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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended July 31, 1996
Commission file number 0-15066
VERTEX INDUSTRIES, INC.
(Exact name of registrant as specified in its charter
New Jersey 22-2050350
(State of incorporation) (I.R.S. Employer Identification No.)
23 Carol Street, Clifton, New Jersey 07014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 777-3500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.005 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K.
As of October 22, 1996 the aggregate market value of the voting stock held by
non-affiliates of the registrant was $4,259,346 (based upon the closing price
of the common stock as reported on the NASDAQ system as of October 21, 1996).
As of October 25, 1996 the registrant had 5,096,107 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Exhibits to Registrant's Registration Statement on Form S-18 (No. 33-
897-NY) filed under the Securities Act of 1933, as amended and effective June
2, 1986, its Registration Statement on Form 8-A filed under the Securities
Act of 1934 as amended, its Annual Reports on Form 10-K filed on or about
October 31, 1986 through October 31, 1992 and Current Reports filed on Form
8-K dated January 14, 1987 and July 22, 1987, and Registration Statements on
Form S-8 filed on November 2, 1992, March 1, 1993, March 24, 1993, April 27,
1993, October 2, 1993, October 22, 1993, February 25, 1994 and September 23,
1994,S-4 filed on July 20, 1994, and 10KA filed on June 14, 1996.
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PART I
Item 1. Business
General
Vertex Industries, Inc. ("Vertex", "the Registrant" or "the
Company") produces and sells systems, having both software and hardware
components, that are utilized in the collection and processing of data, the
identification of goods, services and individuals, and the payment and
dispensing of products and services. The primary technologies related to
these systems and their devices involve computers as well as bar-code and
credit/debit card scanners, readers, decoders, and terminals. These
devices may be wired directly to the host computer or transmit the data via
Radio Frequency technology. Such devices generally read pre-set encoded
information and transmit it to a computer for processing and storage. The
software packages, developed and sold by Vertex, are utilized in some of
its devices and are sold separately. The Registrant also manufactures and
markets precision weighing equipment and weights.
The Registrant's systems and devices are used for the automatic
sorting and tracking of inventory, routing and instructions for personnel
as well as the collection of data in factories, warehouses, hospitals and
other commercial establishments on a real time basis. They also are
utilized in point of sales situations in order to verify an individual's
identity and to provide payment for products and services that he receives.
Other applications of Vertex's devices usually involve verifying an
individual's identity for security access and attendance in commercial,
academic and industrial settings and to facilitate the operation of
automated factory equipment.
The Registrant's business focus is currently undergoing a
transformation from primarily producing hardware devices to developing
sophisticated, easy-to-use software products designed for data collection
and computer networking. The Registrant has developed and made sales of
several new products. In the software area, Vertex has developed and
enhanced its BridgeNet Data Collection Management System ("BridgeNet") and
is developing other related software. BridgeNet performs real time data
collection and transaction processing involving simple to complex systems
and interfaces with a wide variety of dissimilar equipment. An application
program development package for unskilled programmers is part of the
system. BridgeNet can be used with other manufacturer's hardware as well
as with Vertex's own devices. The Registrant continues to increase the
different types of computers on which BridgeNet can reside.
The Registrant is also producing and selling a semi-automated
coin collection system for pay public telephones that utilizes BridgeNet as
its operating software. This system enables automatic communication and
processing of data concerning collectors' routes, scheduling and individual
telephones. It usually makes the collection process more efficient and
productive and reduces manual record keeping and administration. To date,
the Registrant has sold
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coin-collection systems to Bell Atlantic for the states of New Jersey,
Pennsylvania, Delaware, Maryland and West Virginia and to Ameritech for the
states of Ohio, Illinois, Michigan, Wisconsin and Indiana.
Vertex is producing and marketing a student attendance and
access control system for urban public schools. This system also employs
BridgeNet and provides automatic identification of students and minimizes
the entry of unauthorized persons in public schools for safety and other
concerns. To date, the Registrant has sold numerous attendance/access
control systems to the New York City and Chicago Public School Systems.
The Registrant's offices are located at 23 Carol Street,
Clifton, New Jersey 07014-0996 and its telephone number is (201) 777-3500.
The Registrant was organized as a corporation in the State of New Jersey
in November 1974.
History
When originally organized, the Registrant was designed to be a
holding company which would acquire, own and manage a series of related
businesses. In December 1975, Vertex acquired the shares of the Torsion
Balance Company, a manufacturer of precision weighing instruments and
weights and later merged that company into it. In July 1976, the
Registrant acquired the assets relating to a magnetic card reader line from
the Cramer Timer Division of Conrac Corporation. This acquisition was the
beginning of its card reader and writer product line. In April 1983 the
Registrant purchased the assets of Identicon Corp. ("Identicon")
pertaining to its existing bar code scanners and terminals. In June 1983,
Vertex also acquired the existing magnetic stripe, optical and static card
product line of Amp Incorporated.
On or about July 10, 1987, Vertex purchased approximately 56.9%
of all the issued and outstanding shares of Common Stock of Computer
Transceiver Systems, Inc. ("CTSI") in consideration of a certain amount of
cash, its guarantee of a four-year bank loan in the principal amount of
approximately $490,000 made to CTSI, and other arrangements. The guarantee
of the remaining bank loan was later fully settled by the payment of
$100,000 in cash and the issuance of 100,000 shares of Vertex's Common
Stock on December 16, 1991 to such bank.
CTSI had been engaged in the business of developing, manufacturing and
marketing computer terminals and label generating systems for use in the bar
code industry. The Registrant assisted CTSI with the promotion and marketing
of its Execuport 2400 intelligent printing system. This was accomplished
both in conjunction with the sale of related Vertex products as well as on
a stand-alone basis. CTSI common stock is publicly held, and it has been a
reporting company under the Securities Exchange Act of 1934, as amended. CTSI
moved its total operations into Vertex's facility at 23 Carol Street, Clifton,
New Jersey and became a subtenant of Vertex.
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The Registrant has purchased the assets of CTSI and assumed its liabilities,
under the terms of an asset purchase agreement between the two companies.
This transaction was approved by the requisite number of CTSI shareholders
at a special shareholders meeting held on August 29, 1994. The transaction
was closed on August 31, 1994. The agreement provided for (a) the purchase
by Vertex of the primary assets of CTSI, including inter alia, patent rights,
machinery, equipment, inventories, receivables, cash, bank deposits, books,
records and goodwill and, (b) the assumption of all its liabilities. The
base purchase price of $1,600,000 which, after adjustment for CTSI's cash,
receivables and payables became $1,699,580, was offset against CTSI's
indebtedness of $1,257,001 owed to Vertex, based upon an effective date of
June 30, 1994. The difference of $442,579 was paid by the issuance of
Vertex Common Stock. The value of the Vertex Common Stock as of June 30, 1994
(as calculated pursuant to the Asset Purchase Agreement) was $1.875 per share.
Therefore, the Registrant issued 236,042 shares of its Common Stock to CTSI
which were registered by an S-4 Registration Statement filed with the
Securities and Exchange Commission effective July 28, 1994 (Registration
No. 33-76378). The shares were distributed in an exchange offer to minority
shareholders of CTSI with an expiration date of October 14, 1994 which was
subsequently extended to November 14, 1994.
On June 17, 1996 two wholly-owned inactive subsidiaries, Versci, Inc.
and Sentry One were merged into the Registrant.
Industry Background
Automated Identification involves the utilization of specialized
machines that automatically read predetermined and generally encoded
information contained on various media and transmit it to computers for
processing and storage. The Automated Identification industry encompasses
a number of technologies. These include, among others, magnetic stripe,
laser and smart cards, bar code, optical character and pattern recognition,
and radio frequency scanning. Vertex's operations cover only a portion of
these technologies and relate to pattern recognition, magnetic stripe cards
and bar code technologies.
As currently applied, the Registrant's technologies function in
several ways. They serve to identify an individual for security access,
financial transactions and time and attendance employment records. In
addition, they can provide identification, sorting and tracking of
inventory and products in a variety of industrial and commercial settings.
All of these functions are performed automatically by special equipment,
devices and software. Each of such technologies usually performs some, but
not all, of these functions.
Bar codes are configurations of parallel lines or bars and
spaces of differing widths, printed or etched on a package, label or tag.
Specific sequences and groupings of the lines or bars and spaces represent
in coded form a series of numbers, letters or graphic symbols. These codes
are placed on forms, inventory, finished products, tools and plastic cards
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to identify the specific item or individual concerned. With regard to
products and inventory, these codes contain information related to their
identification number, routing, origin and composition. Affixed to goods,
tools or cards carried by individuals, bar codes are an organization tool
that permit an end user, on an automatic and real-time basis, to identify
them, obtain specific information about them, and to apply that data in
their processing or employment as well as for record keeping purposes.
The primary equipment utilized in bar code technology are
printing devices, scanners, terminals and decoders. The Registrant markets
scanners, terminals, printers and decoders. The scanner is a device that
machine-reads the bar code. Printers generally print bar codes. On the
other hand, terminals and decoders interpret the data received from the
scanner, convert it into standard computer language, store and then
transmit it to a computer.
Bar coding has several significant advantages as a data
collection and entry system over visual observation and manual recordation.
Machine readability generally affords rapid and accurate readings even in
harsh industrial environments. Moreover, data is transmitted quickly and
directly to the user's computer for storage or implementation, thus
enhancing management's control.
The Registrant does not manufacture or sell any devices that
interpret or encode laser cards or smart cards. Vertex has manufactured
and marketed card readers and encoders (writers) pertaining only to
magnetic stripe, which are based on older technology, but these product
lines are not currently being emphasized.
Products
Bar Code Products
Vertex manufactures, sells and distributes a line of bar code
scanners, printers and data collection terminals with decoding
capabilities. Offered in many different models, these devices are used
mainly in factories, warehouses and hospitals.
The Registrant's bar code scanners fall into both contact and
non-contact categories. In the contact variety, the Registrant has a
series of hand-held scanning devices or visible light pens with digital or
analog output. Such pens or wands, in order to read the bar code, must be
physically wiped across a bar code label or tag. These devices are
generally used on flat, non-moving surfaces. Vertex offers a bar code
label generating system. It is a microprocessor-based stand-alone device
that furnishes a variety of standard format labels.
The Registrant also has several scanners of the non-contact
variety that need not physically touch the bar code to register it. These
scanners are manufactured by a third party. These units contain a scanner,
decoder and communications capabilities.
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Vertex manufactures and sells several different types of
terminals, with decoding capability and specialized software. Terminals
analyze and decode the scanners' information, convert it to a standard
computer language and transmit it to a computer. The
Registrant sells terminals containing decoders which can read all of the
popular bar code styles.
The Registrant's terminals range from a simple printed circuit
board for insertion in the end-users' computer-related systems to single
and multi-function data collection systems. The multi-function terminals
come with several features, such as an alphanumeric keyboard for manual
data entry, a 32-character display, audible annunciators and standard
computer interface. As an alternative to the traditional time clock,
Vertex also offers a time and attendance terminal for employee
identification, time verification, work assignment data or messages.
The Registrant's Data Collection BridgeNet Transaction Processor
has the capability of accepting simultaneous input from up to 32 terminals
and allows such terminals to communicate with the host computer bi-
directionally through a single host port.
Software Products
The Registrant's main software product, BridgeNet, performs data
collection and transactional processing functions. It is a complete Data
Collection Management System for real time data collection providing
connectivity of dissimilar equipment and compatibility with most major
networks. It includes a development system which allows the creation of
application programs by persons not highly skilled as programmers.
While originally conceived and implemented for personal
computers running on DOS operating system, BridgeNet has been expanded to
run on UNIX-based machines such as Sun Sparc, Hewlett Packard's HP/9000,
AT&T 3B2, DEC VAX and IBM RS 6000 platforms plus the IBM AS/400. BridgeNet
also runs on most of the popular portable data terminals on the market and
has been recently been implemented on Windows 95 and Windows NT.
BridgeNet also has communication network support that allows
different types and brands of computers to communicate with one another and
to transfer information between them. It connects different software
operating systems as well as different hardware platforms that were
otherwise incompatible. While other networking systems allow simple
communication links between different computer platforms, unlike BridgeNet,
they generally do not permit the development and writing of application
software on one operating system for use on other operating systems. Once a
BridgeNet application program has been written, it can run on any computer
hardware platform on which BridgeNet is resident.
