UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
Form 10-Q
______________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended December 31, 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.)
3619 Kennedy Road, South Plainfield, New Jersey 07080
(Address of Principal Executive Offices) (Zip Code)
(908) 756-2000
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _____ No __X___
Common stock, par value $.005 per share: 48,201,978 shares
outstanding as of October 31, 2003.
Preferred stock, Series "A", par value $.01 per share: 1,356,852
shares outstanding as of October 31, 2003.
Preferred stock, Series "B", par value $.01 per share: 1,000
shares outstanding as of October 31, 2003.
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
FORM 10-Q
December 31, 2002
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets 3 - 4
December 31, 2002 and September 30, 2002
Condensed Consolidated Statements of Operations 5
For the three months ended December 31, 2002 and 2001
Condensed Consolidated Statement of Changes in 6
Stockholders' Deficiency For the three months
ended December 31, 2002
Condensed Consolidated Statements of Cash Flows 7
For the three months ended December 31, 2002 and 2001
Notes to the Condensed Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis Of 23
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 28
Market Risk
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 31
Item 4. Submission of Matters to a Vote of Security 31
Holders
Item 6. Exhibits and Reports on Form 8-K 31
2
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, September 30,
2002 2002
(Unaudited)
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents $ 191,949 $ 74,016
Accounts receivable, less allowance for doubtful accounts
of $949,957 and $929,030 at December 31, 2002 and
September 30, 2002 750,586 936,246
Inventories, net 804,228 941,357
Prepaid expenses and other current assets 280,581 263,260
------------ -----------
Total current assets 2,027,344 2,214,879
Equipment and improvements, net of depreciation and
amortization of $1,243,266 at December 31, 2002 and
$1,200,546 at September 30, 2002 144,354 187,074
Capitalized software, net of amortization of $144,695
at December 31, 2002 and $115,756 at September 30, 2002 202,574 231,513
Other assets 130,273 166,965
------------ ------------
Total assets $ 2,504,545 $ 2,800,431
============ ============
See notes to condensed consolidated financial statements.
3
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
December 31, September 30,
2002 2002
------------- -------------
(Unaudited)
LIABILITIES:
Senior credit facility $ - $ 145,736
Notes payable 1,852,500 1,602,500
Notes payable - related parties 3,191,831 2,588,900
Convertible notes payable - related parties 2,294,324 1,814,324
Accounts payable 4,403,240 4,429,065
Liabilities associated with subsidiaries in liquidation 7,709,138 7,263,694
Payroll and related benefits accrual 2,060,905 2,074,902
Litigation related accruals 4,037,510 4,122,123
Other accrued expenses and liabilities 4,155,600 3,933,725
Advances from customers 0 343,547
Deferred revenue 1,008,485 1,317,440
------------- -----------
Total liabilities 30,713,533 29,635,956
------------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Series A preferred stock, par value $.01 per share; 2,000,000
shares authorized, 1,356,852 shares issued and outstanding
($10,000,000 aggregate liquidation preference) 13,569 13,569
Series B preferred stock, par value $0.01 per share;
1,000 shares authorized, 1,000 shares issued and outstanding
($1,000,000 aggregate liquidation preference) 10 10
Series C preferred stock, par value $0.01 per share;
10,000 shares authorized, 997 shares issued and outstanding
($997,000 aggregate liquidation preference) 10 10
Common stock, par value $.005 per share; 75,000,000 shares
authorized; 37,201,978 shares issued and outstanding 186,011 186,011
Additional paid-in capital 154,979,295 154,979,295
Accumulated deficit (181,641,792) (180,681,702)
Accumulated other comprehensive loss (1,678,851) (1,265,478)
------------- -------------
(28,141,748) (26,768,285)
Less: Treasury stock, 87,712 shares of common stock(at cost) (67,240) (67,240)
------------- -------------
Total stockholders' deficiency (28,208,988) (26,835,525)
------------- -------------
Total liabilities and stockholders' deficiency $ 2,504,545 $ 2,800,431
============= =============
See notes to condensed consolidated financial statements.
4
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended December 31,
----------------------------------
2002 2001
-------------- ----------------
REVENUES $1,282,136 $13,036,644
COST OF SALES 639,983 8,737,867
-------------- ------------
GROSS PROFIT 642,153 4,298,777
-------------- ------------
OPERATING EXPENSES:
Selling and administrative 1,359,727 7,027,562
Research and development 0 1,465,268
Depreciation and amortization
of intangibles 71,659 473,639
-------------- ------------
Total operating expenses 1,431,386 8,966,469
-------------- ------------
OPERATING LOSS (789,233) (4,667,692)
-------------- ------------
OTHER INCOME (EXPENSES):
Interest income 1,200 35,827
Interest expense (164,745) (1,501,790)
Other (7,312) 42,445
-------------- -----------
Other income (expense), net (170,857) (1,423,518)
-------------- -----------
NET LOSS (960,090) (6,091,210)
============== ============
Net loss per share of
Common Stock:
Basic and diluted ($.03) ($.17)
============== ============
Weighted Average Number of
Shares Outstanding:
Basic and diluted 37,201,978 34,844,686
============== ============
See notes to condensed consolidated financial statements.
5
VERTEX INTERACTIVE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002
(UNAUDITED)
Additional
Preferred Stock Common Stock Paid-In
--------------- -----------------
Shares Amount Shares Amount Capital
------ ------ ------ ------ -----------
Balance September 30, 2002 1,358,849 $ 13,589 37,201,978 $186,011 $154,979,295
Net loss(A)
Change in unrealized foreign
exchange translation gains/losses(A) - -
Comprehensive income (loss)
---------- -------- ---------- -------- -------------
Balance December 31, 2002 1,358,849 $ 13,589 37,201,978 $186,011 $154,979,295
========== ======== ========== ======== ============
See notes to condensed consolidated financial statements.
6
VERTEX INTERACTIVE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002
(UNAUDITED)
(CONTINUED)
Accumulated
Other
Accumulated Comprehensive Treasury
Deficit Loss Stock Total
------------ -------------- --------- -------------
Balance September 30, 2002 $(180,681,702) $(1,265,478) $ (67,240) $(26,835,525)
Net loss(A) (960,090) (960,090)
Change in unrealized foreign
exchange translation gains/losses(A) (413,373) (413,373) -
-------------- ------------ --------- -------------
Balance December 31, 2002 $(181,641,792) $(1,678,851) $ (67,240) $(28,208,988)
============== ============ ========== =============
(A) other comprehensive loss for the three months ended December 31, 2002 totaled $1,373,463.
See notes to condensed consolidated financial statements.
