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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, 1998
Commission file number 0-15066
VERTEX INDUSTRIES, INC.
(Exact name of Company as specified in its charter)
New Jersey 22-2050350
(State of incorporation) (I.R.S. Employer Identification No.)
23 Carol Street 07014
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (973) 777-3500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.005 per share
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Company was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO _______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K.______
As of October 26, 1998 the aggregate market value of the voting stock held
by non-affiliates of the Company was $ 3,444,349 (based upon the closing
price of the common stock as reported on the over-the-counter market as of
October 23, 1998).
As of October 26, 1998 the Company had 5,146,979 shares of Common Stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE:
Exhibits to Company's Registration Statement on Form S-18
(No. 33-897-NY) filed under the Securities Act of 1933, as
amended and effective June 2, 1986, its Registration Statement on
Form 8-A filed under the Securities Act of 1934 as amended, its
Annual Reports on Form 10-K filed on or about October 31, 1986
through October 29, 1997 and Current Reports filed on Form 8-K
dated January 14, 1987, July 22, 1987, April 11, 1996, and March
6, 1998, and Registration Statements on Form S-8 filed on
November 2, 1992, March 1, 1993, March 24, 1993, April 27, 1993,
October 2, 1993, October 22, 1993, February 25, 1994, September
23, 1994, January 23, 1997, July 8, 1997 and July 10, 1998. S-4
filed on July 20, 1994, and 10KA filed on June 14, 1996.
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PART I
Item 1. Business
General
Vertex Industries, Inc. ("Vertex" or "the Company")
produces and sells systems, having both software and hardware
components, that are utilized in the collection and processing of
data, the identification of goods, services and individuals,
solutions for the automation of warehouse operations and the
integration of disparate computing systems and applications. The
primary technologies related to these systems involve computers
as well as data collection devices and computer software
development involving various applications programs and computer
operating systems. The devices may be wired directly to the host
computer or transmit the data via Radio Frequency technology.
Such devices generally read pre-set encoded information and
transmit it to a computer for processing by existing or new
applications programs. The software packages, may be developed by
Vertex or purchased from a third party and resold by Vertex as
part of the solution. The Company also manufactures and markets
precision weighing equipment and weights.
The Company's systems and devices are used for the
automatic sorting and tracking of inventory, routing and
instructions for personnel as well as the collection of data in
factories, warehouses, hospitals and other commercial
establishments on a real time basis. Many of Vertex's solutions
for its current warehouse customers involve the picking and
packing of orders for customers with specific label compliance
and EDI requirements and the receiving, put-away of goods being
received from outside suppliers. The software products supplied
by The Company which allow dissimilar computers and application
programs to interact is generally referred to as middleware.
These products are generally sold in the banking, financial
services and manufacturing industries.
The Company's business focus has undergone a
transformation from primarily producing hardware devices to
developing sophisticated, software products and systems designed
for data collection and computer networking and communication
along with software resold from third parties. These systems may
also contain hardware devices manufactured by third parties which
Vertex resells as part of the solution for the customer. In the
software area, Vertex has developed and enhanced its BridgeNet
Data Collection Management System ("BridgeNet") and is developing
other related software. BridgeNet performs real time data
collection and transaction processing involving simple to complex
systems and interfaces with a wide variety of dissimilar
equipment. An application program development package for
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unskilled programmers is part of the system. BridgeNet can be
used with other manufacturer's hardware as well as with Vertex's
own devices. The Company continues to increase the different
types of computers on which BridgeNet can reside.
The Company has produced and sold 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.
In prior periods, The Company has sold coin-collection systems to
Bell Atlantic for the states of New Jersey, Pennsylvania,
Delaware, Maryland and West Virginia and to Ameritech for the
states of Ohio, Illinois, Michigan, Wisconsin and Indiana. In
Fiscal Year 1998, Vertex competed with other vendors and received
a $4.1 Million contract from the new Bell Atlantic, which now
includes NYNEX, to supply an upgraded coin collection system for
the states from Maine to Virginia. The new system not only
handles the coin collection, but unlocks all phones with a single
electronic key.
Vertex has produced and marketed a student attendance
and access control system for urban public schools. This system
also employs BridgeNet and provides automatic identification of
students and minimizes the entry of unauthorized persons in
public schools for safety and other concerns. To date, the
Company has sold numerous attendance/access control systems to
the New York City and Chicago Public School Systems.
Vertex has enhanced its software product offering with
the addition of a product called NetWeave through a licensing
agreement with the NetWeave Corporation. NetWeave is a software
middleware product that allows disparate computing systems to
interoperate with each other. NetWeave allows programmers to
connect their applications which may be residing on separate
major host systems, including those from IBM, Digital, Unisys,
Tandem and large UNIX systems. Although there are competing
products, NetWeave has a unique advantage in that it runs on some
of the major legacy systems which are not covered by the
competition such as Unisys and Tandem. In addition to its own
marketplace, NetWeave brings added capability to BridgeNet. With
the addition of NetWeave to the Vertex product offering, the
customer now has the ability to bring data from the factory or
warehouse directly to their legacy database.
The Company's offices are located at 23 Carol Street,
Clifton, New Jersey 07014-0996 and its telephone number is (973)
777-3500. The Company was organized as a corporation in the
State of New Jersey in November 1974.
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History
When originally organized, the Company was designed to
be a holding company which would acquire, own and manage a series
of related businesses. In December 1975, Vertex acquired the
shares of the Torsion Balance Company, a manufacturer of
precision weighing instruments and weights and later merged that
company into it. In July 1976, the Company acquired the assets
relating to a magnetic card reader line from the Cramer Timer
Division of Conrac Corporation. This acquisition was the
beginning of its card reader and writer product line. In April
1983 the Company purchased the assets of Identicon Corp.
("Identicon") pertaining to its existing bar code scanners and
terminals. In June 1983, Vertex also acquired the existing
magnetic stripe, optical and static card product line of Amp
Incorporated.
On or about July 10, 1987, Vertex purchased
approximately 56.9% of all the issued and outstanding shares of
Common Stock of Computer Transceiver Systems, Inc. ("CTSI") in
consideration of a certain amount of cash, its guarantee of a
four-year bank loan in the principal amount of approximately
$490,000 made to CTSI, and other arrangements. The guarantee of
the remaining bank loan was later fully settled by the payment of
$100,000 in cash and the issuance of 100,000 shares of Vertex's
Common Stock on December 16, 1991 to such bank.
CTSI had been engaged in the business of developing,
manufacturing and marketing computer terminals and label
generating systems for use in the bar code industry. The Company
assisted CTSI with the promotion and marketing of its Execuport
2400 intelligent printing system. This was accomplished both in
conjunction with the sale of related Vertex products as well as
on a stand-alone basis. CTSI common stock is publicly held, and
it has been a reporting company under the Securities Exchange Act
of 1934, as amended. CTSI moved its total operations into
Vertex's facility at 23 Carol Street, Clifton, New Jersey and
became a subtenant of Vertex.
The Company subsequently purchased the assets of CTSI
and assumed its liabilities, under the terms of an asset purchase
agreement between the two companies. This transaction was
approved by the requisite number of CTSI shareholders at a
special shareholders meeting held on August 29, 1994. The
transaction was closed on August 31, 1994. The agreement
provided for (a) the purchase by Vertex of the primary assets of
CTSI, including inter alia, patent rights, machinery, equipment,
inventories, receivables, cash, bank deposits, books, records and
goodwill and, (b) the assumption of all its liabilities. The
base purchase price of $1,600,000 which, after adjustment for
CTSI's cash, receivables and payables became $1,699,580, was
offset against CTSI's indebtedness of $1,257,001 owed to Vertex,
based upon an effective date of June 30, 1994. The difference of
$442,579 was paid by the issuance of Vertex Common Stock. The
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value of the Vertex Common Stock as of June 30, 1994 (as
calculated pursuant to the Asset Purchase Agreement) was $1.875
per share. Therefore, the Company issued 236,042 shares of its
Common Stock to CTSI which were registered by an S-4 Registration
Statement filed with the Securities and Exchange Commission
effective July 28, 1994 (Registration No. 33-76378). The shares
were distributed in an exchange offer to minority shareholders of
CTSI with an expiration date of October 14, 1994 which was
subsequently extended to November 14, 1994.
On March 4, 1998 the Company entered into an agreement with
MPEL Holdings Corp., parent company of Mortgage Plus Equity and
Loan Corp., a mortgage banking company whereby MPEL Holdings
Corp. merged with Vertex's inactive subsidiary, Computer
Transceiver Systems Inc. (OTCBB:CPTT). The agreement provided
pre-merger CPTT shareholders with 4% of the merged company, of
which Vertex owns approximately 2.7%. The merged company is
traded Over the Counter Bulletin Board under the symbol MPEH.
The Company currently owns 226,251 shares of MPEH.
Industry Background
Automated Identification involves the utilization of
specialized machines that automatically read predetermined and
generally encoded information contained on various media and
transmits 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 identification. Vertex's
operations cover only a portion of these technologies and relate
to pattern recognition, magnetic stripe cards and bar code
technologies.