Due to its open architecture, corresponding flexibility and
scope, BridgeNet enlarges the number and type of individuals who can write
and implement applications software for specific data collection and
processing functions. This expansion of use gives the
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user quicker and less expensive means of resolving certain data collection
and processing tasks along with ease of software maintenance in the future.
Recent releases of BridgeNet have included direct database
access and support for radio frequency ("RF") terminals. Remote terminals
(direct connection or radio frequency) running on a Vertex data collection
system can have direct access to host databases such as Informix, Access,
Sybase and others. Powerful new RF terminals are being manufactured by
such companies as Symbol Technologies, Intermec, Norand and Telxon. These
terminals allow applications to be developed where an operator can be in
direct contact with a host computer database from a remote location in a
factory or warehouse while he is picking and packing an order, checking
inventory status or a similar function. In these instances, BridgeNet would
be on both the RF terminal and the host. It would handle the application
on the RF portable, communications with the host and the access to the host
database.
BridgeNet serves as the necessary software component in several
of Vertex's hardware systems, including its school attendance/access
control and its public telephone, coin-collection systems.
On September 24, 1993, Vertex entered into two contracts with
Kearney Systems, Inc. ("KSI"), a consulting agreement and a mutual royalty
agreement. Under this one (1) year consulting arrangement, KSI converted
six of its Barware products to BridgeNet net data collection software under
the UNIX operating system. The converted software packages featured
networking capabilities to allow them to communicate with one another at
high speeds. In addition, KSI rendered advice and assistance to Vertex in
regard to this conversion process. For such service, KSI was paid the
equivalent value of $232,250 in shares of the Registrant Common Stock at
the closing bid price of such stock on the day immediately preceding the
issuance. Vertex has also registered at its cost such shares with the
Securities and Exchange Commission on Form S-8.
Under the four (4) year royalty agreement, KSI is also entitled
to a royalty of 10% of all sales of its six BridgeNet Application Programs
developed under the consulting agreement from Vertex. On the other hand,
KSI will pay Vertex a royalty equal to 15% of all sales of its Barware
Database programs and Source Code generated under the consulting
arrangement until Vertex has earned and has been paid the sum of $230,000
and thereafter such royalty will be at the rate of 10% of such sales. This
mutual royalty arrangement is subject to certain other terms and
conditions. As of July 31, 1996 no product sales have been generated under
this agreement.
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Student Identification, Attendance/Access Control System
Vertex has designed a special student identification, attendance
and access control system (the "School System") for urban public schools.
The major purpose of such system is to automate identification and record
attendance of students on site and, in so doing, restrict the access of
unauthorized persons to school facilities. The system is designed to
promote a safer environment for students and teachers.
To date, Vertex has sold and installed one School System in each
of 54 New York City public high schools. It has shipped another 6 School
Systems to New York City public high schools, which have not been
completely installed. In addition, it has sold and installed 6 School
Systems to Chicago, Illinois, and is currently attempting to interest
numerous other cities in purchasing this system.
Utilizing bar code technology, the School System is a complex
network of computers, printers, uninterrupted power supply units, terminals
and other ancillary devices which communicate through the building's
standard AC (Alternating Current) power lines.
Telephone Coin Collection System
In conjunction with several other companies, Vertex has
developed a system to semi-automate the collection of coins from public pay
telephones (the "Telephone System"). The Telephone System is designed to
reduce manual record keeping, improve efficiency of coin collections and
telephone repairs, and enhance data collection and processing. The
Telephone System operates with computer hardware and software components
and bar code technology.
To date, the Registrant has sold the Telephone Systems to Bell
Atlantic for installation in the states of New Jersey, Pennsylvania,
Delaware, Maryland, West Virginia and Virginia and to Ameritech for use in
the states of Ohio, Michigan, Illinois, Wisconsin and Indiana. Vertex is
discussing the sale of its Telephone System to other telephone companies.
Card Products
Vertex has manufactured and sold many different models of card
readers, encoders (writers) and decoders. Recently, the Registrant has
deemphasized sales of new card devices.
The nature of the Registrant's card product business is changing
from one of manufacturing and marketing new devices to one of support of
the existing customer base. There have been no significant expenditures in
either R&D or marketing for the card products in the fiscal year ended July
31,1996.
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Precision Weighing Equipment and Weights
The Registrant manufactures and/or sells mechanical precision
weighing equipment, weight sets and accessories under the trade name of
"Torbal". Operating on the torsion principle, these devices are utilized
to weigh small amounts of materials from a minute fraction of a gram to
4,500 grams. The items weighed by this equipment include drugs, medicine,
powders, grains, dairy products, inks, gemstones, ball bearings and other
materials.
The Registrant produces and sells mainly pharmaceutical balances
and weight sets. Vertex enjoys a good reputation in the pharmacy market.
There have been no significant R&D or marketing expenditures for these
products for the fiscal year ending July 31, 1996.
Label Generating Systems
The Model 2400 Label Generating System("2400") was acquired as
part of the asset purchase agreement with Computer Transceiver Systems
Inc.("CTSI") in August 1994. Prior to the sale of its assets to Vertex,
CTSI supplied and supported an intelligent bar code system, the Execuport
2400, intended for various applications within the automatic identification
market. Vertex has been manufacturing the 2400 for CTSI recently.
The 2400 is a computerized, thermal bar code printing system
intended for inventory and document control and for use in connection with
warehousing, distribution and processing in a variety of markets. The
built-in microprocessors and print head used in the 2400 allow the unit to
produce high density, high resolution bar codes at relatively low cost. It
utilizes fan-fold thermal label stock up to 8 1/2 inches wide, is capable
of printing individual labels up to 8 1/2 inches in width, and can generate
thousands of labels an hour.
The 2400's bar code character sets are resident within the
printer, and label formats are generated by a replaceable, programmable
cartridge, permitting the unit to operate independently of, to be
controlled by or interfaced with each customer's computer system. In its
stand alone mode, the 2400 prompts the customer with instructions given on
a built in display screen, using simple data entry through the 2400's own
keyboard. When the 2400 is interfaced with a computer system, the host
computer need only transmit variable data, while the fixed formats and the
character sets required for making customized bar code labels are generated
by the 2400 itself.
During Fiscal Year 1996, the registrant developed the capability of
printing thermal bar code labels in a similar manner to the Model 2400
Label Generating Systems except that the label stock used is 4 inches wide
instead of 8 1/2 inches. Unlike, the Model 2400, the Registrant does not
actually manufacture the printer mechanism, but instead has developed and
manufactures a computerized printed circuit board. This board can be
mounted within any one of several different manufacturers' printers and
provide that printer with the capability to connect to different computer
systems and print labels based upon formats which are stored within a
replaceable module mounted on the printed circuit board. As with the Model
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2400, the host computer need only transmit the variable data, while the
label formats and character sets are stored within the printed circuit
board itself.
Product Prices and Revenues
The prices of the Registrant's products range as follows: (a)
Bar code products from $110 to $5,000; (b) Card products from $40 to
$5,000; (c) weighing equipment and weights from $5 to $1,200; (d) Label
Generating Systems from $100 to $5600 and (e) Software Products pricing
varies with the individual application.
The following table sets forth the contribution to revenues of
each of the Registrant's principal product lines during the periods
indicated:
Year Ended July 31,
Product Lines(1) 1996 1995 1994(2)
Bar Code Equipment(3) $ 756,039 $1,025,762 $ 984,654
Card Devices $ 64,674 $ 105,737 $ 141,678
Weighing Equipment
and weights $1,100,382 $1,291,377 $1,667,211
Label Generating
Systems (2) $1,015,295 $ 724,533 --
Software $ 848,090 $ -- --
(1) All of the above product lines include revenues from repair
services.
(2) Excludes revenues from CTSI for fiscal 1994 in the amount of
$1,220,076.
(3) Includes revenue from software for 1995 and 1994.
Manufacturing and Supply
Vertex's manufacturing operation runs on a batch basis in which
a group of products move from station to station for processing and testing
at irregular intervals. Manufacturing is not accomplished on a continuous
flow or conventional production line basis. Generally, the Registrant
manufactures its products pursuant to specific customer orders. It usually
purchases a major portion of its related inventory upon receiving such
orders.
Vertex designs and assembles its own printed circuit boards and
other devices and builds its wiring assemblies and enclosures. It then
assembles the components into finished products. The Registrant also
designs and develops its own software. Vertex inspects and tests its
products prior to and/or during assembly and then has each finished product
undergo a complete test prior to shipment.
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The Registrant acquires raw materials used in its products from
third-party sources. Most supplies, materials and parts required for the
manufacture of its products, including those custom-made for it, are
available from many sources. In the past, the Registrant has been able to
adjust its stocking and procurement procedures to mitigate the effects of
slow delivery of parts. However, it is not certain that shortage of parts
may not have an adverse impact on its operations in the future.
Maintenance and Service
Depending on the product concerned, the Registrant offers a
ninety day to one-year warranty which includes parts and labor regarding
hardware. To date, warranty costs have been immaterial. All other repair
work is performed at standard quoted rates, which are adjusted from time to
time, and which is generally accomplished in the Registrant's factory.
Products sold by the Registrant but manufactured by others are covered by
the manufacturers' standard warranty and service agreements.
Marketing and Sales
The Registrant sells its bar code products through a direct
sales force and through distributors and value added resellers in the
United States. In recent months, the Company has placed more emphasis on
direct sales of systems utilizing its software to end users. The Company
has entered into a Master Distribution Agreement with NetWeave Europe, Ltd.
("NWE") for distribution of its BridgeNet product in Europe. NWE is
negotiating with sub-distributors for the sale of BridgeNet throughout
Europe. Under the terms of this agreement, NWE purchases the Company's
software products at a 25% discount from the US list price and resells to
the European distributors. This agreement was signed in July, 1996 and to
date there have been no sub-distributor contracts signed or have there been
any sales in Europe of BridgeNet products.
The Model 2400 Label Generating System has been marketed under a
marketing and distribution arrangement with MedPlus, Inc., a company in
Cincinnati, Ohio, which has acted as CTSI's primary distributor in recent
years. Under the arrangement, CTSI granted MedPlus exclusive long term
distribution rights for the 2400 in the healthcare market(except for sales
to certain customers), subject to agreed sales quotas and the fulfilling of
certain payment and other conditions by MedPlus. The arrangement between
CTSI(acquired by Vertex) and MedPlus is set forth in a letter agreement
which contemplated the preparation of a more formal distribution agreement.
While no such formal distribution agreement was ever prepared, CTSI has
been selling a substantial portion of its Model 2400 units to MedPlus, Inc.
over the last three years, and MedPlus extended the term of the letter
agreement for an additional five years in August 1993. Since the asset
purchase of CTSI by the Registrant the Model 2400 has been produced and
sold by Vertex. In November, 1995, the Company informed MedPlus that the
exclusive rights to sale of the Model 2400 Label Generating System in the
healthcare market had been rescinded due to the fact that the minimum sales
quotas specified in the letter agreement were not being net. Medplus
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continues to purchase the model 2400. Subsequent to that notice, the
Company has accepted orders from TimeMed Inc., for the Model 2400 Label
Generating Systems which will be sold in the healthcare market.
The Model 2400 has been sold directly to end users and through
value added reseller channels. However, an aggregate of 93.5% of Label
Generating System sales during the Fiscal Year ending July 31, 1996 were
made to customers in the medical and healthcare fields, and 28.1% and 85.7%
of all sales of the Model 2400 in fiscal 1996 and 1995, respectively, were
made to MedPlus. Additionally, 50% of all sales of the Model 2400 in
fiscal 1996 were made to TimeMed.
From December 1993 through August 1994, the Registrant entered
into non-exclusive written distribution, licensing and marketing
arrangements involving its BridgeNet Software products. Currently, these
arrangements are with Symbol Express (a division of Symbol Technologies),
Arrow Electronics, Inc., and Norand Corporation. These contracts typically
run for either one year or are indefinite as to term, may be cancelled by
either party under certain conditions and offer discounts ranging from 15%
to 55%. Under these arrangements, Vertex generally offers training,
marketing support and limited warranties. To date, minimal sales have been
realized from these contracts and Arrow Electronics has sent the Company a
formal cancellation notice to terminate their contract.