6
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended December,
-----------------------------------
2002 2001
----------------- --------------
Cash Flows from Operating Activities:
- ------------------------------------
Net Loss ($960,090) ($6,091,210)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation and amortization 71,659 473,639
Non cash interest expense - 1,168,885
Amortization of deferred compensation costs - 67,073
Changes in assets and liabilities:
Accounts receivable, net 217,731 1,625,604
Inventories, net 137,129 72,606
Prepaid expenses and other current assets (17,321) 228,829
Other assets 36,692 (210,073)
Accounts payable (25,825) (1,810,557)
Accrued expenses and other liabilities 123,265 81,377
Advances from customers (343,547) (5,273)
Deferred revenue (308,955) (617,089)
----------- -----------
Net cash used in operating activities (1,069,262) (5,016,187)
----------- -----------
Cash Flows from Investing Activities
- -------------------------------------
Additions to equipment and improvements - (169,944)
----------- -----------
Cash Flows from Financing Activities:
- -------------------------------------
Repayment of loans payable - bank - (12,903)
Repayment of senior credit facility and
notes payable (145,736) (357,981)
Repayment of mortgage - (18,216)
Repayment of capitalized lease obligations - (43,939)
Proceeds from notes and convertible notes payable -
related parties 1,082,931 4,781,000
Proceeds from notes payable 250,000 -
Net proceeds from issuance of preferred stock - 981,152
----------- -----------
Net cash provided by financing activities 1,187,195 5,329,113
----------- -----------
Effect of exchange rate changes on cash - (20,074)
----------- -----------
Net increase in Cash and Cash Equivalents 117,933 122,908
Cash and Cash Equivalents at Beginning of Period 74,016 1,411,222
----------- -----------
Cash and Cash Equivalents at End of Period $191,949 $1,534,130
=========== ===========
See notes to condensed consolidated financial statements.
7
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Background
Vertex Interactive, Inc. ("Vertex" or "we" or "our" or the
"Company") is a global provider of supply chain management ("SCM")
technologies, including enterprise software systems and
applications, that enable our customers to manage their
orders, inventory and warehouse needs, consultative services,
and software and hardware service and maintenance. We serve
our clients through three general product and service lines:
(1) enterprise solutions; (2) point solutions; and, (3)
service and maintenance for our products and services,
including service and maintenance of software and hardware we
resell for third parties. Our enterprise solutions include a
suite of Java'TM'-architected software applications,
applications devoted to the AS/400 customer base, as well as a
portfolio of "light-directed" systems for inventory, warehouse and
distribution center management. Our point solutions provide an
array of products and services designed to solve more specific
customer needs from managing a mobile field workforce,
mobile data collection, distributed bar code printing
capabilities, compliance labeling applications, automated card
devices, software development tools and proprietary software
serving SAP R/3 users. We provide a full range of software and
hardware support services and maintenance on a 24-hour, 7-days a
week, 365-days a year basis, including the provision of wireless
and wired planning and implementation services for our customers'
facilities.
Recent Developments
As previously reported on Form 8-K which was filed with the
Securities and Exchange Commission on August 12, 2003, the Company
entered into an asset purchase agreement with Jag Media Holdings, Inc.,
("JAG Media") pursuant to which it would sell all of the assets
and certain liabilities of XeQute Solutions, Inc. ("XeQute"), the
Company's wholly-owned subsidiary, to JAG Media, subject to certain
terms and conditions, one of which was closing on or before October 31,
2003 and the Company's ability to arrange $8,000,000 of financing
upon terms and conditions satisfactory to JAG Media, XeQute and Vertex.
On October 31, 2003, the agreement expired by its terms.
There is no assurance (i) that an amendment extending the closing
date (or a waiver thereof) will be entered into by the parties
to permit consummation of the agreement, or (ii) if such amendment
or waiver is provided, that the conditions to the proposed
transaction with JAG Media will be met, or (iii) if such conditions
are met, that the transaction will be consummated.
8
Going Concern
Based upon our substantial working capital deficiency of
approximately $28,700,000 at December 31, 2002, our historic rate
of cash consumption, the uncertainty of liquidity-related
initiatives described in detail below, and the reasonable
possibility of on-going negative impacts on our operations from
the overall economic environment for a further unknown period of
time, there is substantial doubt as to our ability to continue as
a going concern.
The successful implementation of our business plan has required,
and will require on a going forward basis, substantial funds
to finance (i) continuing operations, (ii) further development
of our enterprise software technologies, (iii) settlement of
existing liabilities including past due payroll obligations to
our employees, officers and directors, and (iv) possible
selective acquisitions to achieve the scale we believe will be
necessary to remain competitive in the global SCM industry.
There can be no assurance that we will be successful in raising
the necessary funds.
Outlook
In light of current improving economic conditions and the
upswing in the economy we may now anticipate reaching the point
at which we generate cash in excess of our operating expenses in
the quarter ending December 31, 2003, about which there can be no
assurance. However, the Company has accrued significant
obligations during the past several years and to the extent we
cannot settle existing obligations in stock or defer our
obligations until we generate sufficient operating cash, we
will require significant additional funds to meet accrued
non-operating obligations, working capital to fund operating
losses, if required, short term debt and related interest, capital
expenditures, expenses related to cost-reduction initiatives, and
potential liabilities related to litigation claims and
judgments.
Our sources of ongoing liquidity include the cash flows of
our operations, potential new credit facilities, and
potential additional equity investments. Consequently,
Vertex continues to aggressively pursue additional debt
and equity financing, to restructure certain existing debt
obligations, reduce its operating expenses, and has structured
its overall operations and resources around high margin
enterprise products and services. However, in order to remain
in business, the Company must raise additional cash in a timely
fashion.
9
The following initiatives have been completed or are in process
to raise the required funds, settle liabilities and/or reduce
expenses:
(i) In December 2002, Vertex, through XeQute Solutions PLC,
("XeQute PLC"), a wholly owned subsidiary of Vertex,
closed a $500,000 Bridge Loan arranged by Charles Street
Securities, Inc. ("CSS") from Midmark Capital ("Midmark"),
a company owning shares of Vertex's Preferred and Common stock, and
Aryeh Trust. The Bridge Loan was to have been repaid with
proceeds from a proposed Private Placement funding (see iii below).
The Bridge Loan was for a term of 180 days, which matured on
June 9, 2003. The Bridge Loan is secured by a first security
interest in all of the assets of XeQute (which is a wholly
owned subsidiary of XeQute PLC) and carries an interest rate
of 3% per month. The Company has agreed to continue
paying interest at the existing rate of 3% per month, with the
principal to be repaid when funds became available.
During December 2002, XeQute received an additional $480,000
from Midmark under a Convertible Loan Note. The Convertible
Loan Note would automatically convert into Non-Voting Shares of
XeQute PLC, when a minimum subscription of $480,000 of the
proposed but now aborted Private Placement had been reached.
The Company is in discussions to renegotiate the terms of this loan.
In addition, as of September 30, 2003, Vertex and XeQute have
borrowed a further $1,113,000 from Midmark Capital II, L.P.
("Midmark II") pursuant to a series of demand notes, of which
$425,000 was restricted for usage on XeQute obligations. These
notes are payable on demand, bear interest at 10% per annum and
are secured by the same collateral in which the Company previously
granted a security interest to Midmark II under an agreement
related to its convertible notes payable (see Note 5).
During October, 2002, Vertex also executed a Grid Note which
provides for up to $1,000,000 of availability from Midmark Capital,
L.P. This note will be funded by the proceeds, if any, from the
sale of any shares of Vertex Common Stock held by Midmark Capital.
This note is payable on demand but in any event no later than
December 31, 2003, unless extended further, carries interest at
the rate of 10% per annum and is secured by the same collateral in
which the Company previously granted a security interest to Midmark
under an agreement related to its convertible notes payable. In
consideration of Midmark providing this facility, the Company agreed
to issue warrants to purchase a number of unregistered shares equal
to 120% of the number of tradeable shares sold by MidMark to fund
such note, at a purchase price per share equal to 80% of the price
per share realized in the sale of shares to fund the Grid Note.