As currently applied, the Company's technologies
function in several ways. They serve to identify an individual
for security access, financial transactions and time and
attendance employment records. In addition, they can provide
identification, sorting and tracking of inventory and products in
a variety of industrial and commercial settings. All of these
functions are performed automatically by special equipment,
devices and software. Each of such technologies usually perform
some, but not all, of these functions.
The primary equipment utilized in bar code technology
are printing devices, scanners, terminals and decoders. The
Company markets scanners, terminals, printers and decoders. The
scanner is a device that machine-reads the bar code. Printers
generally print bar codes. On the other hand, terminals and
decoders interpret the data received from the scanner, convert it
into standard computer language, store and then transmit it to a
computer.
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Bar coding has several significant advantages as a data
collection and entry system over visual observation and manual
recordation. Machine readability generally affords rapid and
accurate readings even in harsh industrial environments.
Moreover, data is transmitted quickly and directly to the user's
computer for storage or implementation, thus enhancing
management's control.
The Company does not manufacture or sell any devices
that interpret or encode laser cards or smart cards. Vertex has
manufactured and marketed card readers and encoders (writers)
pertaining only to magnetic stripe, which are based on older
technology, but the only sales which are currently being made are
for the repair of units and the supply of spare parts for
existing customers.
Products
Bar Code Products
Vertex distributes bar code scanners, printers and data
collection terminals, both portable and fixed. These devices are
manufactured by various companies with whom The Company has
distribution or VAR agreements. Offered in many different
models, these devices are used mainly in factories, warehouses
and hospitals.
The Company's bar code scanners fall into both contact
and non-contact categories. Vertex offers a bar code label
generating system. It is a microprocessor-based stand-alone
device that furnishes a variety of standard format labels.
In prior years, the Company has manufactured less and
less of the terminals that it sells. The nature of Vertex's
product offering is changing from that of selling hardware
devices to that of selling solutions to customer's needs which is
accomplished mainly through software offerings. The hardware
requirements of these solutions can be supplied by offering
products which best fill the need from a variety of manufacturers
under terms of resellers agreements. Vertex has such agreements
with manufacturers which allow the purchase of these devices at a
discount of 25-50% from the list price of the item.
The Company's Data Collection BridgeNet Transaction
Processor has the capability of accepting simultaneous input from
up to 32 terminals and allows such terminals to communicate with
the host computer bi-directionally through a single host port. In
systems applications, this device is used as a preprocessor to
handle a large number of terminals in order to off-load the host
in time critical applications.
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Software Products
The Company's software product, BridgeNet, performs
data collection and transactional processing functions. It is a
complete Data Collection Management System for real time data
collection providing connectivity of dissimilar equipment and
compatibility with most major networks. It includes a development
system which allows the creation of application programs by
persons not highly skilled as programmers.
While originally conceived and implemented for personal
computers running on DOS operating system, BridgeNet has been
expanded to run on UNIX-based machines such as Sun Sparc, Hewlett
Packard's HP/9000, AT&T 3B2, DEC VAX and IBM RS 6000 platforms
plus the IBM AS/400. BridgeNet also runs on most of the popular
portable data terminals on the market and has been recently
implemented on Windows 95 and Windows NT.
BridgeNet also has communication network support that
allows different types and brands of computers to communicate
with one another and to transfer information between them. It
connects different software operating systems as well as
different hardware platforms that were otherwise incompatible.
While other networking systems allow simple communication links
between different computer platforms, unlike BridgeNet, they
generally do not permit the development and writing of
application software on one operating system for use on other
operating systems. Once a BridgeNet application program has been
written, it can run on any computer hardware platform on which
BridgeNet is resident.
Due to its open architecture, corresponding flexibility
and scope, BridgeNet enlarges the number and type of individuals
who can write and implement applications software for specific
data collection and processing functions. This expansion of use
gives the user quicker and less expensive means of resolving
certain data collection and processing tasks along with ease of
software maintenance in the future.
Recent releases of BridgeNet have included direct
access to all major SQL databases and support for radio frequency
("RF") terminals. Remote terminals (direct connection or radio
frequency) running on a Vertex data collection system can have
direct access to host databases such as Oracle, Informix, Access,
Sybase and others. Powerful new RF terminals are being
manufactured by such companies as Symbol Technologies, Intermec,
Norand and Telxon. These terminals allow applications to be
developed where an operator can be in direct contact with a host
computer database from a remote location in a factory or
warehouse while he is picking and packing an order, checking
inventory status or a similar function. In these instances,
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BridgeNet would be resident on both the RF terminal and the host.
It would handle the application on the RF portable,
communications with the host and the access to the host database.
BridgeNet serves as the necessary software component in
several of Vertex's hardware systems, including its school
attendance/access control and its public telephone, coin-
collection systems.
On February 17, 1997, the Company entered into a
license agreement with Netweave Corporation to develop, market,
and support the NetWeave product worldwide. Vertex will pay
NetWeave Corporation a royalty on the initial licenses sold and
on the annual license fees paid by the customer for maintenance
and support of the NetWeave product. Vertex assumed the
responsibility of the existing customer base for ongoing support
and new license sales.
The NetWeave product lets companies integrate their
otherwise incompatible IBM, Digital, Unisys, Tandem, UNIX, and PC
systems into a seamless whole. The NetWeave product has been used
as a means of managing information by customers such as The New
York Stock Exchange, Amtrak, Credit Agricole(France), Generale
Bank(Belgium) and The Hungarian National Railway. Since the
signing of this license agreement, Vertex has added new customers
such as Rabo Bank(Belgium) and the U. S. Navy.
The synergy that exists between the NetWeave product and
BridgeNet, provides Vertex with access to new customers with
legacy systems and the need for direct data collection solutions
without having to change computer platforms or databases. The
NetWeave product has become the Company's primary offering in the
new Middleware Technologies group.
In December 1997, the Company entered into a Sales and
Marketing agreement with E.D.G. Enterprises, Inc., under the
terms of which Vertex will sell, install and maintain Trak-Star,
Part-Store and Acu-Lite software products. These products are
generally referred to as Warehouse Management Systems
Products(WMS).
Warehouse Management Systems fulfill the requirements of
material storage and retrieval operations in today's Supply Chain
management. The warehouse of today is the buffer between the
manufacturer and/or importer and the retail outlet. In some
cases, the operator of the warehouse is independent and operates
what is known as a third party facility. In that case, companies
contract out their warehouse operations to a single consolidation
facility. The operator performs the warehouse functions of
multiple companies on a contract basis under, all under one roof.
Received goods are verified against purchase orders, bar
coded put-away labels are printed, allocated to specific storage
locations and reported back to the host system. Items can be
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tracked by date, lot and serial number and selected for
inspection by many different criteria. Hand Held batch and Radio
Frequency are utilized to direct picking of customer orders,
replenishment of goods and cycle counting.
Customer orders to be shipped are picked by portable
terminal, printed or bar coded shipping documents are prepared,
routing determined by customer requirements, and packed to pre-
defined container sizes. The customer is then notified of the
shipment by electronic Advanced Shipping Notice(ASN).
Trak-Star provides several options for host computer
interfaces. Host interface transfers are available for most every
mainframe, mini and/or PC network.
Student Identification, Attendance/Access Control System
Vertex has designed a special student identification,
attendance and access control system (the "School System") for
urban public schools. The major purpose of such system is to
automate identification and record attendance of students on site
and, in so doing, restrict the access of unauthorized persons to
school facilities. The system is designed to promote a safer
environment for students and teachers.
To date, Vertex has sold and installed one School System in
each of 60 New York City public high schools. In addition, it
has sold and installed 6 School Systems to Chicago, Illinois.
The company has made no significant sales of these systems
in the past few years and does not foresee significant sales in
the future.
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.
In 1991, the Company 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.
In Fiscal Year 1998, Vertex was successful in a
competitive bid to replace the hardware, upgrade the system
software and add new features to the system previously sold to
Bell Atlantic. The resulting contract is valued at $4.1M and will
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be taken to revenue in Fiscal year 1999. Bell Atlantic has
acquired NYNEX and now covers the states from Virginia to Maine.
Vertex is discussing the sale of its Telephone System to other
telephone companies.
Card Products
Vertex has manufactured and sold many different models
of magnetic stripe card readers, encoders (writers) and decoders.
Recently, the Company has de-emphasized sales of new card
devices. Presently, the only sales being made in this area is for
repair of previously sold units and for spare parts. There have
been no significant expenditures in either marketing or R&D for
the card products in the fiscal year ending July 31, 1998.
Precision Weighing Equipment and Weights
The Company manufactures and/or sells mechanical
precision weighing equipment, weight sets and accessories under
the trade name of "Torbal". Operating on the torsion principle,
these devices are utilized to weigh small amounts of materials
from a minute fraction of a gram to 4,500 grams. The items
weighed by this equipment include prescription drugs, medicine,
powders, grain, dairy products, inks, gemstones, ball bearings
and other materials.
