Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Year Ended: September 30, 2003
0-15066
Commission file number
Vertex Interactive, Inc.
(Exact name of Company as specified in its charter)
New Jersey 22-2050350
(State of incorporation) (I.R.S. Employer Identification No.)
3619 Kennedy Road, South Plainfield, NJ 07080
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (908) 756-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.005 per share
Indicate by check mark whether the Company (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Company was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the Company's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
Indicate by check mark whether the Company is an accelerated filer
(as defined in Rule 12b-2 of the Act.
Yes ___ No X
As of March 31, 2003 the aggregate market value of the voting
common stock held by non-affiliates of the Company was $744,040
based upon the closing price of the common stock as reported on
the "Pink Sheets" on that date. For purposes of this calculation
only, Directors, Executive Officers and the principal controlling
stockholder of the Registrant are deemed to be affiliates of
the Registrant.
1
As of December 31, 2003 the Company had 48,201,978 shares of
Common Stock outstanding.
Preferred stock, Series "A", par value $.01 per share: 1,356,852
shares outstanding as of December 31, 2003.
Preferred stock, Series "B", par value $.01 per share: 1,000
shares outstanding as of December 31, 2003.
Preferred stock, Series "C", par value $.01 per share: 997 shares
outstanding as of December 31, 2003.
DOCUMENTS INCORPORATED BY REFERENCE:
Exhibits to the Company's Registration Statement on Form S-18
(No.33-897-NY) filed under the Securities Act of 1933, as amended
and effective June 2, 1986, Current Reports filed on Form 8-K dated
May 14, 2002, April 9, 2002, September 7, 2001, March 2, 2001
(and amended on March 14, 2001), October 2, 2000, April 12, 2000,
and October 7, 1999, Quarterly Report on Form 10Q filed on May
20, 2002, February 20, 2002, and August 14, 2001, Annual Report
on Form 10-K filed on January 25, 2002 and December 18, 2000 and
Transition Report on Form 10K filed on January 13, 2000.
2
PART I
ITEM 1. BUSINESS
General
Vertex Interactive, Inc. ("Vertex" or "we") is a provider of
supply chain management ("SCM") technologies, including
enterprise software systems and applications, and software
integration solutions, that enable our customers to manage their
order, inventory and warehouse management needs, consultative
services, and software and hardware service and maintenance. We
serve our clients through three general product and service
lines: (1) enterprise solutions; (2) point solutions; and, (3)
service and maintenance for our products and services, including
service and maintenance of software and hardware we resell for
third parties. Our enterprise solutions include a suite of Java-
architected software applications, applications devoted to the
AS/400 customer base, as well as a portfolio of "light-directed"
systems for inventory, warehouse and distribution center
management. Our point solutions provide an array of products and
services designed to solve more specific customer needs from
managing a mobile field workforce, mobile data collection,
distributed bar code printing capabilities, compliance labeling
applications, automated card devices, software development tools
and proprietary software serving SAP R/3 users. We provide a full
range of software and hardware services and maintenance on a 24-
hour, 7-days a week, 365-days a year basis, including the
provision of wireless and wired planning and implementation
services for our customers' facilities.
We have achieved our current focused product and service
portfolio as a result of various acquisitions over the past four
years, with the more recent ones being described in the
"Acquisitions" section of Note 2 to the Consolidated Financial
Statements and through the sale and/or disposal of certain
businesses no longer core to the Company's strategy over the past
two years as described in the "Disposals" Section of Note 2
to the Consolidated Financial Statements. Our customers are able
to maximize the efficiency of the flow of inventory through
their supply chains, by implementing our integrated systems.
Our customers use our software to reduce procurement and
distribution costs, and manage and control inventory along the
supply chain, thereby increasing sales and improving customer
satisfaction and loyalty. We also resell third party software
and hardware as part of our integrated solutions. We provide
service and support for all of our software and systems from
established facilities in North America.
We have sold our products and services worldwide, but now
operate primarily in North America, through a direct sales
force and through strategic reseller alliances with
complementary software vendors and consulting organizations.
We target customers with a need to manage high volumes of
activity along their supply chains from order intake and
fulfillment, through inventory, warehouse and distribution
center management to the ultimate delivery of goods to end
users.
3
Our total revenues for the fiscal year ended September 30, 2003
were $4,226,000, approximately 100% of which were generated by
our North American operations. For the comparable period
ended September 30, 2002 we reported $36,135,000 in
revenues, approximately 43% of which were generated by our
North American operations.
Our principal executive offices are located at 3619 Kennedy
Road, South Plainfield, New Jersey and its telephone number is
(908) 756-2000. The Company was organized in the State of New
Jersey in November 1974.
Outlook
The successful implementation of our business plan has required,
and will require on an ongoing basis, substantial funds to
finance (i) continuing operations, (ii) the further development
of our enterprise software technologies, (iii) expected future
operating losses, (iv) the settlement of existing liabilities,
including past due payroll obligations to our employees, officers
and directors, and (v) from time to time, selective acquisitions.
Assuming we receive the required funding mentioned above, we do
not anticipate reaching the point at which we generate cash in
excess of our operating expenses until June 2004 at the earliest,
about which there can be no assurance. In order to meet future
cash flow needs, we are aggressively pursuing additional equity
and debt financings including through our enterprise software
subsidiary XeQute Solutions, Inc., and continued cost cutting
measures. Historically, we have financed these activities
through both equity and debt offerings. There can be no
assurance that we will continue to be successful in these
efforts. As a result there is substantial doubt as to our
ability to continue as a going concern. (See Management's
Discussion and Analysis, Liquidity and Capital Resources.)
Throughout 2003, the Company experienced continued weakness
in its core markets, continued operating losses and a
consistent shortfall in working capital. In order to survive in
these circumstances, the Company continued its strategy to focus
on its core enterprise level products, while continuing to reduce
costs.
By the summer of 2002, it became apparent that the sharp downturn
in capital spending in the Company's major markets was likely to
continue for the foreseeable future. This factor combined with
the continuing working capital shortfall (which had already
caused the Company to focus on its enterprise level software and
sell off non-core businesses to raise cash to fund current
operations as mentioned above) required the Company to look anew
at its operations with a view to raising additional working
capital and to reducing costs further. In light of the depressed
price of the Company's common stock and the related shrinking
trading volumes, the Company elected to fund its enterprise
software group separately from the Company in order to achieve
better values than could be obtained by funding through Vertex
directly. At the same time as mentioned above, the Company needed
to further contain costs and streamline operations.
4
In August 2002, the Company formed a wholly owned subsidiary,
XeQute Solutions, Inc., ("XeQute") into which, effective October
1, 2002, the Company transferred all of theassets and certain of
the liabilities of its Enterprise Software Division. This action
was intended to consolidate all of the enterprise level products
and services in one entity, under a single brand, namely XeQute
Solutions, to streamline operations, reduce costs, provide a more
effective route to market, and also to provide a new platform for
hiring. Then in October 2002 the Company entered into an agreement
with underwriter Charles Street Securities ("CSS")to raise
approximately $3,800,000 of equity into XeQute, on a best
efforts basis, in a United Kingdom offering of XeQute Solutions
Plc, the parent company of XeQute, under the terms of which the
Company would retain control of XeQute. Pending completion of
this offering, CSS procured on our behalf a bridge loan in an
amount of $500,000; $250,000 equally from the Aryeh Trust and
MidMark Capital. MidMark Capital is a shareholder of the Company
and certain MidMark Managing Directors have served as directors
of the Company. The offering 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.
The Supply Chain Management Industry
The term "supply chain management" refers to a wide spectrum of
software applications, consulting services, maintenance services
and hardware products intended to enable businesses to manage
their chains of supply. The primary goals of successful supply
chain planning and execution are to reduce the costs of sales,
recognize early opportunities and act on them to increase sales
and to detect problems as they emerge to address them promptly to
reduce their impact on the operations of the business. The SCM
industry is evolving toward a more software-driven model as
enterprises increasingly seek ways to manage their supply chains
in real-time at a lower cost and in a more decentralized
environment.
SCM spending falls within the Information Technology industry.
Because SCM technologies and services enable enterprises to manage
a critical aspect of their operations, namely the chain
of supply of components into products to be manufactured, sold
and delivered to end customers, the Company believes that,
despite some cyclicality that may always characterize investment
in software, over the long-term, SCM solutions are likely to
remain significant factors in corporate IT budgeting. Management
believes that applications and value-added services such as
implementation and consulting will play a more significant role
in the overall IT investment of companies in our target market,
as enterprises increasingly focus on generating the highest return
possible on their asset base-the primary focus of SCM technology.
5
The Opportunity
Recent analysis from Gartner Dataquest concludes that as
macroeconomic factors that adversely affected spending on
technology in 2001 and 2002 begin to ease in 2003 and beyond,
users will want to derive more value from the effective
integration of existing IT investment. According to Gartner
Dataquest outsourcing demand will continue to spur information
technology growth over the next few years, and pent-up demand for
consulting as well as development and integration of new
technologies will be important growth factors.
According to the U.S. Bureau of Commerce, approximately 10% of
the U.S. gross domestic product, or more than $900 billion in
1999, is spent annually on the movement and storage of raw
materials, parts, finished goods and other activities along the
supply chain. Globalization and the rise of the Internet are
working in conjunction as catalysts for the emergence of supply
chain technologies designed not only to reduce the costs inherent
in the global economy, but to give enterprises unprecedented
visibility into and dynamic control over their supply chains. The
Company's strategy is grounded in the conviction that supply
chain optimization and management, driven by software
applications and integrated systems is a long-term growth
industry still in its early stages of development, in which there
is an attractive opportunity for companies with sufficient scale
and the right product set to emerge as global leaders in this
industry.
AMR Research had forecasted the worldwide SCM industry to reach
$21 billion by 2005, a five year compound annual growth rate of
approximately 32%. Application software license revenues, which
in 2001 comprised an estimated 41% of total SCM industry sales,
according to AMR, are forecast to continue to grow at a 29%
compound annual growth rate and to reach nearly $8 billion by
2005. Software maintenance, which AMR estimated to generate
nearly $1 billion in industry revenues in 2001, is expected to
grow at a 36% compound annual growth rate and to reach $3 billion
by 2005.
6
The two largest geographic markets for SCM technology and
services are North America and Europe. AMR estimated that in 2001
these two markets accounted for roughly 86% of worldwide sales,
with the North American market expected to grow at a 28% annual
compound growth rate through 2005 and Europe expected to grow at
a 38% annual compound growth rate over the same period. In light
of the continuing impact of the recessionary economies in North
American and Europe, management believes that AMR's current
industry growth forecasts may prove to be aggressive.
Asia/Pacific and Central and South America are forecast to grow
more rapidly over this period, but today these markets account
only for an estimated 13% of industry sales and are forecast to
reach about 17% by 2005.
The industry opportunity is being defined by three worldwide
trends:
Two Major Catalysts: Global Competition and the Internet
Many observers point to two fundamental drivers of long-term
growth in the SCM industry: (i) the increase in globalization and
the competitive pressures that trend is creating for businesses;
and (ii) the rise of the Internet as a medium for commerce at
virtually every level of the economy.
As competitive barriers fall around the world, we believe
that there is a secular trend toward more open global commerce
that has the potential to impact businesses of nearly every
size. This may create opportunities for the Company's products in
large as well as in small enterprises.
Coincidental with the increase in the pressures of global
competition, has been the arrival of the Internet. Electronic
commerce is characterized by more interdependent relationships
among companies, their vendors and their customers. Managing the
supply chain in an e commerce environment lies at the heart of
the Company's suite of products.
An Industry Evolving
Despite billions of dollars of capital investment in new software
systems in the decade of the nineties, the benefits of this
investment have been achieved more slowly than corporate buyers
had expected. As corporate buyers began to return to their
technology needs during 2002 and into 2003, after a slowdown in
2001 and early 2002, their approach is a more modest one, seeking
affordable solutions targeted at specific problems and whose
projected return on investment can be more rigorously assessed.
The Company is focusing the marketing of its product portfolio to
meet such buyer expectations and is seeking to offer specific
supply chain products, at a predictable total cost of ownership,
with predictable time to complete implementation.
7
Beyond the "Four Walls"
Traditionally, companies have viewed their supply chains as a
series of discrete activities that could be managed largely
independently of each other and almost certainly independently of
a company's vendors and customers. This approach is changing.
Corporate buyers are understanding the interdependence of each
stage and of each participant in the supply chain and are seeking
"visibility" into their supply chain.
This transition to a new operating model poses challenges for
corporate managers because few internal IT systems or business
practices are yet fully capable of taking advantage of the new
opportunity to access and manage enterprise information in a
decentralized environment. Increasingly, corporations are taking
advantage of opportunities to add value at many more places along
the supply chain. This is placing a more complex set of
functional needs on legacy supply chain management practices and
technologies. These challenges include:
Implementing and managing more dynamic, customer-driven
fulfillment processes;
Supporting a new array of relationships with partners, vendors,
trading partners and customers;
Enhancing visibility into order, inventory, warehouse and
transportation status;
Improving real-time co-ordination among enterprise facilities;
Extending supply chain visibility beyond the enterprise;
Permitting dynamic scalability to address unpredictable increases
in transaction volumes;
Allowing least-cost routing;
Enabling the application of value-added services along the supply
chain;
Providing means to monitor activity along the supply chain; and
Managing events in the supply chain in the optimum time to take
advantage of revenue opportunities and avoid costs.
A premium is developing on SCM systems and software that are more
integrated, scaleable, offering real-time capabilities and that
can support a more complex and dynamic web of business
relationships with vendors, partners and customers. Management
believes that the Company's software and services, coupled with
its expertise in the areas of order fulfillment, inventory,
warehouse and transportation management offer important value-
added in the evolving SCM marketplace.
8
The Business and Products of the Company
The Company is a provider of products designed to meet the
emerging opportunity described above. These products principally
involve the provision of services and enterprise level software
for order fulfillment comprising order management, warehouse and
inventory management and distribution management. This market is
sometimes referred to as supply chain "execution management"
software. The business benefits from an established,
revenue-producing suite of proven products which have been
sold to a client base consisting principally of Fortune 500
clients in the United States, in the Company's target vertical
markets. These vertical markets are pharmaceuticals; consumer
packaged goods, third party logistics providers; and bulk food
distributors.
The following summary relates to the product lines currently
offered by the Company, principally through its wholly-owned
subsidiary, XeQute:
1. Warehouse Management Systems (WMS) Products -
the eSuite Software Products
The Company's core product offerings are its Java-
architected, enterprise level, supply chain execution
systems which include order management (eOMS) and warehouse
management (eWMS) applications. Vertex's eSuite of products
promotes collaboration and the exchange of "real-time"
critical information among users within their trading
environment, including employees, distributors,
manufacturers, suppliers and customers. Portable by design,
the eSuite of products can operate across multiple operating
and hardware environments, incorporate the ability to
utilize various database options, and can easily be
integrated with existing IT infrastructure and third party
applications.
eWMS is a Java architected warehouse management
system that provides companies with real-time
insight into warehouse operations and inventory
availability. eWMS is a true multi-warehouse/owner
system that can be deployed across industries and
has specific functionality for food and third party
warehouse/logistics environments. eWMS can be
implemented to interface with existing enterprise
applications or as an integrated component of eOMS
to facilitate a complete supply chain execution
solution.
9
eOMS is a web-based order management system that
integrates all users in a real-time environment:
internal employees, external sales force,
distributors, and customers, through any means of
deployment: Internet, Intranet, or Extranet. eOMS
provides companies with maximized selling
opportunities by capturing valuable buying pattern
information and then uses this information to
broadcast suggestive selling and promotional
opportunities as well as many other benefits. The
eOMS market is potentially the single largest of the
Company's products because order management is a
function performed by every business irrespective of
whether they operate a warehousing and distribution
facility. The importance of this market is
highlighted by the fact that over the past eighteen
months two of the larger ERP vendors, PeopleSoft and
JD Edwards, among others have entered this segment
of the market. The Company is intending to devote
marketing resources to exploit this opportunity.
eOMS represents one of the largest, new market
opportunities for the Company. Every business has a
requirement to manage its customers' orders properly.
Ideally, the order management system should ensure
accurate order entry and timely fulfillment while
providing readily available information to
customers on progress in meeting their respective
orders. Very few existing order management systems
provide all of this functionality, or all of this
functionality in an easily accessible form. In contrast,
eOMS addresses these needs in a single complete
package. First, the system allows customers to enter
their orders directly through a browser-based solution.
This permits customers to not only self enter their
orders, but also to track the progress of, and if
required change, such orders during the fulfillment
process in real time over the internet. Again, being
internet based allows for access to, and collaborative
trading among, all of the participants in the chain of
supply, namely customers, employees and vendors.
The Company has commenced a sales campaign targeted
at its existing customer base initially, with plans to
reach the broader market after implementing the system in
certain existing accounts.
In conjunction with the sale of the WMS product suite,
the Company also provides customers with software
maintenance support, business and warehouse consulting,
and other implementation services, including system
design and analysis, project management, and user and
technical training.
10
Customers which have purchased a warehouse management
system from the Company during the period 2000-2002 have
included major US companies such as: McLane, a division of
Walmart Stores and the largest distribution company in the
world, Iowa Beef, ConAgra,CDC Distribution, ABX Logistic,
Air Express International, Branch Electric, Land O'Lakes
Dairy, Avery Dennison, The General Printing Office
(US Government) and Rand McNally. The first release of the
E Suites product was delivered to a large retailer in
February 2001, who indicated that the software was capable
of processing in excess of 100,000 transactions per hour
per distribution center (of which there were 19). A product
for the bulk food and 3PL vertical markets was released
in 2002.
The eSuite product line was recently rewritten in JAVA.
Management believes that the eSuite product line is
presently one of the few completely integrated internet-based
order fulfillment systems in the world. The competitive
importance of this was recently highlighted by SAP's
announcement that its web strategy would center around a
new JAVA version of its SAP R/3 operating system. The
JAVA language is critically important to the future of
the Company's development in that it is the first
software language to be independent of both operating
platforms and databases; that is to say this software can
run in any IT environment without extensive
modifications.
iSeries WMS
The original product developed by Renaissance was a
warehouse management system, iWMS, developed
exclusively for use in an AS/400 environment. iWMS
provides the stability, security and ease-of-
implementation that AS/400 users have learned to expect
and mandate. iWMS is a well established, highly
functional, warehouse management system, that is
currently installed worldwide in a variety of
industries including, third part logistics (3PL),
pharmaceutical, cosmetic and fragrance, food, office
supplies, furniture, fast moving consumer goods among
others.
2. Light-Directed Picking and Put Away Systems
The terms "light-directed" or "light-prompted" systems refer
to the stock picking (or put away) functions in warehousing
management systems whereby a light automatically shines in
the sector where stock needs to be picked. Such "light-
directed" stock picking systems have a proven track record
for making the order fulfillment process dramatically more
efficient with a very significant reduction in the error
rate in the stock picking function and a measured
improvement in productivity.
The Company's light-directed family of software picking
systems was originally developed by our subsidiary, Data
Control Systems. The products offer a design and
implementation of state-of-the-art, IT-based solutions that
dramatically improve productivity for the order fulfillment
and warehouse management functions in manufacturing and
distribution companies.
11
The Company's light-directed picking solutions interface
with a number of ERP systems and can be modified to work
with almost any system. The order control/fulfillment
systems represent an important facet of the complete E-
commerce system. While E-commerce marketing and order
taking engines can generate substantial sales, without an
optimized order fulfillment process, the promise of E-
commerce will not be fully realized by companies. The
Company is recognized as a leader in electronic warehouse
management systems in real-time, and in light-directed
order processing.
The industry has recognized the Company's products and
services and they were awarded the "Modern Materials
Handling" Productivity Achievement Award in 1999 and the
Vendor of the Year for Merck Pharmaceuticals in 1998.
Our product line includes a mobile cart based system that
appeals to a broader customer base. This system, CartRite,
utilizes light panels and advanced wireless communications
in its warehouse management application.
The Company believes that it is the only supplier in its
industry to develop, engineer, assemble, and install its
own systems, in contrast to other companies which provide
some, but not all, of the systems and services that the
Company is able to provide as a one-stop shop. In-house
personnel implement turn-key solutions that have yielded
to clients the immediate benefit of increased operating
efficiencies, an improved competitive edge and have
offered a platform for future growth.
The Company has documented that its light-directed
products achieve dramatic improvements in operating
efficiency for clients. Typically, after introduction of
the Company's light-directed order fulfillment system,
clients eliminate a portion of the staff they previously
required to fill warehouse orders. This is achieved by
automating and optimizing the scheduling, method and the
order of picking items without any paper. The system thus,
among other things, eliminates the multiple steps associated
with paper handling and manual reconciliation.
The software products automate the process from order
receipt to final shipment. The Company has developed
standard communication interfaces with the leading ERP
vendors including SAP, JD Edwards, Oracle, Peoplesoft and
Microsoft Great Plains Resources, and other enterprise
level systems. The Company is an authorized software
provider for all the major shippers in the US which
includes UPS/FedEx/RPS/USPS. The software is capable of
simultaneous production of shipping bar codes when labels
are generated.
Hundreds of the Company's installations of its WareRite
Warehouse Management Systems ("WMS"), PicRite,
TurnRite, and PutRite light-prompt systems are
providing results in a wide range of industries,
including: pharmaceuticals, cosmetics, publishing, mail
order industries, automotive, electronics, direct selling
associations, retail and wholesale distribution. The
above product lines along with the CartRite system
have the potential to enhance its clients' E-commerce
related processes. Customers include Merck
Pharmaceutical, Pfizer, Wyeth, Estee Lauder, OfficeMax,
Rite Aid, Braun Electronics ( a wholly owned subsidiary
of Gillette) and Dr. Mann Pharma in Germany.
12
3. Integration Applications
This line of business is involved in the design,
development and implementation of software that connects
applications on handheld devices used in the distribution
system to the base ERP system and in particular to the
SAP R/3 operating systems.
This product family includes proprietary, patented
products and services that allow companies to leverage
their existing investment in SAP R/3 by extending
its functionality to the warehouse floor. To assist
in ease-of-implementation, the Company has developed
tools for SAPConsole implementation including the
Universal Starter Transaction Set which allows
transactions to be easily modified by new users
of ABAP, BC2SAP for rapid bar code label design,
Z-Builder which develops transactions in hours.
The Company's UMDC is shrink-wrapped software that
enhances SAP R/3 functionality. In addition, Vertex
has professional services to complete its SAP R/3
practice offering including SAPConsole technical training,
ABAP coding for data collection, bar code design,
implementation, training and on-going support.
Customers include Mercedes-Benz U.S. International,
Colgate, Bristol Myers Squibb, Oceanspray, Bodek & Rhodes,
Rexam, SAATI in Italy, among others.
Competition
The industry today is marked by competition in two industry
segments: SCM planning and SCM execution. Vertex competes
primarily in the execution segment. In this segment, the Company
faces competition from numerous foreign and domestic companies of
various sizes. Competition in these areas is further complicated
by possible shifts in market share due to technological
innovation, changes in product emphasis and applications and new
entrants with greater capabilities or better prospects.
Order Management
The order management market is becoming a center of focus for
every business in the world whether or not they run distribution
centers. As a result this market segment could become the largest
part of the Company's business in the future. The importance of
this emerging opportunity is highlighted by the recent entry of
JD Edwards, PeopleSoft, i2 and Manugistics into this market. The
competition for the Company's eOrder product is believed to be as
follows:
13
PeopleSoft, an ERP vendor with revenues of $2 billion. The
Company believes that PeopleSoft has a Java-based product
offering which is very competitive with that offered by the
Company.
JD Edwards & Co Inc, an ERP vendor with revenues of
approximately $900 million with a presence in the order
management segment.
i2 Technologies, the largest planning supply chain vendor in the
US based on revenues, with sales of approximately $500 million.
Execution Management
In the execution management segment in the US there are
approximately 275 companies offering a WMS product, of which only
a small number have a top tier product (defined as able to handle
warehouse space in excess of 250,000 square feet and at least 100
simultaneous users of wireless devices at any one time) and
revenues in excess of $10 million. The Company believes that it
is the only supplier with a complete JAVA based cross-platform
solution for Supply Chain Management. In this segment of the
industry the Company's major competitors for the warehouse and
inventory management components and the transportation and
logistics components of its e Suite product are:
EXE Technologies, with revenues of approximately $70 million,
competes most directly with the Company in warehouse management
in the Company's main vertical markets.