As of September 30, 2003, the Company had borrowed $77,000 under
this arrangement.
10
(ii) The Company completed the sale of certain entities and
assets during fiscal 2002. After being unsuccessful in attempting
to sell its five remaining European operations (Vertex UK,
Vertex Service and Maintenance Italy, Vertex Italy, Euronet
and Vertex France), and based on the continuing cash drain
from these operations, during fiscal 2002 the respective
boards of directors determined that in the best interest of
their shareholders that they would seek the protection of the
respective courts in each country, which have agreed to an
orderly liquidation of these companies for the benefit of their
respective creditors. Upon legal resolution of the approximately
$7,700,000 of net liabilities of these remaining European entities,
we expect to recognize a non-cash gain (and no significant
cash outlay), however the amount and timing of such gain and
cash outlay, if any, is totally dependent upon the decisions
to be issued by the respective court appointed liquidators.
(iii) We are aggressively pursuing additional capital raising
initiatives in particular through the formation of XeQute
PLC, into which we have an agreement with CSS to raise in
conjunction with MidMark Capital, approximately $3,800,000
of new equity. This transaction is no longer going forward.
We have conducted extensive negotiations with various sources
as a result of which we have a tentative agreement that is
subject to certain conditions, for the provision of up to
approximately $8,000,000 of new financing by David Sassoon
Holdings, Inc. which may be in the form of debt or equity
or a combination of both to XeQute.
(iv) We have continued to reduce headcount (to approximately 40
employees in our continuing North American business at September
30, 2003, of whom 14 are currently furloughed until additional
funds are raised), consolidate facilities, and generally reduce
costs.
(v) Effective July 31, 2003, the Company completed the sale of
10,000,000 shares of its common stock, which had a fair market
value at that time of approximately $500,000, to American
Marketing Complex, Inc. ("AMC"). Payment for this purchase was in
the form of cash equivalent trade credits with a face value of
$4,000,000, which the Company can utilize for the purchase of
merchandise and services. The face value is not necessarily
indicative of the ultimate fair value or settlement value of the
cash equivalent trade credits. Any trade credits not utilized by
June 30, 2008 shall expire, unless the Company exercises an
option to extend the agreement for one year.
11
In addition, the Company agreed to loan AMC $150,000 of which
$10,000 was delivered at closing; $40,000 was delivered in
August 2003; $50,000 was to be delivered by September 10, 2003
and $50,000 was to be delivered by October 10, 2003. The
Company did not make the September or October payments. This
loan will be repaid exclusively from funds received from the
sale of the 10,000,000 shares. The Company is required to
register these shares within six months of the closing.
(vi) We are seeking to settle certain of our current liabilities
through non-cash transactions. Vertex is negotiating with vendors
to settle balances at substantial discounts, including through
the use of the cash equivalent trade credits set forth in (v)
above. In addition, we are negotiating to settle certain notes
payable and approximately $4 million of litigation accruals at a
discount or with the issuance of shares of either Vertex or
XeQute.
While we are continuing our efforts to reduce costs, increase
revenues, resolve lawsuits on favorable terms and settle certain
liabilities on a non-cash basis there is no assurance that we
will achieve these objectives. In addition, we will continue to
pursue strategic business combinations and opportunities to raise
both debt and equity financing. However, there can be no assurance
that we will be able to raise additional financing in the
timeframe necessary to meet our immediate cash needs, or if such
financing is available, whether the terms or conditions
would be acceptable to us.
The financial statements have been prepared on a basis that
contemplates Vertex's continuation as a going concern and the
realization of assets and liquidation of liabilities in
the ordinary course of business. The financial statements do
not include any adjustments, with the exception of the
provision to reduce the carrying values of the assets of the
subsidiaries in liquidation to their estimated net realizable
value, 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.
12
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by
accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period
ended December 31, 2002 are not necessarily indicative of
the results that may be expected for the year ending
September 30, 2003.
The balance sheet at September 30, 2002 has been derived from the
audited financial statements at that date but does not include
all of the information and footnotes required by accounting
principles generally accepted in the United States of America for
complete financial statements.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended September 30, 2002.
2. Sales or Divestitures of Non-Core Businesses
The Company developed and initiated a plan in the quarter ended
June 30, 2002 that resulted in the sale or divestiture of
assets or closings of businesses that were not part of the
Company's current strategic plan or had not achieved an
acceptable level of operating results or cash flows. In
connection with this plan, the Company has completed the sale of
certain businesses and assets. After being unsuccessful in
attempting to sell its five remaining European operations
(Vertex UK, Vertex Service and Maintenance Italy, Vertex Italy,
Euronet and Vertex France), and based on the continuing cash
drain from these operations, the respective boards of directors
determined that in the best interest of their shareholders
that they would seek the protection of the respective courts in
each country, which have agreed to an orderly liquidation of
these companies for the benefit of their respective creditors.
Accordingly, the net assets and liabilities of these businesses
are classified as Liabilities Associated with Subsidiaries in
Liquidation in the accompanying September 30, 2002 and
December 31, 2002 balance sheets. While the Company expects
the liquidation process to take from 12 to 18 months from
December 31, 2002, significant variations may occur based on
the complexity of each entity and requirements of the respective
country.
13
Liabilities associated with subsidiaries in liquidation are
generally carried at their contractual or historical amounts.
The ultimate amounts required to settle these retained
liabilities will differ from estimates, based on contractual
negotiations, and the outcome of certain legal actions and
liquidation proceedings.
The following is a summary of net assets and liabilities
associated with subsidiaries in liquidation as of December 31, 2002:
Cash $ 491,207
Receivables, net 1,022,890
Inventories, net 550,598
Accounts payable (2,743,830)
Accrued liabilities (4,659,819)
Deferred revenue (1,074,166)
Loans payable - banks (971,145)
Other liabilities (324,873)
-----------
Net liabilities associated with
subsidiaries in liquidation $(7,709,138)
===========
The results of these businesses' operations are not segregated
from other businesses in the accompanying statements of operations
as they are not considered distinct segments or discontinued
operations.
3. INVENTORIES
Inventories consist of the following:
December 31, September 30
2002 2002
------------ ------------
Raw materials $756,015 $713,295
Work in process 48,213 66,414
Finished goods and parts 0 161,648
------------ ------------
$804,228 $941,357
============ ============
14
4. Senior Credit Facility
In December, 2002, the Company settled the remaining balance
($145,736 outstanding as of September 30, 2002) under
the Laurus Senior Credit Facility and terminated the agreement.
15
5. CONVERTIBLE NOTES PAYABLE - RELATED PARTIES
Midmark Capital L.P. is a shareholder of the Company and certain
Midmark Capital L.P. Managing Directors have served as directors
of the Company. On June 19, 2001 and subsequently amended in
November 2001 and again in January 2002, the Company issued
in the aggregate $5,500,000 of convertible notes payable to
Midmark Capital L.P., Midmark Capital II L.P., and certain
individuals related to these two entities (collectively
"Midmark Capital"). These notes were to automatically convert
into shares of Vertex common stock on the day that the
Company obtained 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 the prime rate) would
become immediately due and payable. The notes were to convert,
subject to future events, into (i) Vertex common stock at a
future market price no higher than $1.31 per share or (ii) 5,500
shares of Series "C" Preferred Stock, which were convertible
into 6,545,000 common shares at $0.84 per share. The Company was
required to register the underlying common shares. In the
event of a shareholder rejection, or prepayment prior to shareholder
approval, the interest rate on the notes would have increased
retroactively to 14%.