The Company produces and sells mainly pharmaceutical
balances and weight sets. Vertex enjoys a good reputation in the
pharmacy market. There have been no significant R&D or marketing
expenditures for these products for the fiscal year ending July
31, 1998.
Label Generating Systems
The Model 2400 Label Generating System("2400") was
acquired as part of the asset purchase agreement with Computer
Transceiver Systems Inc.("CTSI") in August 1994. Prior to the
sale of its assets to Vertex, CTSI supplied and supported an
intelligent bar code system, the Execuport 2400, intended for
various applications within the automatic identification market.
Vertex has been manufacturing the 2400 for CTSI.
The 2400 is a computerized, thermal bar code printing
system intended for inventory and document control and for use in
connection with warehousing, distribution and processing in a
variety of markets.
During Fiscal Year 1996, the Company developed the
capability of printing thermal bar code labels in a similar
manner to the Model 2400 Label Generating Systems except that the
label stock used is 4 inches wide instead of 8 1/2 inches. As
with the Model 2400, the host computer need only transmit the
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variable data, while the label formats and character sets are
stored within the printed circuit board itself.
During Fiscal Year 1998, the Company has de-emphasized
the Label Generating product line. Competition in the bar code
printing market place is such that it would be necessary for
Vertex to make a significant investment in new product
development. As the Company is now focused on software and system
solutions, the only sales in the Label Generating System area
will be in support of existing customers.
Product Prices and Revenues
The prices of the Company's products range as follows:
(a) Bar code products from $110 to $5,000; (b) Card products from
$40 to $200(repairs and parts); (c) weighing equipment and
weights from $50 to $1,200; (d) Label Generating Systems from
$100 to $5600 and (e) Software Products pricing varies with the
individual application.
The following table sets forth the contribution to
revenues of each of the Company's principal product lines during
the periods indicated:
Year Ended July 31,
Product Lines (1) 1998 1997 1996
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Barcode Equipment $412,883 $488,827 $756,039
Card Devices $66,472 $49,806 $64,674
Weighing Equipment
and weights $1,231,481 $1,291,054 $1,100,382
Label Generating
Systems $130,004 $688,195 $1,015,295
Software $753,202 $606,183 $848,090
Middleware $972,901 $104,533 $0
(1) All of the above product lines include revenues from
repair services.
Manufacturing and Supply
Vertex's manufacturing operation runs on a batch basis
in which a group of products move from station to station for
processing and testing at irregular intervals. Manufacturing is
not accomplished on a continuous flow or conventional production
line basis. Generally, the Company manufactures its products
pursuant to specific customer orders. It usually purchases a
major portion of its related inventory upon receiving such
orders.
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The Company also designs and develops its own software
utilizing an in house development staff and outside contractors.
The outside software developers are utilized on an as needed
basis and are experts in their particular field.
As the nature of the Company's business continues to
change to that of a system solutions provider, the manufacturing
portion of the business continues to decrease in size. Presently,
the major item manufactured is the pharmaceutical balance. This
business has remained constant over the past ten years.
Maintenance and Service
Depending on the product concerned, the Company offers
a ninety day to one-year warranty which includes parts and labor
regarding hardware. To date, warranty costs have been
immaterial. All other repair work is performed at standard quoted
rates, which are adjusted from time to time, and which is
generally accomplished in the Company's factory. Products sold
by the Company but manufactured by others are covered by the
manufacturers' standard warranty and service agreements.
Vertex encourages its customers to purchase annual
maintenance contracts on software purchased from the Company. The
normal fee for the maintenance contract is 15-18% of the original
purchase price of the software package. For this fee, the
customer is entitled to "bug" fixes and updates to his software
which are released by the company during the period of the
contract. The contract does not include major revisions.
Marketing and Sales
The Company sells its BridgeNet and WMS products
through a direct sales force, distributors and value added
resellers in the United States. In recent years, the Company has
placed more emphasis on direct sales of systems utilizing its
software to end users.
The NetWeave product is sold through sales
representatives and through direct channels in the United States.
Vertex has a Master Distributor, SX Consultancy LTD., based in
the UK which is responsible for sales of NetWeave in Europe, the
Middle East and Asia. They in turn have distributors for the
product in most of the countries in Europe and Australia and New
Zealand.
The Model 2400 Label Generating System has been
marketed and sold directly to end users and through value added
reseller channels. In recent years MedPlus, Inc. a company in
Cincinnati, Ohio and Time-Med, a company in Burr Ridge, Illinois
have been the primary distributors. Most of Label Generating
System sales during the prior years were made to customers in the
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medical and healthcare fields, and over 50% were made to MedPlus.
On June 5, 1997 Time-Med terminated its contract with the Company
whereby the Company received $75,000 in cash and all of the label
generating systems which Time-Med purchased from the Company as
consideration for terminating the contract. The Company expects
no further major sales of the Label Generating Systems.
Sales of Vertex's weighing equipment and weights are
made through approximately 60 laboratory supply distributors and
wholesale drug suppliers in the United States and Canada. The
Company has no written contract other than purchase orders with
any of these distributors or suppliers of this line and thus such
distribution arrangements are non-exclusive and cancelable at
will. The Company usually grants discounts ranging from 10% to
35%, depending on the product and quantity sold to such
distributors and suppliers.
The Company promotes the sales of some or all of its
products through national advertising, direct mailings,
distributors' catalogs, trade shows and product literature. Its
marketing effort has been designed to support and promote the
sales of its bar code products, software and systems solutions.
Customers
The Company sells its products, directly or indirectly,
to numerous customers, ranging in size from small companies to
Fortune 100 corporations. Its customers are end users, original
equipment manufacturers as well as distributors. Many of its
customers are repeat purchasers. Vertex's business is generally
not seasonal.
Backlog
As of July 31, 1998 the Company's backlog, was
approximately $4,496,000 as compared with a backlog of
approximately $704,000 as of July 31, 1997. The Company
currently anticipates manufacturing and delivering substantially
all of such total backlog during the current fiscal year, which
ends July 31, 1999. Backlog figures generally include those
orders that are in writing and executed by the customer and are
for both products and services. On most orders, payment is due
Within 30 days of shipment.
Research and Development
The Company intends to continue its research and
development activities mainly in the area of its BridgeNet and
NetWeave software products and considers these efforts vital to
its future business and prospect. It anticipates the
continuation and expansion of such efforts primarily directed
toward the improvement of existing products and the development
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of new products and applications in the Automatic Identification
area and Electronic Commerce. For the fiscal years ended July
31, 1998 and 1997 the Company spent $460,781 and $496,862
respectively, for research and development.
Patents
The Company holds approximately 7 active patents all of
which relate to its card reader product line in the United States
and abroad. Approximately 3 products of Vertex are covered by
these patents. Vertex is currently de-emphasizing this product
line. The Company believes, however, that it is possible that a
number its competitors and potential competitors could develop,
produce and market products similar to the Company's if they so
chose.
Employees
As of July 31, 1998 the Company had 25 full time
employees, including its officers, of whom 7 were engaged in
manufacturing, 12 in administration, 5 in engineering and
research and development, and 1 in repair services. As of July
31, 1997, Vertex had a total of 32 full time employees.
All production and maintenance employees of the Company
are covered by a collective bargaining agreement between the
Company and Local 262 of the New Jersey AFLCIO which runs through
November 5, 1999. Other Company's employees, including clerical,
administration, sales and marketing and engineering, are not
covered by such an agreement. The Company considers its
relations with its employees to be satisfactory.
Designing and manufacturing the Company's equipment
requires substantial technical capabilities in many disparate
disciplines, from mechanics and computer science to electronics
and mathematics. While the Company believes that the capability
and experience of its technical employees compare favorably with
other similar manufacturers, there is no guarantee that it can
retain existing employees or attract and hire capable technical
employees it may need in the future, or, if it is successful,
that such personnel can be secured on terms deemed favorable to
the Company.
Competition
In all its products lines, Vertex faces competition
from numerous foreign and domestic manufacturers of various
sizes. In the Company's opinion, dominant companies with which
it competes are Manhattan Associates, Kronos and Epic Data in
data collection software, McHugh Freeman and Robocom Systems in
Warehouse Management Systems, and Microsoft and IBM in middleware
technologies. Many of its competitors have greater financial,
technical and marketing resources than the Company. Competition
-15-
in these areas is further complicated by possible shifts in
market shares due to technological innovation, changes in product
emphasis and applications and new entrants with greater
capabilities or better prospects.
In the Company's opinion, its weighing equipment and
weights business is part of a maturing industry that offers
little or no prospects for long-term growth and no significant
competition. 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 Company
generally competes on the basis of price, product performance and
features.
Item 2. Properties
The Company leases from an unrelated third party a
40,000 square foot building in Clifton, New Jersey for its
manufacturing facilities and executive offices. This lease runs
from June 1, 1998 to May 31, 2003 at an annual rental of $164,340
for the first 3 years and $170,280 for the next two years.