On June 7, 1993, Vertex retained Tri-State Telecomputers, Inc.,
("TST") as a sales representative pursuant to a written commission
agreement. Under this arrangement, TST is obligated to introduce Vertex's
products to the security industry and potential customers in such industry.
For such services, TST will earn a commission of 5% on all sales of Vertex
products made to certain security industry companies. The term of this
agreement runs for seven (7) years unless there is an uncured material
breach or both parties agree in writing to so terminate. To date, no sales
have been realized from this agreement.
Sales of Vertex's weighing equipment and weights are made
through approximately 60 laboratory supply distributors and wholesale drug
suppliers in the United States and Canada. The Registrant has no written
contract with any of these distributors or suppliers of this line and thus
such distribution arrangements are non-exclusive and cancelable at will.
The Registrant usually grants discounts ranging from 10% to 35%, depending
on the product and quantity sold to such distributors and suppliers.
The Registrant promotes the sales of some or all of its products
through national advertising, direct mailings, distributors' catalogs,
trade shows and product literature. Its marketing effort has been designed
to support and promote the sales of its bar code products, software and
systems.
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Customers
The Registrant sells its products, directly or indirectly, to
numerous customers, ranging in size from small companies to Fortune 100
corporations. Its customers are end users, original equipment
manufacturers as well as distributors. Many of its customers are repeat
purchasers. Sales to two customers, represented approximately 26% of Vertex's
total fiscal 1996 sales. Vertex's businessis generally not seasonal.
Backlog
As of July 31, 1996 the Registrant's backlog, was approximately
$646,818 as compared with a backlog of approximately $623,279 as of July
31, 1995. The Registrant currently anticipates manufacturing and
delivering substantially all of such total backlog during the current
fiscal year, which ends July 31, 1997. Backlog figures generally include
those orders that are in writing and executed by the customer and are for
both products and services. On most orders, payment is due within 30 days
of shipment.
Research and Development
The Registrant intends to continue its research and development
activities mainly in the area of its BridgeNet software product and
considers these efforts vital to its future business and prospect. It
anticipates the continuation and expansion of such efforts primarily
directed toward the improvement of existing products and the development of
new products and applications in the Automatic Identification area. For
the fiscal years ended July 31, 1996 and 1995 the Registrant spent $377,318
and $349,775 respectively, for research and development.
Patents
The Registrant holds approximately 7 active patents all of which
relate to its card reader product line in the United States and abroad.
Approximately 3 products of Vertex are covered by these patents. Vertex is
currently deemphasizing this product line. The Registrant believes,
however, that it is possible that a number its competitors and potential
competitors could develop, produce and market products similar to the
Registrant's if they so chose.
Employees
As of July 31, 1996 the Registrant had 31 full time employees,
including its officers, of whom 11 were engaged in manufacturing, 13 in
administration, 6 in engineering and research and development, and 1 in
repair services. As of July 31, 1995, Vertex had a total of 28 full time
employees.
-14-
All production and maintenance employees of the Registrant are
covered by a collective bargaining agreement between the Registrant and
Local 262 of the New Jersey AFLCIO which runs through November 5, 1996.
Other Registrant's employees, including clerical, administration, sales and
marketing and engineering, are not covered by such an agreement. The
Registrant considers its relations with its employees to be satisfactory.
Designing and manufacturing the Registrant's equipment requires
substantial technical capabilities in many disparate disciplines, from
mechanics and computer science to electronics and mathematics. While the
Registrant believes that the capability and experience of its technical
employees compare favorably with other similar manufacturers, there is no
guarantee that it can retain existing employees or attract and hire capable
technical employees it may need in the future, or, if it is successful,
that such personnel can be secured on terms deemed favorable to the
Registrant.
Competition
In all its products lines, Vertex faces competition from
numerous foreign and domestic manufacturers of various sizes, including
large Japanese and European companies. In the Registrant's opinion,
dominant companies with which it competes are Intermec and Welch Allyn in
bar code devices, Kronos in data collection software, American Magnetics
and Omron in card equipment, Intermec Corporation and Zebra Technologies
Corporation in Label Generating Systems and Mettler and Sartorius in
precision weighing equipment. Many of its competitors have greater
financial, technical and marketing resources than the Registrant.
Competition in these areas is further complicated by possible shifts in
market shares due to technological innovation, changes in product emphasis
and applications and new entrants with greater capabilities or better
prospects.
In the Registrant's opinion, its weighing equipment and weights
business is part of a maturing industry that offers little or no prospects
for long-term growth. As a consequence, Vertex is placing greater emphasis
and more of its resources on the development of its bar code and software
products. For all its products, the Registrant generally competes on the
basis of price, product performance and features.
Item 2. Properties
The Registrant leases from an unrelated third party a 40,000
square foot building in Clifton, New Jersey for its manufacturing
facilities and executive offices. This lease runs from May 31, 1993 to May
31, 1998 at an annual rental of $130,680 for the first 3 years and $142,560
for the next two years.
On May 20, 1993 the Registrant entered into a 2-1/2 year
sublease with Thea & Schoen, Inc., regarding its Clifton facility which
covers approximately 13,200 square feet for use as a storage/warehouse
space. The annual rent approximates $33,000 plus pro rata or percentage
charges for taxes, heat and electricity.
-15-
Under the sublease, the sublessee had an option to renew for an additional
2-1/2 years at such annual rent to be increased by rises in a certain consumer
price index. On October 12, 1995 the Registrant amended its sublease
agreement with Thea & Schoen, Inc., whereby Thea & Schoen exercised its
renewal option and leased an additional 3,900 square feet from the registrant
bringing Thea & Schoen's total square footage to approximately 17,100 square
feet for an annual rent of approximately $45,657.
The Registrant's facilities are considered adequate for present
and expansion purposes.
Item 3: Legal Proceedings
The Registrant is not aware of any material litigation, whether
pending or threatened, to which it is or may become a party.
Item 4: Submission of Matters to a Vote of Security Holders
The Registrant did submit a matter involving the election of
directors during the second quarter of the fiscal year covered by this
report to a vote of security holders through the solicitation of proxies or
otherwise.
-16-
PART II
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters
The principal market for the Registrant's shares of Common
Stock, par value $.005 per share is the over-the-counter market. Such
shares are quoted in the NASDAQ system under the symbol VETX and the Boston
Stock Exchange under the symbol VER.
The following table sets forth, for the periods shown, the high
and low sale prices concerning such shares of Common Stock as furnished by
NASDAQ:
High Low
1995
First Quarter 2 1/4 1 1/8
Second Quarter 2 5/8 1
Third Quarter 1 13/16 7/8
Fourth Quarter 1 1/8 1
1996
First Quarter 3/8 3/4
Second Quarter 1 1/16 1/2
Third Quarter 2 1/4 3/4
Fourth Quarter 3 5/16 1
(1) The Registrant split its common stock on a 2 for 1 basis
on April 19, 1993.
The approximate number of holders of record of the Registrant's
shares of Common Stock, par value $.005 per share as of September 30, 1996
was 259. This number includes numerous brokerage firms that hold such
shares in street name. The Registrant estimates that there are more than
3,000 beneficial shareholders as of October 25, 1996. There were no
holders of record of the Registrant's shares of Preferred Stock, par value
$.01 per share.
The Registrant has not paid any cash dividends on its Common Stock
and does not intend to do so in the foreseeable future.
-17-
Item 6. Selected Consolidated Financial Data
A SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
For the Years Ended July 31, Are As Follows:
1996 1995 1994 1993 1992
Revenues $ 3,784,480 $ 3,147,409 $ 4,013,619 $ 4,701,177 $ 3,429,907
Net Income(Loss) $ 237,748 $(1,219,339) $ (607,840) $ 390,881 $ (10,396)
Average Number of
Shares Outstanding 5,360,763 5,060,832 4,805,401 4,402,662 4,058,860
Net Income or
(Loss) Per Share $ .04 $ (.24) $ (.13) $ .09 $ (.01)
Working Capital $ 1,489,689 $ 1,077,890 $ 1,924,166 $ 2,305,317 $ 913,309
Current Ratio 4.81:1 2.93.1 6.17:1 5.64:1 2.16:1
Property, Equipment
and Capital Leases $ 1,867,259 $ 1,725,122 $ 2,235,478 $ 2,067,048 $ 1,839,133
Less: Accumulated
Depreciation &
Amortization $ 1,393,102 $ 1,268,462 $ 1,730,566 $ 1,635,047 $ 1,628,848
Property, Equipment
Capital Leases and
Leased Equipment
-Net $ 474,157 $ 456,660 $ 504,912 $ 432,001 $ 210,285
Total Assets $ 2,715,856 $ 2,663,031 $ 3,304,595 $ 3,542,614 $ 2,124,242
Long-Term Debt $ 32,875 $ 38,926 $ 68,382 $ 75,642 $ 223,353
Stockholder's Equity $ 2,285,377 $ 2,033,251 $ 2,815,546 $ 2,883,791 $ 1,016,004
-18-
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Year ended July 31, 1996 compared with Year Ended July 31, 1995
Operating Revenues
Operating revenues increased to $3,784,480 or 20.2% for
the year ended July 31, 1996 compared to $3,147,409 for fiscal year
ended July 31, 1995. Sales of Bar Code equipment (including
software) increased 56% to $1,604,129 for the current year due to an
increase in direct sales and the Company's focus of increasing sales
in these product lines. Sales of the other product lines, except
the LGS product line, decreased over the prior year (see Product
lines in Part I).
Revenue for the weighing equipment line decreased 15% to $1,100,382
for fiscal 1996. This decrease was due to a decrease in volume.
Revenue for the Card Reader product line decreased to $64,674 from
$105,737 for the same period last year. Management does not expect
revenue from this product line to increase. Revenue for the LGS
product line (formerly CTSI subsidiary) increased to $1,015,295
compared to $724,533 a year ago. This 40% increase is due to an
increase in product demand.
Operating Expenses
Cost of sales as a percentage of revenue decreased to 46%
in 1996 as compared to 55% a year ago. The decrease is largely due
to more efficient operations in addition to better pricing of the
Company's product lines.
Selling and administrative expenses decreased 21% to
$1,285,538 in 1996 as compared to $1,625,508 in 1995. The decrease
is primarily due to the closing of the Company's Ohio sales office,
reduced health insurance costs and reduced professional fees. The
decrease is also due to the Company's effort to streamline
operations and an overall operating strategy to reduce
administrative expenses.
Research and development expenses increased $27,543 or 8%
to $377,318 compared to $349,775 in fiscal 1995. The increase is due
to a combination of factors. The Company closed its Massachusetts
R&D facility in May 1995 and subsequently paid lease termination
fees and other relocation costs in fiscal 1996. The Company hired
additional personnel for the R&D department in fiscal 1996 to
support the research and development on the BridgeNet product line.
In the fourth quarter of fiscal 1995 the Company recorded
a $800,765 restructuring charge. This amount included the write off
of $500,000 of goodwill which primarily resulted from the purchase of
-19-
the Company's subsidiary, CTSI. This amount also included a $300,765
charge for obsolete inventory related to product lines which the Company
is deemphasizing.
Operating Income (Loss)
The Company recorded operating income of $392,566 for
fiscal 1996 as compared to an operating loss of $1,346,003 in fiscal
1995. The operating income in fiscal 1996 is attributed to
increased operating revenues, increased profit margins as well as a
decrease in operating expenses. The operating loss in fiscal 1995
was primarily due to a restructuring charge of $800,765.
Other Income (Expenses)
Interest income increased in fiscal 1996 as compared to
1995 due to higher cash balances which were invested in money market
accounts. Interest expense decreased in 1996 as compared to 1995
due to a decrease in interest expense on capital leases.
Income Tax Provision (Benefit)
The Company recorded an income tax provision of $162,500
for fiscal 1996 as compared to an income tax benefit of $121,895 in
fiscal 1995. See Footnote 9 on page F-13.