Manhattan Associates, the largest warehouse management software
vendor in the world with annual revenues of approximately $170
million. They focus principally on the AS/400 market in retail
distribution and fast moving consumer goods.
Catalyst International, with revenues of $33 million, provides
principally UNIX solution solutions in the Company's vertical
markets.
Light-Directed Systems
In the "Pick-to-light" business, the Company believes that there
are some 25 competitors, of which the largest are Real Time
Solutions, Rapistan, Kingsway and Haupt of Austria, all
privately held companies. These companies compete with aggressive
pricing and turn key solutions. However, the Company's
competitive advantage centers around its product's flexibility
and software capabilities.
The Company believes that it has a strong market share in the
pharmaceutical vertical market.
Research and Development
The Company's research and development ("R&D") initiatives focus
on enhancing the product set with additional functionality aimed
at the Company's core vertical markets.
14
For the year ended September 30, 2003, there was no R&D spending
as the company suspended R&D to focus its resources on customer
support. For the years ended September 30, 2002 and 2001, R&D
expense was $4,180,000 (representing 11.6% of revenues), and
$7,039,000 (representing 11.9% of revenues), respectively.
The high level of R&D expenditures in 2001 arose out of the need
to complete the Java-architected, enterprise level SCM suite.
The Company's research and development timetable, over the next
24 months for the eWMS product includes a number of
features and enhancements which are budgeted to begin
development in mid-2004. However the extent and timing of this
development is dependent upon the Company's ability to raise the
required funds.
Employees
At September 30, 2003, we had approximately 35 employees, which has
been reduced to 30 as of January 15, 2004. With the sale or
liquidation of our European operations in 2002, 100% of the
remaining employees are in North America. In our North
American operations, approximately 70% are in Installation and
Implementation, 10% in Sales and Marketing (including sales support)
and the balance in Executive/Administrative.
Designing and implementing the Company's software solutions
requires substantial technical capabilities in many disparate
disciplines, from mechanics and computer science to electronics
and mathematics. While the Company believes that the capability
and experience of its technical employees compare favorably with
other similar companies, there is no guarantee that it can retain
existing employees or attract and hire capable technical employees
it may need in the future, or if it is successful, that such
personnel can be secured on terms deemed favorable to the Company.
ITEM 2. PROPERTIES
Vertex and its subsidiaries occupy approximately 15,000 square
feet of office & warehouse space in a building in South
Plainfield, New Jersey under a lease expiring in April 2008.
In addition, the Company leases approximately 2,000 square feet
of office space in Paramus, New Jersey which has been subleased.
The Company believes that its current office space and facilities
are sufficient to meet its present needs and does not anticipate
any difficulty securing alternative or additional space, as needed,
on terms acceptable to the Company.
ITEM 3. LEGAL PROCEEDINGS
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.
15
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.
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.
16
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security
holders during the most recent fiscal quarter.
17
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market for Company's Common Equity
Until August 20, 2002, the principal market for the Company's
shares of Common Stock, par value $.005 per share was the NASDAQ
National Market System under the symbol VETX. From August 21,
2002 until February 17, 2003 the Company's Common Stock was
traded on the NASDAQ Bulletin Board. Thereafter it trades on the
Pink Sheets under the symbol "VETXE" (See Note 1 - Recent
Developments to the Consolidated Financial Statements).
The following table sets forth, for the periods shown, the high
and low sale prices concerning such shares of Common Stock:
High Low
2002
First Quarter $ 1.27 $0.71
Second Quarter 1.23 0.27
Third Quarter 0.40 0.08
Fourth Quarter 0.14 0.05
2003
First Quarter $0.10 0.04
Second Quarter 0.06 0.02
Third Quarter 0.07 0.01
Fourth Quarter 0.15 0.04
2004
First Quarter 0.09 0.04
The approximate number of holders of record of the Company's
shares of Common Stock as of December 31, 2003 was 440. This
number includes numerous brokerage firms that hold such shares in
street name. The Company estimates that there are more than 3,000
beneficial shareholders as of December 31, 2003. The Company's
shares of Series A Preferred Stock par value $.01 per share are
held by one holder of record. The Company's shares of Series B
Preferred Stock par value $.01 per share are held by one holder
of record. The Company's shares of Series C Preferred Stock par
value $.01 per share are held by six holders of record.
The Company has not paid any cash dividends on its Common Stock
and does not intend to do so in the foreseeable future.
Securities authorized for issuance under equity compensation
plans.
18
Number of securities to be
issued upon exercise of Weighted average exercise Number of securities
outstanding options, price of outstanding options, remaining available for
Plan category warrants and rights warrants and rights future issuance
- -------------- ------------------------ ----------------------------- -----------------------
(a) (b) (c)
------------------------ ----------------------------- -----------------------
Equity compensation
plans approved by
security holders 1,828,000 $3.37 3,835,032
Equity compensation
plans not approved
by security holders 0 0 0
---------- -------- ----------
Total 1,828,000 $3.37 3,835,032
---------- -------- ----------
Recent Sales of Unregistered Securities
We have issued unregistered securities to (a) employees and (b)
other individuals and institutional investors. Each such issuance
was made in reliance upon the exemptions from registration
requirements of the Securities Act of 1933, contained in Section
4(2) and/or Regulation D promulgated there under, or Rule 701
promulgated there under on the basis that such transactions did
not involve a public offering. When appropriate, we determined
that the purchasers of securities described below were
sophisticated investors who had the financial ability to assume
the risk of their investment in our securities and acquired such
securities for their own account and not with a view to any
distribution thereof to the public. At the time of issuance, the
certificates evidencing the securities contained legends stating
that the securities are not to be offered, sold or transferred
other than pursuant to an effective registration statement under
the Securities Act of 1933 or an exemption from such registration
requirements. The following is a summary of transactions were made
during the quarter ended September 30, 2003 involving sales and
issuances of securities that were not registered under the
Securities Act of 1933 at the time of such issuance or
transfer:
Pursuant to a stock agreement, the Company issued 10,000,000
shares of Common Stock pursuant to an agreement with American
Marketing Complex. The shares were issued within the meaning
of Rule 501 and pursuant to Rule 506 of Regulation D under
the Securities Act of 1933.
19
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company should be
read in conjunction with the Company's Consolidated Financial
Statements and notes thereto appearing on pages beginning on F-1.
Also, as discussed in Item 7 and Note 2 to the Consolidated
Financial Statements, the Company has completed various
acquisitions and disposals in the past four years so the amounts
shown in selected financial data are not directly comparable.
SUMMARY OF SELECTED FINANCIAL DATA
2003 2002 2001 2000 1999
OPERATIONS FOR THE
YEAR:
Revenues $4,226,187 $36,135,217 $59,087,470 $47,769,311 $10,106,332
Income (loss) before
amortization,
impairment of goodwill and
other intangible assets
and in-process
research and
development write-off (3,534,596) (25,383,385) (21,568,546) (198,157) 333,542
Amortization of intangible assets 115,757 417,162 14,571,510 1,063,775 -
Impairment of goodwill and
other intangible assets(2) - 18,973,832 78,364,560 - -
In-process research and
development write-off(1) - - 3,600,000 7,500,000 -
Net loss (3,650,353) (44,774,379) (122,952,102) (9,412,424) (160,413)
Basic Net Loss Per Share (.09) (1.26) (3.95) (0.46) (0.02)
FINANCIAL POSITION
AT END OF YEAR:
Total Assets $1,519,191 $2,800,431 $53,439,283 $110,219,476 $30,348,130
Long-Term Debt - - 7,129,260 1,927,943 1,495,337
Stockholders' Equity
(Deficiency) (31,661,190) (26,835,525) 11,950,527 84,407,725 13,725,628
(1) For fiscal years 2001 and 2000, the in-process research and
development write-off is associated with the acquisitions of
Transcape assets from Pitney Bowes in February 2001 and the
enterprise software applications of Renaissance Software, Inc.,
effective September 30, 2000, respectively.
(2) In fiscal years 2002 and 2001, the Company wrote down
intangible assets (primarily goodwill) to their estimated fair
value (See Note 4 to the Consolidated Financial Statements).
20
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATION
This Annual Report on Form 10K contains, in addition to
historical information, certain forward-looking statements that
involve significant risks and uncertainties. Such forward-looking
statements are based on management's belief, as well as
assumptions made by and information currently available to,
management pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Our actual
results could differ materially from those expressed in or
implied by the forward-looking statements contained herein.
Factors that could cause or contribute to such differences
include, but are not limited to, those discussed herein and in
Item 1: "Business", and elsewhere in this Annual Report on Form
10-K. Vertex undertakes no obligation to release publicly the
result of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date of
this Annual Report or to reflect the occurrence of other
unanticipated events.
This discussion and analysis should be read in conjunction with
the Selected Financial Data and the audited consolidated
financial statements and related notes of the Company contained
elsewhere in this report. In this discussion, the years "2003",
"2002" and "2001" refer to fiscal years ended September 30, 2003,
2002, and 2001, respectively.
Overview
Purchase Acquisitions:
As discussed in Note 2 to the Consolidated Financial Statements,
we had completed a number of acquisitions through October 2001,
which had substantially expanded our portfolio of products
and services, as well as our geographic reach throughout North
America and into Europe. The following summary of the more
significant purchase acquisitions closed during the last three
years is segregated by those first impacting operations in fiscal
2001 ("Fiscal 2001 Acquisitions"), and fiscal 2002 ("Fiscal
2002 Acquisitions"). There were no acquisitions in fiscal 2003.
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.
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.
21
On February 13, 2001, we acquired all of the capital stock of
Binas Beheer B.V. ("Binas") a Java IT consulting practice.
Fiscal 2002 Acquisitions:
Effective September 30, 2001, we acquired all of the
outstanding stock of DynaSys, a software developer of
enterprise level advance planning and scheduling applications.
In October 2001, Vertex acquired Euronet Consulting S.r.l
("Euronet"), an Italian software applications consulting firm
that expanded our professional services capabilities in Europe.
Vertex has accounted for each of these acquisitions using the
purchase method of accounting in accordance with APB No. 16
(and SFAS 141 for DynaSys and Euronet). Accordingly, the financial
statements include the results of operations from November 1, 2000
for ESSC, from January 1, 2001 for ATS, from February 7, 2001
for Transcape, from February 13, 2001 for Binas, and from October 1,
2001 for DynaSys and Euronet (collectively, the "Purchase
Acquisitions").
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements requires
management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and
the related disclosure of contingent assets and liabilities.
Management bases its estimates and judgments on historical experience
and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Management continuously
evaluates its estimates and judgments, and actual results may differ
from these estimates under different assumptions or conditions.
Those estimates and judgments that were most critical to the
preparation of the financial statements involved the allowance for
doubtful accounts, inventory reserves, recoverability of
intangible assets and the estimation of the net liabilities
associated with subsidiaries in liquidation.
a) We estimate the collectibility of our trade receivables.
A considerable amount of judgment is required in assessing
the ultimate realization of these receivables including analysis
of historical collection rates and the current credit-worthiness
of significant customers. Significant changes in required
reserves have been recorded in recent periods and may occur in
the future due to the current market and economic conditions.
b) We establish reserves for estimated excess or obsolete
inventory equal to the difference between the cost of inventory
and the estimated fair value based upon assumptions about future
demand and market conditions. Inventory reserves have
increased as a result of the decision to discontinue or
significantly reduce certain non-core product lines. If actual
market conditions are less favorable than those projected by
management, additional inventory write-downs may be required.
c) During 2002 and 2001 we have recorded significant impairment
charges related to the carrying value of goodwill and other
intangibles. In assessing the recoverability of our goodwill
and other intangibles, we have made assumptions regarding
estimated future cash flows and considered various other
factors impacting the fair value of these assets, as more
fully described below in the discussions of the results of
operations - provision for impairment of goodwill. However,
as of September 30, 2003, our only remaining intangible
asset, software development costs, will become fully
amortized in fiscal 2004.
22
d) We regularly evaluate our ability to recover the reported
amount of our deferred income taxes considering several factors,
including our estimate of the likelihood that we will generate
sufficient taxable income in future years in which temporary
differences reverse. Due to the uncertainties related to, among
other things, the extent and timing of future income and the
potential changes in the ownership of the Company, which
could subject our net operating loss carry forwards to substantial
annual limitations, we offset our net deferred tax assets by an
equivalent valuation allowance as of September 30, 2003.
e) As described in the Sales or Divestitures of Non-Core
Businesses section of Note 2 to the Consolidated Financial
Statements we have sought the protection of the respective
courts in three European countries, which have agreed to orderly
liquidations of five of our European subsidiaries. We have
used a liquidation accounting model in the establishment of
the net liabilities associated with these entities at September 30,
2003 and 2002. This accounting model required the estimation of
the fair value of the assets of these entities. A considerable
amount of judgment was used in determining the amount of cash to
be recovered through the collection of receivables or the sale
of inventory and equipment in a liquidation environment, that
will then be available for the respective creditors. If
actual market conditions are less favorable than those projected
by management, the net assets available for creditors may be less
than estimated. However, since the liabilities of these entities
remain on our balance sheet at historical values (and exceed the
fair value of their net assets by approximately $8,500,000 at
September 30, 2003), we expect to recognize a gain upon legal
resolution of the liquidations. The amount and timing of such
gain is totally dependent upon the decisions to be issued by the
respective court appointed liquidators. We received notice that
the liquidation of the UK companies, which were under liquidation
as of September 30, 2003 and 2002, has been approved and finalized
by the UK creditors as of January 5, 2004. Based on such notice,
management estimates the Company will reduce net liabilities
associated with subsidiaries in liquidation by approximately
$1,400,000 and recognize a gain of approximately $1,200,000 in
fiscal 2004.
f) Revenue related to software license sales is recorded at
the time of shipment provided that (i) no significant vendor
obligations remain outstanding at the time of sale; (ii) the
collection of the related receivable is deemed probable by
management; and (iii) vendor specific objective evidence
("V.S.O.E.") of fair value exists for all significant elements,
including post-contract customer support ("PCS") in multiple
element arrangements.
g) Where the services relate to arrangements requiring significant
production, modification or customization of software, and the
service element does not meet the criteria for separate accounting,
the entire arrangement, including the software element, revenue is
accounted for in conformity with either the percentage-of-completion
or completed contract accounting method. Percentage-of-completion
generally uses input measures, primarily labor costs, where such
measures indicate progress to date and provide a basis to estimate
completion.
Results Of Operations
Year ended September 30, 2003 ("2003") compared to year ended
September 30, 2002 ("2002").
Operating Revenues:
Operating revenues decreased by approximately $31,909,000 (or
88.3%) to approximately $4,226,000 in 2003.
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 and 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 years
ended September 30, 2003 and 2002 (in thousands) are as
follows:
September 30
---------------------------
2003 2002
---------- ----------
Point Solutions $ 0 $15,022
Enterprise Solutions 889 6,926
Service, Maintenance And Other 3,337 14,187
-------- --------
$ 4,226 $ 36,135
======== ========
23
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, and our strategy of
de-emphasizing lower margin product sales, together with the impact
of the downturn in the economy, especially post-September 11, in
North America.
Enterprise solutions revenues decreased to $889,000 in 2003
from $6,926,000 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, in North America.
Service, maintenance and other revenues have decreased approximately
$10,850,000 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, in North America.
Gross Profit:
Gross profit decreased by approximately $10,153,000 (or 82.9%)
to $2,087,000 in 2003. As a percent of operating revenues,
gross profit was 49.4% in 2003 as compared to 33.9% in 2002. The
gross profit percentage was favorably impacted by our
emphasis on higher margin service and maintenance revenues.
Operating Expenses:
Selling and administrative expenses decreased approximately
$17,861,000 (or 79.4%) to $4,642,000 in 2003. During 2003 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 ("R&D") expenses decreased approximately
$4,180,000 (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, until which time
additional financing is received.
The decrease in the depreciation and amortization of intangibles
to $235,000 in 2003, as compared to approximately $1,237,000 in 2002,
is the direct result of the disposal of these assets in 2002.
These intangibles were being amortized over their estimated lives
ranging from 2 to 25 years. In 2002, we recorded an impairment
charge of approximately $18,974,000.
In 2002, we also made a provision of approximately $1,103,000
relating to various leases we terminated.
24
As a result of the aforementioned, our operating loss decreased by
approximately $32,966,000 to approximately $2,790,000 for fiscal
2003 as compared to approximately $35,756,000 for fiscal 2002.
Interest expense decreased by approximately $2,023,000 to
$852,000 in 2003. This decrease is due to decreased
working capital borrowings at the end of fiscal 2001, carrying
through in fiscal 2002 and liquidating our foreign operations
in fiscal 2002. In fiscal 2002, we also recorded a loss on
sale or liquidation of our non-core assets of approximately
$3,081,000 and an increase in our litigation reserve of
approximately $2,654,000 relating to our ongoing litigation
(Refer to Item 3 - Legal Proceedings).
The income tax provision (credit) is negligible in both years due
primarily to operating losses.
Year ended September 30, 2002 ("2002") compared to year ended
September 30, 2001 ("2001").
Revenues:
Revenues decreased by approximately $22,952,000 (or 38.8%) to
$36,135,000 in 2002.
Products and Services
Sales to external customers by the three significant product and
service line groupings for the years ended September 30, 2002 and
2001 (in thousands) are as follows:
September 30
2002 2001
-------- ----------
Point Solutions............ $15,022 $28,849
Enterprise Solutions....... 6,926 9,921
Service and Maintenance.... 14,187 20,317
--------- ----------
$36,135 $59,087
========= ==========
Point solutions products and services revenues decreased
approximately $13,827,000 to $15,022,000 in 2002 from
$28,849,000 in 2001, primarily as a result of our strategy
of de-emphasizing lower margin product sales (including the sale
or shutdown of various businesses, both in North America and
Europe no longer core to our focus on enterprise level solutions),
together with the impact of the downturn in the economy,
especially post-September 11, 2001 in both North America and Europe.
Sales of our mobile computing products, principally in the U.K.,
decreased approximately $1,800,000, as revenues in 2001
included two large contracts. In addition, our decision to sell
and/or liquidate all of our European operations effective June 30,
2002 (See Note 2 - Disposals) resulted in a decrease of
point solutions revenue of approximately $4,400,000 from the
same period last year.
25
Enterprise solutions revenues decreased to $6,926,000 in 2002
from $9,921,000 in 2001. Our light directed order fulfillment
systems revenues decreased $5,400,000 in 2002. Sales of
these products have been severely impacted by the general
economic slowdown and the hesitancy of customers to commit
to large system purchases. We expect this slowdown to have a
negative impact on the fiscal 2003 light directed revenues.
The revenues generated by our eSuite of Java (TM) architected
products and services and transportation management systems
acquired in 2001 were $200,000 lower than the revenues
generated last year. License revenues continue to be
below expectations, both as a result of delays in the
development (now substantially complete) and roll out of the
eSuite of products and the downturn in the economy. Recognition of
license revenues had improved in the fourth quarter of 2001 and the first
half of 2002, but were substantially lower in the second half of
2002. Offsetting these decreases, revenues increased by
approximately $2,600,000 as a result of the acquisition
of advanced planning and scheduling software in September
2001, which, in turn, was sold in August 2002 (See Note 2 -
Disposals).
Service and maintenance revenues have decreased approximately
$6,130,000 from 2001. European service and maintenance
revenues decreased $2,500,000 in 2002, primarily as a result of
our decision to sell and/or liquidate all of our European
operations effective June 30, 2002 (See Note 2 - Disposals). In
addition, our North American service and maintenance revenues
decreased approximately $3,600,000 in 2002, resulting primarily
from a large $2,200,000 cable installation project in 2001,
the reduction in the broadband cabling market due in part to the
downturn in the general economy last year and our resulting
decision in July 2002 to close down the wireless and cable
installation division.
Gross Profit:
Gross profit decreased by approximately $9,261,000 (or 43.1%) to
$12,241,000 in 2002. As a percent of operating revenues, gross
profit was 33.9% in 2002 as compared to 36.4% in 2001. The gross
profit percentage has been unfavorably impacted by the decreased
revenue from higher margin software and light directed order
fulfillment systems. These decreases, together with our planned
reduction of point solution sales have substantially impacted the
ability of the Company to cover non variable costs and therefore
reduced the gross profit percentage in 2002. In addition,
inventory reserves increased approximately $300,000 to
provide for discontinued products. Offsetting these decreases,
the gross profit percentage was favorably impacted by a higher
percentage of professional services revenues and higher product
margins generated by the entities acquired during 2002.
Operating Expenses:
Selling and administrative expenses decreased $12,007,000 (or
34.8%) to $22,503,000 in 2002. At the end of 2001 we initiated
various cost reduction measures which continued throughout 2002,
including a 67% reduction in the number of our North American
employees, facilities consolidations, as well as reductions in
other expenses such as marketing and advertising, non essential
travel and other headcount-related expenses. As a result, we
reduced our selling and administrative expenses by approximately
$7,000,000 in North America. In addition, prior to the sale
and/or liquidation of all of our European operations effective
June 30, 2002, we had also reduced headcount by approximately 25%
and curtailed non-essential travel and marketing expenses in
Europe. These reductions, together with the elimination of all
European selling and administration expenses in the fourth
quarter, resulted in a reduction of approximately $5,000,000 in
2002. Offsetting these decreases, the 2002 acquisitions accounted
for approximately $900,000 of additional selling and
administrative expenses.
26
Research and development expenses have decreased approximately
$2,859,000 (or 40.6%) to $4,180,000 in 2002 from $7,039,000
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 $1,700,000 from
the prior year. Other factors impacting R&D were reductions of
approximately $1,500,000 of expenditures incurred in the
development of warehouse management products and transportation
management systems, with the latter decrease resulting primarily
from the disposal of the transportation management system product
line in April 2002. Offsetting these decreases, the R&D
expenditures on the products acquired with our purchase of
DynaSys increased R&D by approximately $500,000 in 2002.
Toward the end of 2001 and throughout 2002, the Company sought to
consolidate its facilities. As a result of this process, we
either terminated or negotiated a settlement for the remainder of
numerous office leases, resulting in additional operating
expenses of $1,100,000 and $300,000 in 2002 and 2001,
respectively.
The decreases in depreciation of $400,000 and amortization of
$14,154,000 was primarily due to a corresponding decrease in the
related asset levels. This was the direct result of two factors:
(i) the write-off of intangible assets in the fourth quarter of
fiscal 2001, based on an assessment of the fair value of these
assets as of September 30, 2001; and (ii) the adoption of SFAS
142 as of October 1, 2001, which substantially reduced the amount
of intangibles that were subject to amortization (See Note 4).
These intangibles were being amortized over their estimated lives
ranging from 2 to 25 years.
The provision for the impairment of goodwill and other
intangibles was $18,974,000 in 2002 and $78,365,000 in 2001.
At September 30, 2002, we assessed the carrying value of our
remaining goodwill using the criteria established in SFAS 142.
As a result of the continuing weak market conditions in our
industry, our significant operating losses and stockholders'
deficit, we determined that the remaining goodwill of
approximately $19 million was impaired and it was written off.
At September 30, 2001 we wrote off approximately $78,365,000,
as the result of an assessment of the carrying values of our
intangible assets recorded in connection with all of our
acquisitions. Management undertook this assessment because of
the significant negative economic trends impacting our current
operations, lower expected future growth rates, a decline in
our stock price, and significantly lower valuations for
companies within our industry. At the time of our analysis, the
net book value of our assets exceeded our market capitalization.
Based on our evaluation of these factors, our belief that the
decline in market conditions within our industry was
significant and permanent, the consideration of all other
available evidence, we determined that the fair value of our
long-lived assets was less than their carrying value.
27
In 2001, as a result of the February 2001 acquisition of
Transcape, $3,600,000 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.
As a result of the aforementioned and primarily due to the
impairment charge in 2001, our operating loss decreased by
approximately $82,349,000 to approximately $35,756,000 for
fiscal 2002 as compared to approximately $118,105,000 for fiscal
2001.
Interest expense increased by approximately $1,840,000 to
$2,875,000 in 2002. This increase is due to increased working
capital borrowings at the end of fiscal 2001 and early in fiscal
2002, including approximately $9,000,000 of convertible notes
payable, $2,500,000 of demand notes payable, and a $2,400,000
senior credit facility. As a result of an imbedded
beneficial conversion feature in a convertible note payable, the
Company incurred a non-cash interest charge of approximately
$1,200,000 in 2002. These increases were offset by the effects
of debt conversions, paydowns or settlements of debt.