In March 2002, the Company agreed to amend the agreement related
to the $5,500,000 of convertible notes payable issued in June 2001.
The amendment removed both the requirement for shareholder approval
and the automatic conversion feature, and set the maturity date
for September 30, 2003. Concurrent with the amendment of these
notes, Midmark Capital elected to convert approximately
$782,000 of principal and $218,000 of accrued interest into
997 shares of Series "C" preferred stock. The remaining convertible
notes payable of $4,718,717 accrued interest at prime and all
convertible into Series" "C" preferred shares at a conversion price
of $1,000 per share. The Series "C" preferred shares in turn were
convertible into shares of common stock at $0.84 per share.
In November 2001, the Company issued $3,000,000 of
10% convertible notes payable, with an original maturity date of
September 30, 2003, to Midmark Capital II, LP ("Midmark II")
that would have been convertible into 3,000 shares of Vertex
Series "C" Preferred Stock at the option of Midmark II on the day
that the Company obtained the requisite shareholder approval
for the issuance of Series "C" Preferred Stock to Midmark
II. Midmark II could have converted the Series "C" Preferred Shares
into 3,570,026 shares of Vertex common stock at $0.84 per share.
The Company was required to register the underlying common
shares. In the event of a shareholder rejection, or prepayment
prior to shareholder approval, the interest rate on the notes would
have increased retroactively to 14%.
16
On August 9, 2002, the remaining balance of the $4,718,717
convertible notes and $1,185,176 of the $3,000,000
convertible notes were fully settled with the sale of the
French based advanced planning software business to Midmark.
The remaining $1,814,324 of 10% convertible notes payable at
December 31, 2002 are collateralized by all tangible and
intangible property of the Company, except that the holders
have executed in favor of certain senior lenders a
subordination of their right of payment under the Convertible
Notes and the priority of any liens on certain assets, primarily
accounts receivable.
The conversion rates of all the above Midmark notes are
subject to certain antidilution provisions.
During the year ended September 30, 2002, the Company
borrowed $2,588,900, and an additional $352,931 during the
quarter ended December 31, 2002, 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 described above.
In December 2002, XeQute received an additional $480,000 from
Midmark under a Convertible Loan Note. The Convertible Loan Note
would have automatically converted into Non-Voting Shares of XeQute
PLC at $0.672 per share when a minimum subscription of
$480,000 of a proposed but now aborted Private Placement had
been reached. As of December 8, 2003, the Company was in discussions
to renegotiate the terms of the outstanding obligations to Midmark.
17
6. NOTES PAYABLE
The Company had approximately $1,500,000 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 was due on August
15, 2001, and the remaining balance, plus accrued interest
from June 30, 2001, was due on September 30, 2001. The Company
paid the August 15, 2001 installment and, as of December 8, 2003
has not paid the remaining past due balance of approximately
$1,230,000.
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 $2,000,000 in cash at closing
and a deferred cash payment of $500,000 that was due on September 1,
2001. The Company paid $125,000 in December 2001 and has not paid
the remaining $375,000 balance. At December 31, 2002, 5,357,143
shares of Vertex common stock collateralize the unpaid balance.
18
In December 2002, Vertex, through XeQute PLC, closed a
$500,000 Bridge Loan arranged by CSS from Midmark Capital and
Aryeh Trust. The Bridge Loan is to be repaid with proceeds from
a proposed private placement funding. The Bridge Loan
matured on June 9, 2003. The Company has agreed to continue
paying interest at the original rate of 3% per month, with the
principal to be repaid when funds become available. The Bridge
Loan is secured by a first security interest in all of the assets
of XeQute. The lenders were each granted 60,000 warrants in XeQute
PLC at 10 pence per share as part of the consideration for
this loan. The interest charge relating to these warrants is not
material and was recognized over the term of the Loan.
Upon the receipt of the minimum subscription amount for a Private
Placement by XeQute PLC, Midmark has agreed to relinquish
its security interest in the assets of XeQute, in exchange for
warrants to purchase 250,000 common shares of XeQute PLC
which are presently owned by Vertex. Midmark has agreed that it
will vote any shares which it may acquire through the exercise of
the warrant in accordance with the directions of Vertex. However,
it will retain its security interest in the shares of XeQute
PLC owned by Vertex and in all of the assets of Vertex.
Since January 1, 2003 and as of November 30, 2003, Vertex and XeQute
have borrowed an additional $770,000 from Midmark Capital II, L.P.
pursuant to a series of demand notes, of which $425,000 was
restricted for usage on XeQute obligations. These notes are
payable on demand, bear interest at 10% per annum and are secured
by the same collateral in which the Company previously granted a
security interest to Midmark under its agreements related to the
convertible notes payable.
7. STOCKHOLDERS' EQUITY
During the three months ended December 31, 2002, 119,400 stock
options were cancelled, and no options of common stock were
exercised.
Preferred Stock
Series "A"
In connection with the Transcape acquisition in February 2001,
the Company issued 1,356,852 shares of Series "A" Preferred Stock.
The Series "A" Preferred Stock is convertible, at the option of
the holder, into common stock on a one-for-one basis. All of the
common shares issuable on conversion of the Series "A" Preferred
Stock must be registered by the Company.
Series "B"
In October 2001, the Company raised $1,000,000 in cash through
the issuance and sale of 1,000 shares of Series "B" Convertible
Preferred Stock to Pitney Bowes, with each share of Series "B"
Preferred being convertible into 1,190 shares of common stock
at a price of $0.84 per share. The Company must register all
of the common shares issuable on conversion of the Series "B"
Preferred Stock. In connection with this transaction, Pitney
Bowes had nominated Michael Monahan to Vertex's Board of
Directors. He served as a Director from November 15, 2001
until his resignation on February 21, 2002.
Series "C"
In March 2002, the Company issued 997 shares of Series "C"
Convertible Preferred Stock to Midmark Capital upon conversion
of approximately $997,000 of convertible notes payable and
accrued interest (See Note 6). 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.
19
Pursuant to certain acquisition agreements and private placement
offerings, the Company is 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 intention is to file a registration statement as soon as
possible. At December 31, 2002, the Company's was obligated to
register approximately 8,000,000 shares of outstanding common stock
and 1,200,000 shares of common stock underlying options and warrants.
8. EARNINGS (LOSS) PER SHARE
As further explained in Note 3 in the 10-K, the Company has adopted
the provisions of Statement of Financial Accounting Standards No. 128
"Earnings per Share" ("FAS 128), which require the presentation of
"basic" earnings (loss) per common share and, if appropriate, "diluted"
earnings per common share. Basic earnings (loss) per share is
calculated by dividing net income (loss)(there are no dividend
requirements on the Company's outstanding Preferred Stock) by the
weighted average number of common shares outstanding during each period.