Net Income (Loss)
The Company recorded net income of $237,748 in 1996 as
compared to a net loss of $1,219,339 in 1995. Net income in 1996 is
primarily attributed to increased operating revenues, increased
profit margins and a decrease in operating expenses. The net loss
of $1,219,339 in 1995 is primarily attributed to a non-recurring
restructuring expense of $800,765 as well as a reduction in
operating revenues.
Vertex's major focus continues to be the development of
its BridgeNet Data Collection Management System and related
products. The majority of its R&D expenditures are spent in this
effort. The Company expended significant time in porting BridgeNet
to Windows '95 and Windows NT, which did not significantly
contribute to this year's revenue but is expected to contribute to
next year's revenue.
The Registrant has increased its direct sales and
marketing efforts with the hiring of an additional sales person in
fiscal 1996 and anticipates that this will have an impact in fiscal
1997. The Registrant also expanded its Value Added Reseller (VAR)
channel, and has trained many members of their technical staff on
Vertex's products.
-20-
Vertex continues to expand and service the systems
installed at Bell Atlantic. They are a prime customer for the
Windows NT port as mentioned above.
The Company has developed the capability of printing
thermal bar code labels for the health care industry on a 4 inch wide
label stock. This capability can be adapted to multiple printers.
-21-
Year Ended July 31, 1995 Compared with Year Ended July 31, 1994
Operating Revenues
Operating revenues decreased to $3,147,049 or 22% for the
year ended July 31, 1995 compared to $4,013,619 for fiscal year
ended July 31, 1994. Sales of Bar Code equipment (including
software) increased 4% to $1,025,762 for the current year due to an
increase in direct sales and the Company's focus of increasing sales
in this product line. Sales of the other product lines decreased
over the prior year (see Product lines in Part I).
Revenue for the weighing equipment line decreased 23% to
$1,291,377 for fiscal 1995. This decrease was due to a decrease in
volume. Revenue for the Card Reader product line decreased to
$105,737 from $141,678 for the same period last year. Management
does not expect revenue from this product line to increase. Revenue
of the LGS product line (formerly CTSI subsidiary) decreased to
$724,533 compared to $1,220,076 a year ago. This 41% decrease is
due to a decrease in product demand and production, and management
anticipates revenues from this product line to remain constant for
1996.
Operating Expenses
Cost of sales as a percentage of revenue decreased to 55%
in 1995 as compared to 60% a year ago. The decrease is largely due
to a write off of slow moving inventory of approximately $200,000 in
fiscal 1994.
Selling and administrative expenses decreased 16% to
$1,625,508 in 1995 as compared to $1,935,902 in 1994. Approximately
$200,000 of the decrease was in advertising costs in 1994 which were
not expended in 1995. The decrease is also due to the Company's
effort to streamline operations and an overall operating strategy to
reduce administrative expenses.
Research and development expenses decreased $136,252 or
28% to $349,775 compared to $486,027 in fiscal 1994. In 1994 the
Company expensed approximately $200,000 of costs associated with the
development of certain software programs for resale. Excluding this
write off in fiscal 1994 Research and Development expenses increased
$63,748 or 22% in fiscal 1995 as compared to 1994. The Company
continues to expend funds in the Research and Development area in
order to position the Company for future growth in the Bar Code and
software product lines.
In the fourth quarter of fiscal 1995 the Company recorded
a $800,765 restructuring charge. This amount includes the write off
of $500,000 of goodwill which was generated by purchases of the
Company's subsidiary CTSI. This amount also includes $300,765
charge for obsolete inventory related to product lines which the
Company is deemphasizing.
-22-
Operating Income (Loss)
Operating loss increased $540,543 or 67% to $1,346,003 in
fiscal 1995 as compared to an operating loss of $805,460 in 1994.
The increase is primarily due to a non-recurring restructuring
charge of $800,765 in fiscal 1995. The increase in the operating
loss is also due to a decrease of 22% or $866,210 in operating
revenues in 1995 as compared to 1994.
Other Income (Expense)
Interest income decreased in fiscal 1995 as compared to
1994 due to lower cash balances which were invested in money market
accounts.
Income Tax Provision (Benefit)
The Company recorded an income tax benefit of $121,895
for fiscal 1995 as compared to an income tax benefit of $54,400 in
fiscal 1994.
The income tax benefit for 1995 represents the future
deductibility of current year book expense for amortization of
certain purchased goodwill and for current year charges to the
reserve for doubtful accounts which together comprise an income tax
benefit of approximately $165,100. This income tax benefit has been
partly offset by approximately $43,000 of Federal and state income
taxes payable on the sale of assets of CTSI to the Company.
Cumulative Effect of Change in Accounting Principle
For fiscal 1994, this amount represents the estimated
future tax benefit of prior years tax loss carry forward.
Net Income (Loss)
The Company recorded a net loss of $1,219,339 in 1995 as
compared to a net loss of $607,840 in 1994. The net loss in 1995 is
primarily attributed to a non-recurring restructuring expense of
$800,765 and a reduction in operating revenues as explained above.
Vertex's major focus continues to be the development of
its BridgeNet Data Collection Management System and related
products. The majority of its R&D expenditures are spent in this
effort. A great deal of time and effort was spent on software for
wireless (RF) portable hand-held terminals, which did not
significantly contribute to fiscal 1995 revenue.
Vertex continues to expand and service the systems
installed at Bell Atlantic. Its route Optimization Software package
is still being considered, but no commitments have been made.
-23-
The other area of significant revenue decrease related to
Vertex's Access Control/Attendance Systems where budgeting and other
problems have delayed the issuance of additional orders for New York
City Schools. Vertex expects to receive orders from New York City
schools in the current fiscal year.
The Registrant acquired all of the assets and liabilities
of its CTSI subsidiary on August 31, 1994, and is the majority
shareholder in the remaining corporate shell. Vertex is currently
seeking a buyer or a merger for the shell.
Capital Resources and Liquidity:
Working capital increased to $1,489,689 at July 31, 1996
from $1,122,140 on July 31, 1995. The increase is primarily due to
an increase in accounts receivable, a decrease in inventory,
accounts payable, accrued expenses and customer deposits in 1996 as
compared to 1995. The Registrant's cash position increased from
$321,881 at July 31, 1995 to $394,344 at July 31, 1996 due to the
above factors in addition to an increase in sales of $637,071 in
1996 as compared to 1995. Management believes that cash and working
capital are at sufficient levels to meet the short and long term
needs of the Registrant's for the foreseeable future.
Capital expenditures were approximately $118,000 and
$77,000 for the fiscal years ended July 31, 1996 and 1995,
respectively. The Company upgraded its computer hardware and
software in fiscal 1996. The registrant retired approximately
$580,000 of fully depreciated fixed assets in 1995.
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
On April 10, 1996 the Company filed an 8-K for the change
in independent public accountants from Sax, Macy, Fromm & Co. to
Arthur Andersen LLP for fiscal year ended July 31, 1996.
-24-
PART III
Item 10. Directors and Executives Officers of the Registrant
Certain information about directors and officers of the
Registrant is contained in the following table:
Name Age Position
James Q. Maloy(1) 64 Chairman
and Director
Ronald C. Byer(1) 63 President, CEO
and Director
Robert T. McLaughlin 34 Chief Financial
Officer and
Treasurer
Barbara H. Martorano 39 Secretary
Wilbur Highleyman(2) 63 Director
George Powch(2) 48 Director
Irwin Dorros(2) 67 Director
(1) Members of Stock Option Committee and Trustees under the
401(K)Plan.
(2) Members of Audit Committee.
All directors hold office until the next annual meeting of
shareholders of the Registrant or until their successors have been
elected and qualified. Officers serve at the discretion of the
Board of Directors. Directors who are not officers receive $1,000
annual compensation, paid quarterly, for attending director's
meetings and are reimbursed for all related expenses.
Mr. Maloy, a co-founder of the Registrant, has been its
Chairman of the Board of Directors and a director on a full-time
basis since its inception in 1974. In 1983, he became President and
chief executive officer as well. From 1962 to 1974, Mr. Maloy
served as executive vice president, as well as marketing and
engineering managers for Datascan, Inc., a publicly-held company
that was acquired by Dymo Industries, Inc. in 1972. Datascan was a
designer and manufacturer of electro-mechanical equipment. From
1955 to 1962 Mr. Maloy was employed by Bendix Aviation Corp. rising
to a project manager and heading a major group. At Bendix he was
involved in the design and manufacture of electronic test equipment for the
-25-
military. Mr. Maloy is a graduate of City College of New
York with a bachelor's degree in electrical engineering. On July
31, 1995 Mr. Maloy stepped down as President of the Registrant and
on January 17, 1996 he stepped down as Chief Executive Officer, but
remains Chairman of the Board, and a Director.
Mr. Byer joined the Registrant in 1975 and has served as Vice
President of Marketing and Sales since 1979, Treasurer since 1983,
Executive Vice President since 1985 and a Director since 1976. From
1963 to 1975, Mr. Byer held various positions at Datascan, Inc.
After its acquisition by Dymo Industries, Inc., he became manager of
its newspaper computer systems group. From 1958 to 1972 Mr. Byer
was employed by Bendix Aviation Corp. Mr. Byer has a bachelor's
degree in electrical engineering from Rensselaer Polytechnic
Institute ("RPI"). Mr. Byer was promoted to President of the
Registrant on July 31, 1995 and to Chief Executive Officer on
January 17, 1996.
Mr. McLaughlin joined the Registrant in November, 1995 and has
served as Chief Financial Officer and Treasurer. Mr. McLaughlin is
a Certified Public Accountant and started his career in public
accounting with the firm of Peat Marwick Mitchell & Co. From 1988
to 1992 he was Vice President, Treasurer and Controller of Valley
Savings Bank (NASDAQ:VSB). From 1992 to 1994 he was Assistant
Controller of Hanover Direct, Inc. (AMEX:HDI). From 1994 until he
joined the Registrant Mr. McLaughlin operated his own public
accounting firm. Mr. McLaughlin has a Bachelor of Science degree in
accounting from Manhattan College.
Mrs. Martorano joined the Registrant in June, 1990 and has
served in a variety of positions, including Sales Coordinator,
Office Administrator, Assistant to the Secretary, President and
Chairman of the Board, as well as, Corporate Secretary as of January
17, 1996. Mrs. Martorano is a graduate of Berkeley, Garret Mountain
Campus.
Dr. Highleyman was elected to the Registrant's Board of
Directors in 1985. He is currently chairman of Net-Weave, a network
software vendor. From 1962 to date he founded and has served as
chairman of the board of directors of the Sombers Group, a supplier
of turnkey software packages. He founded Mini Data Services, Inc.,
a data processing services supplier in 1969 and served as its
chairman of the board from that date until 1991. He was also a
director of Science Dynamics, Inc., a publicly-held company. From
1962 to 1968 he was co-founder and vice-president of Data-Trends, a
publicly-held supplier of turnkey realtime computer systems. He
holds a bachelor of electrical engineering from RPI, a masters of
electrical engineering from Massachusetts Institute of Technology
and a doctorate of electrical engineering from Brooklyn Polytechnic
Institute.
-26-
Mr. Powch has served as a Director of the Registrant since
1987. He is President & CEO of Huber + Suhner (North America) Inc.,
responsible for the North American units of Huber + Suhner AG of
Switzerland. These include Champlain Cable Corporation, a
manufacturer of specialty wire and cable, Huber + Suhner, Inc. a
manufacturer and reseller of RF and microwave components for
telecommunications, and Huber + Suhner (Canada) Ltd. He was
previously Vice President & General Manager of Cinch Connectors, a
division of Labinal Components & Systems, Inc. From 1987 to 1993,
Mr. Powch was President of BFI-IBEXSA International Inc., a
distributor of electronic components. Prior to that, he held a
variety of positions including President of Diffracto Ltd.(1984-
1986) and VP & General Manager of Bendix's Robotics Division (1981-
1983). Mr. Powch has an MBA degree from Harvard Business School, an
M.S. degree from Stanford University and a B.S. from MIT, both in
Electrical Engineering.
Dr. Dorros was elected to Vertex's Board of Directors in 1987.
He is currently retired and a consultant in telecommunications.