The provision for litigation amounted to $2,654,000 and $3,100,000
in 2002 and 2001, respectively. These amounts relate to
several matters, which arose in 2001 and were settled in 2002,
and are described in Note 16 to the Consolidated Financial
Statements.
In 2002, the Company incurred a net loss on sale or liquidation
of non-core assets. As more fully described in Note 2 to the
Consolidated Financial Statements, this loss is comprised of (1)
a $1,200,000 aggregate net gain on the sale of certain non-core
product lines and business units and (2) a $4,400,000 loss on
companies placed into liquidation during 2002. The net loss on
companies in liquidation includes a provision to reduce the net
assets to their estimated net realizable values.
The income tax provision is negligible in both years due
primarily to operating losses. The income tax provision is
comprised primarily of foreign taxes provided on the profit of
certain subsidiaries for which no net operating losses are
available or where the utilization of the pre-acquisition net
operating losses are an adjustment of goodwill.
Liquidity and Capital Resources
Based upon our substantial working capital deficiency
($31,958,000) and stockholders' deficiency ($31,661,000), at
September 30, 2003 our current rate of cash consumption, the
uncertainty of liquidity- related initiatives described in detail
below, and the reasonable possibility of on-going negative impacts
on our operations from the overall economic environment for a
further unknown period of time, there is substantial doubt as to
our ability to continue as a going concern.
The successful implementation of our business plan has required,
and will require on a going forward basis, substantial funds
to finance (i) continuing operations, (ii) further development
of our enterprise software technologies, (iii) settlement of
existing liabilities including past due payroll obligations to
its employees, officers and directors, and (iv) possible
selective acquisitions to achieve the scale we believe will be
necessary to remain competitive in the global SCM industry.
There can be no assurance that we will be successful in raising
the necessary funds.
28
Fiscal 2003:
In fiscal 2003, the continued softness in the enterprise applications
software and telecommunications industries continued to have a substantial
negative impact on our results of operations. These factors, in
combination with our continuing negative operating cash flows, placed
significant pressures on our financial condition and liquidity and
negatively impacted our operations. Operating activities
resulted in cash consumption of $2,154,000 in 2003. During fiscal
2003 we raised approximately $2,254,000 (net of cash transaction
costs) through notes payable, and notes and convertible notes payable
with related parties and used $146,000 to repay other notes. At
September 30, 2003, the above activities resulted in a net cash balance
of $25,000 (a decrease of $49,000).
Outlook
In light of current improving economic conditions and the
upswing in the economy we may now anticipate reaching the point
at which we generate cash in excess of our operating expenses in
the quarter ending June 2004, about which there can be no
assurance. However, the Company has accrued significant
obligations during the past several years and to the extent we
cannot settle existing obligations in stock or defer our
obligations until we generate sufficient operating cash, we
will require significant additional funds to meet accrued
non-operating obligations, working capital to fund operating
losses, if required, short-term debt and related interest, capital
expenditures, expenses related to cost-reduction initiatives, and
potential liabilities that could arise from litigation claims
and judgments.
Our sources of ongoing liquidity include the cash flows of
our operations, potential new credit facilities, and
potential additional equity investments. Consequently,
Vertex continues to aggressively pursue additional debt
and equity financing, the restructuring of certain existing
debt obligations and the reduction of its operating expenses.
In addition, Vertex has structured its overall operations and
resources around high margin enterprise products and services.
However, in order to remain in business, the Company must raise
additional cash in a timely fashion.
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 L.P. and
Aryeh Trust. The Bridge Loan was originally for a term of 180
days, ending on June 9, 2003, but it was not repaid as of
February 5, 2004. 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. Midmark
Capital L.P. is a shareholder of the Company. Midmark Capital
L.P. and its affiliate, Midmark Capital II, L.P., and certain
individuals related to these two entities, are referred to
collectively as "Midmark".
29
During 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 when a minimum subscription of $480,000
of the proposed but now aborted Private Placement had been reached.
As of February 5, 2004, the Company was in discussions to
renegotiate the terms of this loan. (See Note 9 to our Financial
Statements).
In addition, Vertex and XeQute borrowed $1,113,000 from Midmark
from October 1, 2002 to February 5, 2004, pursuant to a series
of demand notes. 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 agreement related to its convertible notes payable
(see Note 11 to our Financial Statements).
During October, 2002, Vertex also executed a Grid Note which
provides for up to $1,000,000 of availability from Midmark,
This note will be funded by the proceeds, if any, from the
sale of any shares of Vertex Common Stock held by Midmark.
This note is payable on demand, carries interest at the rate of
10% per annum and is secured by the same collateral in which the
Company previously granted a security interest to Midmark under 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 February 5,
2004, the Company had borrowed $272,000 under this arrangement, of
which $144,000 had been borrowed as of September 30, 2003.
(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 approximately
$8,500,000 of net liabilities of these remaining European entities
recorded as of September 30, 2003, we expect to recognize a non-cash
gain (and no significant cash outlay); however the amount and
timing of such gain and cash outlay, if any, is totally dependent
upon the decisions to be issued by the respective court appointed
liquidators. We received notice that the liquidation of the UK
companies, which were under liquidation as of September 30, 2003
and 2002, has been approved and finalized by the UK creditors as
of January 5, 2004. Based on such notice, management estimates
the Company will reduce net liabilities associated with subsidiaries
in liquidation by approximately $1,400,000 and recognize a gain of
approximately $1,200,000 in fiscal 2004.
(iii) We are aggressively pursuing additional capital raising
initiatives in particular through the formation of XeQute
PLC, which had an agreement with CSS to raise, in conjunction with
Midmark, approximately $3,800,000 of new equity. This effort
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 for XeQute by
David Sassoon Holdings, Inc. which may be in the form of debt or
equity or a combination of both.
30
(iv) We have continued to reduce headcount (to approximately 34
employees in our continuing North American business at February 5,
2004 of whom 5 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 $400,000, 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 $4,100,000 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.
Basis of Presentation:
The financial statements have been prepared on a basis that
contemplates our 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 we fail to raise capital
when needed, the lack of capital will have a material adverse
effect on our business, operating results and financial
condition.
31
Contractual Obligations
The table below summarizes our known contractual obligations,
consisting of our debt agreements, our operating lease commitments
and our employment agreements, as of September 30, 2003:
Payments due by period
----------------------------------
Less than 1-3 3-5
Total one year Years Years
-------------------------------------------
Debt(A) $8,259,408 $8,259,408
Operating lease $843,581 $193,248 $367,875 $282,458
Employment agreements $665,000 $665,000
-------------------------------------------
Total $9,767,989 $9,117,656 $367,875 $282,458
===========================================
(A) currently in default or due on demand
New Accounting Pronouncements
For information as to the effects of new accounting pronouncements,
see Note 3 to the financial statements below.
32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Market risk represents the risk of loss that may impact the
financial position, results of operations or cash flows of the
Company due to adverse changes in market prices and rates.
The Company is exposed to market risk because of changes in
foreign currency exchange rates as measured against the U.S.
dollar and currencies of the Company's subsidiaries in
Europe which are currently in liquidation. The Company does
not anticipate that near-term changes in exchange rates
will have a material impact on future earnings, fair values or
cash flow of the Company, especially now that all of the
European operations have been either sold or placed into
liquidation. However, there can be no assurance that a sudden and
significant change in the value of European currencies would not
have a material adverse effect on the Company's financial
condition and results of operations.
The Company's short-term debt bears interest at variable
rates; therefore, the Company's results of operations would only
be affected by interest rate changes to the short-term debt
outstanding. An immediate 10 percent change in interest rates
would not have a material effect on the Company's results of
operations over the next fiscal year.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this "Item 8" is included following
the "Index to Financial Statements and Schedules" appearing at
the end of this Form 10-K.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
(a) In a letter dated April 9, 2002, Ernst & Young LLP ("Ernst
& Young") resigned as auditors of the Company, effective
immediately. Management, under the direction of the Audit
Committee of the Board of Directors, commenced the process of
naming new auditors for the Company.
The reports of Ernst & Young on the Company's consolidated
financial statements for the two fiscal years prior to their
resignation did not contain an adverse opinion or a disclaimer
of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles, except for their report
dated January 25, 2002 on the Company's consolidated financial
statements as of September 30, 2001, and 2000 and for each of
the three years in the period ended September 30, 2001,
which contained an explanatory paragraph indicating substantial
doubt about the Company's ability to continue as a going concern.
In connection with the audits of the Company's consolidated
financial statements for each of the two fiscal years ended
September 30, 2001 and 2000, and in the subsequent interim period
through April 9, 2002, there were no disagreements with Ernst &
Young on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of Ernst & Young would
have caused Ernst & Young to make reference to the matter in
their report.
33
In connection with the audit of the Company's 2001 consolidated
financial statements, Ernst & Young advised the Company and the
Audit Committee that material weaknesses existed with regard to
the Company's financial accounting systems, including the
financial reporting and closing process, impacting the Company's
ability to timely prepare accurate financial statements. The
Company authorized Ernst & Young to respond fully to the
inquiries of any successor auditor concerning this matter.
The Company requested Ernst & Young to furnish it with a letter
addressed to the Commission stating whether it agrees with the
above statements. A copy of that letter, dated April 16, 2002
was filed as Exhibit 16 to our Form 8-K filed on April 16, 2002.
b) On May 13, 2002 by unanimous written consent, the Board of
Directors of the Company engaged WithumSmith+Brown P.C. as the
Company's independent auditors for the fiscal year ending
September 30, 2002. The Company's Audit Committee, approved and
recommended to the Board of Directors, approval of the
appointment of WithumSmith+Brown P.C. based on a recommendation
by management and a Proposal to Serve presented to the Company
by WithumSmith+Brown P.C. dated May 7, 2002. On September 23, 2003,
WithumSmith+Brown P.C. resigned as the Company's independent auditor.
The report of WithumSmith+Brown P.C. on the Company's consolidated
financial statements for the fiscal year prior to their
resignation contained an explanatory paragraph indicating
substantial doubt about the Company's ability to continue as a
going concern.
In connection with the audit of the Company's consolidated
financial statements for the fiscal year ended
September 30, 2002, there were no disagreements with WithumSmith+Brown P.C.
on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of WithumSmith+Brown P.C. would
have caused WithumSmith+Brown P.C. to make reference to the matter in
their report.
In connection with the audit of the Company's 2002 consolidated
financial statements, WithumSmith+Brown P.C. advised the Company
and the Audit Committee that material weaknesses existed with regard
to the Company's financial accounting systems, including the
financial reporting and closing process, impacting the Company's
ability to timely prepare accurate financial statements. The
Company authorized WithumSmith+Brown P.C. to respond fully to the
inquiries of any successor auditor concerning this matter.
The Company requested WithumSmith+Brown P.C. to furnish it with a
letter addressed to the Commission stating whether it agrees with
the above statements. A copy of that letter, dated November 5, 2003
was filed as Exhibit 16 to our Form 8-K filed on November 5, 2003.
c) On October 2, 2003, the registrant engaged J.H. Cohn LLP as
its independent public accountants for the Company's fiscal year
ending September 30, 2003.
ITEM 9A. CONTROLS AND PROCEDURES
As indicated in Item 9, for the fiscal years 2001 and 2002 the
Company and the Audit Committee were advised by our former
auditors that material weaknesses existed with regard to the
Company's financial accounting systems, including the
financial reporting and closing process, impacting the Company's
ability to timely prepare accurate financial statements.
As of the end of the period covered by this report, management,
including our principal executive officer and principal financial
officer, evaluated the effectiveness of the design and operations
of our disclosure controls and procedures with respect to the
information generated for use in our reporting system. Based upon,
and as of the date of that evaluation, our principal executive
officer and principal financial officer concluded that our
disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed
in the reports that we file or submit under the Securities
Exchange Act of 1934 are recorded, processed, summarized
and reported within the time periods specified by the Commissions'
rules and forms.
34
There was no change in our internal control over financial reporting
during the quarter ended September 30, 2003 that has materially
affected, or that is reasonably likely to materially affect, our
internal control over financial reporting.
It should be noted that our management, including our principal
executive officer and principal financial officer, does not expect
that our disclosure controls and procedures or internal controls
over financial reporting will prevent all error and all fraud. A
control system, no matter how well conceived or operated, can
provide only reasonable, not absolute, assurance that the objectives
of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because
of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more
people, or by management override of controls. The design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all
potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
In November 2003, as part of the Company's ongoing efforts to
tighten internal controls and to streamline and improve the
timelines of reporting, the Company consolidated four separate
financial reporting systems onto a single financial reporting
system at XeQute. As a result, the Company has reduced the
manual consolidation procedures, involving four disparate
financial reporting systems, providing a significant improvement
in internal financial procedures and controls.
Going forward financial reporting and controls at the XeQute
level will be fully automated. As the system is refined and
improved, the Company expects to experience continued improvement
in the effectiveness of its internal financial procedures and
controls.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Certain information about directors and officers of the Company
is contained in the following table as of September 30, 2003.
Director
Name of Director Age Principal Occupation Since
- ----------------- ---- ---------------------- --------
Hugo H. Biermann 54 Executive Chairman 1999
Vertex Interactive, Inc
Nicholas R. H. Toms 55 Chief Executive Officer; 1999
Chief Financial Officer,
Vertex Interactive, Inc
Otto Leistner 59 Managing & Senior Partner 2000
Leistner Pokoj Schnedler
There is no family relationship between any of the foregoing
directors or between any of such directors and any of the
Company's executive officers. The Company's executive officers
serve at the discretion of the Board of Directors.
Hugo H. Biermann has served as Executive Chairman of the Board of
Directors since July 2001 and served as Joint Chairman and Joint
Chief Executive Officer and a Director of the Company from
September 1999 through June 2001. Mr. Biermann has been a
principal in Edwardstone & Company, Incorporated ("Edwardstone"),
an investment management company, since 1986 as well as serving
as President of Edwardstone since 1989. From 1988 to 1995 Mr.
Biermann served as Director and Vice Chairman of Peak
Technologies Group, Incorporated ("Peak Technologies"), a company
involved in automated data capture technologies.
Nicholas R. H. Toms has served as Chief Executive Officer since
July, 2001 and served as Joint Chairman of the Board of
Directors, Joint Chief Executive Officer and a Director of the
Company from September 1999 through June 2001. Mr. Toms has been
a principal of Edwardstone, an investment management company,
since 1986 and Chairman and Chief Executive Officer of
Edwardstone since 1989. From 1988 to 1997, Mr. Toms served as
Chairman, President and Chief Executive Officer of Peak
Technologies.
Otto Leistner has been a Director since April 2000. He has been a
Partner since 1995 in Leistner Pokoj Schnedler, a midsize
accounting and consulting firm in Frankfurt, Germany with a staff
of approximately 100.
Operation of Board of Directors and Committees
The Board of Directors met 39 times during the fiscal year ended
September 30, 2003. Standing committees of the Board include an
Audit Committee and a Stock Option/Compensation Committee. The
Company does not have a Nominating Committee. During the time in
which they were members, all directors attended in excess of 75%
of the meetings.
36
During the year 2003 the Audit Committee was solely
comprised of Messr. Leistner, a non-employee director. Pursuant
to the Audit Committee Charter, the Committee's primary duties
and responsibilities are to 1) serve as an independent and
objective party to monitor the Corporation's financial reporting
process and internal control system; 2) review and appraise the
audit efforts of the Corporation's independent accountants; and
3) provide an open avenue of communication among the independent
accountants, financial and senior management and the Board of
Directors. Audit Committee Meetings primarily were combined with
regular Board Meetings and included full Board participation.
There were 4 meetings during the 2003 fiscal year during which
Audit Committee agenda items were addressed. All members attended
in excess of 75% of the meetings which were held while they were
members.
As of September 30, 2003 the Stock Option/Compensation Committee
was comprised solely of Messr. Leistner. The Committee's
primary functions are to determine remuneration policies
applicable to the Company's executive officers and to determine
the bases of the compensation of the Chief Executive Officer,
including the factors and criteria on which such compensation
is to be based. The Committee also administers the Company's
Stock Option Plan. Stock Option/Compensation Committee Meetings
primarily were combined with regular Board Meetings and
included full Board participation. All members attended 100% of
the meetings which were held while they were members.
Compensation of Directors
During fiscal year 2003, no compensation was received by its
non-employee Director, Otto Leistner for services provided due
to the financial condition of the Company. With the exception
of Messrs. Clevenger (3) and Robinson(3) who are partners in
Midmark Associates, which firm was paid a management fee
by Vertex (this management fee was discontinued in August 2002),
non-employee directors had in fiscal year 2001 received
compensation of 15,000 stock options per year for their services
as directors. No options were granted to directors in fiscal year
2002 and 2003. The Company reimburses directors for their reasonable
out-of-pocket expenses with respect to board meetings and other
Company business. Stephen Duff(2), Otto Leistner and George Powch(2)
each received 30,000 in-plan non-qualified options on February 6,
2001 at an exercise price of $8.50. Of these options, 15,000 vested
immediately for services provided in the year 2000 and 15,000 vested
on December 31, 2001 for services provided during 2001. In August,
2001 L. G. Schafran(2) received 15,000 in-plan, non-qualified
options at an exercise price of $1.51 which vested on December 31,
2001 for services provided during 2001. Options received by
Directors for services provided terminate one year from the date
of resignation.
In addition, in January 2000, the Company granted options to
purchase 100,000 shares of common stock at $3.85 (110% of the
fair market value of the stock on the date of grant) to each of
Mr. Clevenger(3), Mr. Robinson(3), Mr. Thomas(1) and Mr. Denis
Newman (a former Director, who resigned from the Board effective
August 9, 2000). These options were granted to compensate these
individuals for consultation, advice, due diligence and other
work performed in addition to the standard scope of
responsibilities of an outside director. Such options were fully
vested on the date of grant and expire five years from that date.
37
(1) Mr. Thomas resigned from the Board in January, 2001.
(2) Mr. Duff, Mr. Powch, Mr. Monahan, and Mr. Schafran have
resigned from the Board, in November, 2001, December, 2001,
February 2002, and July 2002 respectively.
(3) Mr. Clevenger and Mr. Robinson resigned from the Board in
August 2002.
EXECUTIVE OFFICERS
In addition to Messrs. Biermann and Toms the following persons
were executive officers of Vertex Interactive, Inc. as of
September 30, 2003:
Name Age Position
Mark A. Flint 56 Chief Financial Officer
Barbara H. Martorano 46 Corporate Secretary
Mark A. Flint joined Vertex in June 2001. From December 2000 to
May 2001, he was Chief Financial Officer of Industria Solutions,
a Silicon Valley B2B supply chain software company. From October,
1998 to December, 2000 he was an independent management
consultant. From September, 1996 to September, 1998 he served as
the CFO of Dart Group, as the COO of Crown Books, and CEO of
Shoppers Food Warehouse. He has held additional positions in
several other distribution, retail and professional service
companies as a Board member, Chairman of the Executive Committee,
CFO, and CIO. Mr. Flint is currently furloughed from the Company
and Mr. Toms has taken over the role of Chief Financial Officer.
Barbara H. Martorano joined the Company in June 1990 and has
served in a variety of positions, including Sales Order
Processing Coordinator, Office Administrator, Executive Assistant
to the President, CEO and Chairman of the Board, as well as,
Corporate Secretary as of January 17, 1996.
38
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual
and long-term compensation for services in all capacities to the
Company for the fiscal years ended September 30, 2003, 2002, and
2001 of the five highest compensation persons who were, at
September 30, 2003, executive officers of the Company and earned
$100,000 or more in any of the respective fiscal years:
Long Term
Annual Compensation
Compensation Securities
Name and Principal Bonus & Other Underlying
Position Year Salary Cash Items Options(#)
------------------ ----- -------- ------------- -------------
Hugo H. Biermann 2003 $ 0 - -
Executive Chairman 2002 300,000 - -
of the Board of Directors 2001 300,000 - -
Nicholas R. H. Toms 2003 91,667 - -
Chief Executive Officer 2002 300,000 - -
And Director 2001 300,000 - -
Mark A. Flint 2003 218,589 (2) - -
Chief Financial Officer 2002 275,000 $100,000(1) -
2001 40,104 - 400,000
Donald W. Rowley 2003 101,667 (3) - -
Executive Vice President - 2002 225,000 - -
Strategic Development 2001 206,731 - 200,000
Robert Schilt 2003 217,475 - -
Chief Operating Officer 2002 235,828 $105,000 -
Xequte Solutions, Inc. 2001 210,050 $ 85,000 -
Timothy Callahan 2003 198,750 - -
Vice President 2002 170,625 - -
Sales and Marketing 2001 175,125 $155,000 -
(1) Such amount is accrued however unpaid as of December 31, 2003.
(2) Mr. Flint was furloughed from the Company in August, 2003.
(3) Mr. Rowley resigned as an officer in February, 2003, and
was furloughed from the Company in June, 2003.
(4) All officers and U.S. based employees of Vertex are
eligible to participate in the 401k Savings and Retirement
plan that is funded by voluntary employee and Company
contributions. See "401(k) Savings and Retirement Plan".
(5)In accordance with the rules of the Securities and
Exchange Commission, other compensation received in the form
of perquisites and other personal benefits has been omitted
because such perquisites and other personal benefits
constituted less than the lesser of $50,000 or 10% of the
total annual salary and bonus for the Named Executive Officer
for such year.
39
Employment Agreements
Effective October 1, 1999, Edwardstone entered into an agreement
with the Company pursuant to which Edwardstone agreed to provide
the services of Messrs. Biermann and Toms to act as the Joint
Chairmen and Joint Chief Executive Officers of the Company. Such
Agreement provided for aggregate annual compensation of $600,000
and entitled them to participate in all employee benefit plans
sponsored by Vertex in which all other executive officers of
Vertex participate. The agreement had an initial five-year term
and continued thereafter on a year-to-year basis on the same
terms and conditions existing at the time of renewal, unless
terminated by either the Company or the employee upon thirty days
written notice prior to the end of either the initial (5 year)
term or any subsequent one-year term, as the case may be. This
agreement was terminated by mutual consent effective September
30, 2002.
On May 30, 2001, the Company entered into an agreement with
employee, Mr. Donald W. Rowley, commencing on December 4, 2000.
The employment agreement provides for an annual base salary of
$250,000, and a bonus of up to 100% of base salary based on
performance goals established. The agreement further provides Mr.
Rowley with the option to purchase up to 200,000 shares of the
Company's common stock. These options vest ratably over 5 years.
In the event Mr. Rowley is discharged without cause, he will be
entitled to receive his base salary and bonus for 12 months.
Mr. Rowley was furloughed by the Company as of June, 2003.
Stock Option Grants in Last Fiscal Year
The following table describes certain information regarding
stock options granted to each of the named executive officers in
the fiscal year ended September 30, 2003, including the potential
realizable value over the ten-year term of the options, based on
assumed rates of stock appreciation of 5% and 10%, compounded
annually. These assumed rates of appreciation comply with the
rules of the Securities and Exchange Commission and do not
represent Vertex's estimate of future stock price. Actual gains,
if any, on stock option exercises will be dependent on the timing
of such exercises and the future performance of Vertex's common
stock.
Potential
Percent realizable
of total value at assumed
options annual rates of
Number of granted to stock price
Securities employees appreciation for
Underlying in Exercise options terms
Options fiscal Price Expiration ---------------
Granted year ($/share) Date 5% 10%
---------- ---------- ---------- ---------- ----- ------
None in 2003
40
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-
End Option Values
The following table describes for the named executive
officers, the exercisable and unexercised options held by them as
of September 30, 2003. No options were exercised by the named
executive officers in fiscal 2003. The "Value of Unexercised In-
the-Money Options at Fiscal Year End" is based on a value of $.09
per share, the closing price of Vertex's common stock on The
Nasdaq Stock Market's National Market, on September 30, 2003,
less the per share exercise price, multiplied by the number of
shares to be issued upon exercise of the options.
Number of Securities Value of unexercised
Underlying unexercised in-the-money options
Options at fiscal year end at fiscal year end
--------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Hugo Biermann 475,000 - n/a n/a
Nicholas Toms 475,000 - n/a n/a
Mark Flint 220,000 180,000 n/a n/a
401(k) Savings And Retirement Plan
Vertex maintains a 401(k) savings plan (the "401(k) Plan")
for the benefit of all U.S. based employees age 18 or over who
have worked for at least three months and who are not covered by
a collective bargaining agreement. The 401(k) Plan is qualified
under Section 401(a) of the Code and is intended to qualify under
Section 401(k) of the Code. The assets accumulated by the 401(k)
Plan are held in a trust.
