expense as a write-off of in-process research and
development costs, based on a valuation made by an independent
valuation firm.
Interest expense increased by approximately $1.9 million to 2.5
million in 2002. This increase is due to increased working
capital borrowings at the end of fiscal 2001 and early in fiscal
2002, including approximately $9 million of convertible notes
payable and a $2.4 million senior credit facility. As a result
of an imbedded beneficial conversion feature in the $2.0 million
convertible notes payable, the Company incurred a non-cash
interest charge of approximately $1.2 million. Offsetting this
increase was the payment or settlement during 2001 of certain
acquisitions related debt.
Other expenses increased approximately $12.9 million in 2002
primarily as a result of (1) a $3.8 million loss on the sale of
assets (See Note 2) (2) a $5.4 million disposition/impairment
charge for certain non-core assets primarily in Europe (see Note 2),
(3) a $3.1 million increase in our provision for litigation
(see Note 10) and (4) a $960,000 write off of deferred acquisition
costs related to the proposed Plus acquisition (See Note 2).
The income tax provision is negligible in both years due
primarily to operating losses. The income tax provision is
comprised primarily of foreign taxes provided on the profit of
certain subsidiaries for which no net operating losses are
available or where the utilization of the pre-acquisition net
operating losses are an adjustment of goodwill.
30
Liquidity and Capital Resources
The successful implementation of our business plan has required,
and will require on a going forward basis, substantial additional
funds to finance (i) the growth of our operations,
(ii)further development of our software to keep it technologically
current, (iii) historic and expected future operating losses, and
(iv) additional selective acquisitions to achieve the scale we believe
will be necessary to remain competitive in the global SCM industry.
Background
In the fiscal year ended September 30, 2001, the overall decline in
the enterprise applications software and telecommunications industries
had a substantial negative impact on our results of operations. These
factors, in combination with the substantial additional
investment incurred in completing our enterprise suite of products
and our continuing negative operating cash flows, placed
significant pressures on our financial condition and liquidity
position. Operating and investing activities resulted in cash
consumption of $21.5 million in 2001. During fiscal 2001, the
Company completed a series of transactions to fund its cash
needs arising from the foregoing, including private placement sales
of common shares resulting in approximately $8.8 million of proceeds
(net of cash transaction costs totaling $0.8 million) and the
issuance of convertible notes in an aggregate principal amount
of $5.9 million. In addition, the exercise of stock options during
the period totaled $0.9 million. At September 30, 2001, the above
activities resulted in a net cash balance of $1.4 million (a decrease
of $6.5 million) and a negative working capital balance of $15.1
million.
From October 1, 2001 through June 30, 2002 we have raised
approximately $9.3 million (net of cash transaction costs)
through the issuance of: (1) Series "B" Convertible Preferred
Stock to Pitney Bowes valued at $1 million; (2) $3 million in
notes payable convertible into Series "C" Convertible Preferred
Stock to Midmark Capital II, LP; (3) $3.1 million of demand notes
payable from Pitney Bowes and Midmark Capital II L.P. and (4)
$2.4 million in a senior credit facility collateralized by North
American accounts receivable. During the same period, we sold
the source code, documentation and all related rights to the TMS
product line to Pitney Bowes in exchange for $1.65 million, which
included the cancellation of the $1.0 million Pitney Bowes
promissory note and related accrued interest; sold the Netweave
product line for approximately $0.5 million of cash and the
assumption of $0.4 million of liabilities; sold certain of the
Irish product lines for approximately $0.2 million; paid various
debt obligations ($3.0 million) and approximately $7.8 million
was used for operating activities. At June 30, 2002, the above
activities resulted in a net cash balance of $1.2 million
(a decrease of $0.2 million) and a negative working capital
balance of $24 million.
31
Outlook
In light of current economic conditions and the general expectation
that there will be no significant upswing in the economy or technology
capital expenditures until the second half of 2003, we do not now
anticipate reaching the point at which we generate cash in
excess of our operating expenses until June 2003 at the earliest,
about which there can be no assurance. We previously
estimated that we would require significant additional funds
aggregating approximately $7 million for the period from April 1,
2002 through September 30, 2002 to meet accrued non-operating
obligations, working capital to fund operating losses, interest,
capital expenditures, expenses related to cost-reduction
initiatives, and potential liabilities related to pending
litigation (see Note 10 to Consolidated Financial Statements).