On May 4, 1998 the Company entered into a five year
sublease with Thea and Shoen, Inc. Under the terms of the
sublease the tenant is required to pay annual rent of $53,010 for
the first three years and $54,720 for the last two year, plus a
proportionate share of utilities. The tenant occupies
approximately 17,000 square feet.
The Company's facilities are considered adequate for
present and expansion purposes.
Item 3: Legal Proceedings
On or about January 5, 1998, the Company was named as a
Respondent, along with Sombers Associates, Inc., The Somers
Group, Inc., NetWeave Corporation and Wilbur Highleyman, in a
monetary claim brought by Channel Group, Inc., a marketing and
sales company, commenced before the American Arbitration
Association, for services Channel allegedly provided to the
Sombers Group, Inc.
The Company challenged its having been named as a party
to the arbitration in the United States District Court.
On or about August 18, 1998 the Court dismissed
Channel's arbitration claim against Vertex. Channel has appealed
the Court's decision.
The Company is aware of the potential for claims
against it and other companies for damages arising from products
and services provided by the Company that were not Year 2000
ready. The Company continues to believe that any such claim
against it would be without merit. See Management Discussion and
Analysis, Year 2000.
-16-
Item 4: Submission of Matters to a Vote of Security Holders
The Company did submit matters involving the election
of directors, approval of an increase in the number of shares in
its qualified incentive stock option plan, and approval of its
selection of certified independent accountants to a vote of
security holders through the solicitation of proxies or otherwise
during the second quarter of the fiscal year covered by this
report.
-17-
PART II
Item 5: Market for Company's Common Equity and Related
Stockholder Matters
The principal market for the Company's shares of Common
Stock, par value $.005 per share is the over-the-counter bulletin
board market under the symbol VETX.
The following table sets forth, for the periods shown,
the high and low sale prices concerning such shares of Common
Stock:
High Low
1997
First Quarter 1 3/4 1 1/16
Second Quarter 1 1/2 15/16
Third Quarter 1 1/4 1
Fourth Quarter 1 3/16 11/16
1998
First Quarter 1 1/16 11/16
Second Quarter 1 3/8
Third Quarter 15/16 1/2
Fourth Quarter 1 1/2 5/8
(1) The Company split its common stock on a 2 for 1 basis
on April 19, 1993.
The approximate number of holders of record of the
Company's shares of Common Stock, par value $.005 per share as of
September 30, 1998 was 252. This number includes numerous
brokerage firms that hold such shares in street name. The
Company estimates that there are more than 3,000 beneficial
shareholders as of October 23, 1998 There were no holders of
record of the Company's shares of Preferred Stock, par value $.01
per share.
The Company has not paid any cash dividends on its Common
Stock and does not intend to do so in the foreseeable future.
-18-
Item 6. Selected Financial Data
A SUMMARY OF SELECTED FINANCIAL DATA
For the Years Ended July 31, Are As Follows:
1998 1997 1996 1995 1994
Revenues $3,566,943 $3,228,598 $3,784,480 $ 3,147,409 $ 4,013,619
Net Income (Loss) $ 48,446 $ (473,060) $ 237,748 $(1,219,339) $ (607,840)
Average Number
of Shares
Outstanding
Basic 5,133,674 5,102,003 5,090,719 5,060,832 4,805,401
Diluted 5,239,920 5,102,003 5,360,763 5,060,832 4,805,401
Net Income or
(Loss)Per Share
Basic $.01 $(.09) $.04 $(.24) $ (.13)
Diluted $.01 $(.09) $.05 $(.24) $ (.13)
Working Capital $ 1,594,271 $ 1,184,762 $ 1,489,689 $ 1,077,890 $ 1,924,166
Current Ratio 2.81:1 3.03:1 4.81:1 2.93.1 6.17:1
Property,
Equipment and
Capital Leases $ 1,941,283 $ 1,895,152 $ 1,867,259 $ 1,725,122 $ 2,235,478
Less: Accumulated
Depreciation &
Amortization $ 1,653,962 $ 1,545,071 $1,393,102 $ 1,268,462 $ 1,730,566
Property,
Equipment
Capital Leases and
and Leased
Equipment - Net $ 287,321 $ 350,081 $ 474,157 $ 456,660 $ 504,912
Total Assets $3,228,066 $ 2,433,455 $2,715,856 $ 2,663,031 $ 3,304,595
Long-Term Debt $11,424 $ 17,065 $ 32,875 $ 38,926 $ 68,382
Stockholder's
Equity $ 2,336,569 $ 1,831,412 $2,285,377 $ 2,033,251 $ 2,815,546
-19-
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Year ended July 31, 1998 compared with Year Ended July 31, 1997
Operating Revenues
Operating revenues increased $338,345 or 10% to
$3,566,943 for the fiscal year ended July 31, 1998 as
compared to $3,228,598 for the same period in 1997. Revenue
for the weighing equipment product line decreased 5% or
$59,573 to $1,231,481 for the year ended July 31, 1998 as
compared to $1,291,054 in 1997. The decrease is due to a
decrease in product demand. Revenue for the bar code
product line decreased $75,945 or 16% to $412,883 for 1998
as compared to $488,827 for fiscal 1997. The decrease is
due to a lack of orders for bar code hardware products. For
fiscal 1999 the Company expects revenues of approximately
$3.3 million of bar code hardware primarily from the Bell
Atlantic contract for 1,000 data collection devices.
Revenue for the Card Reader product line increased to
$66,472 in 1998 from $49,806 for the same period in 1997.
Management does not expect revenue from this product line to
increase and currently the company is supporting its
existing customer base.
Revenue for the software product line which
includes the Company's BridgeNet software product and
warehouse management systems increased $147,019 or 24% to
$753,202 in fiscal 1998 as compared to $606,183 for the same
period in 1997. The increase is primarily due to the Bell
Atlantic software order which was previously announced by
the Company. The Company has added additional software
products in addition to BridgeNet to its current list of
products, such as warehouse management systems and it's new
e-commerce product, "evolve". Management expects revenue
from these products to increase in future years. Revenue
from the Label Generating Systems product line decreased
$558,191 or 81% to $130,004 for the year ended July 31, 1998
as compared to $688,195 for the same period in 1997. The
decrease is due to a decrease in demand for the Model 2400
Label Generating System. The Company is currently supporting
existing customers and does not expect any future revenue
from this product line. Revenue from the Netweave licensing
agreement increased to $972,901 for fiscal 1998 as compare
$104,533 for the same period in 1997. The Company entered
into the Netweave licensing agreement in February 1997
therefore only had five months of revenues in fiscal 1997.
-20-
Operating Expenses
Cost of Sales decreased to 48% of revenues 1998
as compared to 55% in 1997. The decrease is partially
attributed to reduced costs in operating the Netweave
licensing agreement, in addition to a change in the sale mix
for fiscal 1998 as compared to 1997. As the Company moves
to a more service oriented company, the cost of sales should
continue to decrease.
Selling and administrative expenses increased
$37,777 or 3% to $1,549,726 as compared to $1,511,949. The
increase is partially due to having twelve months of
operating expenses for the Netweave licensing agreement in
fiscal 1998 as compared to only five months of operating
expenses in fiscal 1997.
Research and development expenses decreased 7%
or $36,081 to $460,781 for the year ended July 31, 1998 as
compared to $496,862 for the same period in 1997. The
decrease is due to a decrease in the staff of the R&D
department in addition to a decrease in R&D expenses for
the Netweave licensing agreement.
Operating Income (Loss)
The Company recorded an operating loss of
$176,716 for fiscal 1998 as compared to an operating loss of
$580,489 in fiscal 1997. The operating loss in 1998 is
primarily attributed to the Company's sales mix and
operating revenues not increasing sufficiently to cover the
operating expenses of the Company's operations. Management
expects to increase revenues and keep operating expenses
constant in 1999.
Other income
Interest income decreased $15,877 to $22,924 in
1998 as compared to $38,801 in 1997. The decrease is due to
funds not available to invest in the Company's money market
account and generate interest income. Interest expense
decreased $3,610 in fiscal 1998 to $2,762 as compared to
$6,372 in fiscal 1997. The decrease is due to the Company's
reduction in capital leases.
In 1997 the Company recorded $75,000 in other
income. The $75,000 pertains to the termination of Time-
Med's contract to purchase label generating systems from the
Company. The Company received $75,000 in cash and all of
the previously purchased LGS from Time-Med in settlement on
the contract. In 1998 the Company did not record any other
income.
-21-
Income Tax Provision (Benefit)
The Company recorded an income tax benefit of
$205,000 for fiscal 1998 as compared to no income tax
provision or benefit for fiscal 1997. (See footnote 9 on
page F-15)
The income tax benefit for 1998 represents the
Company's ability to utilize the net operating loss
carryforwards which were generated in past years in fiscal
1999 and beyond.
Net Income (Loss)
The Company recorded net income of $48,446 in
1998 as compared to a net loss of $473,060 in 1997. The net
income in 1998 is primarily attributed to an income tax
benefit of $205,000 which was recorded in the fourth quarter
of fiscal 1998.
The Company has shifted its focus to warehouse
management systems and its e-commerce product, "evolve".