Under the current terms of the 401(k) Plan, employees may
elect to defer from Federal income tax up to 17% of their annual
compensation, not to exceed Internal Revenue Code limits and have
it contributed to the 401(k) Plan on their behalf. Beginning
January 1, 2001, the Company contributed 50% of an employee's
salary deferral up to 6% or a 3% match. The Company's contribution
is funded after each calendar year end, with either cash or
Vertex common stock, at the Company's option. The salary deferrals
are fully vested, while the Company's contributions vest 20% upon
the completion of the first year of service and 20% each successive
year thereafter, until completion of the fifth year of service or,
if earlier, upon the death, disability or retirement of the
participant. Benefits under the 401(k)Plan are generally
distributed in a lump sum following the participant's retirement,
death, disability or termination of employment, or in a case of
hardship, prior to the termination of the participant's
employment.
The Company contributions for the years ended September 30 were
$80,000 for 2003, $202,000 for 2002, and $290,000 for 2001.
41
Compensation Committee Interlocks and Insider Participation
The following non-employee directors were members
of the Stock Option/Compensation Committee of the Board of
Directors during the time periods listed: In 2003 Otto Leistner
was the sole member of the Stock Option/Compensation Committee;
and during 2002 Wayne Clevenger (until his resignation in August
2002), George Powch (until his resignation in December 2001) and
Otto Leistner composed the Committee. During 2002 the Company
paid $218,000 to MidMark Associates for consulting services
pursuant to a five year management agreement entered into
in September 1999 and terminated on August 1, 2002.
Mr. Clevenger is a managing director of MidMark Associates.
On February 6, 2001 the Board awarded Messrs. Leistner and
Powch each 30,000 options to purchase the Company's stock at
an exercise price of $8.50 per share. No stock option awards
were granted in 2002.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the
"Exchange Act") requires the Company's directors and executive
officers, and holders of more than 10% of the Company's Common
Stock, to file with the Securities and Exchange Commission (the
"SEC") initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the
Company. Such executive officers, directors and 10% stockholders
are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
Based on its review of such forms that it received, or
written representations from reporting persons that no Forms 5
were required for such persons, the Company believes that, during
fiscal 2003, all Section 16(a) filing requirements have not
been satisfied on a timely basis for members of the Board of
Directors and Executive Officers.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
General
Notwithstanding any statement to the contrary in any of the
Company's previous or future filings with the Securities and
Exchange Commission, this Report shall not be incorporated by
reference into any such filings.
The Stock Option/Compensation Committee of the Company's
Board of Directors (the "Committee") has furnished the following
report on Executive Compensation in accordance with the rules and
regulations of the Securities and Exchange Commission. This
report outlines the duties of the Committee with respect to
executive compensation, the various components of the Company's
compensation program for executive officers and other key
employees, and the basis on which the 2003 compensation was
determined for the executive officers of the Company, with
particular detail given to the compensation for the Company's
Chief Executive Officer.
Compensation of Executive Officers Generally
The Committee is responsible for establishing compensation
levels for the executive officers of the Company, including the
annual bonus plan for executive officers and for administering
the Company's Stock Option Plan. The Committee was comprised of
three non-employee directors: Messrs. Clevenger (Chair) (until
his resignation in August 2002), Duff (until his resignation in
November 2001) and Leistner. The Committee's overall objective is
to establish a compensation policy that will (i) attract, retain
and reward executives who contribute to achieving the Company's
business objectives; (ii) motivate executives to obtain these
objectives; and (iii) align the interests of executives with
those of the Company's long-term investors. The Company
compensates executive officers with a combination of salary and
incentives designed to focus their efforts on maximizing both the
near-term and long-term financial performance of the Company. In
addition, the Company's compensation program rewards individual
performance that furthers Company goals. The executive
compensation program includes the following: (i) base salary;
(ii) incentive bonuses; (iii) long-term equity incentive awards
in the form of stock option grants; and (iv) other benefits. Each
executive officer's compensation package is designed to provide
an appropriately weighted mix of these elements, which
cumulatively provide a level of compensation roughly equivalent
to that paid by companies of similar size and complexity engaged
in the same or similar business.
42
Base Salary. Base Salary levels for each of the Company's
executive officers, including the Executive Chairman and the
Chief Executive Officer, are generally set within a range of base
salaries that the Committee believes are paid to similar
executive officers at companies deemed comparable based on the
similarity in revenue level, industry segment and competitive
employment market to the Company. In addition, the Committee
generally takes into account the Company's past financial
performance and future expectations, as well as the performance
of the executives and changes in the executives'
responsibilities. There were no increases in the base salary for
any of the Executive Officers of the Company during fiscal 2002,
reflecting the Company's objectives of cash preservation.
Incentive Bonuses. The Committee recommends the payment of
bonuses to provide an incentive to executive officers to be
productive over the course of each fiscal year. These bonuses are
awarded only if the Company achieves or exceeds certain corporate
performance objectives. The incentive bonus to each executive
officer is based on the individual executive's performance as it
relates to the Company's performance. With the exception of the
Chief Financial Officer and the Chief Operating Officer - Europe
(which bonuses were guaranteed bonuses), there were no incentive
bonuses granted to any of the executive officers of the Company
in 2003 or 2002, reflective of the operating losses and the
desire to preserve cash.
Equity Incentives. Stock options are used by the Company for
payment of long-term compensation to provide a stock-based
incentive to improve the Company's financial performance and to
assist in the recruitment, retention and motivation of
professional, managerial and other personnel. Generally, stock
options are granted to executive officers upon commencement of
employment with the Company and from time to time thereafter,
based primarily upon the individual's actual and/or potential
contributions to the Company and the Company's financial
performance. Stock options are designed to align the interests of
the Company's executive officers with those of its shareholders
by encouraging executive officers to enhance the value of the
Company, the price of the Common Stock, and hence, the
shareholder's return. In addition, the vesting of stock options
over a period of time is designed to create an incentive for the
individual to remain with the Company. The Company has granted
options to the executives on an ongoing basis to provide
continuing incentives to the executives to meet future
performance goals and to remain with the Company. During the
fiscal year ended September 30, 2001, options to purchase an
aggregate of 715,000 shares of Common Stock were granted to the
Company's executive officers based on the Committee's assessment
of the individual contributions of the executive officers
receiving options. None of the options granted to the Company's
executive officers were granted to Messrs. Biermann or Toms. No
options were granted in 2002 or 2003.
Other Benefits. Benefits offered to the Company's executive
officers are provided to serve as a safety net of protection
against the financial catastrophes that can result from illness,
disability, or death. Benefits offered to the Company's executive
officers are substantially the same as those offered to all of
the Company's regular employees. The Company also maintains a tax-
qualified deferred compensation 401(k) Savings and Retirement
Plan covering all of the Company's eligible U.S. based employees.
43
Compensation of the Chief Executive Officer
The Committee annually reviews the performance and compensation
of the Chief Executive Officer based on the assessment of
his past performance and its expectation of his future
contributions to the Company's performance. Messrs. Biermann
and Toms served as Joint CEOs from September 27, 1999 through
June 2001, at which time Mr. Biermann became Executive Chairman
and Mr. Toms became the Chief Executive Officer. Both
Mr. Biermann and Mr. Toms serve under a five year agreement with
compensation at $300,000 each per annum, which compensation has
remained unchanged since September 1999. The Committee believes
the compensation paid to Messrs. Biermann and Toms was reasonable
given the competitive nature of the market place for executive
talent, given the implementation of cost and expense reductions
to align the company's business with its core competencies and
the lack of base pay increases and bonuses to reflect the results
achieved. Mr. Toms agreed to reduce his annual compensation to
$50,000 per year effective December 1, 2002. Mr. Biermann received
no compensation beginning October 1, 2002 as a result of the
termination of the agreement with Edwardstone effective September
30, 2002.
Policy with Respect to Qualifying Compensation for Deductibility
Section 162(m) of the Internal Revenue Code imposes a limit
on tax deductions for annual compensation (other than performance-
based compensation) in excess of one million dollars paid by a
corporation to its Chief Executive Officer and the other four
most highly compensated executive officers of a corporation. The
Company has not established a policy with regard to Section
162(m) of the Code, since the Company has not and does not
currently anticipate paying cash compensation in excess of one
million dollars per annum to any employee. None of the
compensation paid by the Company in 2003 was subject to the
limitations on deductibility. The Board of Directors will
continue to assess the impact of Section 162(m) on its
compensation practices and determine what further action, if any,
is appropriate.
Stock Option/Compensation Committee
Otto Leistner
STOCK PERFORMANCE GRAPH
The following line-graph provides a comparison of the
cumulative total shareholder return on our Common Stock for the
period September 30, 1998 through September 30, 2003, against the
cumulative shareholder return during such period achieved by The
Nasdaq Stock Market (U.S. Companies) ("Nasdaq US") and the "RDG
Software Composite Index"). The graph assumes that $100 was
invested on September 30, 1998 in our Common Stock and in each
of the comparison indices, and assumes reinvestment of dividends.
NASDAQ Stock RDG Software
Measurement Period Vertex Market (U.S. Composite
(Fiscal Year Covered) Interactive Companies) Index
- ---------------------- ----------- --------------- ------------
September 30, 1998 100.00 100.00 100.00
September 30, 1999 278.80 163.12 167.48
September 30, 2000 1,775.89 217.03 220.61
September 30, 2001 99.88 88.74 96.90
September 30, 2002 6.79 69.90 73.82
September 30, 2003 6.89 106.49 99.10
The Stock Performance Graph shall not be deemed incorporated
by reference by any general statement incorporating by reference
this proxy statement into any filing under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as
amended (collectively, the "Acts"), except to the extent that the
Company specifically incorporates this information by reference,
and shall not otherwise be deemed filed under such Acts.
44
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG VERTEX INTERACTIVE, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX,
AND THE RDG SOFTWARE COMPOSITE INDEX
PERFORMANCE GRAPH AVAILABLE UPON REQUEST
* $100 invested on 9/30/98 in stock or index-including reinvestment
of dividends.
45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the amount and percent of
shares of each class of stock that, as of December 31, 2003 are
deemed under the rules of the Securities and Exchange Commission
(the "Commission") to be "beneficially owned" by each member of
the Board of Directors of the Company, by each Named
Executive Officer of the Company, by all Directors and Executive
Officers of the Company as a group, and by any person or "group"
(as that term is used in the Securities Act of 1934, as amended)
known to the Company as of that date to be a "beneficial owner"
of more than 5% of the outstanding shares of the respective class
of stock.
Shares Beneficially Owned
Number (1) Percent(2)
PREFERRED "A":
5% Beneficial Owners:
Pitney Bowes, Inc. 1,356,852 100%
One Elmcroft Road
Stamford CT 06926
PREFERRED "B":
5% Beneficial Owners:
Pitney Bowes, Inc. 1,000 100%
One Elmcroft Road
Stamford CT 06926
PREFERRED "C"
5% Beneficial Owners:
MidMark Capital II L.P. 805 80.74%
177 Madison Avenue
Morristown, NJ 07960
Paine Webber Custodian 50 5.02%
F/B/O Wayne Clevenger
177 Madison Avenue
Morristown, NJ 07960
Joseph Robinson 50 5.02%
177 Madison Avenue
Morristown, NJ 07960
O'Brien Ltd Partnership 50 5.02%
177 Madison Avenue
Morristown, NJ 07960
Total as a Group 955 95.79%
46
COMMON STOCK:
5% Beneficial Owners:
American Marketing Complex 10,000,000 20.75%
330 East 33rd Street, Suite 15M
New York, NY 10016
MidMark Capital L.P.(3) 6,201,930 11.50%
177 Madison Avenue
Morristown, NJ 07960
Non-Employee Directors:
Otto Leistner (4) 572,875 1.19%
Named Executive Officers:
Hugo H. Biermann (5) 863,010 1.79%
Nicholas R. H. Toms (6) 1,314,014 2.73%
All directors and executive officers
as a group (3 persons)(7) 2,766,899 5.62%
* Less than 1%
(1) Represents shares held directly and with sole voting and
investment power, except as noted, or with voting and
investment power shared with a spouse.
(2) For purposes of calculating the percentage beneficially
owned, the number of shares of each class of stock deemed
outstanding include (i) 48,201,978 common shares, 1,356,852
Preferred "A" Shares; 1000 Preferred "B" Shares and 997
Preferred "C" shares outstanding as of December 31, 2003 and
(ii) shares issuable by us pursuant to options held by the
respective person or group which may be exercised within 60
days following December 31, 2003 ("Presently Exercisable
Options"). Presently Exercisable Options are considered
to be outstanding and to be beneficially owned by the
person or group holding such options for the purpose of
computing the percentage ownership of such person or group,
but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person or group.
(3) Includes 300,000 shares issuable pursuant to presently
exercisable options and warrants to purchase 5,411,580 shares.
(4) Includes 50,000 shares issuable pursuant to presently
exercisable options.
(5) Includes 475,000 shares issuable pursuant to presently
exercisable options and 388,010 shares held in the name of
Bunter BVI Limited of which Mr. Biermann may be deemed to be
a beneficiary. Mr. Biermann, however, disclaims such
beneficial ownership.
(6) Includes 475,000 shares issuable pursuant to presently
exercisable options.
(7) Includes 1,017,000 shares issuable pursuant to presently
exercisable options and 388,010 shares held by a
company for which by Mr. Biermann disclaims beneficial
ownership.
47
PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Wayne L. Clevenger and Joseph R. Robinson, directors of the
Company until August 1, 2002, are partners in Midmark
Associates, which firm provided consulting services to the
Company. During fiscal 2001 and 2002, the Company paid $250,000
and $218,000 respectively, to Midmark Associates for consulting
services pursuant to a five-year management agreement entered
into in September 1999 that was terminated in August 2002
when Mr. Clevenger and Mr. Robinson resigned as directors. In
addition, during the year ended September 30, 2001, the Company
issued in the aggregate $5,500,000 of convertible notes payable
to Midmark. During the year ended September 30, 2002, Midmark
elected to convert approximately $782,000 of principal
and $218,000 of accrued interest into 997 shares of Series
"C" Preferred Stock. The remaining convertible notes payable of
$4,718,717 with accrued interest at prime were convertible
into Series "C" Preferred Shares at a conversion price of
$1,000 per share, and the Series "C" Preferred Shares in turn
were convertible into Common Shares at $0.84 per share. In
addition, during the year ended September 30, 2002, the
Company issued $3,000,000 of notes payable convertible into
3,000 shares of Series "C" Preferred Stock and in turn
convertible into 3,570,026 shares of Common Stock at $0.84 per
share, and borrowed $2,588,900 under a demand note payable and
and additional $1,113,000 (including $425,000 restricted for
usage on XeQute obligations) during 2003. The Company had
an additional $250,000 payable to Midmark at June 30, 2003
under the Bridge Loan described in Note 11. In December 2002,
XeQute received an additional $480,000 from Midmark under a
Convertible Loan Note with terms similar to the 10% convertible
note payable described above. The Convertible Loan Note would
have automatically converted into Non-Voting shares of XeQute
at $0.672 per share when a minimum subscription of $480,000
of a proposed but now aborted Private Placement had been reached.
(See Note 9 to the Consolidated Financial Statements). On
August 9, 2002, the remaining balance of the $4,718,717
convertible notes and $1,185,176 of the $3.0 million convertible
notes were fully settled with the sale of the French based
advanced planning software business to MidMark (See Note 2 to
the Consolidated Financial Statements). The remaining $1,814,324
or 10% convertible notes payable at September 30, 2002 are
collateralized by all tangible and intangible property of the
Company, except that the holders have executed in favor
of certain senior lenders a subordination of their right of
payment under the Notes and the priority of any liens on certain
assets, primarily accounts receivable.
On January 2, 2001, the Company awarded Otto Leistner, one of
its Directors, options exercisable at a price of $5.72 per share
for 20,000 unregistered shares of our common stock for the
accounting services he performed from September 22, 1999 thru
April 17, 2000 prior to his becoming a Director. In August 2001,
the Company issued a $359,375 convertible note payable to PARTAS
AG, which is owned by Mr. Leistner. This note was to
automatically convert into 250,000 shares of Vertex common stock
on the day that the Company obtained the requisite shareholder
approval for the issuance of shares to PARTAS AG. Since
shareholder approval was not obtained by February 22, 2002, the
principal amount plus any accrued interest (at prime rate) became
immediately due and payable. On July 31, 2002 this convertible
note payable was fully settled with the sale of the German point
solutions business to PARTAS AG (See Note 2 to the Consolidated
Financial Statements).
L. G. Schafran, a director of the Company, provided
consulting services to the Company prior to his election as a
Director on August 9, 2001. For these services Mr. Schafran
received 30,000 non-qualified, in-plan options at an exercise
price of $1.51, all of which vested on the date of grant, August
14, 2001. Mr. Schafran resigned as a Director of the Company on
July 8, 2002.
ITEM 14. Principal Accounting Fees and Services
Selection of the independent public accountants for the Company is
made by the Audit Committee. J.H. Cohn LLP has been selected as
the Company's independent public accountants for the current
fiscal year. All audit and non-audit services provided by J.H.
Cohn LLP are pre-approved by the Audit Committee which gives due
consideration to the potential impact of non-audit services on
auditor independence.
In accordance with Independent Standard Board Standards No. 1
(Independence Discussion with Audit Committees), the Company
received a letter and verbal communication from J.H. Cohn LLP
that it knows of no state of facts which would impair its status
as the Company's independent public accountants. The Audit
Committee has considered whether the non-audit services provided
by J.H. Cohn LLP are compatible with maintaining its independence
and has determined that the nature and substance of the limited
non-audit services have not impaired J.H. Cohn LLP's status
as the Company's independent public accountants.
Audit Fees
J.H. Cohn LLP did not bill the Company during fiscal 2003 for
professional services rendered in connection with audit services
rendered to the Company during fiscal 2003.
Audit-Related Fees
J.H. Cohn LLP did not bill the Company for any audit related
services during fiscal 2003.
Tax Fees
J.H. Cohn LLP did not bill the Company for tax related work
during fiscal 2003.
All Other Fees
J.H. Cohn LLP did not bill the Company for any other services
during fiscal 2003.
Presence at Annual Meeting
Representatives of J.H. Cohn LLP will be present at the Annual
Meeting and will have an opportunity to make a statement if the
representatives desire to do so and will be available to respond
to appropriate questions.
48
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND
REPORTS ON FORM 8-K
(a) The following documents are filed at the end of this report:
1. and 2. Financial Statements:
1. Financial Statements and Supplementary Data:
Index to Financial Statements
Report of Independent Public Accountants F-1
Reports of Independent Auditors F-2, F-3
Consolidated Balance Sheets
September 30, 2003 and 2002 F-4, F-5
Consolidated Statements of Operations
Years ended September 30, 2003, 2002 and 2001 F-6
Consolidated Statements of Changes in
Stockholders' Equity (Deficiency)
Years ended September 30, 2003, 2002 and 2001 F-7, F-8
Consolidated Statements of Cash Flows
Years ended September 30, 2003, 2002 and 2001 F-9
Notes to Consolidated Financial Statements F-10
2. Financial Statement Schedules:
Schedules for the three years ended September 30, 2003, 2002, and
2001.
Schedule II - Valuation Qualifying Accounts
Schedules other than those listed above have been omitted
because they are not applicable or the required
information is shown in the financial statements or notes
thereto.
49
3. Exhibits:
The following is a list of exhibits incorporated by reference
from the Company's Registration Statement on Form S-18 filed
under the Securities Act of 1933, as amended and effective June
2, 1986 (File No. 33-897-NY), those filed pursuant to
Registration Statement on Form 8-A under the Securities Exchange
Act of 1934, as amended, and those material contracts of the
Company previously filed pursuant to the Securities Act of 1934
as amended, and those filed herewith.
Exhibit Description
Number
2.1 Form of Common Stock Certificate (incorporated by
reference to the Registration Statement on Form S-18
filed under the Securities Act of 1933, as amended and
effective June 2, 1986 (File No. 33-897-NY).
3.1 Certificate of Amendment to the Certificate of
Incorporation of Vertex Interactive, Inc. filed with
the Secretary of State, State of New Jersey on February
7, 2001, on October 18, 2001 and November 2, 2001
(incorporated by reference to the Form 10-Q filed
May 20, 2002).
3.2 Amended By-laws, amended as of August 9, 2001
(incorporated by reference to the Form 10-K filed January
25, 2002).
10.5 Incentive Stock Option Plan dated October 10, 1985, and
amended February 14, 2000 (incorporated by reference to
the Form 10-K filed on December 18, 2000).
10.54 Management agreement between the Company and
Edwardstone & Company, Inc. dated September 27, 1999
(incorporated by reference to the Form 10-K filed on
January 13, 2000).
10.55 Share Purchase Agreement, by and among Vertex
Industries, Inc. St. Georges Trustees Limited, as
trustee on behalf of the John Kenny Settlement and the
Godfrey Smith Settlement, John Kenny and Bryan J.
Maguire and Godfrey Smith dated June 21, 1999, as
amended September 27, 1999, (incorporated by reference
to the Form 8-K filed October 7, 1999).
10.56 Share Purchase and Transfer Agreement, 1999, between
Gregor von Opel and Vertex Industries, Inc. dated as of
June 21, 1999 and as amended September 27, 1999,
(incorporated by reference to the Form 8-K filed
October 7, 1999).
10.57 Stock Purchase Agreement by and among Vertex
Interactive, Data Control Systems and The Stockholders
of Data Control Systems, Inc. dated March 31, 2000
(incorporated by reference to the Form 8-K filed April
12, 2000).
10.58 Agreement and Plan of Merger, dated September 18, 2000,
by and among Vertex Interactive, Rensoft Acquisition
Corp. and Renaissance Software, Inc. (incorporated by
reference to the Form 8-K filed October 2, 2000).
10.59 Form of Note Purchase Agreement dated June 19, 2001
between Vertex Interactive, Inc. and MidMark Capital
II, Lp with respect to the Convertible Notes Payable
(incorporated by reference to the Form 10-Q filed
August 14, 2001).
50
10.60 Form of Subscription Agreement dated April l3, 2001
with respect to the private placement of common shares
(incorporated by reference to the Form 10-Q filed
August 14, 2001).
10.61 Agreement and Plan of Merger, dated December 29, 2000,
between Vertex Interactive and Applied Tactical
Systems, Inc. (incorporated by reference to the Form 8-K
filed March 2, 2001 and Form 8-K a filed March 14,
2001.)
10.62 Asset Purchase Agreement and Ancillary Agreements
between Vertex Interactive, Inc. and Finmek Holding N.
V.-Genicom S.p.A., Genicom Ltd., Genicom S.A. dated
October 6, 2000 (incorporated by reference to the Form
10-K filed on January 25, 2002).
10.63 Transaction Agreement among Vertex Interactive, Inc.,
Pitney Bowes Inc. and Renaissance Software, Inc. dated
February 7, 2001 (incorporated by reference to the Form
10-K filed January 25, 2002).
10.64 Note Purchase Agreement dated July 31, 2001 by and
among Vertex Interactive and Partas AG (incorporated by
reference to the Form 10-K filed on January 25, 2002).
10.65 Employment Agreement dated April 17, 2000 between
Vertex Interactive, Inc. and Raymond J. Broek
(incorporated by reference to the Form 10-K filed on
January 25, 2002).
10.66 Employment Agreement dated May 30, 2001 between Vertex
Interactive, Inc. and Donald W. Rowley (incorporated
by reference to the Form 10-K filed on January 25, 2002).
10.67 Stock Purchase Agreement by and between Pitney Bowes
Inc. and Vertex Interactive, Inc. dated October 18,
2001 for the purchase of Series "B" Preferred Stock
(incorporated by reference to the Form 10-Q filed
February 20,2002).
10.68 Securities Purchase Agreement by and among Laurus
Master Fund, Ltd. and Vertex Interactive, Inc. dated
November 20, 2001 for the purchase of 7% Convertible
Notes Payable (incorporated by reference to the Form 10-
Q filed February 20,2002).