From 1982 to July 1993 Dr. Dorros served as Executive Vice President
and Director of Bell Communications Research ("Bellcore"). He was
responsible for all the Bellcore's technical programs including
research, development and engineering. From 1978 to 1982, he served
as an Assistant Vice President of AT&T for network planning. From
1956 to 1978, Dr. Dorros was employed by Bell Telephone Laboratories
in various capacities, including Director of Systems Engineering
programs. His current consulting work is on management and mergers
and acquisitions in telecommunications. Dr. Dorros holds Bachelor
and Master of Science degrees from the Massachusetts Institute of
Technology and a Doctorate in Electrical Engineering from Columbia
University. He is a member of the National Academy of Engineering.
While not an executive officer of Vertex, Kevin Halloran may
be deemed a significant employee of the Registrant.
Mr. Halloran served Vertex as its Director of Engineering from
1987 to May 31, 1995. Mr. Halloran was promoted to Vice President
of Sales and Research and Development on May 31, 1995. From 1979
through 1980 he was employed as a Mechanical Engineer by his own
company, Halloran Hybrid Engineering, and as a Project Engineer at
Commuter Vehicles, Inc. From 1980 to 1982, he also worked as
Project engineer for Addressograph/Farrington ("AF"). In the later
part of 1982, he served briefly as a Project Engineer for Identicon,
a company purchased by Vertex. From late 1982 through the spring of
1987, he again worked for AF in the capacity of Chief engineer. He
has a Bachelor of Science degree in Mechanical Engineering from
Worcester Polytechnic Institute.
On March 27, 1996 Mr. Halloran resigned as Vice President of
the Registrant, but remains Technical Director.
-27-
Item 11. Executive Compensation
The following table sets forth information concerning the
annual and long-term compensation for services in all capacities to
the Registrant for the fiscal years ended July 31, 1994, 1995 and
1996 of those persons who were, at July 31, 1996, executive officers
of the Registrant earning annually $100,000 or more:
SUMMARY COMPENSATION TABLE
All Other
Annual Compensation Long-Term Compensation Compensation
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted All
Name and Annual Stock LTIP Other
Principal Salary Bonus Compensation Award(s) Options/ Payouts Compensation
Position Year ($) ($) ($) ($) SARs (#) ($) ($)
James Q. 1996 $ 56,520 - $ 5,210 - - - -
Maloy 1995 $ 96,852 - $ 6,506
Chairman 1994 $104,104 - $ 6,714 - - - -
Ronald C. 1996 $106,480 - $ 6,055
Byer 1995 $ 87,901 - $ 6,506 - - - -
CEO, 1994 $107,504 - $ 6,714 - - - -
President
(1) All Officers and non-union employees of Vertex are covered by
a pension plan that is financed by voluntary employee and Registrant
contributions. See "401(k) Savings and Retirement Plan" and Note 7
of Notes to Financial Statements.
(2) Messrs. Maloy and Byer are each provided with an automobile by the
Registrant; a portion of which may represent the personal use thereof
estimated at $2,500 per year and is excluded.
On November 13, 1995 Mr. McLaughlin was granted 50,000 stock options
at an exercise price of $.75 which vest over five years and expire on
November 13, 2005. These shares were granted under the Registrants
Incentive Stock Option Plan. Stock appreciation rights are not
granted under the Incentive Stock Option Plan. The Registrant does
not currently have in effect a Long-Term Incentive Plan ("LTIP") and,
consequently, no such awards were granted to Vertex's executive
officers in fiscal years covered above.
There were no unexercised options, under the incentive stock
option plan to purchase the Registrant's common stock in fiscal 1996
by the above named officers. None of the above named officers
exercised stock options during fiscal 1996.
The Registrant had no other executive officers other than Mr.
Maloy, Mr. Byer, Mr. McLaughlin and Mrs. Martorano.
-28-
The Registrant entered into a three (3) year employment contract
with Carlo Pastore commencing on May 14, 1993 to serve as its Sales
and Marketing Director. Under this contract, Mr. Pastore is to
receive as compensation: (a) an annual salary of $80,000 plus one
percent (1%) commission on all Vertex's bar code product sales; (b)
reimbursement of business expenses incurred; (c) grant of a five (5)
year stock option to purchase up to 75,000 shares of Vertex's Common
Stock under its Incentive Stock Option Plan at an exercise price of
$7.625; (d) the same group benefits received by other Vertex
executives and (e) use of a leased automobile costing up to $750 per
month and a right of first refusal to purchase such vehicle at the end
of the lease term. On October 6, 1995 the Registrant terminated Mr.
Pastore's employment. Among other things Mr. Pastore received
fourteen weeks compensation, 35,000 non-qualified stock options at
$1.25 per share which expire October 6, 2000, the use of a Company
paid auto with the option to buy at the end of the lease term,
reimbursement for medical coverage through December 31, 1995 and a
line of credit with Vertex Industries to establish his own value added
reseller business.
On May 19, 1993, Vertex also entered into a three (3) year
employment contract with Kevin R. Halloran, its Technical Director.
Pursuant to the terms of this agreement, Mr. Halloran will earn an
annual base salary of $95,000, which increases by 3% on each November
6th from 1993 through 1995. Under this contract, Mr. Halloran
receives reimbursement for business expenses and normal group benefits
available to other Registrant executives. This contract also provides
Mr. Halloran with the grant of a 10 year non-qualified stock option
agreement to purchase up to 300,000 shares of Vertex's common stock at
an exercise price of $7.875 per share. Such options may be exercised
in 75,000 share increments on or after each November 6th from 1993
through 1996. Should the market price for the Registrant's common
stock decline below the exercise price of the options, the Employee
may chose to retire all unexercised options and have new ones granted
to the extent of the number of unexpired options outstanding with a
new exercise price at the then market price. On December 29, 1995 Mr.
Halloran retired all unexercised options (300,000 options) and had new
options granted at $.50, the market price of the common stock on
December 29, 1995.
Under the Registrant's Incentive Stock Option Plan ("The Plan"),
options to purchase a maximum of 1,000,000 shares of its Common Stock
may be granted to officers and other key employees of the Registrant.
Options granted under the Plan are intended to qualify as incentive
stock options under the Economic Recovery Tax Act of 1981 (the "1981"
Act) as amended.
The plan is administered by the Board of Directors and a
committee presently consisting of two members of the Board which
determines which persons are to receive options, the number of shares
that may be purchased under each option and the exercise prices. In
the event an optionee voluntarily terminates his employment with the
Registrant, he has the right to exercise his accrued options within
-29-
30 days of such termination. However, the Registrant may redeem any
accrued options held by each optionee by paying him the difference
between the option price and the then fair market value. If an optionee's
employment is involuntarily terminated, other than because of death, he
also has the right to exercise his accrued options within 30 days of such
termination. Upon death, his estate or heirs have one year to exercise his
accrued options. The maximum term of any option is ten years and the
option price per share may not be less than the fair market value of the
Registrant's shares on the date the option is granted. However, options
granted to persons owning more than 10% of the voting shares of the
Registrant may not have a term in excess of five years and the option price
per share may not be less than 110% of the fair market value on the date the
option is granted.
If the aggregate fair market value of the shares of Common Stock
(determined at the time the option is granted) with respect to which
incentive stock options are exercisable for the first time by such
optionee during any calendar year (under all such plans) exceeds
$100,000, then only the first $100,000 of such shares so purchased
will be treated as exercised under the Plan and any excess over
$100,000 so purchased shall be treated as options which are not
incentive stock options. This rule shall be applied by taking options
into account in the order or sequence in which they are granted.
Options must be granted within ten years from the effective date of
the Plan.
Options granted under the Plan are not transferable other than by
will or by the laws of descent and distribution. Options granted
under the Plan are protected by anti-dilution provisions increasing
the numbers of shares issuable thereunder and reducing the exercise
price of such options, under certain conditions. The Plan terminated
on October 9, 1995. Any option outstanding at the termination date
will remain outstanding until it expires or is exercised in full,
whichever occurs first. At the Registrant's annual meeting in the
second quarter of fiscal 1995 the Registrant's shareholders approved
the incentive stock option plan for the issuance of up to 1,000,000
shares of common stock commencing on October 9, 1995 and expiring on
October 9, 2005. The terms and conditions of this new plan are
identical to the old plan which expired on October 9, 1995.
As of July 31, 1996 options to acquire 616,000 shares of the
Registrant's Common Stock at exercise prices of $.475 to $8.12 per
share have been granted under the Plan to ten employees and three
directors of the Registrant. As of July 31, 1996 274,400 shares have
been exercised and 341,600 shares are outstanding, with 99,400 shares
presently exercisable.
During fiscal 1996 the Registrant granted 35,000 options to two
service firms as partial payment for financial, legal and consulting
services. The options are exercisable at 20,000 options at $.91 and
15,000 options at $.75 and expire at various
-30-
dates through February, 2001. These options are currently
exercisable. These stock options have been registered under the
Securities Act of 1933 on form S-8.
The Registrant has granted non-qualified options to a public
relations firm for the purchase of up to a total of 210,000 shares of
its Common Stock, registered under the Securities Act of 1933 on Form
S-8. These options were granted under the terms of two separate
contracts; the first, dated February 10, 1994, was for a total of
120,000 shares priced from $5.00 - $10.00 per share exercisable over a
period of 3 years; the second, dated July 1, 1994, was for a total of
90,000 shares priced at $1.875 per share exercisable over a period of
3 years. These options were granted in connection with certain
services to be rendered to the Registrant by such firm.
Vertex maintains a 401(k) savings plan (the "401(k) Plan") for
the benefit of all employees age 18 or over who have worked for at
least six months and who are not covered by a collective bargaining
agreement. The 401(k) Plan is qualified under Section 401(a) of the
Code and is intended to qualify under Section 401(k) of the Code.
Under the current terms of the 401(k) Plan, employees may elect
to defer from Federal income tax from 1% to 17% of their annual
compensation, not to exceed Internal Revenue Code limits and have it
contributed to the 401(k) Plan on their behalf. In addition, Vertex
makes a contribution of up to 3% of a contributing employee's salary.
The salary deferrals are fully vested, while the Registrant's
contributions vest 20% upon the completion of the second year of
service with the Registrant or its subsidiaries, 20% upon completion
of the third year of service, 20% upon the completion of the fourth
year of service, 20% upon the completion of the fifth year of service
and the remaining 20% upon the completion of the sixth year of service
or, if earlier, upon the death, disability or retirement of the
participant. Benefits under the 401(k) Plan are generally distributed
in a lump sum following the participant's retirement, death,
disability or termination of employment, or in a case of hardship,
prior to the termination of the participant's employment.
The assets accumulated by the 401(k) Plan are held in a trust,
the trustees of which are Messrs. Maloy and Byer, who are officers and
directors of the Registrant. Under the terms of the 401(k) Plan,
Vertex has agreed to indemnify the trustees to the fullest extent
permitted by law against any liability whatsoever for any action taken
or omitted by them in good faith in connection with the 401(k) Plan
unless it results from their own willful misconduct.
The charge against income for matching contributions for fiscal
1996 and 1995 were $14,865, and $5,342, respectively. For fiscal
1994, Vertex made no contributions for its employees to the 401(k)
Plan.
-31-
The following directors of Vertex were granted qualified stock
options in the fiscal year ended July 31, 1993 in the amounts
specified opposite their names, at the exercise prices so indicated
and on the dates specified:
Name of Number of Exercise Price Date of
Director Option Shares (1) Per Option (1) Grant
Wilbur Highleyman 32,000 $ 4.25 1/20/93
Irwin Dorros 32,000 $ 4.25 1/20/93
George Powch 24,000 $ 4.25 1/20/93
(1) Adjusted for 2 for 1 stock split effective April 19, 1993.
(2) No options were granted to Directors in Fiscal 1996, 1995 and 1994.
(3) The above options were granted under the incentive stock option plan as
discussed above.
Item 12: Security Ownership of Certain Beneficial Owners and
Management
The following information table sets forth certain information regarding
the Registrant's Common Stock owned on September 30, 1996 by (i) each who is
known by the Registrant's to own beneficially more than 5% of its outstanding
Common Stock, (ii) each director and officer, and (iii) all officers and
directors as a group:
Names and Address of
Directors, Officers and Shares Owned (1) (2)
5% Shareholders Number Percent
James Q. Maloy 1,202,208 23.5
23 Carol Street
Clifton, New Jersey
Ronald C. Byer 448,422 8.8
23 Carol Street
Clifton, New Jersey
All officers and director 1,688,630 33.1
as a group (6 persons)
(1) Does not give effect to the issuance of up to 1,000,000 shares of
Common Stock reserved for issuance under the Registrant's
incentive stock option plan, 592,000 shares under non-qualified
stock options.