The Company continues its efforts on the BridgeNet Data
Collection management systems and the Netweave middleware
product.
Management expects to remain profitable for
fiscal 1999 partially due to the Bell Atlantic contract,
warehouse management systems, evolve, Netweave middleware
and BridgeNet systems.
The Company continues to expand its customer
base which includes: AT&T, Bell Atlantic, Credit Lyonnais,
Dell Computers, Tenneco Packaging, MCI, Lucent Technologies,
Gemini Industries, P.C. Richards and Tommy Hilfiger.
Year 2000
The Year 2000 issue arises because many computer
hardware and software systems use only two digits to
represent the year. As a result, these systems and programs
may not process dates beyond 1999, which may cause errors in
information or systems failures. Assessments of the
potential effects of the Year 2000 issues vary markedly
among different companies, governments, consultants,
economists and commentators, and it is not possible to
predict what the actual impact may be. Given this
uncertainty, the Company recognizes the need to remain
vigilant and is continuing its analysis, assessment and
planning for the various Year 2000 issues.
-22-
In early 1998, the Company developed a program
to determine Year 2000 compliance of its computer systems,
products and services, as well as computer hardware which it
has sold but which it did not manufacture. The Company's
current product and service offerings have been designed to
be Year 2000 ready. A Year 2000 committee was formed and
several meetings have taken place to address the Company's
Year 2000 issues. The Company has identified three areas of
inquiry respecting Year 2000 compliance -- (1) the Company's
internal finance and informational systems, (2) software and
hardware sold or licensed to customers, and (3) third-party
relationships, including vendors, suppliers and customers.
The Company is in the process of conducting a
review of the above areas to determine exposure to Year 2000
issues. In the financial and information system areas, a
number of applications have been identified as being Year
2000 compliant due to their recent implementation. The
Company's core financial and reporting systems are Year 2000
compliant. Tests on the remaining systems are being
performed. The Company anticipates completing these tests
in early 1999.
In the software and hardware area, the Company
is in the process of identifying areas of exposure. The
original version of Netweave which is no longer sold has
been determined not to be Year 2000 compliant.
The Company is presently developing an upgrade
to the old version of Netweave which is Year 2000 compliant
which will be supplied to the customers currently using this
old version of Netweave.
The Company will supply all BridgeNet customers
with the processing code to insure Year 2000 compliance.
Both of the above upgrades will be available by early 1999.
In the third-party area, the Company is in the
process of assessing the Year 2000 readiness of its key
suppliers, subcontractors and business partners. This
project has been undertaken with a view toward assuring that
the Company has adequate resources for required supplies and
components, and to enable the Company to identify potential
Year 2000 non-compliance problems with hardware which it has
sold but did not manufacture. The Company plans to complete
this project in early 1999. Letters and questionnaires have
been sent out and the Company is waiting for responses.
-23-
The Year 2000 readiness of the Company's
customers varies and the Company is actively encouraging its
customers to prepare their own systems for the Year 2000.
The Company's major customer, Bell Atlantic, has tested the
Company supplied software, BridgeNet, in conjunction with
their internal systems and found BridgeNet to be Year 2000
compliant. Efforts by customers to address Year 2000 issues
may absorb a substantial part of their information
technology budgets in the near term and customers may either
delay or accelerate the deployment and implementation of new
applications and systems. This could potentially decrease
demand for the Company's products and services and thereby
effect the Company's revenues.
Although the Company believes its costs in steps
addressing any Year 2000 issues (for testing, third party
inquiries, and remedies) shall be minimal and will not have
a material adverse impact on the Company's financial
position, any failure or delay in addressing the issues
could result in the disruption of business in the Year 2000.
In addition, the Company is aware of the potential for
claims against it and other companies for damages arising
from products and services provided by the Company that were
not Year 2000 ready. The Company continues to believe that
any such claims against it would be without merit.
The Company has reviewed all internal equipment
(excluding computer equipment) which may have embedded
systems which could be date sensitive and determined that
there would be no adverse affect on Company operations if
these systems were determined not to be Year 2000 compliant.
The Company has developed a contingency plan
appointing a trouble shooting team of employees to quickly
evaluate and remedy a Year 2000 problem when one may occur
upon reaching that year.
Finally, the Year 2000 presents a number of
other risks and uncertainties that could effect the Company,
including utilities failures, competition for its personnel
skilled in the resolution of Year 2000 issues, building
systems failures, environmental systems failures, office
equipment failures, and the nature of government responses
to Year 2000 issues, among others. While the Company
continues to believe that the Year 2000 matters discussed
above will not have a material impact on its business,
financial condition or results of operations, it remains
uncertain whether or to what extent the Company may be
effected.
-24-
Year ended July 31, 1997 compared with Year Ended July 31, 1996
Operating Revenues
Operating revenues decreased $555,882 or 15% to
$3,228,598 for the fiscal year ended July 31, 1997 as
compared to $3,784,480 for the same period in 1996. Revenue
for the weighing equipment product line increased 17% or
$190,672 to $1,291,054 for the year ended July 31, 1997 as
compared to $1,100,382 in 1996. The increase is due to an
increase in product demand. Revenue for the bar code
product line decreased $267,212 or 35% to $488,827 for 1997
as compared to $756,039 for fiscal 1996. The decrease is
due to a lack of orders for bar code hardware products.
Revenue for the Card Reader product line decreased to
$49,806 in 1997 from $64,674 for the same period in 1996.
Management does not expect revenue from this product line to
increase and currently the company is supporting its
existing customer base.
Revenue for the software product line which
includes the Company's BridgeNet software product decreased
$137,374 or 16% to $710,716 in fiscal 1997 as compared to
$848,090 for the same period in 1996. BridgeNet continues
to be the Company's main focus and the product of the
future. The Company did not generate as many custom
application projects as it had forecasted for 1997.
Management expects revenue from the BridgeNet product line
coupled with the NetWeave product line to increase in future
years. Revenue from the Label Generating Systems ("LGS")
product line decreased $327,100 or 32% to $688,195 for the
year ended July 31, 1997 as compared to $1,015,295 for the
same period in 1996. The decrease is due to a decrease in
demand for the Model 2400 Label Generating System. The
decrease is also due to Time-Med terminating its contract to
purchase the Model 2400 LGS.
Operating Expenses
Cost of Sales increased to 55% of revenues 1997
as compared to 46% in 1996. The increase is attributed to a
reserve for obsolete inventory of $132,000 and in cost of
sales of $155,000 for the NetWeave Licensing agreement.
Selling and administrative expenses increased
$226,411 or 18% to $1,511,949 as compared to $1,285,538.
The increase is primarily due to the NetWeave Licensing
Agreement which generated $123,000 in selling and
administrative expenses for fiscal 1997. The increase is
also due to a $50,000 contingency reserve for the
restructuring of the NetWeave Licensing Agreement in
addition to a $80,000 reserve for the NetWeave note
receivable and factored receivables.
-25-
Research and development expenses increased 32%
or $119,544 to $496,862 for the year ended July 31, 1997 as
compared to $377,318 for the same period in 1996. The
increase is due to $68,000 from the NetWeave Licensing
Agreement in addition to $51,000 from the Company's R&D
department. The Company did not generate sufficient custom
programming jobs so programmers spent more time on
enhancing the Company's software products.
Operating Income (Loss)
The Company recorded an operating loss of
$580,489 for fiscal 1997 as compared to operating income of
$392,566 in fiscal 1996. The operating loss in 1997 is due
to a number of factors such as a decrease in revenue of
$555,882 coupled with an increase in operating expenses of
$417,173. The operating loss is also due to $262,000 in non-
recurring changes for fiscal 1997. Management expects to
increase revenues and keep operating expenses constant in
1998.
Other income
Interest income increased from $21,961 to
$38,801 in 1997 as compared to $16,840 in 1996. The
increase is due to additional funds available which the
Company invested and generated interest income. Interest
expense decreased $4,462 in fiscal 1997 to $6,372 as
compared to $10,834 in fiscal 1996. The decrease is due to
the Company's reduction in capital leases.
In 1997 the Company recorded $75,000 in other
income. The $75,000 pertains to the termination of Time-
Med's contract to purchase label generating systems from the
Company. The Company received $75,000 in cash and all of
the previously purchased LGS from Time-Med in settlement on
the contract.
Net Income (Loss)
The Company recorded a net loss of $473,060 in
1997 as compared to net income of $237,748 in 1996. The net
loss in 1997 is attributed to a decrease in operating
revenues, and an increase in operating expenses. The
Company recorded $262,000 in non-recurring charges in fiscal
1997. The non-recurring charges relate to inventory
reserve, reserve for notes receivable and factored
receivables and the restructuring of the NetWeave Licensing
Agreement.
-26-
The Company continues to focus on its BridgeNet
Data Collection Management System and the NetWeave
middleware product. The majority of the Company's R&D
expenditures are spent on BridgeNet and NetWeave. The
Company continued its R&D effort on porting BridgeNet to
Windows 95 and Windows NT and expects to generate future
revenue from this effort.