Since that time despite certain cost cutting measures and
additional fund raising, the delays in the closing of most of the
asset sales has caused the Company to continue to generate
operating losses. As a result, the amount of additional funds
now needed from July 1 to December 31 is estimated to be
approximately $3 to $5 million, assuming the Company is able to
settle certain of its current liabilities with non-cash transactions.
Our sources of ongoing liquidity include the cash flows of our
operations, cash available from various existing credit lines,
potential new credit facilities, potential additional equity
investments, and sales of our remaining non-core assets.
Consequently, Vertex continues to aggressively pursue additional
debt and equity financing, restructure certain existing debt
obligations, reduce its operating expenses, and is structuring its
overall operations and resources around high margin enterprise products
and services. However, in order to remain in business, the
Company must complete the successful sale of the remaining non-core
assets and raise additional cash in a timely fashion.
Subsequent to June 30, 2002 the following initiatives have
been completed or are in process to raise the required funds,
settle liabilities and/or reduce expenses:
(i) MidMark Capital Partners loaned Vertex an
additional $444,500 in the form of a demand note.
(ii) We sold various components of our European business,
including (a) the German point solutions business; (b)the
UK hardware maintenance business; (c) the French based advanced
planning software business; (d) the Benelux point solutions and
maintenance businesses; and (e) the French hardware
maintenance business for a total consideration of
approximately $7.1 million (of which $0.7 million was cash
and the remainder was an assumption or forgiveness of debt).
(iii) We have ceased trading in our Italian and Irish businesses
to reduce operating losses. In September 2002, after being
unsuccessful in attempting to sell its three (3) Italian and
three (3) remaining Irish businesses, and based on the continuing
cash drain from these operations the respective boards of
32
directors determined that in the best interest of their
shareholders that they would seek the protection of the respective
courts in Milan and Ireland, which have agreed to an orderly
liquidation of these companies for the benefit of their respective
creditors.
(iv) We are currently reviewing our options with respect to
those business units for which there is no current buyer,
with the intent of minimizing the future cash outlays.
(v) We are aggressively pursuing additional capital raising
initiatives.
(vi) We have continued to reduce headcount (to approximately 70
employees in our continuing North American business at
September 15,2002), consolidate facilities, and generally reduce costs.
(vii) We are seeking to settle certain of our current liabilities
through non-cash transactions.
While we are continuing our efforts to reduce costs, gain scale,
sell non-core business operations, resolve lawsuits on favorable
terms and settle certain liabilities on a non-cash basis there
is no assurance that we will achieve these objectives.
In addition, we continue to pursue opportunities to raise both
debt and equity financing. However, there can be no assurance
that we will be able to raise additional financing in the
timeframe necessary to meet our immediate cash needs, or if
such financing is available, whether the terms or conditions would
be acceptable to us.
The financial statements have been prepared on a basis that
contemplates Vertex's continuation as a going concern and the
realization of assets and liquidation of liabilities in the
ordinary course of business. The financial statements do not
include any adjustments, with the exception of the provision
to reduce the carrying values of the non-core assets held for sale
or divestiture to their estimated net realizable value (see Note 2),
relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities
that might be necessary should we be unable to continue as
a going concern. If Vertex fails to raise capital when needed,
the lack of capital will have a material adverse effect on
Vertex's business, operating results, and financial condition.
33
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market risk represents the risk of loss that may impact the
financial position, results of operations or cash flows of the
Company due to adverse changes in market prices and rates.
The Company is exposed to market risk because of changes in
foreign currency exchange rates as measured against the U.S.
dollar and currencies of the Company's subsidiaries and
operations in Europe. Revenues from these operations are
typically denominated in European currencies thereby potentially
affecting the Company's financial position, results of
operations, and cash flows due to fluctuations in exchange rates.