The calculation of diluted earnings per share is similar to that of
basic earnings per share, except that the denominator is increased to
include the number of additional common shares that would have been
outstanding if all potentially dilutive common shares, such as those
issuable upon the exercise of stock options and warrants and the
conversion of convertible securities, were issued during the period.
For periods in which a net loss occurs, such additional shares would
not be included, as their effect would be anti-dilutive.
9. COMMITMENTS AND CONTINGENCIES
Leases
The Company and its subsidiaries lease office facilities and
certain office equipment under operating leases that expire at
various dates through 2007.
Rent expense for the three months ended December 31, 2002
and 2001 was approximately $142,000 and $575,000, respectively.
During the year ended September 30, 2002, the Company sold
and closed down various businesses. In connection with these
dispositions of non-core businesses, the Company abandoned
certain facilities and terminated leases at a cost of approximately
$1,100,000. As a result of these sales and the accrual of the
remaining terminated lease obligations, the minimum lease payments
under non-cancellable operating leases, as of December 31, 2002, are
approximately $104,000 through May 2003.
In October, 2003 the Company consolidated its offices into one
building in South Plainfield, and subleased a portion of its office
space in Paramus commencing December 1, 2003, and subleased the
remainder of the office space in that building commencing January 1,
2004. The subleases, which have rentals that approximate the
original lease rentals, run through May, 2008.
Pending Litigation
We are party to a number of claims, which have been previously
disclosed by the Company, and claims by vendors, landlords and
other service providers seeking payment of balances owed. Since
such amounts have already been recorded in accounts payable or
accrued liabilities, these claims are not expected to have a
material affect on the stockholders' deficiency of the Company.
However, they could lead to involuntary bankruptcy proceedings.
a) On April 16, 2003, an action was commenced in the Supreme
Court of the State of New York, County of Suffolk, entitled
Bautista v. Vertex Interactive, Inc and Renaissance Software,
Inc. The action, which demands $394,000, is brought by a former
employee claiming breach of his employment agreement.
b) On June 25, 2003, an action was commenced in the United
States District Court, District of New Jersey, entitled CPG
International, N.V. vs. Vertex Interactive, Inc. The action,
which demands $406,342, alleges the Company's breach of an
Asset Sale and Purchase Agreement pursuant to which the Company
acquired various assets related to CPG International's Service
business.
c) On October 31, 2001, an action was commenced in the United
States District Court, Southern District of New York entitled
Edgewater Private Equity Fund II, L.P. et al. v. Renaissance
Software, Inc. et al. The action, brought against Renaissance
Software, Inc., a subsidiary of Vertex, and Vertex, alleged the
default by Renaissance Software, Inc. in payment of certain
promissory notes in the principal aggregate sum of $1,227,500.
Vertex guaranteed the notes. The noteholders demanded $1,227,500,
together with interest accruing at the rate of 8% per annum from
June 30, 2001. On March 12, 2002, the noteholders were successful
in obtaining a judgment against Renaissance Software, Inc. in the
aggregate amount of $1,271,407 including interest, late charges and
attorneys' fees. However given the Company's current cash position,
we have been unable to pay the judgment and have been pursuing
non cash alternatives.
20
Settled Litigation
a) On September 28, 2001 Vertex filed a Demand for Arbitration
with the American Arbitration Association ("AAA") against Russell
McCabe, Daniel McCabe and David Motovidlak (the "ATS
Shareholders"), the former shareholders of Applied Tactical
Systems, Inc., an entity which merged with Vertex pursuant to a
Merger Agreement dated December 29, 2000, seeking damages
resulting from the McCabe's interference with Vertex's employees
and customers. The ATS Shareholders also filed a Demand for
Arbitration seeking $25,000,000 in damages based on, among other
things, Vertex's alleged failure to register the ATS
Shareholders' stock in Vertex by a certain date.
In a related action, on December 10, 2001 the ATS Shareholders
filed a complaint in the United States District Court for the
District of New Jersey against Ernst & Young LLP (our former
auditors), and certain Vertex shareholders, officers and
directors individually. Vertex itself was not a defendant in
this action. The ATS Shareholders were seeking damages in the
amount of $40,000,000 plus punitive and statutory treble
damages based upon, among other things, allegations that Vertex
failed to register stock of the ATS Shareholders by a certain
date.
On November 15, 2002, we resolved and dismissed claims relating
to both of these matters. The United States District Court
for the District of New Jersey entered a Stipulation and
Order of Settlement and Dismissal as to Certain Parties,
agreed to by Vertex, other named parties, and three former
ATS shareholders in the case styled Russell McCabe, et al. v.
Ernst & Young, LLP, et al., Case No. 01-5747 (WHW). Pursuant
to the Stipulation and Order, Vertex and the three former
ATS shareholders also agreed to dismiss their respective AAA
arbitration claims. The settlement was funded by Vertex's
insurance carrier, with no additional payments by Vertex or
by any settling defendants. The parties dismissed all claims
between them and exchanged mutual general releases.
b) On May 7, 2002 an action was commenced in the Supreme Court
of the State of New York, County of New York by Harris
Hoover & Lewis, Inc., ("Harris Hoover") in which Harris Hoover
alleged that the Company breeched a financial advisory contract.
The claim sought damages in the amount of $250,000. The Company
had filed a counter claim alleging breech of contract, breech
of fiduciary duty and intentional misrepresentation and sought
damages in an amount not less than $2,050,000 plus punitive
damages. This matter was dismissed by the New York Supreme
Court on November 26, 2002. The parties dismissed all claims
between them and exchanged mutual general releases. No payments
were made by either party to the other.
c) As part of the settlement entered into between the Company
and three former principals of a company acquired by Vertex in
2000, consent judgments in the amount of approximately
$1,000,000 each were entered against Vertex on July 19, 2002.
The incremental liability has been included in other expense
(provision for litigation) for the year ended September 30, 2002.
The Company is currently negotiating with the former owners to
accept forms of payment other than cash and there can be no
assurance that a non-cash settlement will be concluded.
In July 2002, the former owners obtained a court levy upon
several of the Company's bank accounts, placing a hold on
approximately $70,000 of the Company's funds. The Company,
together with its secured lenders, objected to the turnover
of these funds, however a turnover order was granted by the
court in October 2002.
d) On November 7, 2000, Pierce Procurement Ltd. ("Pierce")
brought an action against the Company's subsidiary Renaissance
Software, Inc. ("Renaissance"), in the Boone County Circuit Court
in Northwestern Illinois. The suit was removed to the United States
District Court for the Northern District of Illinois,
Western Division, on February 1, 2001. The claim by Pierce against
Renaissance was based upon allegations that Renaissance sold a
computer system which did not meet the particular purposes of Pierce
and that Renaissance made certain misrepresentations to Pierce with
respect to the system. Renaissance denied such claims, and through
its insurance carrier defended the action. Renaissance
had counterclaimed against Pierce alleging that Pierce had paid only
a portion of the contract fee agreed to by the parties. Total damages
claimed by Pierce were approximately $1,500,000 plus interest and
penalties. Renaissance sought approximately $76,500 on its
counterclaim. In December, 2003, the Company, through its
insurance carrier, reached a settlement in this matter, which
settlement will be paid by the insurance carrier.