10.69 Note Purchase Agreement by and among MidMark Capital
II, L.P. and Vertex Interactive, Inc. dated as of
November 1, 2001 for the purchase of 10% Convertible
Notes Payable (incorporated by reference to the Form 10-
Q filed February 20,2002).
10.70 Accounts Receivable Purchase Agreement dated February
27, 2002 between Vertex Interactive, Inc., its North
American subsidiaries and Laurus Master Fund, Ltd.
(incorporated by reference to the Form 10-Q filed May
20,2002).
10.71 Form of Conversion Agreement between Vertex
Interactive, Inc. and MidMark dated March 7, 2002 and
the Amended and Restated Convertible Promissory Note
dated March 7, 2002 (incorporated by reference to the
Form 10-Q filed May 20,2002).
10.72 Asset Purchase Agreement between Vertex, Renaissance
and Pitney Bowes dated April 19, 2002 (incorporated by
reference to the Form 10-Q filed May 20,2002).
10.73 ICS Sale Agreement between Vertex Interactive, Partas
Aktiengesellschaft and ICS AG dated July 12, 2002.
10.74 Stock and Debt Purchase Agreement between MidMark
Capital II, L.P., MidMark Capital, L.P., DynaSys, S.A.
and Vertex Interactive, Inc. dated August 9, 2002.
21.0 Subsidiaries of Vertex Interactive, Inc.(filed herewith).
23.1 Consent of J.H. Cohn LLP (filed herewith).
23.2 Consent of WithumSmith+Brown P.C. (filed herewith).
23.3 Consent of Ernst & Young LLP (filed herewith).
31.1 Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
32.1 Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
(b) The following Reports on Form 8-K were filed
during the period:
None.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
VERTEX INTERACTIVE, INC.
Date: March 2, 2004 /s/ Nicholas R. Toms
Nicholas R. Toms
Chief Executive Officer and
Chief Financial Officer
Pursuant to the requirements by the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the Company and in the capacities and on the dates
indicated:
March 2, 2004 /s/ Hugo H. Biermann
Hugo H. Biermann
Executive Chairman and
Director
March 2, 2004 /s/ Nicholas R. Toms
Nicholas R. Toms
Chief Executive Officer,
Chief Financial Officer and
Director
March 2, 2004 /s/ Otto Leistner
Otto Leistner
Director
52
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants F-1
Reports of Independent Auditors F-2, F-3
Consolidated Balance Sheets
September 30, 2003 and 2002 F-4, F-5
Consolidated Statements of Operations
Years ended September 30, 2003, 2002 and 2001 F-6
Consolidated Statements of Changes in
Stockholders' Equity (Deficiency)
Years ended September 30, 2003, 2002 and 2001 F-7, F-8
Consolidated Statements of Cash Flows
Years ended September 30, 2003, 2002 and 2001 F-9
Notes to Consolidated Financial Statements F-10
FINANCIAL STATEMENT SCHEDULE:
II - Valuation and Qualifying Accounts
Years ended September 30, 2003, 2002 and 2001 F-44
Schedules other than the one listed above have been omitted
(See page 49 above)
53
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Vertex Interactive, Inc.:
We have audited the accompanying consolidated balance sheet of Vertex
Interactive, Inc. and Subsidiaries as of September 30, 2003, and the
related consolidated statements of operations, changes in stockholders'
deficiency and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Vertex
Interactive, Inc. and Subsidiaries as of September 30, 2003, and their
results of operations and cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
The consolidated financial statements referred to above have been prepared
assuming that the Company will continue as a going concern. As further
discussed in Note 1 to the consolidated financial statements, among other
things, the Company's operations have generated recurring losses and it had
working capital and stockholders' deficiencies as of September 30, 2003.
Such matters raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans concerning these matters are also
described in Note 1. The accompanying consolidated financial statements as
of and for the year ended September 30, 2003 do not include any adjustments
that might result from the outcome of this uncertainty.
Our audit referred to above also included the information in Schedule II as
of and for the year ended September 30, 2003, which presents fairly, in all
material respects, when read in conjunction with the consolidated financial
statements, the information required to be set forth therein.
/s/ J.H.Cohn LLP
Roseland, New Jersey
January 15, 2004
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Vertex Interactive, Inc.:
We have audited the accompanying consolidated balance sheet of Vertex
Interactive, Inc. and Subsidiaries as of September 30, 2002, and the related
consolidated statements of operations, stockholders' equity (deficiency)
and cash flows for the year then ended. Our audit also included the financial
statement schedule listed in the index at Item 15(a). These financial
statements and the schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Vertex
Interactive, Inc. and Subsidiaries as of September 30, 2002, and the
consolidated results of their operations and their cash flows for the year
ended September 30, 2002 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedule taken as a whole, presents fairly in all material respects
the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred significant operating losses
and, at September 30, 2002 has a working capital deficiency of $27.4 million
and a Stockholders' Deficiency of $26.8 million. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
As discussed in Notes 3 and 4 to the financial statements, the Company changed
its method of accounting for goodwill and other intangible assets in accordance
with Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" effective October 1, 2001.
/s/ WithumSmith+Brown P.C.
Livingston, New Jersey
April 30, 2003 (July 31, 2003 as to Notes 1 and 19 of the September 30, 2002
financial statements)
F-2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of Vertex Interactive, Inc.
We have audited the accompanying consolidated statements of operations,
cash flows and changes in stockholders' equity of Vertex Interactive,
Inc. and subsidiaries for the year ended September 30, 2001. Our audit also
included the financial statement schedule for the year ended September 30, 2001
listed in the Index at Item 15(a)2. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Vertex Interactive, Inc. and subsidiaries for the year ended
September 30, 2001 in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule for the year ended September 30, 2001, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As more fully discussed in Note 1 to the consolidated financial statements, the
Company's recurring losses from operations, negative working capital, rate of
cash consumption and lack of sufficient current financing raise substantial
doubt about its ability to continue as a going concern. Management's plans as to
these matters are also described in Note 1. The 2001 consolidated financial
statements and financial statement schedule do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
MetroPark, New Jersey
January 25, 2002
F-3
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2003 and 2002
ASSETS 2003 2002
------ ------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 25,265 $ 74,016
Accounts receivable, less allowance for
doubtful accounts of $456,358 and $929,030 639,208 936,246
Inventories, net of valuation allowances 537,337 941,357
Prepaid expenses and other current assets 20,103 263,260
------------ -------------
Total current assets 1,221,913 2,214,879
Equipment and improvements, net of accumulated
depreciation and amortization of $1,320,152
and $1,200,546 70,249 187,074
Capitalized software costs, net of accumulated
amortization of $231,513 and $115,756 115,756 231,513
Other assets 111,273 166,965
------------ -------------
Total assets $ 1,519,191 $ 2,800,431
============ =============
See notes to consolidated financial statements.
F-4
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2003 and 2002
LIABILITIES AND STOCKHOLDERS' DEFICIENCY 2003 2002
---------------------------------------- ------------- -------------
CURRENT LIABILITIES:
Senior credit facility $ - $ 145,736
Notes payable - unrelated parties 1,869,236 1,602,500
Notes payable - related parties 4,095,848 2,588,900
Convertible notes payable - related parties 2,294,324 1,814,324
Accounts payable 4,533,875 4,429,065
Net liabilities associated with subsidiaries in
liquidation 8,511,077 7,263,694
Payroll and related benefits accrual 2,622,354 2,074,902
Litigation related accruals 4,077,665 4,122,123
Other accrued expenses and liabilities 4,870,759 3,933,725
Advances from customers - 343,547
Deferred revenue 305,243 1,317,440
------------ ------------
Total liabilities 33,180,381 29,635,956
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Series A preferred stock, par value $0.01 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 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 10
Common stock, par value $0.005 per share; 75,000,000 shares
authorized; 48,201,978 and 37,201,978 shares issued at
September 30, 2003 and 2002, 241,011 186,011
Additional paid-in capital 155,364,295 154,979,295
Unearned income (400,000) -
Accumulated deficit (184,332,055) (180,681,702)
Accumulated other comprehensive loss (2,480,790) (1,265,478)
Less: Treasury stock, 87,712 shares (at cost) (67,240) (67,240)
------------- -------------
Total stockholders' deficiency (31,661,190) (26,835,525)
------------- -------------
Total liabilities and stockholders' deficiency $ 1,519,191 $ 2,800,431
============= =============
See notes to consolidated financial statements.
F-5
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 2003, 2002 and 2001
2003 2002 2001
------------ ------------ -----------
REVENUES $ 4,226,187 $36,135,217 $59,087,470
COST OF SALES 2,138,883 23,894,594 37,586,253
------------ ------------ -----------
GROSS PROFIT 2,087,304 12,240,623 21,501,217
------------ ------------ -----------
OPERATING EXPENSES:
Selling and administrative 4,642,123 22,503,288 34,510,749
Research and development - 4,179,553 7,039,014
Depreciation of equipment
and improvements 119,606 820,000 1,220,000
Amortization of intangible assets 115,757 417,162 14,571,510
Provision for termination of leases - 1,102,984 300,000
In-process research and development
write-off - - 3,600,000
Impairment of goodwill and
other intangible assets - 18,973,832 78,364,560
----------- ------------ ------------
Total operating expenses 4,877,486 47,996,819 139,605,833
----------- ------------ ------------
OPERATING LOSS (2,790,182) (35,756,196) (118,104,616)
----------- ------------- ------------
OTHER INCOME (EXPENSES):
Interest income 2,703 93,967 141,358
Interest expense (851,933) (2,875,396) (1,035,140)
Provision for litigation claims - (2,653,891) (3,100,000)
Loss on sale or liquidation of
non-core assets - (3,080,656) -
Other (10,941) (367,364) (703,228)
----------- ------------ ------------
Net other income (expense) (860,171) (8,883,340) (4,697,010)
----------- ------------ ------------
LOSS BEFORE PROVISION FOR
INCOME TAXES (3,650,353) (44,639,536) (122,801,626)
Provision for income taxes - 134,843 150,476
----------- ------------ ------------
NET LOSS ($3,650,353) ($44,774,379)($122,952,102)
============ ============= ==============
Net loss per share of
common stock:
Basic and diluted ($0.09) ($1.26) ($3.95)
Weighted average number of
shares outstanding:
Basic and diluted 39,671,923 35,649,274 31,128,185
See notes to consolidated financial statements.
F-6
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
For the Years ended September 30, 2003, 2002 and 2001
Preferred Stock Common Stock
------------------ ---------------- Additional Deferred
Paid-In Compensation/
Shares Amount Shares Amount Capital Unearned Income
------ ------ ------ ------ ---------- ---------------
Balance September 30, 2000 - $ - 26,267,947 $131,340 $99,563,198 ($461,012)
Exercise of stock options 437,481 2,187 908,297
Issuance of stock in connection with
new investors, net of expenses 4,186,754 20,933 7,830,033
Stock options issued to
non-employees 1,465,756
Issuance of stock in connection
with retirement of debt and other
obligations 576,501 2,883 2,496,009
Issuance of stock and stock options
in connection with acquisitions 1,356,852 13,569 3,440,823 17,205 37,014,273
Deferred compensation 44,200 (44,200)
Amortization of deferred
compensation 324,655
Other comprehensive income (loss),
net of tax:
Net loss
Change in unrealized foreign
exchange translation
gains/losses
Comprehensive income (loss)
---------- ------- ---------- -------- ----------- ----------
Balance September 30, 2001 1,356,852 13,569 34,909,506 174,548 149,321,766 (180,557)
Issuance of common stock 34,404 172 68,844
Issuance of Series B
preferred stock, net of expenses 1,000 10 960,990
Issuance of stock in connection
with acquisitions 1,676,168 8,381 930,667
Issuance of stock and stock
options in connection with
retirement of debt and other
obligations 581,900 2,910 2,031,153
Purchase of treasury
stock (47,657 shares)
Conversion of notes payable
into Series C preferred stock 997 10 996,990
Amortization of deferred
compensation 180,557
Cancellation of common stock (1,676,168) (8,381) (930,667)
Exercise of stock options 1,676,168 8,381 930,667
Settlement of acquisition
related escrow (500,000)
Non cash interest expense 1,168,885
Other comprehensive income
(loss), net of tax:
Net loss
Change in unrealized foreign
exchange translation
gains/losses
Comprehensive income (loss)
--------- -------- ----------- -------- ------------ ---------
Balance September 30, 2002 1,358,849 13,589 37,201,978 186,011 154,979,295 -
Common stock issued in exchange
for services 1,000,000 5,000 35,000
Common stock issued for trade credits 10,000,000 50,000 350,000 (400,000)
Net loss
Change in unrealized foreign
exchange translation gains/losses
Comprehensive income (loss)
--------- -------- ----------- -------- ------------ ---------
Balance September 30, 2003 1,358,849 $ 13,589 48,201,978 $241,011 $155,364,295 $(400,000)
========= ======== =========== ======== ============ =========
F-7
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
For the Years Ended September 30, 2003, 2002 and 2001
(continued)
Accumulated
Other
Accumulated Comprehensive Comprehensive Treasury
Deficit Loss Income/(Loss) Stock Total
----------- ------------- ------------- -------- -------
Balance September 30, 2000 ($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 -
Amortization of deferred
compensation 324,655
Other comprehensive income (loss),
net of tax:
Net loss (122,952,102) $(122,952,102) (122,952,102)
Change in unrealized foreign
exchange translation
gains/losses 399,104 399,104 399,104
--------------
Comprehensive income (loss) $(122,552,998)
------------ ============== --------- ------- ------------
Balance September 30, 2001 (135,907,323) (1,426,307) (45,169) 11,950,527
Issuance of common stock 69,016
Issuance of Series B
preferred stock, net of expenses 961,000
Issuance of stock in connection
with acquisitions 939,048
Issuance of stock and stock options
in connection with
retirement of debt and other
obligations 2,034,063
Purchase of treasury stock
(47,657 shares) (22,071) (22,071)
Conversion of notes payable
into Series C preferred stock 997,000
Amortization of deferred
compensation 180,557
Cancellation of common stock (939,048)
Exercise of stock options 939,048
Settlement of acquisition
related escrow (500,000)
Non cash interest expense 1,168,885
Other comprehensive income (loss),
net of tax:
Net loss (44,774,379) $(44,774,379) (44,774,379)
Change in unrealized foreign
exchange translation
gains/losses 160,829 160,829 160,829
------------
Comprehensive income (loss) $(44,613,550)
------------- ============ ---------- ------- ------------
Balance September 30, 2002 (180,681,702) (1,265,478) (67,240) (26,835,525)
Common stock issued in exchange
for services 40,000
Common stock issued for trade credits
Net loss (3,650,353) $ (3,650,353) (3,650,353)
Change in unrealized foreign
exchange translation gains/losses (1,215,312) (1,215,312) (1,215,312)
-------------
Comprehensive income (loss) $(4,865,665)
------------- ============= ---------- -------- ------------
Balance September 30, 2003 $(184,332,055) $(2,480,790) $(67,240)$(31,661,190)
============= ========== ======== =============
See notes to consolidated financial statements.
F-8
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2003, 2002 and 2001
2003 2002 2001
------------ ------------ ------------
Cash Flows from Operating Activities:
- ------------------------------------
Net Loss (3,650,353) ($44,774,379)($122,952,102)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 235,363 1,237,162 15,791,510
Loss on sale or liquidation of
non-core businesses and assets - 3,080,656 6,951
Impairment of goodwill and other
intangible assets - 18,973,832 78,364,560
Stock and stock options issued in
consideration for services and other
obligations 40,000 - 2,325,850
Non cash interest expense - 1,168,885 -
Amortization of deferred
compensation costs - 180,557 324,655
In-process research and development write-off - - 3,600,000
Changes in assets and liabilities, net of
effects of acquisitions and disposals:
Accounts receivable, net 297,038 4,948,464 781,789
Inventories, net 404,020 933,072 530,699
Prepaid expenses and other current assets 243,157 261,629 (750,052)
Other assets 55,692 1,010,556 252,945
Accounts payable 104,810 184,707 2,548,730
Accrued expenses and other liabilities 1,472,099 5,580,371 3,577,123
Advances from customers (343,547) (39,400) 184,663
Deferred revenue (1,012,197) (1,075,747) (406,502)
------------ ---------- -----------
Net cash used in operating activities (2,153,918) (8,329,635) (15,819,181)
------------ ----------- -----------
Cash Flows from Investing Activities:
- ---------------------------------------
Additions to equipment and improvements (2,781) (172,458) (1,070,668)
Proceeds from sale of assets, net of cash sold - 1,184,231 18,378
Acquisition of businesses, net of cash acquired - - (4,626,222)
------------ ----------- -----------
Net cash provided by (used in) investing
activities (2,781) 1,011,773 (5,678,512)
------------ ----------- -----------
Cash Flows from Financing Activities:
- -------------------------------------
Loans payable bank, net - (683,386) (183,158)
Proceeds from senior credit facility and
notes payable 250,000 3,186,000
Payment of senior credit facility and
notes payable (145,736) (2,933,645) (272,500)
Payment of mortgages - (49,564) (69,205)
Payment of capitalized lease obligations - (127,656) (625,422)
Proceeds from other long-term borrowings - - 437,816
Proceeds from notes and convertible notes
payable - related parties 1,986,948 5,588,900 5,859,375
Net proceeds from issuance of stock - 1,030,168 8,773,373
Proceeds from exercise of stock options - - 910,484
Purchase of treasury stock - (22,071) -
------------ ----------- -----------
Net cash provided by financing activities 2,091,212 5,988,746 14,830,763
------------ ----------- -----------
Effect of exchange rate changes on cash 16,736 (8,090) 185,378
----------- ----------- -----------
Net Decrease in cash and cash equivalents (48,751) (1,337,206) (6,481,552)
Cash and Cash Equivalents at Beginning of year 74,016 1,411,222 7,892,774
----------- ----------- -----------
Cash and Cash Equivalents at End of year $25,265 $ 74,016 $1,411,222
=========== =========== ===========
Cash paid for:
Interest $ 72,000 $ 930,000 $ 671,000
Income taxes $ - $ 237,000 $ 134,000
See notes to consolidated financial statements.
F-9
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. RECENT DEVELOPMENTS AND NATURE OF PRESENTATION
Background and Description of Business
Vertex Interactive, Inc. ("Vertex" or "we" or "our" or the
"Company") is a global provider of supply chain management ("SCM")
technologies, including enterprise software systems and
applications, that enable our customers to manage their
orders, inventory and warehouse needs, consultative services,
and software and hardware service and maintenance. We serve
our clients through three general product and service lines:
(1) enterprise solutions; (2) point solutions; and, (3)
service and maintenance for our products and services,
including service and maintenance of software and hardware we
resell for third parties. Our enterprise solutions include a
suite of Java'TM'-architected software applications,
applications devoted to the AS/400 customer base, as well as a
portfolio of "light-directed" systems for inventory, warehouse and
distribution center management. Our point solutions provide an
array of products and services designed to solve more specific
customer needs from managing a mobile field workforce,
mobile data collection, distributed bar code printing
capabilities, compliance labeling applications, automated card
devices, software development tools and proprietary software
serving SAP R/3 users. We provide a full range of software and
hardware support services and maintenance on a 24-hour, 7-days a
week, 365-days a year basis, including the provision of wireless
and wired planning and implementation services for our customers'
facilities.
In August 2002, Vertex formed XeQute Solutions, Inc. ("XeQute"), a Delaware
corporation, which is an indirect, wholly-owned subsidiary. XeQute
purchased most of the operating assets and assumed certain liabilities
of both Vertex and its principal North American subsidiaries and became
the principal operating entity of the group effective October 1, 2002.
These assets comprise substantially all of the enterprise software
businesses of Vertex. XeQute is a wholly-owned subsidiary of XeQute
Solutions PLC ("XeQute PLC") which is a holding company that is a direct,
wholly-owned subsidiary of Vertex.
In August 2002, the Company was notified that the NASDAQ Listing
Qualifications Panel had determined that the Company had failed to comply with
the $1.00 minimum closing bid price and the minimum stockholders' equity or the
market value of publicly held shares requirements for continued listing and
determined to delist the Company's securities from the NASDAQ National Stock
Market effective with the open of business on August 21, 2002 and listed on
the NASDAQ Bulletin Board. Effective February 17, 2003, the Company's
securities currently trade on the Pink Sheets under the symbol "VETXE".
F-10
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, the Company's wholly-owned subsidiary, to JAG Media, in
exchange for approximately 54% of JAG Media's common stock. The agreement
was 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.
Going Concern Matters
Based upon our substantial working capital deficiency and stockholders'
deficiency, of approximately $31,958,000 and $31,661,000 at September 30,
2003, respectively, our recurring losses, our historic rate of cash
consumption, the uncertainty arising from our defaults on substantially
all of our notes payable, the uncertainty of our liquidity-related
initiatives described in detail below, and the reasonable possibility
of on-going negative impacts on our operations from the overall economic
environment for a further unknown period of time, there is substantial
doubt as to our ability to continue as a going concern.
The successful implementation of our business plan has required, and our
ability to continue as a going concern will require on a going forward basis,
the Company to raise substantial funds to finance (i) continuing operations,
(ii) the further development of our enterprise software technologies,
(iii) the settlement of existing liabilities including past due payroll
obligations to our employees, officers and directors, and (iv) possible
selective acquisitions to achieve the scale we believe will be necessary
to enable us to remain competitive in the global SCM industry. There can
be no assurance that we will be successful in raising the necessary funds.
Fiscal 2003:
In fiscal 2003, the continued decline in the enterprise applications software
and telecommunications industries continued to have a substantial negative
impact on our results of operations. These factors, in combination with our
continuing negative operating cash flows, placed significant pressures on
our financial condition and liquidity and negatively impacted our
operations. Operating activities resulted in cash consumption of
approximately $2,154,000 in 2003.
During fiscal 2003 we raised approximately $2,254,000 (net of cash transaction
costs) through the issuance of notes payable and notes and convertible notes
payable from related parties and used $146,000 to repay other notes. At
September 30, 2003, we had a net cash balance of approximately $25,000 (a
decrease of $49,000).
F-11
Outlook:
In light of current improving economic conditions and the upswing in the
economy we now anticipate, but cannot assure, reaching the point at which we
will generate cash in excess of our operating expenses in the quarter ending
June 30, 2004. However, we had current obligations at September 30, 2003
accumulated during the past several years that substantially exceeded our
current assets and, to the extent we cannot settle existing obligations in
stock or defer payment of our obligations until we generate sufficient
operating cash, we will require significant additional funds to meet accrued
non-operating obligations, to fund operating losses, if required, short-term
debt and related interest, capital expenditures and expenses related to
cost-reduction initiatives, and to pay liabilities that could arise from
litigation claims and judgments.
Our sources of ongoing liquidity include the cash flows from our operations,
potential new credit facilities and potential additional equity investments.
Consequently, Vertex continues to aggressively pursue obtaining
additional debt and equity financing, the restructuring of certain existing
debt obligations, and the reduction of its operating expenses. In addition, it
has structured its overall operations and resources around high margin
enterprise products and services. However, in order to remain in business,
the Company must raise additional cash in a timely fashion.
Initiative Completed or in Process:
The following initiatives related to raising the required funds, settling
liabilities and/or reducing expenses have been completed or are in process:
(i) In December 2002, Vertex, through XeQute PLC, closed a $500,000 Bridge Loan
whereby it borrowed $250,000 from both Midmark Capital L.P., a company that
owns shares of Vertex's preferred and common stock, and Aryeh Trust, an
unrelated party. The Bridge Loan was to have been repaid with proceeds from
a proposed Private Placement funding (see iii below). The Bridge Loan was
originally for a term of 180 days, through June 9, 2003, but it was not repaid.
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 became available (See Note 11). Midmark
Capital L.P. is a shareholder of the Company. Midmark Capital L.P. and its
affiliate, Midmark Capital II, L.P., and certain individuals related to these
two entities, are referred to collectively as "Midmark".
During 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 when a minimum subscription of $480,000 from a proposed
but now aborted private placement of nonvoting common stock had been reached.
In addition, during the year ended September 30, 2003, Vertex and XeQute
borrowed a further $1,113,000 from Midmark 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 agreement related to previously issued convertible notes
payable (See Note 11).
F-12
During October, 2002, Vertex also executed a Grid Note which
provides for up to $1,000,000 of availability from Midmark.
This note will be funded by the proceeds, if any, from the
sale of any shares of Vertex Common Stock held by Midmark.