The Company does not anticipate that near-term changes in
exchange rates will have a material impact on future earnings,
fair values or cash flow of the Company. However, there can be no
assurance that a sudden and significant decline in the value of
European currencies would not have a material adverse effect on
the Company's financial condition and results of operations.
The Company's short-term bank debt bears interest at variable
rates, as do certain of the notes payable, which are at prime;
therefore, the Company's results of operations would only be
affected by interest rate changes to this debt outstanding.
An immediate 10 percent change in interest rates would not have
a material effect on the Company's results of operations over the
next fiscal year.
34
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
Part II Other Information
Item 1. Legal Proceedings
We are party to certain judicial actions and an arbitration
proceeding, the outcomes of which may, together, or individually,
have a material negative impact on our financial condition and
liquidity if we do not prevail. The items of litigation
are summarized as follows:
a) On October 31, 2001, an action was commenced against Vertex
alleging the default in payment of certain unsecured promissory
notes in the principal aggregate sum of $1,225,000 (United States
District Court; Southern District of New York, Docket #01 CIV.
9600(PKL)). The noteholders demand $1,225,000, together with
interest accruing at the rate of 8% per annum from June 30, 2001.
b) On September 28, 2001 Vertex filed a Demand for Arbitration
with the American Arbitration Association ("AAA") against Russell
McCabe, Daniel McCabe and David Motovidlak (the "ATS Shareholders"),
the former shareholders of Applied Tactical Systems, Inc., an
entity which merged with Vertex pursuant to a Merger Agreement
dated December 29, 2000, seeking damages resulting from the
McCabe's interference with Vertex's employees and customers.
The ATS Shareholders also filed a Demand for Arbitration seeking
$25,000,000 in damages based on, among other things, Vertex's
alleged failure to register the ATS Shareholders' stock in Vertex
by a certain date. At present, discovery is almost concluded and
the ATS Shareholders' Motion for Default and/or Summary Judgment
is pending. The arbitration is scheduled for trial on October 28,
2002.
In a related action, on December 10, 2001 the ATS Shareholders
filed a complaint in the United States District Court for the
District of New Jersey (Docket #01-5747(WHW)) entitled Russell
McCabe, et al. v. Ernst & Young, LLP et al., against Ernst &
Young LLP, Nicholas R.H. Toms, Hugo Biermann, Gregory Thomas,
Edwardstone & Company, Inc., Wayne Clevenger, Joseph Robinson,
MidMark Capital, LP, Otto Leistner, Bunter B.V.I., Ltd.,
George Powch, Stephen M. Duff, The Clark Estates, Inc., Raymond
Broek, Donald Rowley, Douglas L. Davis, Barbara H. Martorano
and Jacqui Gerrard. Vertex itself is not a defendant in this
action. The defendants are our former auditors, and certain
shareholders, officers and directors individually. The ATS
Shareholders are seeking damages in the amount of $40,000,000 plus
punitive and statutory treble damages based upon, among other
things, allegations that Vertex failed to register stock of the
ATS Shareholders by a certain date. Counsel has been retained and
we understand that the defendants intend to contest the ATS
shareholders' claims vigorously. The ATS Shareholders have
voluntarily dismissed defendants Donald Rowley, Douglas L. Davis,
Barbara H. Martorano and Jacqui Gerrard. A Motion to dismiss
the ATS Shareholders' claims against the remaining defendants
is pending.
c) We also continue to defend two subsidiary customer claims
resulting from projects that were in process at the time of our
acquisition of the respective subsidiary. Management believes
that any potential exposure with respect to these two matters
would be covered by accruals established at the time of the
respective acquisition.
35
d) On May 7, 2002 an action was commenced in the Supreme Court of
the State of New York, County of New York entitled Harris Hoover
& Lewis, Inc., d/b/a Harris, Hoover and Lewis LLC ("Harris Hoover")
vs. Vertex Interactive, Inc. Index no. 601722 in which Harris Hoover
alleges that the Company breeched a financial advisory contract.