Employment Agreements and Other Commitments
The Company has employment agreements with certain key
employees, the terms of which expire at various times through
2004. Such agreements provide for minimum salary levels
(approximately $690,000 as of December 31, 2002) as well
as for incentive bonuses.
21
10. SUBSEQUENT EVENTS
a) As a result of its severe cash constraints (see Note 1 -
Going Concern section), the Company had fallen as much as two to
three months behind in meeting its payroll obligations to its
employees subsequent to September 30, 2002. The Company has
been meeting its current payroll obligations, and has attempted
to pay overdue employee payroll obligations as cash resources
become available. However, in a letter dated April 3, 2003
the New Jersey Department of Labor (N.J.D.O.L.) has assessed
the Company a penalty of $154,000 for failure to pay payroll
on a timely basis. The Company is vigorously appealing this
assessment as being counterproductive to actually paying the
employees. Company management met with the N.J.D.O.L. on
June 23, 2003 and presented a plan to bring payroll current
over a four month period (beginning in September 2003 and
ending December 2003). The N.J.D.O.L. agreed to consider
the Company's plan, together with its request for a reduction
in the penalty assessed by N.J.D.O.L. The Company has not yet
made any payments toward this proposed plan.
In addition, a number of former employees of a California
based division of Vertex had filed claims with the California
Department of Labor for non payment of wages for the second
half of July 2002; the final payroll prior to the closing of
the division. The Company had disputed the claims, primarily
on the basis of the lack of documentation for hours worked
during the period. However in July 2003, these claims were
heard by the California DOL and the amounts claimed, together
with interest and penalties aggregating approximately $100,000,
which remain unpaid, were granted to these former employees.
b) In May 2003 the Company issued 1,000,000 common shares,
which had a fair market value of approximately $20,000, to an
investment advisor to assist in the Company's fund raising efforts.
c) Effective July 31, 2003, the Company completed the sale of
10,000,000 shares of its common stock, which had a fair market
value at that time of approximately $500,000, to American
Marketing Complex, Inc. (AMC). Payment for this purchase was in
the form of cash equivalent trade credits with a face value of
$4,000,000, which the Company can utilize for the purchase of
merchandise and services. The face value is not necessarily
indicative of the ultimate fair value or settlement value of
the cash equivalent trade credits. Any trade credits not
utilized by June 30, 2008 shall expire, unless the Company
exercises an option to extend the agreement for one year.
In addition, the Company agreed to loan AMC $150,000 of which
$10,000 was delivered at closing; $40,000 was delivered in
August 2003; $50,000 was to be delivered by September 10, 2003
and $50,000 was to be delivered by October 10, 2003. The
Company did not make the September or October payments. This
loan will be repaid exclusively from funds received from the
sale of the 10,000,000 shares. The Company is required to
register these shares within six months of the closing.
22
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, 2002. 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 "2003" and "2002" refer to the three months
ended December 31, 2002 and 2001, respectively.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements requires
management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and the related disclosure of contingent assets and liabilities.
Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources.
Management continuously evaluates its estimates and judgments,
and actual results may differ from these estimates under different
assumptions or conditions.
Those estimates and judgments that were most critical to the
preparation of the financial statements involved the allowance
for doubtful accounts, inventory reserves, recoverability of
intangible assets and the estimation of the net liabilities
associated with subsidiaries in liquidation as further explained
in the Company's Annual Report on Form 10-K for the year ended
September 30, 2002.
Results of Operations
Three months ended December 31, 2002 ("2003") compared to three
months ended December 31, 2001 ("2002").
Operating Revenues:
Operating revenues decreased by approximately $12 million (or
90.2%) to $1.3 million in 2002.
Revenues were negatively impacted by the asset sales or disposals
of all of the Company's European businesses and certain of its
non-core US operations as well as continued weak demand in its
key markets; exacerbated by the Company's lack of financial
condition.
Products and Services
Sales to external customers by the three significant
product and service line groupings for the three months
ended December 31, 2002 and 2001 (in thousands) are as
follows:
December 31
---------------------------
2002 2001
---------- ----------
Point Solutions $ 0 $ 6,799
Enterprise Solutions 83 1,848
Service and Maintenance 1,199 4,390
-------- --------
$ 1,282 $13,037
======== ========
There were no Point Solutions products and services revenues as a
result of our decision to sell and/or liquidate all of our
European operations effective June 30, 2002, our strategy of de-
emphasizing lower margin product sales, together with the impact
of the downturn in the economy, especially post-September 11.
Enterprise solutions revenues decreased to $83,000 in 2003
from $1,800,000 in 2002. The decrease was a result of our
decision to sell and/or liquidate all of our European operations
effective June 30, 2002, our strategy of de-emphasizing lower
margin product sales, together with the impact of the downturn in
the economy, especially post-September 11.
Service and maintenance revenues have decreased approximately
$3,200,000 from 2002. The decrease was a result of our decision
to sell and/or liquidate all of our European operations effective
June 30, 2002, our strategy of de-emphasizing lower margin
product sales, together with the impact of the downturn in the
economy, especially post-September 11.
23
Gross Profit:
Gross profit decreased by approximately $3,700,000 (or 85.1%)
to $642,000 in 2003. As a percent of operating revenues,
gross profit was 50.1% in 2003 as compared to 33.0% in 2002. The
gross profit percentage was favorably impacted by a larger
percentage of higher margin service and maintenance revenues.
Operating Expenses:
Selling and administrative expenses decreased $5,600,000 (or
80.2%) to $1,400,000 in 2003. During 2002 we continued various
cost reduction measures, including reduction in the number of our
employees, facilities consolidations, as well as reductions in
other expenses deemed redundant such as marketing and advertising
and other headcount-related expenses.
Research and development expenses ("R&D") decreased approximately
$1,500,000 (or 100%) from 2002. As a result of the slow economy
and our cost cutting efforts, we suspended R&D, focusing our
technical resources on maintenance services.
The decrease in the amortization of intangibles to $29,000
in 2003, as compared to approximately $200,000 in 2002,
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. These intangibles were
being amortized over their estimated lives ranging from 2 to
25 years.
Interest expense decreased by approximately $1,300,000 to
$164,000 in 2003. This decrease is due to decreased
working capital borrowings at the end of fiscal 2001, carrying
through in fiscal 2002.
The income tax provision (credit) is negligible in both years due
primarily to operating losses.
24
Liquidity and Capital Resources
The successful implementation of our business plan has required,
and will require on a going forward basis, substantial funds
to finance (i) continuing operations, (ii) further development
of our enterprise software technologies, (iii) settlement of
existing liabilities including past due payroll obligations to
its employees, officers and directors, and (iv) possible
selective acquisitions to achieve the scale we believe will be
necessary to remain competitive in the global SCM industry.
There can be no assurance that we will be successful in raising
the necessary funds.
Outlook
In light of current improving economic conditions and the
upswing in the economy, we may now anticipate reaching the point
at which we generate cash in excess of our operating expenses in
the quarter ending December 31, 2003, about which there can be no
assurance. However, the Company has accrued significant
obligations during the past several years and to the extent we
cannot settle existing obligations in stock or defer our
obligations until we generate sufficient operating cash, we
will require significant additional funds to meet accrued
non-operating obligations, working capital to fund operating
losses, short term debt and related interest, capital
expenditures, expenses related to cost-reduction initiatives, and
potential liabilities related to litigation claims and
judgments.