(2) Gives effect to a 2 for 1 stock split effective April 19, 1993
(3) Includes 8,000 shares of Common Stock owned by Dr. Dorros and
30,000 shares of common stock owned by Mr. Powch.
-32-
Item 13. Certain Relationships and Related Transactions
On May 23, 1996, the Company entered into a contingent and
conditional Memorandum of Agreement (the "Memorandum"), as amended by
letters of July 15, 1996 and Board Resolution of September 25, 1996,
with Netweave Corp. ("NetWeave"), pursuant to which the parties could
enter into a business combination, proposed generally as an exchange
of all of Netweave's stock for a portion of the Company's common stock
and warrants to purchase the Company's common stock. The proposed
business combination is subject to fulfillment of certain conditions
set forth in the Memorandum relating principally to the achievement of
specific business goals and objectives by Netweave Corp. The failure
to fulfill any condition jeopardizes the potential business
combination.
With the addition of Netweave applications, BridgeNet
software could increase its potential consumer base, due to the
expanding number of host systems that could be connected through
NetWeave. Netweave could provide the underpinning to allow BridgeNet
terminals to work with host systems not currently supported.
Additionally, broader BridgeNet applications could be supported in
which BridgeNet hosts communicate with other hosts and databases via
Netweave applications.
Dr. Wilbur H. Highleyman, Chairman of Netweave Corp., has
been a director of Vertex since 1985 and presently owns 25.5% of
Netweave Corp. Ronald C. Byer, Jr., the President of Netweave Corp.,
is the son of Ronald C. Byer, the President of the Company. Ronald C.
Byer, Jr., presently owns 2.1% of Netweave Corp.
-33-
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K
(a) The following documents are filed as a part of this report:
1. and 2. Financial Statements:
1. Financial Statements and Supplementary Data:
Index to Consolidated Financial Statements
Reports of Independent Public Accountants
Consolidated Balance Sheets as of July 31, 1996 and 1995
Consolidated Statements of Operations for the Years Ended
July 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended July 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended
July 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Schedules for the Years Ended July 31, 1996, 1995 and 1994.
Schedule II - Valuation Qualifying Accounts
Schedules other than those listed above have been omitted
because they are not applicable or the required information
is shown in the financial statements or notes thereto.
Separate financial statements for Vertex Industries, Inc.
are not required. Vertex Industries, Inc. total assets at
July 31, 1996, constitute more than 75% of total
consolidated assets at the same date.
-34-
3. Exhibits:
The following list of exhibits are incorporated by reference
from the Registrant's Registration Statement filed under the
Securities Act of 1933, as amended (File No. 33-897-NY) and those
filed pursuant to Registration Statement on Form 8-A under the
Securities Exchange Act of 1934.
1.1 Form of Underwriter's Warrant Agreement and Warrant.
2.1 Form of Common Stock Certificate.
3.1 Articles of Incorporation and Amendment.
3.2 Amended By-laws (See also Registration Statement on
Form 8A referred to above).
5.1 Opinion of Cascone & Rapaport, including its consent.
10.1 Assets Purchase Agreement between the Registrant and
Identicon Corp. dated April 25, 1983.
10.2 Assets Purchase Agreement between the Registrant and
Amp Incorporated dated June 2, 1983.
10.3 License Agreement between the Registrant and Speed
Queen Company dated March 16, 1985 and amendment
thereto.
10.4 Distributor Agreement between the Registrant and Saab
Automation AB dated September 4, 1984 and amended June
17, 1986.
10.5 Incentive Stock Option Plan dated October 10, 1985 and
Form of Agreement.
10.6 Union Contract between the Registrant and Local 2262
of New Jersey dated November 6, 1984.
10.9 Lease between the Registrant and Ninth Avenue Equities
Co., dated May 9, 1983.
10.10 Agreements between the Registrant and Robert L.
Richardson dated August 1, 1981.
10.11 Agreement between the Registrant and Calvin S. Wesley
dated December 20, 1984.
10.12 Promissory Notes of the Registrant issued to Messrs.
Maloy and Byer dated December 15 and 16, 1975.
10.13 Forms of Agreement between the Registrant and its
Sales Representatives.
-35-
10.14 Purchase Agreement between Vertex, VBM and Dicom,
Amendment and certain schedules thereto.
10.15 Purchase Agreement between Vertex and CTSI and certain
schedules thereto.
10.16 401(k) Retirement and Savings Plan.
10.17 OEM Agreement between Vertex and Scientific Games,
Inc. dated November 2, 1987.
10.18 Employment Agreement between the Registrant and
Carlo Pastore dated May 14, 1993.
10.19 Employment Agreement between the Registrant and
Kevin R. Halloran dated May 19, 1993.
10.19 Lease Agreement between the Registrant and
KHIP Associates dated August 20, 1993.
10.20 Sublease Agreement between the Registrant and
Thea & Schoen, Inc. dated May 20, 1993.
10.21 Consulting Agreement between the Registrant and
Kearney Systems, Inc. dated September 24, 1993.
10.21 Royalty Agreement between the Registrant and
Kearney Systems, Inc. dated September 24, 1993.
10.22 Commission Agreement between the Registrant and
Tri-State Telecomputers, Inc. dated June 7, 1993.
10.23 Employment Termination Agreement between the
Registrant and Carlo Pastore dated September 26, 1995.
10.24 Sublease Agreement between the Registrant and Thea &
Schoen, Inc. dated October 12, 1995.
10.25 Retainer agreement between Registrant and Jeffrey
Marks, Esq. Dated January 26, 1996. (Filed herewith)
10.26 Consulting and Stock Option agreement between Registrant
and Vamcom Corporation dated February 15, 1996. (Filed
herewith)
10.27 Indeminity Agreement between Registrant and Robert T.
McLaughlin dated April 3, 1996. (Filed herewith)
10.28 Letter Agreement between Registrant, Computer
Transceiver Systems, Inc and Seymour H. Bucholz and
Rosner, Bresler, Goodman & Bucholz dated May 1, 1996.
(Filed herewith)
-36-
10.29 Memorandum of Agreement and Amendment between
Registrant and NetWeave Corporation and Somber Group
Inc. dated May 23, 1996. (Filed herewith)
10.30 Loan Agreement and Promissory Note between Registrant
and NetWeave Corporation dated May 30, 1996. (Filed
herewith)
10.31 Certificate of Merger of Sentry One into Vertex
Industries, Inc. dated June 17, 1996. (Filed herewith)
10.32 Certificate of Merger of Versci, Inc. into Vertex
Industries, Inc. dated June 17, 1996. (Filed herewith)
10.33 Master Distribution Agreement between Registrant and
NetWeave (Europe) dated July 1, 1996. (Filed herewith)
10.34 Factoring Agreement between Registrant and NetWeave
Corporation dated July 18, 1996. (Filed herewith)
(b) Reports on Form 8-K
The Company filed a report on form 8-K on April 10, 1996
reporting a change in independent public accountants from Sax, Macy,
Fromm & Co. to Arthur Andersen LLP for fiscal year ended July 31,
1996.
-37-
VERTEX INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS:
Reports of Independent Public Accountants F-2, F-3
Consolidated Balance Sheets as of July 31, 1996 and 1995 F-4, F-5
Consolidated Statements of Operations for the Years Ended
July 31, 1996, 1995 and 1994 F-6
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended July 31, 1996, 1995 and 1994 F-7
Consolidated Statements of Cash Flows for the Years Ended
July 31, 1996, 1995 and 1994 F-8
Notes to Consolidated Financial Statements F-9 to F-19
SUPPLEMENTAL SCHEDULES:
Schedule II -- Valuation and Qualifying Accounts for the
years ended July 31 1996, 1995 and 1994 F-20
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
Vertex Industries, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Vertex
Industries, Inc. and Subsidiaries (a New Jersey Corporation) as of July 31,
1996 and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Vertex
Industries, Inc. and Subsidiaries as of July 31, 1996, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in
the index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
Arthur Andersen LLP
Roseland, New Jersey
October 11, 1996
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Vertex Industries, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Vertex
Industries, Inc. and Subsidiaries as of July 31, 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the years ended July 31, 1995, 1994 and have also audited the supplemental
schedule listed in the index on page F-1 of this Form 10-. These financial
statements and the supplemental schedule are the responsibility of the
Company's management. Our responsibility is to express an opinon on these
financial statements and the supplemental schedule based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Vertex Industries, Inc. and Subsidiaries as of July 31, 1995
and the consolidated results of their operations and their cash flows
for each of the two years in the period ended July 31, 1995, in conformity
with generally accepted accounting principles. In addition, in our opinion,
the supplemental schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
s/Sax Macy Fromm & Co., PC
Sax Macy Fromm & Co., PC
Certified Public Accountants
Clifton, New Jersey
October 3, 1995
F-3
VERTEX INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1996 AND 1995
ASSETS 1996 1995
CURRENT ASSETS:
Cash and cash equivalents $394,344 $321,881
Accounts receivable, less allowance for doubtful account of $75,985
at July 31, 1996 and 1995 608,164 462,612
Note and other receivables 170,755 0
Inventories 693,179 823,042
Prepaid expenses and other current assets 13,885 29,375
-------- ---------
Total current assets 1,880,327 1,636,910
---------- ----------
PROPERTY, EQUIPMENT AND CAPITAL LEASES: 1,867,259 1,725,122
Less-Accumulated depreciation and amortization (1,393,102) (1,268,462)
---------- ----------
Net property, equipment and capital leases 474,157 456,660
---------- ----------
OTHER ASSETS:
Cost in excess of net assets of companies acquired, net of amortization
(accumulated amortization of $301,016 and $251,636 at July 31, 1996
and 1995, respectively) 112,872 162,252
Deferred tax asset 195,000 357,500
Other assets 53,500 49,709
---------- ----------
Total other assets 361,372 569,461
---------- ----------
Total assets $2,715,856 $2,663,031
========== ===========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
F-4
VERTEX INDUSTRIES, INC. AND SUBSIDARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1996 AND 1995
Liabilities and Stockholders' Equity 1996 1995
CURRENT LIABILITIES:
Current portion of long-term debt $2,800 $2,800
Current portion of obligations under captial leases 32,849 26,757
Accounts payable 169,632 178,877
Accrued expenses and other liabilities 99,237 151,096
Customer deposits 86,120 199,490
--------- ---------
Total current liabilities 390,638 559,020
--------- ---------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 2,567 5,367
Obligations under capital leases, net of current portion 30,308 33,559
--------- ---------
Total long-term liabilities 32,875 38,926
--------- ---------
EXCESS OF NET ASSETS OF COMPANIES ACQUIRED OVER COST,net
of amortization (accumulated amortization of $479,165 and $454,297
at July 31, 1996 and 1995, respectively 6,966 31,834
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; 2,000,000 shares authorized;
none issued and outstanding 0 0
Common stock, par value $.005 per share; 20,000,000 shares authorized;
5,108,979 and 5,080,879 issued at July 31, 1996 and 1995, respectively 25,545 25,404
Capital in excess of par value 5,182,188 5,167,951
Accummulated deficit (2,871,787) (3,109,535)
----------- -----------
2,335,946 2,083,820
Less- Treasury stock, 12, 872 shares at cost at July 31, 1996
1995, respectively (50,569) (50,569)
------------ ------------
Total stockholders' equity 2,285,377 2,033,251
------------ ------------
Total liabilities and stockholders' equity $2,715,856 $2,663,031
============ ============
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
F-5
VERTEX INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended July 31
1996 1995 1994
OPERATING REVENUES $3,784,480 $3,147,409 $4,013,619
---------- ---------- ----------
OPERATING EXPENSES:
Cost of sales 1,729,058 1,717,364 2,397,150
Selling and administrative 1,285,538 1,625,508 1,935,902
Research and development 377,318 349,775 486,027
Restructuring expenses 0 800,765 0
---------- --------- ---------
Total operating expenses 3,391,914 4,493,412 4,819,079
---------- --------- ---------
Operating income (loss) 392,566 (1,346,003) (805,460)
---------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 16,840 15,038 18,560
Interest expense (10,834) (14,468) (13,340)
Other 1,676 4,199 0
---------- --------- ---------
7,682 4,769 5,220
---------- --------- ---------
Income (loss) before income
taxes and cumulative effect of a
change in accounting principle 400,248 (1,341,234) (800,240)
---------- ----------- ----------
INCOME TAX PROVISION (BENEFIT):
Federal 138,287 (88,100) (47,800)
State 24,213 (33,795) (6,600)
---------- ----------- ----------
Total income tax provision (benefit): 162,500 (121,895) (54,400)
---------- ----------- ----------
Income (loss) before cumulative effect
of a change in accounting principle 237,748 (1,219,339) (745,840)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 0 0 138,000
----------- ----------- ---------
Net income (loss) $237,748 ($1,219,339) ($607,840)
============ ============ ==========
NET INCOME PER SHARE OF COMMON STOCK:
Income (loss) before cumulative effect of
change in accounting principle $.04 ($.24) ($.16)
Cumulative effect of a change in
accounting principle 0 0 .03
----------- ------------ ----------
Net income (loss) per share $.04 ($.24) ($.13)
=========== ============ ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 5,360,763 5,060,832 4,805,401
=========== ============ ==========
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-6
VERTEX INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED JULY 31, 1996, 1995 AND 1994
Common Stock Capital in
$.005 Par Value Excess of Accumulated Treasury
---------------
Shares Amount Par Value Deficit Stock Total
BALANCE, July 31, 1993 4,752,857 $23,764 $4,142,383 ($1,282,356) $0 $2,883,791
Issuances of common stock-
Private placement 24,000 120 199,464 0 0 199,584
Consideration for services 24,480 122 240,386 0 0 240,508
Exercise of stock options 43,500 218 144,454 0 0 144,672
Purchase of 10,000 shares of treasury stock 0 0 0 0 (45,169) (45,169)
Net loss for the year ended July 31, 1994 0 0 0 (607,840) 0 (607,840)
----------- --------- ----------- ------------- -------- ----------
BALANCE, July 31, 1994 4,844,837 24,224 4,726,687 1,890,196 (45,169) 2,815,546
Issuances of common stock-
Consideration for CTSI assets 236,042 1,180 441,399 0 0 442,579
2,872 shares of parent common stock acquired
by subsidiary 0 0 0 0 (5,400) (5,400)
Overpayment on stock options refunded 0 0 (135) 0 0 (135)
Net loss for the year ended July 31, 1995 0 0 0 (1,219,339) 0 (1,219,339)
---------- --------- ----------- ------------- -------- ----------
BALANCE, July 31, 1995 5,080,879 25,404 5,167,951 (3,109,535) (50,569) 2,033,251
Issuances of common stock-
Exercise of stock options 28,100 141 14,237 0 0 14,378
Net income for the year ended July 31, 1996 0 0 0 237,748 0 237,748
---------- --------- ----------- ------------- --------- ----------
BALANCE, July 31, 1996 5,108,979 $25,545 $5,182,188 ($2,871,787) ($50,569) $2,285,377
========== ========= =========== ============= ========= ===========
The accompanying notes to consolidated statements are an integral part of these statements.