In addition the Company has hired a new Vice
President of Sales and Marketing in August, 1997 and has
hired an additional sales person in October 1997. The
Company anticipates increased revenues from the above two
hires.
The Company continues to expand its customer
base which includes: AMP, Inc., Bell Atlantic, Lucent
Technologies, Gemini Industries, P.C. Richards and Tommy
Hilfiger. The Company anticipates future custom application
projects with the above mentioned companies.
Capital Resources and Liquidity:
Working capital increased to $1,594,271 at July
31, 1998 from $1,184,762 on July 31, 1997. The increase is
primarily due to an increase in accounts receivable and
investment securities, a decrease in inventory, coupled with
an increase in accrued expenses and other liabilities and an
increase in deferred revenue in 1998 as compared to 1997.
The Company's cash position increased from $608,553 at July
31, 1997 to $631,362 at July 31, 1998 due to the above
factors. In September 1998 the Company secured a $600,000
working capital line of credit with a New Jersey lending
institution. The line of credit was specifically granted to
fund the Bell Atlantic project and expires on February 28,
1999.
Capital expenditures were approximately $46,000
and $28,000 for the fiscal years ended July 31, 1998 and
1997, respectively. Capital expenditures are primarily
computer equipment used for Research and Development and
internal office use.
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.
-27-
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
On March 6, 1998 the Company filed an 8-K for the
change in independent public accountants from Arthur
Andersen, LLP to Sax, Macy, Fromm & Company for fiscal year
ended July 31, 1998.
-28-
PART III
Item 10. Directors and Executives Officers of the Company
Certain information about directors and
officers of the Company is contained in the following
table:
Name Age Position
James Q. Maloy(1) 66 Chairman
and Director
Ronald C. Byer(1) 65 President,
CEO and
Director
Robert T. McLaughlin 36 Chief Financial
Officer and
Treasurer
Barbara H. Martorano 41 Secretary
Wilbur Highleyman(2) 65 Director
George Powch(2) 50 Director
Irwin Dorros(2) 69 Director
(1) Members of Stock Option Committee and Trustees under
the 401(K)Plan.
(2) Members of Audit Committee.
All directors hold office until the next annual
meeting of shareholders of the Company or until their
successors have been elected and qualified. Officers
serve at the discretion of the Board of Directors.
Directors who are not officers receive $1,000 annual
compensation, paid quarterly, for attending director's
meetings and are reimbursed for all related expenses.
Mr. Maloy, a co-founder of the Company, has been its
Chairman of the Board of Directors and a director on a
full-time basis since its inception in 1974. In 1983, he
became President and chief executive officer as well.
From 1962 to 1974, Mr. Maloy served as executive vice
president, as well as marketing and engineering managers
-29-
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 military. Mr. Maloy is a graduate of City College of
New York with a bachelor's degree in electrical
engineering. On July 31, 1995 Mr. Maloy stepped down as
President of the Company and on January 17, 1996 he
stepped down as Chief Executive Officer, but remains
Chairman of the Board, and a Director.
Mr. Byer joined the Company in 1975 and has served
as Vice President of Marketing and Sales since 1979,
Treasurer since 1983, Executive Vice President since 1985
and a Director since 1976. From 1963 to 1975, Mr. Byer
held various positions at Datascan, Inc. After its
acquisition by Dymo Industries, Inc., he became manager
of its newspaper computer systems group. From 1958 to
1972 Mr. Byer was employed by Bendix Aviation Corp. Mr.
Byer has a bachelor's degree in electrical engineering
from Rensselaer Polytechnic Institute ("RPI"). Mr. Byer
was promoted to President of the Company on July 31, 1995
and to Chief Executive Officer on January 17, 1996.
Mr. McLaughlin joined the Company in November, 1995
and has served as Chief Financial Officer and Treasurer.
Mr. McLaughlin is a Certified Public Accountant and
started his career in public accounting with the firm of
Peat Marwick Mitchell & Co. From 1988 to 1992 he was
Vice President, Treasurer and Controller of Valley
Savings Bank (NASDAQ:VSB). From 1992 to 1994 he was
Assistant Controller of Hanover Direct, Inc. (AMEX:HDI).
From 1994 until he joined the Company Mr. McLaughlin
operated his own public accounting firm. Mr. McLaughlin
has a Bachelor of Science degree in accounting from
Manhattan College.
Mrs. Martorano joined the Company in June, 1990 and
has served in a variety of positions, including Sales
Coordinator, Office Administrator, Assistant to the
Secretary, President and Chairman of the Board, as well
as, Corporate Secretary as of January 17, 1996. Mrs.
Martorano is a graduate of Berkeley, Garret Mountain
Campus.
Dr. Highleyman was elected to the Company's Board of
Directors in 1985. He is currently chairman of NetWeave,
a network software vendor. From 1962 to date he founded
and has served as chairman of the board of directors of
-30-
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.
Mr. Powch has served as a Director of the Company
since 1987. He is President & CEO of Huber + Suhner
(North America) Inc., responsible for the North American
units of Huber + Suhner AG of Switzerland. These include
Champlain Cable Corporation, a manufacturer of specialty
wire and cable, Huber + Suhner, Inc. a manufacturer and
reseller of RF and microwave components for
telecommunications, and Huber + Suhner (Canada) Ltd. He
was previously Vice President & General Manager of Cinch
Connectors, a division of Labinal Components & Systems,
Inc. From 1987 to 1993, Mr. Powch was President of BFI-
IBEXSA International Inc., a distributor of electronic
components. Prior to that, he held a variety of
positions including President of Diffracto Ltd.(1984-
1986) and VP & General Manager of Bendix's Robotics
Division (1981-1983). Mr. Powch has an MBA degree from
Harvard Business School, an M.S. degree from Stanford
University and a B.S. from MIT, both in Electrical
Engineering.
Dr. Dorros was elected to Vertex's Board of
Directors in 1987. He is currently President of Dorros
Associates, consultants in telecommunications, and serves
as Chairman of the New Jersey Commission on Science and
Technology. From 1982 to July 1993 Dr. Dorros served as
Executive Vice President and Director of Bell
Communications Research ("Bellcore"). He was responsible
for all the Bellcore's technical programs including
research, development and engineering. From 1978 to
1982, he served as an Assistant Vice President of AT&T
for network planning. From 1956 to 1978, Dr. Dorros was
employed by Bell Telephone Laboratories in various
capacities, including Director of Systems Engineering
programs. His current consulting work pertains to
management and mergers and acquisitions in
telecommunications. Dr. Dorros holds Bachelor and Master
of Science degrees from the Massachusetts Institute of
Technology and a Doctorate in Electrical Engineering from
Columbia University. He is a member of the National
Academy of Engineering.
-31-
Item 11. Executive Compensation
The following table sets forth information concerning
the annual and long-term compensation for services in all
capacities to the Company for the fiscal years ended July
31, 1998, 1997 and 1996 of those persons who were, at
July 31, 1998, executive officers of the Company earning
annually $100,000 or more:
SUMMARY COMPENSATION TABLE
Annual Long-Term Compensation All Other
Compensation Compensation
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted All
Name and Annual Stock LTIP Other
Principal Salary Bonus Compensation Award(s) Options/ Payouts Compensation
Position Year ($) ($) ($) ($) SARs (#) ($) ($)
Ronald 1998 $115,000 - $5,553 - - - -
C.Byer
CEO 1997 $115,000 - $6,150 - - - -
President
1996 $106,480 - $6,055 - - - -
(1) All Officers and non-union employees of Vertex are covered by
a pension plan that is financed by voluntary employee and Company
contributions. See "401(k) Savings and Retirement Plan" and Note 8
of Notes to Financial Statements.
(2) Messr. Byer is provided with an automobile by the
Company; a portion of which may represent the personal use thereof
estimated at $2,500 per year and is excluded.
On November 13, 1995 Mr. McLaughlin was granted 50,000 stock
options at an exercise price of $.75 which vest over five
years and expire on November 13, 2005. On November 13, 1997
Mr. McLaughlin was granted 25,000 stock options at an
exercise price of $.81 which vest over five years and expire
on November 13, 2007. These shares were granted under the
Company's Incentive Stock Option Plan. Stock appreciation
rights are not granted under the Incentive Stock Option
Plan. The Company does not currently have in effect a Long-
Term Incentive Plan ("LTIP") and, consequently, no such
awards were granted to Vertex's executive officers in fiscal
years covered above.
There were no unexercised options, under the incentive
stock option plan to purchase the Company's common stock in
Fiscal 1998 by the above named officers. On March 31
1997 Mr. McLaughlin exercised an option for 10,000 shares
of common stock.
-32-
The Company had no other executive officers other than
Mr. Maloy, Mr. Byer, Mr. McLaughlin and Mrs. Martorano.