Our sources of ongoing liquidity include the cash flows of
our operations, potential new credit facilities, and
potential additional equity investments. Consequently,
Vertex continues to aggressively pursue additional debt
and equity financing, to restructure certain existing debt
obligations, reduce its operating expenses, and has structured
its overall operations and resources around high margin
enterprise products and services. However, in order to remain
in business, the Company must raise additional cash in a timely
fashion.
The following initiatives have been completed or are in process
to raise the required funds, settle liabilities and/or reduce
expenses:
(i) In December 2002, Vertex, through its wholly-owned subsidiary
XeQute Solutions PLC, closed a $500,000 Bridge Loan arranged
by Charles Street Securities, Inc. ("CSS") from Midmark Capital
(a shareholder of the Company)and Aryeh Trust. The Bridge Loan
was to have been repaid with proceeds from a proposed Private
Placement funding (see iii below). The Bridge Loan was for a
term of 180 days, which matured on June 9, 2003. The Bridge Loan
is secured by a first security interest in all of the assets of
XeQute and carries an interest rate of 3% per month. The Company
has agreed to continue paying interest at the existing rate of 3%
per month, with the principal to be repaid when funds become
available.
25
XeQute received an additional $480,000 from Midmark under a
Convertible Loan Note. The Convertible Loan Note would
automatically convert into Non-Voting Shares of XeQute Solutions
PLC when a minimum subscription of $480,000 of the proposed but
now aborted Private Placement had been reached. The Company is in
discussions to renegotiate the terms of this loan.
In addition, as of September 30, 2003, Vertex and XeQute have
borrowed a further $1,113,000 from Midmark Capital II, L.P.
pursuant to a series of demand notes, of which $425,000 was
restricted for usage on XeQute obligations. These notes are
payable on demand, bear interest at 10% per annum and are secured
by the same collateral in which the Company previously granted a
security interest to Midmark under an aggreement related to its
convertible notes payable.
Vertex also executed a Grid Note which provides for up to
$1,000,000 of availability from Midmark Capital, L.P. This note
will be funded by the proceeds, if any, from the sale of any shares
of Vertex Common Stock held by Midmark Capital. This note is
payable on demand but in any event no later than December 31, 2003
unless extended further, carries interest at the rate of 10% per
annum and is secured by the same collateral in which the Company
previously granted a security interest to Midmark under its
convertible notes payable. In consideration of Midmark providing
this facility, the Company agreed to issue warrants to purchase a
number of unregistered shares equal to 120% of the number of
tradeable shares sold by MidMark to fund such note, at a purchase
price per share equal to 80% of the price per share realized in
the sale of shares to fund the Grid Note. As of September 30, 2003,
the Company had borrowed $77,000 under this arrangement.
(ii) The Company completed the sale of certain entities and
assets during fiscal 2002. After being unsuccessful in attempting
to sell its five remaining European operations (Vertex UK-
previously PSS, Vertex Service and Maintenance Italy -
previously SIS, Vertex Italy, Euronet and Vertex France-
previously ICS France) and based on the continuing cash drain
from these operations, during fiscal 2002 the respective
boards of directors determined that in the best interest of
their shareholders that they would seek the protection of the
respective courts in each country, which have agreed to an
orderly liquidation of these companies for the benefit of their
respective creditors. Upon legal resolution of the $7.3 million
of net liabilities of these remaining European entities, we expect
to recognize a non-cash gain (and no significant cash outlay),
however the amount and timing of such gain and cash outlay is
totally dependent upon the decisions to be issued by the
respective court appointed liquidators.
26
(iii) We are aggressively pursuing additional capital raising
initiatives in particular through the formation of XeQute
Solutions PLC, into which we have an agreement with CSS to
raise in conjunction with Midmark Capital, approximately $3.8
million of new equity. This transaction is no longer going
forward. We have conducted extensive negotiations with various
sources as a result of which we have a tentative agreement that
is subject to certain conditions for the provision of up to
$8 million of new financing by Davis Sassoon Holdings, Inc.
which may be in the form of debt or equity or a combination
of both to XeQute.
(iv) We have continued to reduce headcount (to approximately 40
employees in our continuing North American business at September
30, 2003, of whom 14 are currently furloughed until additional
funds are raised), consolidate facilities, and generally reduce
costs.
(v) Effective July 31, 2003, the Company completed the sale of
10,000,000 shares of its common stock, which had a fair market
value at that time of approximately $500,000, to American
Marketing Complex, Inc. ("AMC"). Payment for this purchase was in
the form of cash equivalent trade credits with a face value of
$4,000,000, which the Company can utilize for the purchase of
merchandise and services. The face value is not necessarily
indicative of the ultimate fair value or settlement value of the
cash equivalent trade credits. Any trade credits not utilized by
June 30, 2008 shall expire, unless the Company exercises an
option to extend the agreement for one year.
In addition, the Company agreed to loan AMC $150,000 of which
$10,000 was delivered at closing; $40,000 was delivered in August
2003; $50,000 was to be delivered by September 10, 2003 and $50,000
was to be delivered by October 10, 2003. The Company did not make
the September or October payments. This loan will be repaid
exclusively from funds received from the sale of the 10,000,000
shares. The Company is required to register these shares within
six months of the closing.
(vi) We are seeking to settle certain of our current liabilities
through non-cash transactions. Vertex is negotiating with vendors
to settle balances at substantial discounts, including through
the use of the cash equivalent trade credits set forth in (v)
above. In addition, we are negotiating to settle certain notes
payable and approximately $4 million of litigation accruals at a
discount or with the issuance of shares of either Vertex or
XeQute.
27
While we are continuing our efforts to reduce costs, gain scale,
resolve lawsuits on favorable terms and settle certain
liabilities on a non-cash basis there is no assurance that we
will achieve these objectives. In addition, we continue to pursue
strategic business combinations and opportunities to raise both
debt and equity financing. However, there can be no assurance
that we will be able to raise additional financing in the
timeframe necessary to meet our immediate cash needs, or if such
financing is available, whether the terms or conditions
would be acceptable to us.
The financial statements have been prepared on a basis that
contemplates Vertex's continuation as a going concern and the
realization of assets and liquidation of liabilities in
the ordinary course of business. The financial statements do
not include any adjustments, with the exception of the
provision to reduce the carrying values of the assets of the
subsidiaries in liquidation to their estimated net realizable
value, 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.
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 debt bears interest at variable rates,
as do certain of the convertible notes payable; 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.
Item 4. Controls and Procedures
As of the end of the period covered by this report, a preliminary
evaluation was carried out, under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
pursuant to Rule 13a-15 of the Securities Exchange Act of 1934.
Based upon the Company's disclosure as to material weaknesses in
internal controls as reflected in its 8-K filed April 16, 2002,
the disclosure referenced in Part II, Item 9 of its Annual Report
on Form 10-K for the year ended September 30, 2002, the lateness
of this filing, and its preliminary evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that
given additional procedures performed, our disclosure controls
and procedures were effective, in all material respects, with
respect to the recording, processing, summarizing, and reporting
of information required to be disclosed by us in the reports that
we file or submit under the Exchange Act, but our disclosure
controls and procedures were ineffective, in all material
respects, with respect to completing the recording, processing,
summarizing, and reporting of information, within the time
periods specified in the SEC's rules and forms, of information
required to be disclosed by us in the reports that we file or
submit under the Exchange Act given the resources available to
the Company.