This note is payable on demand, carries interest at the rate of
10% per annum and is secured by the same collateral in which the
Company previously granted a security interest to Midmark under 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 January 15,
2004, the Company had borrowed $272,000 under this arrangement, of
which $143,900 had been borrowed as of September 30, 2003.
(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
$8,511,000 of net liabilities of these remaining European entities
as of September 30, 2003, we expect to recognize a non-cash gain (and
no significant cash outlay), however the amount and timing of such gain
and cash outlay, if any, is totally dependent upon the decisions
to be issued by the respective court appointed liquidators (See Note 2
as to the approval of the liquidation of the U.K. subsidiaries in
January 2004).
(iii) We are aggressively pursuing additional capital raising
initiatives primarily through XeQute PLC. XeQute PLC had an agreement
with Charles Street Securities, Inc. ("CSS") to raise, in conjunction
with MidMark, approximately $3,800,000 of new equity. This effort
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 for XeQute by David Sassoon Holdings, Inc.
which may be in the form of debt or equity or a combination of both.
(iv) We have continued to reduce headcount (to approximately 40
employees in our continuing North American business at September
30, 2003, and to 28 employees as of January 15, 2004, of whom 7
were furloughed until additional funds are raised), consolidate
facilities and generally reduce costs.
(v) Effective July 31, 2003, the Company completed the sale of
10,000,000 shares of its common stock, which had an estimated fair
market value at that time of approximately $400,000, to American
Marketing Complex, Inc. ("AMC")(see Note 13). 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.
F-13
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 by AMC 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 $4,100,000 of litigation related accruals
at a discount or with the issuance of shares of either Vertex or
XeQute.
While we are continuing our efforts to reduce costs, increase
revenues, resolve lawsuits on favorable terms and settle certain
liabilities on a non-cash basis there is no assurance that we
will achieve these objectives. In addition, we will continue to
pursue strategic business combinations and opportunities to raise
both debt and equity financing. However, there can be no assurance
that we will be able to raise additional financing in the
timeframe necessary to meet our immediate cash needs, or if such
financing is available, whether the terms or conditions
would be acceptable to us.
Basis of Presentation:
The financial statements have been prepared on a basis that
contemplates Vertex's continuation as a going concern and the
realization of assets and liquidation of liabilities in
the ordinary course of business. The accompanying consolidated
financial statements do not include any adjustments, with the
exception of the provision to reduce the carrying values of the
assets of the subsidiaries in liquidation to their estimated net
realizable value, relating to the recoverability and classification
of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should we be unable to
continue as a going concern. If Vertex fails to raise capital
when needed, the lack of capital will have a material adverse
effect on Vertex's business, operating results, financial
condition and ability to continue as a going concern.
2. ACQUISITIONS AND DISPOSALS
Acquisitions
Purchase Method
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 due on September 1, 2001. The
Company paid $125,000 in December 2001, however the $375,000 balance has not
been paid and is included in Notes Payable. At September 30, 2003, 4,166,667
shares of Vertex common stock collateralize the remaining $375,000 obligation.
F-14
In December 2000, the Company completed a merger with Applied Tactical Systems,
Inc. ("ATS"), a provider of connectivity software for SAP installations
worldwide, by exchanging 3,000,000 shares of its common stock for all of the
common stock of ATS. Such shares had a fair market value of approximately $8.30
per share at the date of the transaction. In addition, Vertex reserved 153,600
shares for issuance upon exercise of ATS stock options. The vested portion of
these options (included in the total consideration paid for ATS) was estimated
to have a fair market value of approximately $620,000 (See Note 16 - Settled
Litigation).
In February 2001, the Company purchased from Pitney Bowes its Transportation
Management Software and certain engineering assets (the Transcape Division, or
"Transcape"). Consideration for Transcape was 1,356,852 shares of the Company's
Series A preferred stock, which on the date of acquisition, was estimated to
have a fair market value of approximately $10,400,000. A portion of the
Transcape purchase price was identified, using proven valuation procedures and
techniques, as in-process research and development ("R&D") projects. The
revenue projections used to value the in-process R&D were based on estimates
of relevant market sizes and growth factors, expected trends in technology and
the nature and expected timing of new product introductions by us and our
competitors. At the date of the acquisition, the product under development
had not reached technological feasibility and had no alternative future use.
Accordingly, $3,600,000 was expensed as in-process R&D in fiscal 2001. The
value assigned to in-process R&D was comprised of one research and
development project that would introduce new web-enabling technologies, and
was expected to begin generating net cash inflows in fiscal 2002. There was
risk associated with the completion of the project, and there was no assurance
that it would attain either technological feasibility or commercial success.
Also in February 2001, the Company acquired all of the capital stock of Binas
Beheer B.V. ("Binas"). The total purchase price was $570,000, paid for with
approximately $300,000 in cash and by the issuance to the Binas shareholders of
42,686 shares of our common stock, which at the date of the transaction had a
fair market value of $6.34 per share.
In September 2001, the Company acquired all of the outstanding stock of DynaSys,
a software developer of advance supply chain planning and scheduling
applications. Total consideration paid was $565,000, which included 134,979
shares of Vertex common stock, which had an estimated fair market value of
$217,000 on the date of acquisition.
In October 2001, the Company acquired Euronet Consulting S.r.l. ("Euronet"),
an Italian software applications consulting firm. The value of the
transaction was approximately $940,000. The Company acquired all of the
outstanding shares of Euronet for 684,620 shares of Vertex common stock,
which at the date of acquisition had a fair market value of approximately
$625,000, and additional shares of common stock issued later in the year:
approximately 232,000 shares with an estimated fair market value of $.44
per share in February 2002 and approximately 760,000 shares with a fair
market value of $.27 per share in April 2002.
The accompanying consolidated financial statements assume the ESSC acquisition
closed effective October 31, 2000, the ATS acquisition closed effective
December 30, 2000, the Transcape acquisition closed effective February 7,
2001, the Binas acquisition closed effective February 1, 2001, the DynaSys
acquisition closed effective September 30, 2001 and the Euronet acquisition
closed effective October 1, 2001. The Company has accounted for these
acquisitions using the purchase method of accounting in accordance with
Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations,"
and Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" for DynaSys and Euronet and, accordingly, the financial
statements include the results of operations from November 1, 2000 for ESSC,
January 1, 2001 for ATS, February 8, 2001 for Transcape, February 1, 2001
for Binas, and October 1, 2001 for DynaSys and Euronet. An allocation of the
purchase price for ESSC, ATS, Transcape, Binas, DynaSys and Euronet has been
made to the assets and liabilities acquired as of October 31, 2000,
December 31, 2000, February 7, 2001, September 30, 2001, and October 1, 2001,
respectively, based on their estimated fair market values.
F-15
The table below represents the allocation of the purchase price for
acquisitions completed in each of the respective years:
September 30,
----------------------------
2002 2001
------------ ----------
C>
Accounts receivable $ 294,148 $ 1,928,403
Inventories 1,135,853
Other assets 61,771 1,381,507
Intangible assets (including in-process
research and development of $3,600,000 in 2001) 1,078,007 41,474,337
Short-term debt (468,308)
Deferred revenue and customer deposits (1,911,491)
Other liabilities (494,878) (3,123,080)
------------- -----------
Total consideration paid, less cash acquired 939,048 40,417,221
Less stock issued to sellers 939,048 36,923,444
------------- -----------
Net cash paid $ 0 $ 3,493,777
============= ===========
The following table presents unaudited pro forma results of operations of the
Company as if the above described purchase method acquisitions had occurred at
October 1, 2000:
Year Ended September 30,
------------------------
2001
------------------------
Revenues $66,175,127
Net loss (124,375,957)
Net loss per share (3.90)
The unaudited pro forma results of operations are not necessarily indicative of
what the actual results of operations of the Company would have been had the
acquisitions occurred at the beginning of fiscal 2001, nor do they purport to
be indicative of the future results of operations of the Company.
The pro forma amounts reflect the following:
- - The estimated amortization of the excess of the purchase price over the
fair value of net assets acquired for the year ended September 30, 2001 for
acquisitions closed prior to September 30, 2001 and accounted for in
accordance with APB 16, which amounted to approximately $15,500,000.
- - The approximate number of shares issued to complete the acquisitions.
Abandoned Merger
During the quarter ended March 31, 2002, the Company terminated a proposed
transaction with Plus Integration Supply Chain Solutions, BV, ("Plus") a
private supply chain management software and solutions provider headquartered
in Haarlem, the Netherlands, and charged to other expense approximately
$960,000 of previously deferred acquisition costs (primarily legal, accounting
and other professional service fees) incurred with respect to the proposed
transaction.
F-16
Sales or Divestitures of Non-Core Businesses
The Company developed and initiated a plan in the quarter ended June 30, 2002
that would result in the sale or divestiture of assets or closings of
businesses that are not part of the Company's current strategic plan or have
not achieved an acceptable level of operating results or cash flows. In
connection with this plan, the Company has completed the sale of certain
businesses and assets (see "Disposals"). After being unsuccessful in
attempting to sell its five remaining European operations (Vertex UK-
previously PSS, Vertex Service and Maintenance Italy - previously SIS,
Vertex Italy, Euronet and Vertex France - previously ICS France) and based
on the continuing cash drain from these operations, the respective boards of
directors determined that in the best interest of their shareholders that
they would seek the protection of the respective courts in each country,
which have agreed to an orderly liquidation of these companies for the
benefit of their respective creditors. Accordingly, the net assets and
liabilities of these businesses are classified as net liabilities
associated with subsidiaries in liquidation in the accompanying September 30,
2003 and 2002 consolidated balance sheets. While the Company expects the
liquidation process to take through at least June 30, 2004, significant
variations may occur based on the complexity of the entity and requirements
of the respective country. In addition, following the termination of an
agreement in principle to sell our North American wireless and cable
installation division, we closed down this operation in July 2002. The
revenues for all of these non-core businesses (sold and liquidated) were
approximately $24,000,000 in 2002.
A net loss of approximately $4,400,000 was a component of the "Loss on Sale
or Liquidation of Non-core Assets" in 2002. Such amount included a provision
to reduce the carrying values of the net assets, including any remaining
goodwill, to their estimated net realizable values and to record estimated
transaction and closing costs of this plan. Retained liabilities are generally
carried at their contractual or historical amounts. The ultimate amounts
required to settle these retained liabilities will differ from estimates,
based on contractual negotiations, and the outcome of certain legal actions
and liquidation proceedings.
The following is a summary of net assets and retained liabilities as of
September 30, 2003 and 2002:
2003 2002
----------- ------------
Cash $ 654,068 $ 307,398
Receivables, net 990,468 1,124,228
Inventories, net 608,993 515,258
Accounts payable (2,959,933) (2,604,276)
Accrued liabilities (5,207,546) (4,376,327)
Deferred revenue (1,186,486) (1,006,001)
Loans payable - banks (1,074,142) (908,810)
Other liabilities (336,499) (315,164)
----------- -----------
Net liabilities associated with
subsidiaries in liquidation $(8,511,077) $(7,263,694)
=========== ============
F-17
At September 30, 2001, the Company's Irish subsidiary had approximately
$130,000 of non-interest bearing loans payable to the Irish government that
were repayable at rates linked to future revenues earned. Under the terms
of the agreement, the loans were to be repaid at a rate of 4.2% of project
sales made in the United States by PSS in the period from July 1998 to
June 2001 and were due for repayment in the period commencing in July 1999
and ending in July 2002. If the repayments calculated as a percentage of
sales are not sufficient to repay the loans in full, the Irish government
may write-off the balance. PSS had not made any sales in the United States
through September 30, 2003 and, thus, no repayments had been made against
these borrowings nor has the Irish government agreed to write off the
balance. Since the Irish subsidiary has been placed in liquidation, the
remaining balance is included in other liabilities in the table above.
The results of these businesses' operations for the years ended September 30,
2003 and 2002 are not segregated from other businesses in the accompanying
statements of operations as they are not considered distinct segments or
discontinued operations.
The Company received notice that the liquidation of the UK companies, which
were under liquidation as of September 30, 2003 and 2002, has been approved
and finalized by the UK creditors as of January 5, 2004. Based on such
notice, management estimates the Company will reduce net liabilities
associated with subsidiaries in liquidation by approximately $1,400,000 and
recognize a gain of approximately $1,200,000 in fiscal 2004.
DISPOSALS
During the year ended September 30, 2002, the Company completed the sale of
the following product lines and business units:
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 $1,650,000, which included the cancellation of the $1,000,000 Pitney
Bowes promissory note and related accrued interest (See Note 10).
In connection with this sale, Vertex eliminated 34 positions.
2) In May 2002 the Company sold a portion of its mobile computing
solutions business in Ireland in exchange for approximately $200,000 of
cash and the assumption of approximately $200,000 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 $500,000 in cash and the assumption of approximately
$400,000 of deferred revenue liabilities.
4) In July 2002, the Company sold the German point solutions business
to AG, which is owned by one of the Company's Directors, and a related
entity, in consideration for approximately $400,000, including the
cancellation of the AG note payable (See Note 11) and related accrued
interest.
5) In August 2002, the Company sold DynaSys S.A., its French based
advanced planning software business to MidMark Capital in consideration
for $6,000,000, including the cancellation of $5,900,000 of convertible
notes payable and $100,000 of related accrued interest (See Note 11). As
part of this transaction, Vertex retained the right to repurchase,
on February 9, 2003, 20% of the shares of DynaSys held by MidMark
at the original purchase price of $120,000 paid by MidMark. The purchase
price for such shares could be paid for in newly issued 10% senior secured
notes or cash, at Vertex's option. This right of repurchase was subject
to among other things, an initial public offering of DynaSys common stock
in the six months following the closing and that the total market
capitalization of DynaSys shall be not less than $9,000,000 at the time of
repurchase. Such offering did not occur and the right to repurchase has
expired.
F-18
6) During July and August, 2002, the Company also completed the sale of
three additional components ofits European business: (a) the UK hardware
maintenance business; (b) the Benelux point solutions and hardware
maintenance businesses; and (c) the French hardware maintenance
business for a total consideration of approximately $300,000.
The aggregate net gain of approximately $1,200,000 on these transactions
is included in the Loss on Sale or Liquidation of Non-core Assets component
of other income (expense)in 2002.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The more significant estimates are those
used by management to measure net liabilities associated with subsidiaries
in liquidation, litigation accruals, the recoverability of intangible assets,
the allowances for doubtful accounts and inventory reserves and the value of
shares, options or warrants issued for services or in connection with financing
transactions. Actual results could differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform with the 2003
presentation.
Revenue Recognition
Equipment Sales:
Revenue related to sales of equipment is recognized when the products
are delivered, title has passed, the collection of the related receivable
is deemed probable by management and no obligations to the customer remain
outstanding.
Software License Sales:
Revenue related to software license sales is recorded at
the time of shipment provided that (i) no significant vendor
obligations remain outstanding at the time of sale; (ii) the
collection of the related receivable is deemed probable by
management; and (iii) vendor specific objective evidence
("V.S.O.E.") of fair value exists for all significant elements,
including post contract customer support ("PCS") in multiple
element arrangements.
Where the services relate to arrangements requiring significant
production, modification or customization of software, and the
service element does not meet the criteria for separate accounting,
the entire arrangement, including the software element, is
accounted for in conformity with either the percentage-of-completion
or completed contract accounting method. Percentage-of-completion
generally uses input measures, primarily labor costs, where such
measures indicate progress to date and provide a basis to estimate
completion.
Professional Services:
The Company provides consulting and other services on a per-diem billing
basis and recognizes such revenues as the services are performed.
Support and Service:
The Company accounts for revenue related to service contracts and post contract
customer support over the life of the arrangements, usually twelve months,
pursuant to the service and/or licensing agreement between the customers and
the Company.
Deferred Revenue
Deferred revenue represents the unearned portion of revenue related to PCS and
other service arrangements not yet completed and revenue related to multiple
element arrangements that could not be unbundled pursuant to Statement of
Position ("SOP") 97-2 "Software Revenue Recognition" or, in the case of
projects accounted for using percentage of completion or completed contract
accounting in accordance with SOP 81-1 "Accounting for Performance of
Construction - Type and Certain Production -Type Contracts".
F-19
Inventories
Inventories are valued at the lower of cost (first-in, first-out basis) or
market.
Equipment and Improvements
Equipment and improvements are stated at cost, less accumulated depreciation
and amortization. Depreciation is computed on the straight-line basis over the
estimated useful lives of individual assets or classes of assets. Improvements
to leased properties or fixtures are amortized over the shorter of their
estimated useful lives or the related lease terms.
The estimated useful lives of depreciable assets are as follows
Category Years
---------- ------
Office furniture and equipment 3-10
Computer equipment 3-7
Other 3-10
Software Development Costs and Other Intangible Assets
Pursuant to SFAS 86 "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed, " the Company is required to charge the costs of
creating a computer software product to research and development expense as
incurred until the technological feasibility of the product has been
established; thereafter, all related software development and production costs
are required to be capitalized.
Commencing upon the intital release of a product, capitalized software
costs and any costs of related purchased software are generally
required to be amortized over the estimated economic life of the product
or based on current and estimated future revenues. Thereafter, capitalized
software costs and costs of purchased software are reported at the
lower of amortized cost or estimated net realizable value. Due to the
inherent technological changes in the software development industry, estimated
net realizable values or economic lives may decline and, accordingly, the
amortization period may have to be accelerated or impaired balances may have
to be written off.
The Company had other intangible assets that were written off or that became
fully amortized prior to the end of fiscal 2002 which consisted primarily
of the excess of cost over the fair value of identifiable net assets of
businesses acquired ("goodwill"). Until September 30, 2001, goodwill was
amortized on a straight-line basis over estimated useful lives which ranged
from 5 to 25 years. Effective October 1, 2001, the Company was required to
adopt the provisions of SFAS 142, "Goodwill and Other Intangible Assets".
Pursuant to SFAS 142, goodwill and other intangible assets with indefinite
lives are no longer amortized and are subject to reduction only when their
carrying amounts exceed their estimated fair values based on impairment tests
that are required to be made annually or more frequently under certain
circumstances. Fair values are determined based on models that incorporate
estimates of future profitability and cash flows.
Impairment of long-lived assets
Under the provisions of SFAS 144, "Accounting for the Impairment of
Long-Lived Assets," which became effective for the Company as of October 31,
2002, and SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" which was effective prior to that
date, impairment losses on long-lived tangible and intangible assets that
do not have indefinite lives, such as equipment and software licenses, are
generally recognized when events or changes in circumstances, such as the
occurrence of significant adverse changes in the environment in which the
Company's business operates, indicate that the undiscounted cash flows
estimated to be generated by such assets are less than their carrying
value and, accordingly, all or a portion of such carrying value may not be
recoverable. Impairment losses are then measured by comparing the fair value
of assets to their carrying amounts. However, impairment losses for
capitalized software costs are determined pursuant to SFAS 86 and
impairment losses for goodwill and other intangible assets with indefinite
useful lives are now determined pursuant to SFAS 142 as described above.
F-20
As a result of its evaluations pursuant to SFAS 86, SFAS 121 and SFAS 142,
the Company wrote off approximately $19,000,000 and $78,000,000 of
intangible assets in 2002 and 2001, respectively (See Note 4).
Net Earnings (Loss) Per Share
The Company presents "basic" earnings (loss) per share and, if applicable,
"diluted" earnings per share pursuant to the provisions of SFAS 128,
"Earnings per Share". Basic earnings (loss) per shares is calculated by
dividing net income or loss (there are no dividend requirements on the
Company's outstanding preferred stock) by the weighted average number of
common shares outstanding during each period.
The calculation of diluted earnings per share is similar to that of basic
earnings per share, except that the denominator is increased to include
the number of additional common shares that would have been outstanding
if all potentially dilutive common shares, such as those issuable upon
the exercise of stock options and warrants and the conversion of convertible
securities, were issued during the period and appropriate adjustments were
made for the application of the treasury stock method and the elimination
of interest and other charges related to convertible securities.
As of September 30, 2003, there were 13,490,298 shares of common stock
potentially issuable upon the exercise of stock options (7,597,106 shares)
and the conversion of convertible securities (5,893,192 shares). However,
diluted per share amounts have not been presented in the accompanying
consolidated statements of operations because the Company had a net loss
in fiscal 2003, 2002 and 2001 and the assumed effects of the exercise of
all of the Company's outstanding stock options and warrants and the
conversion of all of its convertible securities would have been
anti-dilutive.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity period within three months to be cash equivalents.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined to include all changes in equity
except those resulting from investments by stockholders and distributions
to stockholders and is reported in the Statement of Changes in
Stockholders' Deficiency. Included in the Company's comprehensive income
(loss) are net income (loss), unrealized gains (losses) on investments
and foreign exchange translation adjustments.
Stock-Based Compensation
SFAS 123, "Accounting for Stock-Based Compensation" provides for the use of a
fair value based method of accounting for employee stock compensation. However
SFAS 123 also allows an entity to continue to measure compensation cost for
stock options granted to employees using the intrinsic value method of
accounting prescribed by APB 25, "Accounting for Stock Issued to Employees"
which requires charges to compensation expense based on the excess, if any,
of the fair value of the underlying stock at the date a stock option is
granted over the amount the employee must pay to acquire the stock. The
Company has elected to continue to account for employee stock options under
APB 25. Accordingly, it is required by SFAS 123 and SFAS 148, "Accounting
for Stock-Based Compensation -Transition and Disclosure" to make pro forma
disclosures of net income (loss) and earnings (loss) per share as if the
fair value based method of accounting under had been applied. Such pro forma
net loss was $5,152,358 ($0.13 per share); $44,850,980 ($1.26 per share) and
$125,682,128 ($4.04 per share) in 2003, 2002 and 2001, respectively (See
Note 13).
F-20
In accordance with the provisions of SFAS 123 and related interpretations of
the Emerging Issues Task Force (the "EITF") of the Financial Accounting
Standards Board (the "FASB"), all other issuances of common stock, stock
options or other equity instruments to employees and non employees as the
consideration for goods or services received by the Company are accounted
for based on the fair value of the equity instruments issued (unless the
fair value of the consideration received can be more reliably measured).
Generally, the fair value of any options, warrants or similar equity
instruments issued will be estimated based on the Black-Scholes
option-pricing model. Such fair value is measured as of an appropriate
date pursuant to the guidance in the consensus of the Emerging Issues Task
Force ("EITF") for EITF Issue No. 96-18 (generally, the earlier of the date
the other party becomes committed to provide goods or services or the date
performances by the other party is complete) and capitalized or expensed
as if the Company had paid cash for the goods or services.
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentration of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company maintains its cash and cash equivalents in bank
accounts that, at times, have balances that exceed the federally insured
limit of $100,000, although there was no such excess at September 30, 2003.
The Company reduces its exposure to credit risk by maintaining its cash
deposits with major financial institutions and monitoring their credit
ratings.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base, their
dispersion across different geographic areas, and generally short payment
terms. In addition, the Company closely monitors the extension of credit to its
customers while maintaining allowances for potential credit losses. On a
periodic basis, the Company evaluates its trade accounts receivable and
establishes an allowance for doubtful accounts, based on a history of past
write-offs and collections and current credit considerations.
Accordingly, management does not believe that the Company was exposed to
significant credit risk at September 30, 2003.
Fair Value of Financial Instruments
The Company's material financial instruments for which disclosure of estimated
fair value is required by certain accounting standards consisted of cash and
cash equivalents, accounts receivable, notes payable, accounts payable and net
liabilities associated with subsidiaries in liquidation. In the opinion of
management, cash and cash equivalents and accounts receivable were carried at
values that approximated their fair values because of their liquidity and/or
their short-term maturities. Due to the financial condition of the Company,
management believes that the Company's notes payable, accounts payable, and net
liabilities associated with companies in liquidation could be settled at less
than their carrying values. However, such fair values cannot be reasonably
estimated.
Foreign Currency Translation
Assets and liabilities of the Company's foreign affiliates are translated at
current exchange rates, while revenue and expenses are translated at average
rates prevailing during the respective period. Translation adjustments are
reported as a component of comprehensive income (loss).
F-21
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
approximately $26,000, $400,000 and $1,868,000 in fiscal 2003, 2002 and 2001,
respectively.
Income Taxes
The Company accounts for income taxes pursuant to the asset and liability
method which requires deferred income tax assets and liabilities to be
computed for temporary differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. The income tax provision or
credit is the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities.