F-7
VERTEX INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended July 31
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $237,748 ($1,219,339) ($607,840)
---------- -------------- ------------
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities-
Depreciation and amortization 147,347 142,899 98,559
Cumulative effect of a change in accounting principle 0 0 (138,000)
Deferred taxes 162,500 (165,100) (54,400)
Gain on sale of fixed assets 2,000 (1,524) 0
Stock issued for services 0 0 240,508
Noncash restructuring charge 0 800,765 0
(Increase) decrease in assets-
Accounts receivable, net (145,552) 280,368 (12,675)
Inventories 129,863 (105,268) 71,851
Prepaid expenses and other current assets 15,490 11,040 69,174
Note and other receivables (170,755) 0 0
Increase (decrease) in liabilities-
Accounts payable (9,245) 16,293 (45,564)
Accrued expenses and other liabilities (51,859) (32,279) 17,161
Customer deposits (113,370) 199,490 (117,788)
---------- ---------- ----------
Net adjustments (33,581) 1,146,684 128,826
---------- ---------- ----------
Net cash provided by (used for)
operating activities 204,167 (72,655) (479,014)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (117,720) (76,968) (142,981)
Proceeds from sale of fixed assets 3,166 6,858 0
Deferred acquisition costs -- CTSI 0 31,564 (65,744)
Increase in other assets (3,791) (1,625) (5,681)
----------- --------- ----------
Net cash used for investing activities (118,345) (40,171) (214,406)
----------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt (2,800) (2,800) (3,033)
Repayment of obligations under capital lease (24,937) (23,374) (21,131)
Purchase of treasury stock 0 (5,400) (45,169)
Overpayment on stock option refunded 0 (135) 0
Proceeds from issuance of stock 14,378 0 344,256
----------- ---------- ----------
Net cash provided by (used for) financing activities (13,359) (31,709) 274,923
----------- ---------- -----------
Net increase (decrease) in cash 72,463 (144,535) (418,497)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 321,881 466,416 884,913
----------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $394,344 $321,881 $466,416
=========== ========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-8
VERTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
This summary of significant accounting policies of Vertex
Industries, Inc. and Subsidiaries (the Company) is presented to
assist in understanding the Company's financial statements.
These accounting policies conform to generally accepted
accounting principles and have been consistently applied in the
preparation of the financial statements.
Nature Of Business-
The Company manufactures, sells, and distributes bar code
scanners and printers and data collection terminals, software,
automated card devices and precision weighing equipment to
customers located primarily within the United States. Sales of
bar code printers are primarily to the health care industry.
Sales of precision weighing equipment are primarily to retail
pharmacies.
Use of Estimates in the
Preparation of Financial Statements-
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles Of Consolidation And Reporting-
The consolidated financial statements include the accounts of
Vertex Industries, Inc. (Vertex), and its majority-owned
subsidiary, Computer Transceiver Systems, Inc. (CTSI). During
1996, two inactive subsidiaries were merged into the Company.
All significant intercompany transactions have been eliminated.
Revenue Recognition-
The Company recognizes revenues related to software sales in
compliance with the American Institute of Certified Public
Accountants (AICPA) Statement of Position No. 91-1 "Software Revenue
Recognition." Product revenue is recorded at the time of
shipment provided that no significant vendor and post contract
support obligations remain outstanding and collection of the
resulting receivable is deemed probable of collection by
management. Maintenance and support service agreement are
recognized on a straight-line basis over the life of the
maintenance or support services agreements, generally twelve months.
F-9
Inventories-
Inventories are valued at the lower of cost (first-in, first-out
basis) or market.
Property and Equipment-
All items of property and equipment, including amounts recorded
under capital leases, are stated at cost. It is the general
policy of the Company to depreciate property and equipment under
the straight-line method over their estimated useful lives.
Leasehold improvements are amortized over the lesser of the
useful life of the improvements or the remaining term of the
lease.
The estimated useful lives of depreciable assets are as follows-
Machinery and equipment 12 years
Tools, dies and patterns 12 years
Office furniture and equipment 5-10 years
Computer equipment 3 years
Exhibit equipment 3 years
Capital leases 5 years
Cost in Excess of Net Assets
of Companies Acquired-
The excess of cost of purchased businesses over the fair value of
their assets at the acquisition date is being amortized on a
straight-line method over periods ranging from 4 to 20 years.
Excess of Fair Value of Net Assets
of Companies Acquired Over Cost-
The excess of fair value of net assets of companies acquired over
cost on the date of acquisition is being amortized on the
straight-line method over a period of 20 years.
Net Income (Loss) Per Share of Common Stock-
Net Income (loss) per share is computed based on the weighted
average number of common stock and common stock equivalents, if
dilutive, outstanding during each period as if the common stock
equivalents were converted into common stock at the beginning of
the period.
Cash Equivalents-
The Company considers all investments with an original maturity
period within three months to be cash equivalents.
F-10
Long-Lived Assets-
During 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" (SFAS 121). SFAS 121 requires,
among other things, that an entity review its long-lived assets
and certain related intangibles for impairment whenever changes
in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. As a result of its review, the
Company does not believe that any impairment currently exists
related to the long-lived assets.
Stock Based Compensation-
The Financial Accounting Standards Board issued a standard,
"Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123
requires that an entity account for employee stock compensation
under a fair value based method. However, SFAS 123 also allows
an entity to continue to measure compensation cost for employee
stock-based compensation arrangements using the intrinsic value
based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (Opinion 25).
Entities electing to remain with the accounting under Opinion 25
are required to make pro forma disclosures of net income and
earnings per share as if the fair value based method of
accounting under SFAS 123 has been applied. The accounting and
disclosure requirements of this standard are effective for the
Company's 1997 fiscal year. The Company expects to continue to
account for employee stock-based compensation under Opinion 25.
Reclassifications-
Certain reclassifications have been made to conform prior year amounts
to current year presentation.
(2) PURCHASE OF SUBSIDIARY'S ASSETS:
On August 31, 1994, pursuant to an "Asset Purchase Agreement"
dated May 1, 1993 and with the approval by the respective Boards
of Vertex and CTSI and the shareholders of CTSI, Vertex, which
owned approximately 56.9% of CTSI shares, acquired all of CTSI's
assets and assumed all of its liabilities. The purchase included
inventory, equipment, receivables, proprietary technology,
goodwill and other intangibles. The agreed purchase price of
$1,699,580 was paid by Vertex through the cancellation of CTSI's
indebtedness to Vertex in the amount of $1,257,001, with the
balance of $442,579 being paid through the issuance of 236,042
shares of Vertex common stock. Vertex common stock in the amount of
233,170 shares exchanged in this transaction were subsequently
distributed to the subsidiary's shareholders in exchange for
certain outstanding shares of common stock of the subsidiary
which have since been retired.
In connection with the acquisition, the Company recorded $535,017
of costs in excess of net assets acquired (goodwill) which
includes the market value of the shares issued plus $92,438 in
legal and accounting costs incurred. Subsequently, because of a
F-11
declining demand for the CTSI product line, the Company
recognized a $500,000 impairment in the carrying value of the
goodwill recorded in this and earlier acquisitions and revised
the estimated useful life over which future benefits are expected
to be realized to five years. As of July 31, 1996 and 1995,
unamortized goodwill in connection with the CTSI acquisition of
$77,085 and $123,234 is included in the accompanying consolidated
balance sheets, respectively. The $500,000 charged to operations
is included in restructuring expenses as disclosed in Note 14.
(3)INVENTORIES:
Inventories consist of the following-
July 31
1996 1995
Raw materials $7,432 $9,213
Work in process 67,028 74,020
Finished goods and parts, net of obsolescence reserves of
$34,619 and $59,444 in 1996 and 1995, respectively 618,719 739,809
-------- -------
$693,179 $823,042
======== ========
F-12
(4) PROPERTY, EQUIPMENT
AND CAPITAL LEASES:
Details of property, equipment and capital leases are as follows-
July 31
1996 1995
Property and equipment-
Leasehold improvements $282,228 $260,268
Machinery and equipment 223,911 223,911
Tools, dies and patterns 451,682 451,682
Office furniture and equipment 561,898 561,898
Computer equipment 93,565 0
Exhibit equipment 112,218 113,384
-------- --------
Total 1,725,502 1,611,143
Less- Accumulated depreciation and amortization (1,310,489) (1,207,671)
--------- ---------
Net property and equipment 415,013 403,472
--------- ---------
Capital leases-
Office equipment 86,448 58,670
Automobiles 55,309 55,309
--------- ---------
Total 141,757 113,979
Less- Accumulated amortization (82,613) (60,791)
--------- ---------
Net capital leases 59,144 53,188
--------- ---------
Net property, equipment and capital leases $474,157 $456,660
========= =========
Depreciation and amortization of property, equipment and capital
leases for the fiscal years ended July 31, 1996, 1995 and 1994
was $122,835 , $119,761 and $95,519, respectively.