In November 2003, as part of the Company's ongoing efforts to
tighten internal controls and to streamline and improve the
timelines of reporting, the Company consolidated four separate
financial reporting systems onto a single financial reporting
system at XeQute. As a result, the Company has reduced the
manual consolidation procedures, involving four disparate
financial reporting systems, providing a significant improvement
in internal financial procedures and controls.
Going forward financial reporting and controls at the XeQute
level will be fully automated. As the system is refined and
improved, the Company expects to experience continued improvement
in the effectiveness of its internal financial procedures and
controls.
28
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
Part II Other Information
Item 1. Legal Proceedings
Pending Litigation
a) On April 16, 2003, an action was commenced in the Supreme Court
of the State of New York, County of Suffolk, entitled Bautista v.
Vertex Interactive, Inc and Renaissance Software, Inc. The
action, which demands $394,000, is brought by a former employee
claiming breach of his employment agreement.
b) On June 25, 2003, an action was commenced in the United States
District Court, District of New Jersey, entitled CPG
International, N.V. v. Vertex Interactive, Inc. The action,
which demands $406,342.47, alleges the Company's breach of an
Asset Sale and Purchase Agreement pursuant to which the Company
acquired various assets related to CPG International's Service
business.
c) On October 31, 2001, an action was commenced in the United
States District Court, Southern District of New York entitled
Edgewater Private Equity Fund II, L.P. et al. v. Renaissance
Software, Inc. et al. The action, brought against Renaissance
Software, Inc., a subsidiary of Vertex, and Vertex, alleged
the default by Renaissance Software, Inc. in payment of certain
promissory notes in the principal aggregate sum of $1,227,500.
Vertex guaranteed the notes. The noteholders demanded $1,227,500,
together with interest accruing at the rate of 8% per annum from
June 30, 2001. On March 12, 2002, the noteholders were successful
in obtaining a judgment against Renaissance Software, Inc. in the
aggregate amount of $1,271,407 including interest, late charges
and attorneys' fees. However given the Company's current cash
position, we have been unable to pay the judgment and have been
pursuing non cash alternatives.
d) We are also party to a number of claims by vendors, landlords
and other service providers seeking payment of balances owed.
Since such amounts are already recorded in accounts payable or
accrued liabilities, these claims are not expected to have a
material affect on the stockholders' deficiency of the Company.
However, they could lead to involuntary bankruptcy procedures.
Settled Litigation
a) On September 28, 2001 Vertex filed a Demand for Arbitration
with the American Arbitration Association ("AAA") against Russell
McCabe, Daniel McCabe and David Motovidlak (the "ATS
Shareholders"), the former shareholders of Applied Tactical
Systems, Inc., an entity which merged with Vertex pursuant to a
Merger Agreement dated December 29, 2000, seeking damages
resulting from the McCabe's interference with Vertex's employees
and customers. The ATS Shareholders also filed a Demand for
Arbitration seeking $25,000,000 in damages based on, among other
things, Vertex's alleged failure to register the ATS
Shareholders' stock in Vertex by a certain date.
29
In a related action, on December 10, 2001 the ATS Shareholders
filed a complaint in the United States District Court for the
District of New Jersey against Ernst & Young LLP (our former
auditors), and certain Vertex shareholders, officers and
directors individually. Vertex itself was not a defendant in
this action. The ATS Shareholders were seeking damages in the
amount of $40,000,000 plus punitive and statutory treble
damages based upon, among other things, allegations that Vertex
failed to register stock of the ATS Shareholders by a certain
date.
On November 15, 2002, we resolved and dismissed claims relating
to both of these matters. The United States District Court
for the District of New Jersey entered a Stipulation and
Order of Settlement and Dismissal as to Certain Parties,
agreed to by Vertex, other named parties, and three former
ATS shareholders in the case styled Russell McCabe, et al. v.
Ernst & Young, LLP, et al., Case No. 01-5747 (WHW). Pursuant
to the Stipulation and Order, Vertex and the three former
ATS shareholders also agreed to dismiss their respective AAA
arbitration claims. The settlement was funded by Vertex's
insurance carrier, with no additional payments by Vertex or
by any settling defendants. The parties dismissed all claims
between them and exchanged mutual general releases.
b) On May 7, 2002 an action was commenced in the Supreme Court
of the State of New York, County of New York by Harris Hoover
& Lewis, Inc., ("Harris Hoover")in which Harris Hoover alleged
that the Company breeched a financial advisory contract. The
claim sought damages in the amount of $250,000. The Company
had filed a counter claim alleging breech of contract, breech
of fiduciary duty and intentional misrepresentation and sought
damages in an amount not less than $2,050,000 plus punitive
damages. This matter was dismissed by the New York Supreme Court
on November 26, 2002. The parties dismissed all claims between
them and exchanged mutual general releases. No payments were
made by either party to the other.
c) As part of the settlement entered into between the Company
and three former principals of a company acquired by Vertex in
2000, consent judgments in the amount of approximately $1,000,000
each were entered against Vertex on July 19, 2002. The
incremental liability has been included in other expense
(provision for litigation) for the year ended September 30, 2002.
The Company is currently negotiating with the former owners to
accept forms of payment other than cash and there can be no
assurance that a non-cash settlement will be concluded. In July
2002, the former owners obtained a court levy upon several of
the Company's bank accounts, placing a hold on approximately
$70,000 of the Company's funds. The Company, together with its
secured lenders, objected to the turnover of these funds,
however a turnover order was granted by the court in October 2002.
d) On November 7, 2000, Pierce Procurement Ltd. ("Pierce")
brought an action against the Company's subsidiary Renaissance
Software, Inc. ("Renaissance"), in the Boone County Circuit Court
in Northwestern Illinois. The suit was removed to the United States
District Court for the Northern District of Illinois,
Western Division, on February 1, 2001. The claim by Pierce against
Renaissance was based upon allegations that Renaissance sold a
computer system which did not meet the particular purposes of Pierce
and that Renaissance made certain misrepresentations to Pierce with
respect to the system. Renaissance denied such claims, and through
its insurance carrier defended the action. Renaissance
had counterclaimed against Pierce alleging that Pierce had paid only
a portion of the contract fee agreed to by the parties. Total damages
claimed by Pierce were approximately $1,500,000 plus interest and
penalties. Renaissance sought approximately $76,500 on its
counterclaim. In December, 2003, the company, through its
insurance carrier, reached a settlement in this matter, which
settlement will be paid by the insurance carrier.
30
Item 2.Changes in Securities and Use of Proceeds
None.
Item 4. Submission of Matters to a Vote of Security Holders
None this quarter
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
31.1 Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) The following Reports on Form 8-K were filed
during the period:
Form 8-K dated October 1, 2002, filed October 2,
2002 Certification of CEO and CFO pursuant to 18
U.S. C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 with
regard to the Company's 10Q for period ending June
30, 2002, filed on October 2, 2002.
Form 8-K dated November 15, 2002, filed December 5,
2002, settlement and dismissal of claims relating
to Applied Tactical Systems and Harris Hoover and
Lewis LLC
31
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
December 31, 2003