The Company entered into a three (3) year employment
contract with Robert Morsch commencing on May 1, 1998 to
serve as its Vice President of Sales and Marketing. Under
this contract, Mr. Morsch is to receive as compensation: (a)
an annual salary of $95,000 per annum plus a cost of living
increase each year; (b) 1% commission on the company's
operating revenue; (c) grant of 70,000 stock options at an
exercise price of $.68 (35,000 options immediately vest,
with the remaining 35,000 options vesting on January 1,
1999); (d) 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;(e) reimbursement of business
expenses incurred and (f) the same group benefits received
by other Company executives. The above stock options are in
addition to the 200,000 options previously granted at an
exercise price of $.75 pursuant to the Company's Incentive
Stock Option Plan.
On September 10, 1998 the Company entered into a two
(2) year employment contract with Ronald Byer, Jr. to serve
as its Director of Middleware Technologies. Under this
contract, Mr. Byer, Jr. Is to receive as compensation: (a)
an annual salary of $104,500 per annum for the first year
and $109,725 per annum for the second year; (b) a grant of a
five year stock option to purchase up to 25,000 shares of
the Company's common stock under its Incentive Stock Option
Plan at an exercise price of $.94; (c) reimbursement of
business expenses and (d) the same group benefits received
by other company executives. The above stock options are in
addition to the 50,000 options previously granted at an
exercise price of $1.06 pursuant to the Company's Incentive
Stock Option Plan.
Under the Company's Incentive Stock Option Plan ("The
Plan"), options to purchase a maximum of 2,000,000 shares of
its Common Stock may be granted to officers and other key
employees of the Company. Options granted under the Plan
are intended to qualify as incentive stock options under the
Economic Recovery Tax Act of 1981 (the "1981" Act) as
amended.
The Plan is administered by the Board of Directors and
a committee presently consisting of two members of the Board
which determines which persons are to receive options, the
number of shares that may be purchased under each option and
the exercise prices. In the event an optionee voluntarily
terminates his employment with the Company, he has the right
to exercise his accrued options within 30 days of such
termination. However, the Company may redeem any accrued
options held by each optionee by paying him the difference
-33-
between the option price and the then fair market value. If
an optionee's employment is involuntarily terminated, other
than because of death, he also has the right to exercise his
accrued options within 30 days of such termination. Upon
death, his estate or heirs have one year to exercise his
accrued options. The maximum term of any option is ten
years and the option price per share may not be less than
the fair market value of the Company's shares on the date
the option is granted. However, options granted to persons
owning more than 10% of the voting shares of the Company may
not have a term in excess of five years and the option price
per share may not be less than 110% of the fair market value
on the date the option is granted.
If the aggregate fair market value of the shares of
Common Stock (determined at the time the option is granted)
with respect to which incentive stock options are
exercisable for the first time by such optionee during any
calendar year (under all such plans) exceeds $100,000, then
only the first $100,000 of such shares so purchased will be
treated as exercised under the Plan and any excess over
$100,000 so purchased shall be treated as options which are
not incentive stock options. This rule shall be applied by
taking options into account in the order or sequence in
which they are granted. Options must be granted within ten
years from the effective date of the Plan.
Options granted under the Plan are not transferable
other than by will or by the laws of descent and
distribution. Options granted under the Plan are protected
by anti-dilution provisions increasing the numbers of shares
issuable thereunder and reducing the exercise price of such
options, under certain conditions. The Plan expires on
October 9, 2005. Any option outstanding at the termination
date will remain outstanding until it expires or is
exercised in full, whichever occurs first. At the Company's
annual meeting in the second quarter of fiscal 1998 the
Company's shareholders approved an additional 500,000 shares
of common stock to be issued under the incentive stock
option plan for a total of 2,000,000 shares of common stock
in the plan.
As of July 31, 1998 options to acquire 950,000 shares
of the Company's Common Stock at exercise prices of $.475 to
$8.12 per share have been granted under the Plan to 13
employees and three directors of the Company. As of July
31, 1998 298,400 options have been exercised and 827,600
options are outstanding, with 373,800 options presently
exercisable.
During fiscal 1998 the Company granted 20,000 options
at an exercise price of $.38 per share, to the Company's
legal counsel as partial payment for legal services. These
options are currently exercisable and expire on December 23,
-34-
2000. The underlying shares have been Registered under the
Securities Act of 1933 on form S-8. During fiscal 1997 the
Company granted 20,000 and 120,000 options to two service
firms as partial payment for financial, legal and consulting
services. The 20,000 options are exercisable at $1.00 and
expire on January 9, 2000. The 120,000 options expired on
July 7, 1998. The underlying shares have been registered
under the Securities Act of 1933 on form S-8. During fiscal
1996 the Company granted 35,000 options to two service firms
as partial payment for financial, legal and consulting
services. The options are exercisable at 20,000 options at
$.91 and 15,000 options at $.75 and expire on February 14,
2001 and January 26, 1999.
Vertex maintains a 401(k) savings plan (the "401(k)
Plan") for the benefit of all employees age 18 or over who
have worked for at least six months and who are not covered
by a collective bargaining agreement. The 401(k) Plan is
qualified under Section 401(a) of the Code and is intended
to qualify under Section 401(k) of the Code.
Under the current terms of the 401(k) Plan, employees
may elect to defer from Federal income tax from 1% to 17% of
their annual compensation, not to exceed Internal Revenue
Code limits and have it contributed to the 401(k) Plan on
their behalf. In addition, Vertex makes a contribution of
up to 3% of a contributing employee's salary. The salary
deferrals are fully vested, while the Company's
contributions vest 20% upon the completion of the second
year of service with the Company or its subsidiaries, 20%
upon completion of the third year of service, 20% upon the
completion of the fourth year of service, 20% upon the
completion of the fifth year of service and the remaining
20% upon the completion of the sixth year of service or, if
earlier, upon the death, disability or retirement of the
participant. Benefits under the 401(k) Plan are generally
distributed in a lump sum following the participant's
retirement, death, disability or termination of employment,
or in a case of hardship, prior to the termination of the
participant's employment.
The assets accumulated by the 401(k) Plan are held in a
trust, the trustees of which are Messrs. Maloy and Byer, who
are officers and directors of the Company. Under the terms
of the 401(k) Plan, Vertex has agreed to indemnify the
trustees to the fullest extent permitted by law against any
liability whatsoever for any action taken or omitted by them
in good faith in connection with the 401(k) Plan unless it
results from their own willful misconduct.
-35-
The charge against income for matching contributions
for fiscal 1998, 1997 and 1996 were $3,255, $5,787, and
$14,865, respectively.
The following directors of Vertex were granted
qualified stock options in the amounts specified opposite
their names, at the exercise prices so indicated and on the
dates specified:
Name of Number of Exercise Price Date of
Director Option Shares (1) Per Option (1) Grant
Wilbur Highleyman 32,000 $ 4.25 1/20/93
10,000 1.00 6/11/97
Irwin Dorros 32,000 $ 4.25 1/20/93
10,000 1.00 6/11/97
George Powch 24,000 $ 4.25 1/20/93
10,000 1.00 6/11/97
(1) Adjusted for 2 for 1 stock split effective April 19, 1993.
(2) No options were granted to Directors in Fiscal 1998.
(3) The above options were granted under the incentive stock
option plan as discussed above.
-36-
Item 12: Security Ownership of Certain Beneficial Owners and
Management
The following information table sets forth certain
information regarding the Company's Common Stock owned on
September 30, 1998 by (i) each who is known by the Company to own
beneficially more than 5% of its outstanding Common Stock, (ii)
each director and officer, and (iii) all officers and directors as
a group:
Names and Address of
Directors, Officers and Shares Owned (1) (2)
5% Shareholders Number Percent
James Q. Maloy 1,202,208 23.4
23 Carol Street
Clifton, New Jersey
Ronald C. Byer 448,422 8.7
23 Carol Street
Clifton, New Jersey
All officers and director 1,702,630 33.1
as a group (4 persons)(3)
(1) Does not give effect to the issuance of up to 2,000,000
shares of Common Stock reserved for issuance under the
Company's incentive stock option plan, 445,000 shares
under non-qualified stock options.
(2) Gives effect to a 2 for 1 stock split effective April
19, 1993
(3) Includes 50,000 shares of common stock owned by Mr.
Powch and 2,000 shares of Common Stock owned by Dr.
Highleyman's pension plan.
Item 13. Certain Relationships and Related Transactions
On February 17, 1997 the Company entered into a
License Agreement with NetWeave Corporation to develop,
market, sell and support the NetWeave product worldwide.
The Company will pay NetWeave a royalty on the initial
licenses sold and on annual license fees paid by the
customer for maintenance and support of the NetWeave
product. Under terms of the License Agreement, NetWeave
Corporation assigns its existing customer base to The
Company along with the existing sales representative
agreements in the U.S. and the master distributor agreement
with SX Consultancy for Europe and Asia. SX Consultancy is
a European software distributor and developer of custom
software based in the UK with ties to distributors in Asia.
-37-
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.
-38-
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 Financial Statements
Reports of Independent Certified Public
Accountants
Balance Sheets as of July 31, 1998 and 1997
Statements of Operations for the Years Ended July
31, 1998, 1997 and 1996
Statements of Changes in Stockholders' Equity for
the Years Ended July 31, 1998, 1997 and 1996
Statements of Cash Flows for the Years Ended July
31, 1998, 1997 and 1996.