The claim seeks damages in the amount of $250,000. The Company
has filed a counter claim alleging breech of contract, breech of
fiduciary duty and intentional misrepresentation and seeks damages
in an amount not less than $2,050,000 plus punitive damages.
e) As part of the settlement entered into between the Company
and three former principals of a company acquired by Vertex
in 2000, consent judgments in the amount of approximately $1.0
million each have been entered against Vertex on July 19, 2002.
The incremental liability has been included in other expense for
the three and nine months ended June 30, 2002. The Company is
currently negotiating with the former owners to accept forms of
payment other than cash and there can be no assurance that
this matter will be settled at this time. In July 2002, the
former owners have obtained a court levy upon several of the
Company's bank accounts, placing a hold on approximately $70,000
of the Company's funds. The Company, together with its secured
lenders, is objecting to the turnover of these funds.
f) On November 20, 2001, an action was commenced in the Superior
Court of California, County of Los Angeles, SouthWest District
entitled Reichman et al. v. Vertex Interactive, Inc. et al.
(the "Plaintiffs"). Plaintiffs were former shareholders of
a company we acquired in 2000. In June 2002, this matter was settled
on mutually agreeable terms with minimal cash outlay and no impact
on results of operations. The suit is awaiting a formal dismissal.
Item 2.Changes in Securities and Use of Proceeds
Recent Sales Of Unregistered Securities
We have issued unregistered securities to (a) employees and (b)
other individuals and institutional investors. Each such issuance
was made in reliance upon the exemptions from registration
requirements of the Securities Act of 1933, contained in Section
4(2) and/or Regulation D promulgated thereunder, or Rule 701
promulgated thereunder on the basis that such transactions did
not involve a public offering. When appropriate, we determined
that the purchasers of securities described below were
sophisticated investors who had the financial ability to assume
the risk of their investment in our securities and acquired such
securities for their own account and not with a view to any
distribution thereof to the public. At the time of issuance, the
certificates evidencing the securities contained legends stating
that the securities are not to be offered, sold or transferred
other than pursuant to an effective registration statement under
the Securities Act of 1933 or an exemption from such registration
requirements. The following is a summary of transactions we made
during the past fiscal quarter involving sales and issuances of
securities that were not registered under the Securities Act of
1933 at the time of such issuance or transfer.
36
Acquisitions
On October 5, 2001, the Company acquired all the capital stock of
Euronet Consulting S. r. l. ("Euronet") for 684,620 unregistered
shares of our common stock, subject to certain post-closing price
adjustments and an obligation for an additional $210,000 payable
no later than April 30, 2002. On April 26, 2002, we issued
an additional 759,624 of our unregistered shares to the selling
shareholders in consideration of this obligation. The shares were
issued pursuant to Rule 903 of Regulation S under the Securities
Act of 1933.
Other
In April, 2002, the Company issued 34,404 unregistered shares to
Nicholas Toms, Chief Executive Officer, at a price of $2.18 per
share. These shares were issued to an "accredited investor" within
the meaning of Rule 501 and pursuant to Rule 506 of Regulation D
under the Securities Act of 1933.
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Item 4.Submission of Matters to a Vote of Security Holders
None this quarter
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
3.1 Certificates of Amendments to the Certificate of
Incorporation of Vertex Interactive, Inc. filed
with the Secretary of State, State of New Jersey,
on October 18, 2001 and November 2, 2001
(incorporated by reference to the 10Q filed
May 20, 2002).
3.2 Amended By Laws, as amended as of August 9,
2001 (incorporated by reference to the 10-K filed
January 25, 2002).
(b) The following Reports on Form 8-K were filed
during the period:
Form 8-K dated April 9, 2002, filed April 16, 2002
regarding the resignation of the Company's former
auditors, Ernst and Young.
Form 8-K dated May 14, 2002, filed May 15, 2002
regarding the appointment of WithumSmith+Brown, PC the
Company's independent auditors for the fiscal year
ending September 30, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
VERTEX INTERACTIVE, INC
Registrant
By /s/ Nicholas R. Toms
Nicholas R. Toms
Chief Executive Officer
By /s/ Mark A. Flint
Mark A. Flint
Chief Financial Officer
By /s/ Raymond J. Broek
Raymond J. Broek
Vice President,
Finance/Treasurer
October 1, 2002
39