New Accounting Pronouncements
In November 2002, the EITF reached a consensus on Issue No. 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables." This consensus
provides guidance on when and how to separate elements of an arrangement
that may involve the delivery or performance of multiple products, services
and rights to use assets into separate units of accounting. The guidance
in the consensus is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The Company adopted this
consensus in the quarter beginning July 1, 2003. The transition provision
allows either prospective application or a cumulative effect adjustment
upon adoption. The adoption of this consensus did not have a material
effect on the Company's results of operations.
In December 2002, the FASB issued SFAS 148 which amends SFAS 123 and to
provide alternative methods of transition for entities that elect to switch
to the fair value method of accounting for stock options in fiscal years
ending after December 15, 2002. The Company has not made such an election.
SFAS 148 also requires more prominent and detailed disclosures in annual and
interim financial statements for stock-based compensation regardless of which
method of accounting is selected. The Company has included the additional
disclosures required by SFAS 148 in Note 13 to the consolidated financial
statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." The Company does not hold any material derivative instruments
and does not conduct any significant hedging activities.
In May 2003, the FASB issued SFAS 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This
statement requires that an issuer classify financial instruments that are
within its scope as a liability. Many of those instruments were classified as
equity under previous guidance. Most of the guidance in SFAS 150 was effective
for all financial instruments entered into or modified after May 31, 2003, and
otherwise was effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of the provision of SFAS 150 did not have
any impact on the Company's consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an Interpretation of FASB
Statements Nos. 5, 57 and 107 and a Rescission of FASB interpretation No. 34."
FIN 45 among other things, clarifies that a guarantor is required to recognize,
at inception of a guarantee, a liability for the fair value of the obligation
undertaken. The adoption of the initial recognition and measurement provisions
of FIN 45 was required for guarantees issued or modified after December 31,
2002. Such adoption did not have a material impact on the Company's
consolidated financial statements.
F-22
4. INTANGIBLE ASSETS
As of September 30, 2003, the only intangible asset of the Company that had a
remaining carrying value was capitalized software costs. Information related
to changes in the Company's intangible assets during the years ended September
30, 2003, 2002 and 2001 is presented separately below for intangible assets
that are or were subject to amortization and intangible assets that were not
subject to amortization.
Intangible assets subject to amortization as of September 30, 2003 and related
changes during fiscal 2003 were as follows:
Estimated September 30, Amortization September 30,
Life 2002 Expense 2003
------------- ------------ --------------
Gross Cost 3 Years $347,269 $ - $347,269
Accumulated amortization 115,756 115,757 231,513
-------- ---------- ----------
Net book value $231,513 $ 115,757 $115,756
======== ========== ==========
Total aggregate amortization expense for 2004 is estimated to be $116,000. The Company is not anticipating
any amortization expense beyond 2004.
Intangible assets subject to amortization as of September 30, 2002 and related
changes during fiscal 2002 were as follows:
Additions/
Estimated September 30, Amortization September 30,
Life 2001 Expense Disposals 2002
--------- ----------- ------------ --------- ------------
Gross Cost
Covenant Not To Compete 2 yrs $ 300,000 - ($300,000)(1) $ -
Technology 5 yrs 2,800,000 - (2,800,000)(2) -
Capitalized Software 3 yrs 444,980 - (97,711)(3) 347,269
Software License 5 yrs 1,028,890 - (1,028,890)(3) -
------------- ---------- ------------ ----------
$ 4,573,870 - $(4,226,601) $ 347,269
============= ========== ============ ==========
Accumulated Amortization
Covenant Not To Compete $ 237,500 $ 62,500 $ (300,000)(1) -
Technology 466,664 349,998 (816,662)(2) -
Capitalized Software 24,426 132,040 (40,710)(3) $ 115,756
Software License 222,924 154,332 (377,256)(3) -
--------- ---------- ----------- ------------
$ 951,514 $698,870(4) $(1,534,628) $ 115,756
============= ========== ============ ============
Net Book Value
Covenant Not To Compete $ 62,500 $ (62,500) $ - -
Technology 2,333,336 (349,998) (1,983,338)(2) -
Capitalized Software 420,554 (132,040) (57,001)(3) $ 231,513
Software License 805,966 (154,332) (651,634)(3) -
--------- --------- ------------ -------
$ 3,622,356 ($ 698,870)(4) ($2,691,973) $ 231,513
=========== =========== ============= ========
(1) The covenant not to compete became fully amortized in February of 2002.
(2) The technology intangible asset was sold in April 2002.
(3) The software license and certain capitalized software were sold in June
2002.
(4) Includes $281,708 of impairment charges.
F-23
Intangible assets not subject to amortization as of September 30, 2002 and the related changes
during 2002 were are follows:
September 30, Additions/ September 30,
2001 Foreign Exchange Reductions 2002
-------------- ----------------- ------------- ---------------
Cost
Goodwill $ 27,487,656 $1,571,266(6) $(29,058,922)(5)(7)(8) -
Acquired Workforce 600,000 - (600,000)(5) -
------------- ------------- ------------ -------------
$ 28,087,656 $1,571,266 $(29,658,922) -
============= ============= ============
Accumulated Amortization
Goodwill $ 2,859,871 $ (2,859,871)(5)(8) -
Acquired Workforce 80,000 (80,000)(5) -
------------- ------------- -------------
$ 2,939,871 $ (2,939,871) -
============= ==============
Carrying Value
Goodwill $ 24,627,785 $1,571,266(6) $(26,199,051)(5)(7)(8) -
Acquired Workforce 520,000 - (520,000)(5) -
------------ ---------- ------------- -------------
$ 25,147,785 $1,571,266 $(26,719,051) $ -
============ ========== ============= =============
(5) Goodwill of approximately $3,000,000 and acquired workforce related
to the Transcape acquisition were written off in connection with its sale in
April 2002 (See Note 2).
(6) The additions to goodwill during the year ended September 30, 2002 relate
primarily to the acquisition of Euronet (See Note 2), as well as foreign
exchange translation adjustments on European goodwill.
(7) Goodwill reductions of approximately $4,200,000 relate to European assets
sold or written off in connection with subsidiaries placed into liquidation (See
Note 2).
(8) Goodwill of approximately $19,000,000 was written off as a result of the
Company's annual SFAS 142 impairment analysis performed at September 30,
2002.
The following table reflects the pro forma results of operations of the
Company, giving effect to the provisions of SFAS 142 for the year ended
September 30, 2002 (the year in which the remaining balances of the
Company's intangible assets not subject to amortization were written off)
and for the year ended September 30, 2001:
Year Ended
September 30, 2001
------------------------
Amount Per Share
------------ -----------
Net loss, as reported $(122,952,102) $(3.95)
Add back amortization 12,375,086 .40
Additional impairment
of goodwill charge (12,055,512) (.39)
-------------- --------
$(122,632,528) $(3.94)
============== ========
There were no pro forma adjustments necessary for the years ended
September 30, 2003 and 2002.
F-24
IMPAIRMENT CHARGES RELATED TO INTANGIBLE ASSETS
2002:
As discussed in Note 3, the Company adopted SFAS 142 on October 1, 2001. The
Company had just completed its assessment of the carrying values of its
intangible assets at September 30, 2001 (see below) and recorded a $78,400,000
write-down. Therefore there was no indication of further impairments on the
Company's goodwill intangible at the time of adoption. However the Company was
required to assess the value of goodwill under the provisions of SFAS 142 at
least annually.
During 2002, the sharp downturn in capital spending in the Company's major
markets continued to negatively impact our core businesses, resulting in
substantially lower than expected revenues, additional operating losses and a
concomitant shortfall in working capital. Significantly lower valuations for
companies within our industry were commonplace and our stock price declined
precipitously. At September 30, 2002, our market capitalization had dropped to
approximately $2,000,000, while our net book value (pre goodwill write off) was
a deficit of $7,000,000.
Based upon these indications, the belief that the decline in market conditions
within our industry was significant and permanent, and the consideration of all
other available evidence, the Company determined that an impairment of goodwill
existed at September 30, 2002 and we recorded a $19,000,000 write-down of the
remaining goodwill.
2001:
As of September 30, 2001, the Company performed an assessment of the carrying
values of its intangible assets recorded in connection with all of its
acquisitions. This assessment was initiated because of the significant negative
economic trends impacting our operations at that time, lower expected future
growth rates, a decline in our stock price, and significantly lower valuations
for companies within our industry. Additionally, at the time of our analysis,
the net book value of the Company's assets significantly exceeded its market
capitalization. Market capitalization is the product of (i) the number of
shares of common stock issued and outstanding and (ii) the closing market
price of the common stock. At September 30, 2001, with approximately 35,000,000
common shares issued and outstanding and a closing common stock price of $1.03
per share, our market capitalization approximated $36,000,000, as compared to
our book value of approximately $92,000,000 (prior to a write down). Based upon
these indications, the belief that the decline in market conditions within our
industry was significant and permanent, the consideration of all other available
evidence, and, in particular, the methodology described below, the Company
determined that the fair market value of these assets was less than their
carrying value.
The Company's intangible assets are associated with specific identifiable
acquisitions and their respective product lines. However, as of September 30,
2001 we expected future cash flows from these acquisitions and products to
be significantly less than our initial expectations. The fair value
assessment of intangible assets was determined by discounting the Company's
estimates of the expected future cash flows related to these assets when the
non discounted cash flows indicated that the long-lived assets would not be
recoverable. The rate used to discount our cash flow expectations was based on
our risk adjusted estimated cost of capital. After considering all of the
above, we recorded a $78,400,000 write-down of the intangible assets, which
was equal to the amount in excess of the estimated fair market value of the
respective assets as of September 30, 2001.
F-25
Also at September 30, 2001, the Company performed an assessment of the carrying
values of its capitalized software costs. This assessment was initiated in
light of new product developments and changes in marketing strategies that
included the discontinuation of certain products. The total of the capitalized
software costs written off in fiscal 2001 was approximately $621,000.
5. INVENTORIES
Inventories consist of the following:
September 30,
2003 2002
--------- -----------
Raw materials $537,337 $713,295
Work in process 0 66,414
Finished goods and parts 0 161,648
-------- ----------
Totals $537,337 $941,357
======== ==========
Total inventories were net of valuation allowances of $50,504 and $271,267
at September 30, 2003 and 2002, respectively.
At September 30, 2003 and 2002 inventories of the European operations in
liquidation amounted to approximately $609,000 and $515,000 at September
30, 2003 and 2002, respectively, and are presented on the balance sheet in
net liabilities associated with subsidiaries in liquidation.
6. EQUIPMENT AND IMPROVEMENTS
September 30,
2003 2002
--------- ----------
Office furniture and equipment $ 728,568 $ 728,568
Computer equipment 538,349 535,568
Other equipment 123,484 123,484
--------- ---------
Totals 1,390,401 1,387,620
Accumulated depreciation and amortization (1,320,152) (1,200,546)
----------- ----------
Net equipment and improvements $ 70,249 $ 187,074
=========== ==========
F-26
7. OTHER ASSETS
Other assets consist of the following:
September 30,
2003 2002
-------- --------
Security deposits $111,273 $114,775
Other - 52,190
-------- -------
Totals $111,273 $166,965
======== =======
8. BANK LINES OF CREDIT
The Company had several foreign lines of credit, which allowed it to borrow in
the applicable local currency. These lines of credit were concentrated in
Germany, Italy and the United Kingdom. The Company's lines of credit generally
were collateralized by the accounts receivable of the borrowing subsidiary.
None of these lines of credit were available as of September 30, 2003 and
2002 as the subsidiaries have either been sold or placed in liquidation
(See Note 2). Amounts outstanding at September 30, 2003 and 2002 are
classified in net liabilities associated with subsidiaries in liquidation.
9. SENIOR CREDIT FACILITY
In November 2001, the Company closed on a $2,000,000, 7% convertible note
payable with Laurus Master Fund, Ltd ("Laurus"), collateralized by certain
North American accounts receivable, with an original 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 and a maturity date of November 30,
2003. The borrowings under this facility were collateralized by all of
the North American accounts receivable of the Company and by all of the
tangible and intangible assets of the Company and its North American
subsidiaries and a subordinated lien on certain open assets. Interest accrued
on the outstanding balance at 1.67% per month and the Company paid a
management fee equal to 1.5% of all purchased invoices under the Accounts
Receivable Purchase Agreement. As of September 30, 2002, there was an
outstanding balance of $145,736 under the Laurus Senior Credit Facility.
In December 2002, the Company repaid the remaining balance and terminated
the agreement.
In connection with the original agreement, the Company also issued options
to purchase 180,000 of the Company's Common Stock at $1.284 per share to the
lender valued at $162,000 (See Note 13). Due to an imbedded beneficial
conversion feature, the Company incurred a non-cash interest charge of
approximately $1,200,000 in November 2001, which included the value of the
options. The cash transaction costs of $219,000 associated with the closing of
these transactions were included in other assets as deferred financing costs,
and were being amortized to interest expense over the original term of the
facility. However as a result of the agreement to terminate the facility,
the remaining balance of the deferred financing costs was charged to expense
in the fourth quarter of fiscal 2002.
F-27
10. NOTES PAYABLE TO UNRELATED PARTIES
Notes payable to unrelated parties consist of past due notes payable to the
following:
September 30,
2003 2002
--------- -----------
Renaissance Software, Inc. $1,227,500 $1,227,500
Divisions of Genicom International 375,000 375,000
Aryeh Trust 266,736
-------- ----------
$1,869,236 $1,602,500
========= ==========
The Company issued approximately $1,500,000 in promissory notes payable,
bearing interest at 8%, in connection with the purchase of Renaissance
Software, Inc. ("Renaissance") in fiscal 2000 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 (with a fair
market value of approximately $162,000) the notes became payable as follows:
$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, has not paid the remaining past due
balance as of January 15, 2004.
In connection with the purchase of the assets and business of three former
European service and maintenance divisions of Genicom International in October
2000, the Company paid approximately $2,000,000 in cash at closing and agreed
to make a deferred cash payment of $500,000 that was due on September 1, 2001.
The Company paid $125,000 in December 2001 and had not paid the remaining
$375,000 balance as of January 15, 2004. At September 30, 2003, 4,166,667
shares of Vertex common stock collateralized the unpaid balance.
In December 2002, Vertex, through XeQute PLC, closed a $500,000 Bridge Loan
arranged by CSS whereby it borrowed $250,000 from both Aryeh Trust, an
unrelated party, and Midmark, a related party. The terms of the Bridge Loan
are described in Note 11.
In connection with an acquisition in September 2001, the Company assumed
certain notes payable to banks and other entities. These notes payable had an
aggregate balance of $435,000 at September 30, 2001. Approximately $90,000
of these notes were settled through the issuance of 68,933 shares of Vertex
common stock and the balance was paid in cash in fiscal 2001.
On February 1, 2002, the Company closed on a $1,000,000 promissory
note with Pitney Bowes, which was payable on demand after February
15, 2002, with interest at 12%. This note was collateralized by first
or subordinated liens on all of the tangible and intangible property of the
Company. In April 2002, this note was cancelled in connection with the
Company's sale of source code, documentation and all related rights to
the TMS product line to Pitney Bowes (See Note 2).
F-28
11. RELATED PARTY TRANSACTIONS
NOTES AND CONVERTIBLE NOTES PAYABLE
Notes and convertible notes payable to unrelated parties consist of past due
or demand notes payable to Midmark as follows:
September 30,
2003 2002
---- ----
10% convertible notes $ 1,814,324 $ 1,814,324
Convertible loan note 480,000 -
Demand notes 3,701,900 2,588,900
Grid note 143,948 -
Bridge loan 250,000 -
----------- -------------
$ 6,390,172 $ 4,403,224
=========== =============
Midmark is a shareholder of the Company and certain
Midmark Managing Directors have served as directors
of the Company. In June 2001, November 2001 and again in
January 2002, the Company issued in the aggregate $5,500,000
of convertible notes payable to Midmark. These notes were
to automatically convert into shares of Vertex common stock
on the day that the Company obtained the requisite shareholder
approval for the issuance of shares upon conversion to Midmark.
In the event that shareholder approval was not obtained by
September 30, 2003, the principal amount plus any accrued interest
(at the prime rate) would become immediately due and payable. The
notes were to convert, subject to future events, into (i) Vertex
common stock at a future market price no higher than $1.31 per share
or (ii) 5,500 shares of Series "C" Preferred Stock, which were
convertible into 6,545,000 common shares at $0.84 per share. The
Company was required to register the underlying common shares.
In the event of a shareholder rejection, or prepayment prior to
shareholder approval, the interest rate on the notes would have
increased retroactively to 14%.
In March 2002, the Company agreed to amend the agreement related
to the $5,500,000 of convertible notes payable issued in June 2001.
The amendment removed both the requirement for shareholder approval
and the automatic conversion feature, and set the maturity date
for September 30, 2003. Concurrent with the amendment of these
notes, Midmark elected to convert approximately $782,000 of
principal and $218,000 of accrued interest into 997 shares of
Series "C" preferred stock. The remaining principal balance of the
convertible notes payable of $4,718,717 and accrued interest at prime
were convertible into Series "C" preferred shares at a conversion
price of $1,000 per share. The Series "C" preferred shares in turn were
convertible into shares of common stock at $0.84 per share.
In November 2001, the Company issued $3,000,000 of
10% convertible notes payable, with an original maturity date of
September 30, 2003, to Midmark that would have been convertible
into 3,000 shares of Vertex Series "C" Preferred Stock at the
option of Midmark on the day that the Company obtained the
requisite shareholder approval for the issuance of Series "C"
Preferred Stock upon conversion to Midmark. Midmark could have
converted the Series "C" Preferred Shares into 3,570,026 shares of
Vertex common stock at $0.84 per share. The Company was required to
register the underlying common shares. In the event of a
shareholder rejection, or prepayment prior to shareholder
approval, the interest rate on the notes would have increased
retroactively to 14%.
F-29
On August 9, 2002, the remaining principal balance of $4,718,717
of the convertible notes and $1,185,176 of the $3,000,000 of 10%
convertible notes were fully settled in connection with the sale
of the Company's French based advanced planning software business
to Midmark. The remaining $1,814,324 of past due 10% convertible
notes payable at September 30, 2003 and 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.
In December 2002, XeQute received an additional $480,000 from
Midmark under a Convertible Loan Note with terms similar to the 10%
convertible note payable described above. The Convertible Loan Note
would have automatically converted into Non-Voting Shares of XeQute
PLC at $0.672 per share when a minimum subscription of
$480,000 of a proposed but now aborted Private Placement had
been reached.
The conversion rates of all of the above Midmark notes are
subject to certain antidilution provisions.
The Company borrowed an additional $2,588,900 during the year ended
September 30, 2002, and an additional $1,113,000 (including $425,000
restricted for usage on XeQute obligations) during the year ended
September 30, 2003, from Midmark under nonconvertible notes that are
payable on demand, bear interest at 10% per annum and are secured
by the same collateral in which the Company previously granted a
security interest to Midmark under the agreement related to the
convertible notes payable described above.
During October, 2002, Vertex also executed a Grid Note which
provides for up to $1,000,000 of availability from Midmark,
This note will be funded by the proceeds, if any, from the
sale of any shares of Vertex common stock held by Midmark.
This note is payable on demand, carries interest at the rate of
10% per annum and is secured by the same collateral in which the
Company previously granted a security interest to Midmark under an
agreement related to the convertible notes payable described above.
In consideration of Midmark providing this facility, the Company
agreed to issue warrants to purchase a number of unregistered
shares equal to 120% of the number of tradeable shares sold by
Midmark to fund such note, at a purchase price per share equal to
80% of the price per share realized in the sale of shares to fund
the Grid Note. As of January 15, 2004, the Company had borrowed
$226,000 under this arrangement, of which $143,900 had been
borrowed as of December 31, 2003. As a result of the borrowings
through September 30, 2003, the Company was obligated to issue to
Midmark warrants to purchase 2,470,140 shares of common stock.
The fair value of the warrants issuable to Midmark was not material.
In December 2002, Vertex, through XeQute PLC, closed a $500,000 Bridge Loan
arranged by CSS whereby it borrowed $250,000 from both Midmark and Aryeh
Trust, an unrelated party (See Note 10). The Bridge Loans are to be repaid
with proceeds from a proposed private placement funding. The Bridge Loans
matured on June 9, 2003. The Company has agreed to continue paying interest
at the original rate of 3% per month, with the principal to be repaid when
funds become available. The Bridge Loans are secured by a first security
interest in all of the assets of XeQute. The lenders were each granted
warrants to purchase shares of XeQute PLC as part of the consideration for
this loan. The interest charge relating to the fair value of these warrants
was not material and was recognized over the original term of the Loan.
Upon the receipt of the minimum subscription amount for a private placement
by XeQute PLC, Midmark has agreed to relinquish its security interest in the
assets of XeQute, in exchange for warrants to purchase 250,000 common shares
of XeQute PLC which are presently owned by Vertex. Midmark has agreed that it
will vote any shares which it may acquire through the exercise of the warrant
in accordance with the directions of Vertex. However, it will retain its
security interest in the shares of XeQute PLC owned by Vertex and in all of
the assets of Vertex.
F-30
As of January 15, 2004, the Company was in discussions to renegotiate all of
the terms of the outstanding obligations to Midmark.
In July 2001, the Company issued a $359,375 convertible note payable to
PARTAS AG, which is owned by one of its Directors. This note was to
automatically convert into 250,000 shares of Vertex common stock on the
day that the Company obtained the requisite shareholder approval for the
issuance of shares to PARTAS AG. Since shareholder approval was not
obtained by February 22, 2002, the principal amount plus the accrued interest
(at prime rate) became immediately due and payable. On July 31, 2002 this
convertible note payable was fully settled with the sale of the German point
solutions business to PARTAS AG (See Note 2).
OTHER RELATED PARTY TRANSACTIONS
In March 2003, the Company's subsidiary XeQute entered into an
"Authorized Marketing Program Partnership Agreement" with Core eBusiness
Solutions LLC ("Core"), a company that employs certain former employees
of the Company. This agreement provided Core with the exclusive rights
to market and sell certain of XeQute's warehouse management software in
the United States and Canada.
However, in June 2003, XeQute and Core mutually agreed to rescind
this agreement and renegotiate a non-exclusive marketing agreement, which
had not been finalized as of January 15, 2004.
12. OTHER ACCRUED EXPENSES AND LIABILITIES
The components of other accrued expenses and liabilities consist of the
following:
September 30,
2003 2002
---------- ----------
Professional fees $1,088,055 $1,198,343
Remaining obligations on terminated leases 1,402,984 1,402,984
Sales and other taxes, excluding income
and payroll 57,379 55,005
Income taxes 270,863 228,171
Project costs - 75,608
Accrued interest 1,238,936 474,468
Other 812,542 499,146
---------- ----------
$4,870,759 $3,933,725
========== ==========
13. STOCKHOLDERS' DEFICIENCY
On August 31, 2000, the Company purchased all rights to the NetWeave software
product from Netweave Corporation. Consideration for the software was 80,386
shares of Vertex stock, which at the time of the transaction had an aggregate
fair market value of approximately $1,000,000, and the cancellation of
approximately $71,000 of debt. The total cost of this software was included in
other assets and was being amortized over the five year estimated life of the
product until the Netweave product line was sold in June 2002 (See Note 2).
Prior to the acquisition, the Company sold the Netweave software under a
licensing agreement with NetWeave Corporation. For the year ended September 30,
2001, the NetWeave software product generated revenues of approximately
$776,000.
F-31
During December 2000, the Company closed on the sale of 1,124,461 unregistered
common shares, together with 337,341 options to purchase common stock at $7.50,
through a private placement offering, resulting in net proceeds (after
deducting cash issuance costs of $562,000) of approximately $5,053,000. All of
the common shares issued in this private placement offering were registered
under the Securities Act of 1933 in February 2001.
In January 2001, the Company issued 398,000 shares of common stock, which had a
fair market value of $2,274,000, in settlement of $1,500,000 of notes payable
and other obligations to the sellers of the Portable Software Solutions ("PSS")
Group, which was purchased by Vertex in September 1999.
In April 2001, the Company closed on the sale of 3,062,293 unregistered common
shares (including 278,930 penalty shares for not registering the shares in 45
days), through a private placement offering, resulting in net proceeds (after
deducting cash issuance costs of $281,000) of approximately $3,720,000. All of
the common shares issued in this private placement offering carry registration
rights requiring the Company to register such shares.