(5) LONG-TERM DEBT:
Long-term debt consists of the following-
July 31
1996 1995
Note payable to bank, due in monthly principal
installments of $233 plus interest at 1.25% above the
prime rate $5,367 $8,167
Less- Current portion of long-term debt 2,800 2,800
------- -------
Long-term debt $2,567 $5,367
======= =======
The long-term debt matures in June 30, 1998 and is secured by telephone equipment of the Company.
F-13
(6) NOTE AND OTHER RECEIVABLES:
In May 1996, the Company signed a memorandum of agreement to
acquire the Merged NetWeave Corp., as later defined, into the
Company. NetWeave Corp. (Netweave), a related party, has been
merged with Sombers Group Inc. resulting in the Merged NetWeave
Corp. The acquisition by the Company is contingent upon the
attainment of certain financial ratios and operating results of
the Merged NetWeave Corp. at and for the six months ended January
31, 1997.
In connection with the planned transaction, the Company
advanced NetWeave $100,000 for working capital purposes and
received a promissory note. The note bears interest at 6%, will
be repaid in four monthly installments upon the completion of an
offering of the Merged NetWeave Corp. common stock and is convertible
at the Company's option, upon default, into common stock of Merged
NetWeave Corp.
In July 1996, the Company entered into a factoring agreement with
NetWeave whereby certain accounts receivable with invoice amounts
of approximately $86,000 were factored by the Company at 80%.
(7) ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued expenses and other liabilities consist of the following-
July 31
1996 1995
Professional fees $30,690 $36,130
Vacation salaries 17,003 23,858
Sales tax 20,569 34,545
Commissions 986 1,737
Payroll and deductions 27,026 11,826
Income taxes payable 2,963 43,000
------- ------
$99,237 $151,096
======== ========
(8) PENSION PLANS:
The Company maintains a 401(k) plan, which is a defined
contribution plan, covering substantially all of the nonunion
employees. Eligible employees can contribute up to 17% of their
compensation not to exceed Internal Revenue Code limits. The
Company will match 50% of the amount contributed by employees, up
to 6% of compensation as defined. Company contributions for the
years ended July 31, 1996 and 1995 was $14,865 and $5,342,
respectively. There were no matching contributions for the year
ended July 31, 1994.
F-14
(9) INCOME TAXES:
Deferred income taxes are recognized for tax consequences of
temporary differences by applying enacted statutory tax rates,
applicable to future years, to differences between the financial
reporting and the tax basis of existing assets and liabilities.
The net deferred tax assets in the accompanying consolidated
balance sheets consist of the following-
1996 1995
Deferred tax assets-
Allowance for doubtful accounts $30,000 $19,000
Deductible goodwill amortization 212,000 157,000
Inventory 9,000 5,000
Deferred revenue 21,000 0
Net operating loss carryforwards 1,496,000 649,000
--------- -------
Total deferred tax assets 1,768,000 830,000
Deferred tax liabilities -- Depreciation (77,000) (36,500)
Valuation allowance (1,496,000) (436,000)
----------- ---------
Net deferred tax asset $195,000 $357,500
=========== =========
Deferred tax assets arise from the tax benefit of net operating
loss carryforwards which are expected to be utilized to offset
taxable income and from timing differences between the
recognition in financial statement and tax returns of certain
inventory costs, bad debt reserve allowances on receivables,
depreciation on fixed assets and amortization of certain
intangible assets.
Valuation allowances on deferred tax assets have been provided in
recognition of the possibility that a portion of the net
operating loss carryforwards may expire before utilization.
The components of the income tax provision (benefit) included in
the consolidated statements of operations for the fiscal years
ended July 31, 1996, 1995 and 1994 consist of the following-
1996 1995 1994
Current-
Federal $0 $18,600 $0
State 0 24,605 0
Deferred 162,500 (165,100) (54,400)
-------- --------- --------
Total provision (benefit) $162,500 ($121,895) ($54,400)
======== ========== =========
F-15
At July 31, 1996, the net operating loss carryforwards available
to offset future taxable income consist of approximately
$3,809,000 in Federal net operating losses which will expire in
various amounts through 2010, and state net operating losses of
approximately $3,348,000 which will expire in 2002.
A reconciliation of income tax at the statutory rate to the
Company's effective rate is as follows-
1996 1995 1994
Statutory rate 34.0% (34.0%) (34.0%)
Effect of-
Valuation allowance on operating loss tax
benefits 0.0 10.9 31.3
Federal graduated rates 0.0 7.3 21.2
Permanent differences 0.6 0.8 (9.9)
State income taxes, net of Federal tax effect 6.0 (2.1) (9.8)
Alternative minimum tax 0.0 1.4 0.0
Other, net 0.0 6.6 (5.6)
------- ------ -------
Effective income tax rate 40.6% (9.1%) (6.8%)
======= ====== =======
(10) COMMITMENTS AND
CONTINGENT LIABILITIES:
Leases-
The Company leases certain equipment and vehicles under capital
leases with expiration dates ranging from March 1997 through
February 1998.
The Company leases its plant and office facilities located in
Clifton, New Jersey. The lease expires on May 31, 1998. Annual
rental is $142,560. In addition, the Company is obligated to pay
applicable real estate taxes, repairs and insurance.
In 1993, the Company began subleasing under a 30-month renewable
lease a portion of its plant in Clifton, New Jersey. During
1996, the lease was renewed for an additional 30 month period and
expires in May 1998. Under the terms of the sublease, the tenant
is required to pay annual rent of $45,657, plus a proportionate
share of utilities.
Rent expense for the years ended July 31, 1996, 1995 and 1994 was
$121,032 , $135,500 and $122,009, respectively.
F-16
Minimum lease payments and sublease rental income are as follows-
Year Ended July 31 Equipment Capital Leases Operating Leases Sublease Rental Income
1997 $30,674 $152,030 $45,657
1998 18,432 119,247 38,048
1999 7,180 0 0
2000 7,180 0 0
2001 5,385 0 0
------- --------- -------
Total 68,851 $271,277 $83,705
Less- Amount representing interest 5,694
-------
Present value of net
minimum lease payments 63,157
Less-current portion of obligations
under capital leases (32,849)
-------
Long-term portion of obligations
under capital leases $30,308
=======
Employment Agreements-
The Company has an employment agreement with one individual
through November 1996 which provides for annual compensation of
approximately $103,000 and stock options.
The Company had an employment agreement with another individual
who was terminated in October 1995. Subsequent to July 31, 1995,
the employee received approximately $22,300 in compensation under
this agreement plus 35,000 stock options at an exercise price of
$1.25 with an expiration date of September 2000 and certain
fringe benefits.
(11) STOCKHOLDERS' EQUITY:
Incentive Stock Options-
The Company has an Incentive Stock Option Plan which provides for
the granting of options to officers and other key employees to
purchase shares of the Company's common stock. The maximum
number of shares to be issued as part of the plan is 1,000,000.
The maximum term of any option is ten years and the option price
per share may not be less than the fair market value of the stock
on the date the option is granted. Options granted to persons
owning more than 10% of the voting shares of the Company may not
have a term of more than five years and may not be less than 110%
of fair market value.
F-17
July 31
1996 1995 1994
Options outstanding, beginning of year 338,200 255,700 276,200
Granted 159,000 95,500 23,000
Exercised (28,100) 0 (43,500)
Canceled (127,500) (13,000) 0
----------- --------- --------
Options outstanding, end of year 341,600 338,200 255,700
=========== ========= =========
Options price range $.475-$8.12 $.475-$8.12 $.475-$8.12
Options exercisable 99,400 123,100 81,500
Options available for grant 384,000 415,500 498,000
Other Stock Options-
In connection with an employment agreement, the Company granted
an employee an option to purchase up to 300,000 shares of common
stock, at an option price of $7.875 per share, expiring the
earlier of June 29, 2003, one year after death, or 30 days after
termination. The agreement allowed the employee to retire these
options at their original grant price, should the market price of
the Company's common stock drop below the exercise price of the
options, and have the options granted again at the then market
price. During 1996, the employee retired all 300,000 options
exercisable at $7.875 and was subsequently granted 300,000 at an
exercise price of $.50 per option.
During 1996, the Company granted 35,000 options to two services
firms as partial payment for financial and consulting services.
The options are exercisable at prices between $.75 and $.91 and
expire at various dates through February 2001. These options are
currently exercisable. During 1994, the Company granted a
consulting firm options to purchase up to 210,000 shares of
common stock at various option prices from $1.875 to $10.00 per
share, expiring between May 10, 1997 and July 1, 1997. The
options are all currently exercisable. These options were
granted as partial payment for consulting services. Also during
1994, the Company granted a consulting firm an option to purchase
12,000 shares of common stocks at the option price of $1.875 per
share, expiring June 20, 1998. The option is currently
exercisable and was in payment for consulting services.
(12) MAJOR CUSTOMERS:
During July 31, 1996, the Company had two customers which
accounted for 13.5% and 12.5% of revenue. At July 31, 1996,
approximately $229,000 and $101,000, respectively, of accounts
receivable were from those customers.
The Company had one customer that accounted for 16.5% and 26.0%
of revenue during the years ended July 31, 1995 and 1994,
respectively. At July 31, 1995, approximately $277,000 of
accounts receivable on the accompanying consolidated balance
sheets were from one customer.
F-18
(13) SUPPLEMENTAL DISCLOSURES
ON CASH FLOW INFORMATION:
July 31
1996 1995 1994
Interest paid $10,834 $14,468 $14,039
Noncash investment and financing activities-
Capitalized lease and note payable transactions
related to purchases of property and equipment $27,778 $0 $25,449
========= ========= =========
On August 31, 1994, in connection with the agreement described in
Note 2, the Company issued 236,042 shares of common stock for the
purchase of its subsidiary CTSI's assets less liabilities.
Existing intercompany debt of this subsidiary to the Company was
also canceled as part of this agreement.
During the year ended July 31, 1994, the Company issued 9,480
shares of its stock to a computer software firm for services
related to the Company's software products valued at $197,477 and
15,000 shares to a public relations consultant for services
valued at $43,031.
(14) RESTRUCTURING EXPENSES:
In the fourth quarter of fiscal 1995, the Company recorded a
restructuring charge. This amount includes the write-off of
$500,000 of goodwill acquired in the purchase of assets of the
Company's subsidiary, CTSI and $300,765 of obsolete inventory of
the Company in certain product lines which the Company is
de-emphasizing.
(15) FOURTH QUARTER ADJUSTMENTS:
There were no significant fourth quarter adjustments in 1995
other than those discussed in Note 14. Significant fourth
quarter adjustments which effected operations in the year ended
July 31, 1994 were inventory valuation write-downs of $100,000
and an increase to research and development expense of
approximately $197,000 for software product development costs
which were previously capitalized.
F-19
SCHEDULE II
VERTEX INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JULY 31, 1996, 1995 AND 1994
Balance at Additions Deductions Balance at
Beginning Charged to From End of
of Period Expense Allowances Period
Year Ended July 31, 1996-
Deducted from accounts receivable for
doubtful accounts $75,985 $0 $0 $75,985
Deducted from inventory as valuation
allowance 59,444 48,000 72,825 34,619
Year Ended July 31, 1995-
Deducted from accounts receivable for
doubtful accounts 15,000 71,015 10,030 75,985
Deducted form inventory as valuation
allowance 50,000 74,500 65,056 59,444
Year Ended July 31, 1994-
Deducted from accounts receivable for
doubtful accounts 15,000 154 154 15,000
Deducted form inventory as valuation
allowance 50,000 0 0 50,000
F-20
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: October 28, 1996 VERTEX INDUSTRIES, INC.
s/Ronald C. Byer
Chief Executive Officer, President
Pursuant to the requirements by the Securities Exchange Act
of 1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated:
October , 1996 ________________________
Chairman of the Board,
and Director
October 28, 1996 s/Ronald C. Byer
Chief Executive Officer,
President and Director
October 25, 1996 s/Robert T. McLaughlin
Chief Financial Officer
and Treasurer
October 27, 1996 s/Irwin Dorros
Director
October 25, 1996 s/Wilbur Highleyman
Director
October 25, 1996 s/George Powch
Director
-38-