In addition, the Company granted options to financial advisors to purchase an
aggregate of 289,678 common shares at prices ranging from $1.44 to $5.00 per
share, which were fully earned and exercisable on completion of the December
2000 and April 2001 private placement offerings discussed above. The fair value
of these options was approximately $922,000 and was determined in accordance
with SFAS 123 using the Black-Scholes formula. This amount was recorded as
additional paid-in capital, as well as a direct charge against equity as
a cost of the private placement offerings.
In 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 value of these options was approximately $162,000, and was
determined in accordance with the Black-Scholes option-pricing model. This
amount was recorded as additional paid-in capital, as well as interest expense
with the beneficial conversion feature (See Note 9).
In January 2002, the Company issued 102,663 shares with a fair market value of
$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 shares of common stock at $0.80 per share in connection with the
settlement of certain litigation. Such options had a fair value of
approximately $1,440,000. 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 placed into escrow, 1,500,000 were unregistered
shares. The settlement agreement also required the Company to register
these shares by April 30, 2002, or an additional monthly cash payment would be
required until the shares are registered. The Company has not registered
these shares and has not made additional monthly cash payments and, as part of
the settlement agreement, three consent judgments have been entered against
Vertex (See Note 16 - Settled Litigation).
In April 2002, the Company sold 34,404 shares to its Chief Executive Officer
at a price of $2.18 per share.
During the year ended September 30, 2002, the Company issued 1,676,168
unregistered shares of common stock to the selling shareholders of Euronet in
consideration for the purchase of Euronet (See Note 2). Subsequent to the
issuance of these shares, stock options for 1,676,168 shares of common stock
were granted and exercised in return for the previously issued shares, which
were then cancelled.
In July 2002, the Company issued 410,304 shares to its 401k Retirement Plan
(See Note 14) in satisfaction of its calendar 2001 matching contribution
obligation of approximately $380,000. In addition, to enable the Plan to fund
certain withdrawal requests, the Company purchased 47,657 shares from the Plan
at a cost of $22,071 and put them into treasury.
F-32
In May 2003 the Company issued 1,000,000 common shares,
which had a fair market value of approximately $40,000, to an
investment advisor to assist in the Company's fund raising efforts.
Effective July 31, 2003, the Company completed the sale of 10,000,000
shares of its common stock, which had a fair market value at that time of
approximately $400,000, to AMC. Payment for this purchase by AMC was in the
form of cash equivalent trade credits with a face value of $4,000,000, which
the Company can use or sell to others for the purchase of merchandise and
services. The face value is not necessarily indicative of the ultimate fair
value or settlement value of the trade credits. Any trade credits not
utilized by June 30, 2008 shall expire, unless the Company exercises an
option to extend the agreement for one year. The trade credits were valued
at the fair market value of the shares issued by the Company of $400,000 and
classified as unearned income, which is a separate component of stockholders'
deficiency in the accompanying consolidated balance sheet as of September 30,
2003. The unearned credits will be offset as the trade credits are used.
In addition, the Company agreed to loan AMC $150,000 of which
$10,000 was delivered at closing; $40,000 was delivered in
August 2003; $50,000 was to be delivered by September 10, 2003
and $50,000 was to be delivered by October 10, 2003. The
Company did not make the September or October payments. This
loan will be repaid exclusively from funds received from the
sale by AMC of its 10,000,000 shares of the Company's Common Stock.
The Company is required to register these shares within six months
of the closing.
Preferred Stock
Series "A"
In connection with the Transcape acquisition in February 2001 (See Note 2),
the Company issued 1,356,852 shares of Series "A" Preferred Stock. Each
outstanding share of Series "A" Preferred Stock is convertible at any time,
at the option of the holder, into common stock on a one for one basis.
All of the common shares issuable on conversion of the Series "A" Preferred
Stock must be registered by the Company.
Series "B"
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 at any time into 1,190 shares of common stock at a price
of $0.84 per share. The Company must register all of the common shares
issuable on conversion of the Series "B" Preferred Stock. 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 upon conversion of approximately
$997,000 of convertible notes payable and accrued interest (See Note 11).
Each outstanding share of Series "C" Preferred is convertible at any time
into 1,190 shares of common stock at a price of $0.84 per share. The Company
must register all of the common shares issuable on conversion of the
Series "C" Preferred Stock.
F-33
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.
Stock Option Plan
The Company has an Incentive Stock Option Plan (the "Plan") that provides for
the granting of options to employees, directors, and consultants to purchase
shares of the Company's common stock. During fiscal 2001, the Company's Board
of Directors approved an increase in the number of shares available for
issuance from 4,000,000 to 8,000,000. The Company is required to register the
additional 4,000,000 shares issuable pursuant to options exercised. The
Company intends to register the shares as soon as possible. Options granted
under the Plan generally vest over five years and expire after ten years.
The exercise price per share may not be less than the fair market value of
the stock on the date the option is granted. Options granted to persons owning
more than 10% of the voting shares of the Company may not have a term of more
than five years and may not be granted at less than 110% of fair market value.
The following table summarizes the common stock options granted, cancelled or
exercised under the Plan:
2003 2002 2001
------------------ ------------------- ------------------
Common Weighted Common Weighted Common Weighted
Stock Average Stock Average Stock Average
Options Exercise Options Exercise Options Exercise
Price Price Price
-------- -------- ------- -------- ------- --------
Outstanding at
beginning of year 3,269,000 $3.72 4,691,100 $4.81 3,257,600 $5.95
Granted - 2,141,168 .66 2,094,000 3.28
Exercised - (1,676,168) (.60) (238,600) (1.14)
Cancelled (1,441,000) 4.04 (1,887,100) (5.73) (421,900) (8.07)
----------- --------- ---------
Outstanding at
end of year 1,828,000 3.37 3,269,000 $3.72 4,691,100 $4.81
========= ========= =========
Exercisable at
end of year 1,359,500 3.14 1,645,200 $3.59 1,038,800 $4.57
========= ========= =========
Weighted average
fair value of
options granted
during the year $ - $ .58 $2.14
F-34
The following table summarizes information on stock options outstanding under
the Plan at September 30, 2003:
Options Outstanding Options Exercisable
--------------------------------- ----------------------
Options Weighted
Outstanding Weighted Average Options Weighted
at Average Remaining Exercisable Average
Range of Exercise September Exercise Contractual at September Exercise
Prices 30, 2003 Price Life 30, 2003 Price
- ------------------ --------- -------- ---------- ----------- -------
$.27 to $1.50 870,000 $ .96 7.36 660,000 $ .91
1.51 to 2.25 153,500 1.72 4.29 124,500 1.74
2.26 to 3.40 177,500 2.42 7.61 71,000 2.42
3.41 to 5.00 342,000 3.91 5.78 318,000 3.90
5.01 to 7.65 - - - - -
7.66 to 11.50 80,000 8.63 7.31 51,000 8.62
11.51 to 15.88 205,000 12.74 6.56 123,000 12.74
------- --------
1,828,000 3.37 1,347,500 3.14
========= =========
Other Stock Options
In addition to the stock options granted under the "Plan" discussed above, the
Company periodically grants stock options to non-employees in consideration for
services rendered, as well as for services to be rendered. Options issued for
services rendered were accounted for under SFAS 123 and EITF Issue 96-18, using
the Black-Scholes option pricing model to determine their fair value. In
fiscal 2001, options for 467,561 shares were granted to non-employees, which
resulted in an increase in additional paid-in capital of approximately
$665,000 and non-cash expenses of approximately $474,000 and non cash
acquisition costs of $191,000. In certain instances, options issued for
services to be rendered are contingent upon specific performance by the
grantee, and will be valued when performance is completed.
In connection with the purchase of Renaissance in fiscal 2000, the Company
assumed 535,644 outstanding stock options of Renaissance employees. The fair
value of the vested portion of these options amounted to $6,217,472 and was
included as part of the consideration paid for Renaissance. The unvested
portion of these options was $461,000 and was included as deferred compensation
in stockholders' equity and was amortized as compensation expense over the
remaining vesting period.
In connection with the purchase of ATS in December 2000, the Company assumed
153,600 outstanding stock options of ATS employees. The fair market value of
the vested portion of these options amounted to $620,000 and was included
as part of the consideration paid for ATS. The unvested portion of these
options was $44,000 and was included as deferred compensation in stockholders'
equity and was amortized as compensation expense over the remaining vesting
period.
During fiscal 2001, the Company granted non-qualified options to purchase
595,200 shares to various employees in connection with their employment by the
Company.
F-35
The following table summarizes common stock options granted, cancelled and
exercised in addition to those in the Plan:
2003 2002 2001
------------------- -------------------- -------------------
Weighted Weighted Weighted
Common Average Common Average Common Average
Stock Exercise Stock Exercise Stock Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- ---------
Outstanding at
beginning of year 6,130,673 $3.37 4,572,392 $4.31 3,390,236 $3.88
Granted - 1,680,000 .85 1,764,877 5.50
Exercised - - - (198,881) (3.22)
Cancelled (240,117) 1.32 (148,719) (3.63) (383,840) (6.55)
---------- ---------- ---------
Outstanding at
end of year 5,890,556 3.45 6,103,673 $3.37 4,572,392 $4.31
========== ========== ==========
Options exercisable 5,769,106 $3.33 5,937,673 $3.21 4,203,892 $4.10
========== ========== ==========
Pro-forma SFAS 123 Disclosure
As permitted by SFAS 123, the Company accounts for its stock option plans
using the intrinsic value method under APB 25 and, accordingly, does not
recognize compensation cost for options with exercise prices at or above
fair market value on the date of grant. If the Company had elected to
recognize compensation cost based on the fair value of the options granted
at the grant date using a fair value pursuant to SFAS 123, net loss and net
loss per share would have been increased to the pro forma amounts indicated
in the table below:
2003 2002 2001
------------- -------------- --------------
Net loss-as reported $(3,650,353) $(44,774,379) $(122,952,102)
Deduct total stock -
based employee
compensation expense
determined under a
fair value based
method for all
awards net of related
tax effects 1,502,005 76,601 2,730,026
------------- ------------ --------------
Net loss--pro-forma $(5,152,358) $(44,850,980) $(125,682,128)
============= ============ ==============
Loss per share--as reported $(0.09) $(1.26) $(3.95)
Loss per share--pro-forma (0.13) (1.26) (4.04)
The fair value of each option granted is estimated on the date of grant using
the Black Scholes option-pricing model with the following assumptions used in
fiscal 2002 and 2001 (no options were issued in fiscal 2003):
2002 2001
----------- ----------
Expected dividend yield 0.00% 0.00%
Expected stock price volatility 134.88 106.35
Risk-free interest rate 4.00 4.50
Expected life of options 3 years 3 years
The effects of applying SFAS 123 and the results obtained through the use of
the Black-Scholes option-pricing model used are not necessarily indicative of
future values.
F-36
Registration Requirements
The Company is obligated to register under the Securities Act of 1933 certain
common shares issued or issuable in connection with acquisition agreements,
private placements, the exercise of options and warrants and the conversion
of notes payable and preferred stock. At September 30, 2003, the Company was
obligated to but had been unable to register approximately 16,500,000 common
shares then outstanding. The Company intends to register the shares as soon
as possible.
Warrants Issued by XeQute PLC
As of December 31, 2003, XeQute PLC had issued warrants for the purchase of
shares of its common stock to Midmark, Aryeh Trust and CSS in connection with
certain financing agreements. The total of the fair value of the warrants at
the respective dates of issuance was not material. If all of the warrants had
been exercised as of September 30, 2003, the Company's ownership interest in
XeQute PLC would have decreased from 100% to approximately 90%.
14. RETIREMENT PLANS
The Company and certain of its subsidiaries maintain a 401(k) retirement plan,
which is a defined contribution plan covering substantially all employees in
the United States. During fiscal 2001, all subsidiary plans were merged into
the Company's plan. Eligible employees can contribute up to 17% of their
compensation not to exceed Internal Revenue Code limits. In fiscal 2001, the
Company amended its plan to require matching contributions of 50% of the
employees' contribution up to 3% of gross pay. The Company's contribution
will be funded after each calendar year end in either cash or in Vertex
stock, at the Company's option. Prior to fiscal 2001, the various plans
provided for matching contributions based on management's discretion. The
Company accrued contributions for the years ended September 30, 2003, 2002
and 2001 of approximately $80,000, $202,000 and $290,000, respectively. As
explained in Note 13, the Company funded its required matching contribution
for the calendar year ended December 31, 2001 through the issuance of
410,304 common shares.
15. INCOME TAXES
The components of the income tax provision included in the accompanying
consolidated statements of operations for the years ended September 30, 2003,
2002 and 2001 consist of the following:
2003 2002 2001
----------- ------------ ----------
Current:
Federal $ - $ - $ -
Foreign - 134,473 131,007
State - 370 19,469
----------- ---------- -----------
Total Current - 134,843 150,476
----------- ---------- -----------
Deferred:
Federal - - -
Foreign - - -
State - - -
---------- ---------- -----------
Total Deferred - - -
---------- ---------- -----------
Total income tax provision - $ 134,843 $150,476
========== ========== ===========
F-37
The net deferred tax assets in the accompanying consolidated balance sheets as
of September 30, 2003 and 2002 consist of temporary deficiencies related to the
following:
September 30,
-----------------------------
2003 2002
------------- -------------
Deferred tax assets:
Allowance for doubtful accounts $ 196,234 $ 406,315
Inventory 179,155 271,620
Net operating loss carryforwards 21,695,108 19,514,641
Capital loss carryforwards 1,850,296 1,850,296
Accrued expenses 1,055,638 1,791,904
------------ ------------
Total deferred tax assets 24,976,431 23,834,776
------------ ------------
Deferred tax liabilities:
Depreciation (18,633) (18,633)
Capitalized software costs (49,775) (91,413)
Deferred revenue - (23,664)
------------ ------------
Total deferred tax liabilities (68,408) (133,710)
------------ ------------
Valuation allowance (24,908,023) (23,701,066)
------------ ------------
Net deferred tax assets $ - $ -
============ ============
Deferred tax assets arise from the tax benefit of net operating and capital
loss carryforwards which are expected to be utilized to offset taxable
income and from temporary differences between the recognition in financial
statements and tax returns of certain inventory costs, bad debt
allowances on receivables, depreciation on fixed assets and amortization
of certain intangible assets.
A valuation allowance on the net deferred tax assets has been provided based
on the Company's assessment of its ability to realize such assets in the
future. For the years ended September 30, 2003, 2002 and 2001 the valuation
allowance for net deferred tax assets increased by $1,206,957, $10,359,502 and
$11,105,765, respectively, as a result of net changes in temporary differences.
The Company believes that as of September 30, 1999, an ownership change
under Section 382 of the Internal Revenue Code occurred. The effect of the
ownership change would be the imposition of annual limitations on the use
of the net operating loss carryforwards attributable to the periods before the
change.
At September 30, 2003, the net operating loss carryforwards available to offset
future taxable income consist of approximately $50,100,000 in Federal net
operating losses, which will expire in various amounts through 2023, and
state net operating losses of approximately $51,700,000 which will expire in
various amounts through 2010. These net operating losses also may be limited
due to ownership changes, the effect of which has not yet been determined by
the Company. Total net operating losses available in foreign jurisdictions
are approximately $3,800,000, none of which relate to periods prior to the
acquisition of certain subsidiaries by Vertex. When the Company utilizes
pre-acquisition net operating losses, the benefit will be reflected as a
reduction of goodwill related to the respective subsidiary. No pre-acquisition
net operating losses were utilized during fiscal 2003, 2002 and 2001. Based on
the fact that the remaining European subsidiaries are in liquidation, the
Company does not anticipate utilizing the European net operating losses.
The capital loss carryforward at September 30, 2003 of $4,600,000 has no
expiration date, but utilization is limited to the extent of capital gains
generated by the Company.
F-38
A reconciliation of income tax at the statutory rate to the Company's effective
rate is as follows:
2003 2002 2001
------- -------- -------
Statutory rate 34.0% 34.0 % 34.0 %
Effect of:
Valuation allowances (34.0) (23.2) (8.4)
Permanent differences - (10.8) (26.8)
State income taxes, net - (0.3) 1.1
------- -------- -------
Effective income tax rate (0%) (0.3%) (0.1%)
======= ======== ========
For 2003, 2002 and 2001, the primary permanent differences relate to the
impairment and amortization of goodwill and the in-process research and
development write-off which are not deductible for tax purposes.
There are no undistributed earnings of the Company's foreign subsidiaries at
September 30, 2003. In the event of a distribution of foreign earnings in the
form of dividends or otherwise, the Company would be subject to both U.S.
income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries.
16. COMMITMENTS AND CONTINGENT LIABILITIES
Leases
The Company and its subsidiaries lease office facilities and certain office
equipment under operating leases that expire at various dates through 2008.
Rent expense for the years ended September 30, 2003, 2002 and 2001 was
approximately $275,000, $2,300,000 and $2,645,000, 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
(including common area maintenance charges) under non-cancellable operating
leases as of September 30, 2003, that have initial or remaining terms in
excess of one year are as follows:
2004 $193,248
2005 176,000
2006 191,875
2007 171,375
2008 111,083
--------
$843,581
========
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. The sublease, which
requires rental payments of approximately $37,000 per year,
expires in May 2008. The Company was able to cancel the
remaining portion of the Paramus lease effective January 1, 2004.
F-39
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.
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.
F-40
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. However, there can be no
assurance that a non-cash settlement will be concluded.
In July 2002, the former owners obtained a court levy upon
several of the Company's bank accounts, placing a hold on
approximately $70,000 of the Company's funds. The Company,
together with its secured lenders, objected to the turnover
of these funds, however a turnover order was granted by the
court in October 2002.
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, which
automatically renew on an annual basis, unless otherwise terminated by either
party. Such agreements provide for minimum salary levels (approximately
$665,000 as of September 30, 2003) as well as for incentive bonuses. As of
September 30, 2003, two employees who have employment agreements, are on
furlough from the Company.
On September 27, 1999 the Company entered into a five-year investment banking
agreement with MidMark, which requires the Company to pay annual fees of
$250,000 per annum. Effective August 13, 2002, concurrent with the resignation
of the two Midmark directors from the Vertex Board of Directors, this
agreement was terminated.
Effective October 1, 1999, Edwardstone & Company ("Edwardstone") entered
into an agreement with the Company pursuant to which Edwardstone agreed to
provide the services of Messrs. Biermann and Toms to act as the Executive
Chairman and Chief Executive Officer of the Company. Such agreement
provided for aggregate annual compensation of $600,000 and entitled them
to participate in all employee benefit plans sponsored by Vertex in which
all other executive officers of Vertex participate. The agreement had an
initial five-year term. This agreement was terminated by mutual consent
effective September 30, 2002.
F-41
On April 24, 2001 the Company entered into an investment banking agreement with
Harris, Hoover and Lewis, LLC to provide financial advisory and consulting
services with respect to the acquisition of Plus Integration. This agreement
provided for a transaction fee of 2% of the value of the acquisition, together
with related options, with a minimum transaction fee of $500,000. This
agreement was terminated on November 25, 2002 in connection with the general
release of all claims in the litigation settlement discussed above.
On September 23, 2002, the Company entered into a business advisory
and consulting services agreement with Jeffrey Firestone to assist the
Company in raising funds. The Company paid an initial retainer of $5,000.
When Mr. Firestone raises $1,000,000 on behalf of Vertex, he will be entitled
to a monthly retainer of $5,000 for an additional five months. If
Mr. Firestone is successful within a three year period in raising
$1,000,000 of funds through a private equity offering for Vertex, he is
entitled to a cash fee equal to 10% of the proceeds and five year
warrants to purchase 10% of the shares and other equity instruments sold
through the private equity offering with an exercise price equal to the per
share price at which shares were sold in the private equity offering.
Mr. Firestone is also entitled to a 3% commission if he introduces Vertex
to an entity that in turn raises money for Vertex on a commission basis.
On September 30, 2002, Vertex entered into an agreement with Tarshish
Capital Markets ("TCM"), an Israel based corporation to provide financial
advisory and fund raising services. An initial non-refundable retainer fee
was accrued by the Company at September 30, 2002 and was paid in October 2002
in the form of 800,000 shares of Vertex registered common stock, which had
an aggregate fair market value of $56,000. The agreement provides for TCM
to use its best efforts to raise in excess of $5,000,000 in a private stock
offering. If TCM is successful within a three year period, it is entitled
to a cash fee equal to 10% of the amount invested in Vertex and five year
warrants to purchase 10% of the shares and other equity instruments sold
through the private placement with an exercise price equal to the per
share price at which shares are sold in the private stock offering.
17. SEGMENT INFORMATION AND INTERNATIONAL OPERATIONS
The Company operates in one business segment, which is the design,
development, marketing and support of supply chain management solutions.
Geographic Area Data
The following geographic information presents total revenues, gross profit
and identifiable assets for the years ended September 30, 2003, 2002 and
2001 (in thousands):
2003 2002 2001
------- ------- -------
Revenues
North America $4,226 $15,495 $30,378
Europe(1) - 20,640 28,709
------- ------- -------
$4,226 $36,135 $59,087
======= ======= =======
Gross Profit
North America $2,087 $ 6,813 $12,705
Europe(1) - 5,428 8,796
-------- ------- -------
$2,087 $12,241 $21,501
======== ======= =======
Identifiable assets
North America $17,171 $18,436 $60,174
Europe(1) - - 13,233
Eliminations (15,652) (15,636) (19,968)
--------- -------- ---------
$ 1,519 $ 2,800 $53,439
========= ======== =========
(1) The Company had operated throughout Europe, but principally in the United
Kingdom, Germany and Italy. All European operations had either been sold or placed
into liquidation (See Note 2) by September 30, 2002.
F-42
Products and Services
Sales to external customers by the three significant product and service line
groupings for the years ended September 30, 2003, 2002 and 2001 (in thousands)
are as follows:
2003 2002 2001
--------- --------- --------
Point Solutions $ 0 $15,022 $28,849
Enterprise Solutions 889 6,926 9,921
Service, Maintenance and Other 3,337 14,187 20,317
--------- --------- --------
$4,226 $36,135 $59,087
========= ========= ========
Major Customers
The Company had no customers that accounted for more than 10% of revenue for
the fiscal years ended September 30, 2003, 2002 and 2001.
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended September 30, 2003 and 2002:
Dec. 31 Mar. 31 June 30 Sept. 30
------------ ------------ ------------ ------------
2003
Revenues $1,282,136 $1,174,553 $1,007,793 $ 761,705
Gross profit 642,153 645,080 384,386 415,685
Net loss (960,090) (863,755) (840,071) (986,437)
Weighted average shares
outstanding 37,201,978 37,201,978 37,663,516 46,571,543
Net loss per share $ (0.03) $ (0.02) $ (0.02) $ (0.02)
2002
Revenues $ 13,036,644 $ 11,466,099 $ 9,959,263 $ 1,673,211
Gross profit 4,298,777 4,161,127 3,307,117 473,602
Net loss(A) (6,091,210) (10,276,235) (12,468,033) (15,938,901)
Weighted average shares
outstanding 34,844,686 35,086,676 35,754,249 36,542,025
Net loss per share $ (0.17) $ (0.29) $ (0.35) $ (0.44)
(A) In the fourth quarter of fiscal 2002, the Company recorded a change for the
write-off of impairment of intangibles of approximately $19,000,000 (See Note 4)
and a net gain on sale of non-core assets of approximately $6,000,000.
F-43
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
SCHEDULE II -VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
Balance at Additions Deductions Balance
Beginning Charged to From at End of
of Year Expense Reserves Year
---------- ---------- ---------- ----------
Year Ended September 30, 2003:
Deducted from accounts receivable
for doubtful accounts $ 929,030 $ 0 $ 472,672 $ 456,358
Deducted from inventory as
valuation allowance $ 271,267 $ 0 $ 220,763 $ 50,504
Year Ended September 30, 2002:
Deducted from accounts receivable
for doubtful accounts $ 380,568 $ 617,465 $ 69,003 $ 929,030
Deducted from inventory as
valuation allowance $ 10,000 $ 261,267 $ 0 $ 271,267
Year Ended September 30, 2001:
Deducted from accounts receivable
for doubtful accounts $ 180,630 $ 439,764 $ 239,826 $ 380,568
Deducted from inventory as
valuation allowance $ 10,000 $ 0 $ 0 $ 10,000
F-44