Notes to Financial Statements
2. Financial Statement Schedules:
Schedules for the Years Ended July 31, 1998, 1997
and 1996.
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.
-39-
3. Exhibits:
The following list of exhibits are incorporated by
reference from the Company's Registration Statement filed
under the Securities Act of 1933, as amended (File No. 33-
897-NY) and those filed pursuant to Registration Statement
on Form 8-A under the Securities Exchange Act of 1934.
1.1 Form of Underwriter's Warrant Agreement
and Warrant.
2.1 Form of Common Stock Certificate.
3.1 Articles of Incorporation and Amendment.
3.2 Amended By-laws (See also
Registration Statement on Form 8A referred to
above).
5.1 Opinion of Cascone & Rapaport,
including its consent.
10.1 Assets Purchase Agreement
between the Company and Identicon Corp. dated
April 25, 1983.
10.2 Assets Purchase Agreement
between the Company and Amp Incorporated
dated June 2, 1983.
10.3 License Agreement between the
Company and Speed Queen Company dated March
16, 1985 and amendment thereto.
10.4 Distributor Agreement between
the Company and Saab Automation AB dated
September 4, 1984 and amended June 17, 1986.
10.5 Incentive Stock Option Plan
dated October 10, 1985 and Form of Agreement.
10.6 Union Contract between the
Company and Local 2262 of New Jersey dated
November 6, 1984.
10.9 Lease between the Company and
Ninth Avenue Equities Co., dated May 9, 1983.
10.10 Agreements between the Company
and Robert L. Richardson dated August 1,
1981.
10.11 Agreement between the Company
and Calvin S. Wesley dated December 20, 1984.
-40-
10.12 Promissory Notes of the
Company issued to Messrs. Maloy and Byer
dated December 15 and 16, 1975.
10.13 Forms of Agreement between the
Company and its Sales Representatives.
10.14 Purchase Agreement between
Vertex, VBM and Dicom, Amendment and certain
schedules thereto.
10.15 Purchase Agreement between
Vertex and CTSI and certain schedules
thereto.
10.16 401(k) Retirement and Savings Plan.
10.17 OEM Agreement between Vertex and Scientific
Games, Inc. dated November 2, 1987.
10.18 Employment Agreement between the Company and
Carlo Pastore dated May 14, 1993.
10.19 Employment Agreement between the Company and
Kevin R. Halloran dated May 19, 1993.
10.19 Lease Agreement between the Company and
KHIP Associates dated August 20, 1993.
10.20 Sublease Agreement between the Company and
Thea & Schoen, Inc. dated May 20, 1993.
10.21 Consulting Agreement between the Company and
Kearney Systems, Inc. dated September 24, 1993.
10.21 Royalty Agreement between the Company and
Kearney Systems, Inc. dated September 24, 1993.
10.22 Commission Agreement between the Company and
Tri-State Telecomputers, Inc. dated June 7, 1993.
10.23 Employment Termination Agreement between the
Company and Carlo Pastore dated September 26, 1995.
10.24 Sublease Agreement between the Company and
Thea & Schoen, Inc. dated October 12, 1995.
10.25 Retainer agreement between Company and
Jeffrey Marks, Esq. Dated January 26, 1996.
41
10.26 Consulting and Stock Option agreement between
Company and Vamcom Corporation dated February 15, 1996.
10.27 Indemnity Agreement between Company and
Robert T. McLaughlin dated April 3, 1996.
10.28 Letter Agreement between
Company, Computer Transceiver Systems, Inc
and Seymour H. Bucholz and Rosner, Bresler,
Goodman & Bucholz dated May 1, 1996.
10.29 Memorandum of Agreement and
Amendment between Company and NetWeave
Corporation and Somber Group Inc. dated May
23, 1996.
10.30 Loan Agreement and Promissory
Note between Company and NetWeave Corporation
dated May 30, 1996.
10.31 Certificate of Merger of
Sentry One into Vertex Industries, Inc. dated
June 17, 1996.
10.32 Certificate of Merger of
Versci, Inc. into Vertex Industries, Inc.
dated June 17, 1996.
10.33 Master Distribution Agreement
between Company and NetWeave (Europe) dated
July 1, 1996.
10.34 Factoring Agreement between
Company and NetWeave Corporation dated July
18, 1996.
10.35 Assignment and Amendment to Factoring Agreement
Dated October 8, 1996.
10.36 Agreement with Davis Sauders Associates, LLC.
Dated November 1, 1996.
10.37 Amendment to Assignment and Amendment to
Factoring Agreement dated November 6, 1996.
10.38 Retainer Agreement between
Company and Law Offices of Jeffrey D. Marks,
Esq. P.C. dated January 9, 1997.
10.39 Pre-License Agreement between
Company and NetWeave Corporation dated
February 18, 1997.
-42-
10.40 License Agreement between
NetWeave Corporation and Vertex Industries,
Inc. dated February 19, 1997.
10.41 Consulting Agreement between
Company and Summit Marketing & Public
Relations, Inc. dated July 7, 1997.
10.42 Real Estate Lease between the Company and Ninth
Avenue Equities; October 15, 1997 (filed herewith)
10.43 Legal Services Agreement between the Company and
Jeffrey D. Marks, Esq. P.C. dated December 24, 1997
(filed herewith)
10.44 Purchase Agreement between the Company and
Mortgage Plus; dated March 3, 1998 (filed herewith)
10.45 Employment Contract between the Company and
Robert Morsch; dated May 1, 1998 (filed herewith)
10.46 Sub-lease between the Company and Thea and
Schoen, Inc.; May 4, 1998 (filed herewith)
10.47 Agreement between the Company and Middleberg &
Associates; dated June 1, 1998 (filed herewith)
10.48 Employment Contract between the Company and
Ronald Byer, Jr.; dated September 10, 1998
(filed herewith)
(b) Reports on Form 8-K
The Company filed a report on form 8-K on March 6, 1998
reporting a change in independent public accountants from
Arthur Andersen LLP to Sax, Macy, Fromm & Company for fiscal
year ended July 31, 1998.
-43-
VERTEX INDUSTRIES, INC.
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS:
Reports of Independent Certified Public Accountants F-2, F-3
Balance Sheets as of July 31, 1998 and 1997 F-4, F-5
Statements of Operations for the Years Ended
July 31, 1998, 1997 and 1996 F-6
Statements of Changes in Stockholders' Equity
for the Years Ended July 31, 1998, 1997 and 1996 F-7
Statements of Cash Flows for the Years Ended
July 31, 1998, 1997 and 1996 F-8
Notes to Financial Statements F-9 to F-18
SUPPLEMENTAL SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts for
the Years Ended July 31, 1998, 1997 and 1996 F-19
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Vertex Industries, Inc.
We have audited the accompanying balance sheet of Vertex
Industries as of July 31, 1998 and the related statements of
operations, changes in stockholders' equity, and cash flows for
the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these 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 financial statements referred to above
present fairly, in all material respects, the financial position
of Vertex Industries, Inc. as of July 31, 1998 and the results of
its operations and its 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
financial statements taken as a whole. The schedule listed in
the index to financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and
is not part of the basic financial statements. This schedule has
been subjected to the auditing procedures applied in the audit of
the basic 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 financial statements taken
as a whole.
s/Sax Macy Fromm & Co., PC
Sax Macy Fromm & Co., PC
Certified Public Accountants
Clifton, New Jersey
October 14, 1998
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vertex Industries, Inc. and subsidiary:
We have audited the accompanying consolidated balance sheets of
Vertex Industries, Inc. and subsidiary (a New Jersey Corporation)
as of July 31, 1997 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the
years ending July 31, 1997 and 1996. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Vertex Industries, Inc. and subsidiary as of July 31,
1997, and the results of their operations and their cash
flows for the years ending July 31, 1997 and 1996, in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. The
schedule listed in the index to consolidated financial statements
is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the
basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data
required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Roseland, New Jersey
October 7, 1997
F-3
VERTEX INDUSTRIES, INC.
BALANCE SHEETS
JULY 31, 1998 AND 1997
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $631,362 $608,553
Accounts receivable, less allowance for doubtful
accounts of $75,985
at July 31, 1998 and 1997 837,399 450,266
Note and other receivables, net 67,344 95,451
Inventories, net 464,389 582,609
Investment securities 452,502 0
Prepaid expenses and other current assets 21,348 32,861
-------- --------
Total current assets 2,474,344 1,769,740
--------- ---------
PROPERTY, EQUIPMENT AND CAPITAL LEASES
Property and equipment 1,799,526 1,753,395
Capital leases 141,757 141,757
--------- ---------
Total property, equipment and
capital leases 1,941,283 1,895,152
--------- ---------
Less- Accumulated depreciation and
amortization (1,653,962) (1,545,071)
----------- -----------
Net property, equipment and capital leases 287,321 350,081
----------- -----------
OTHER ASSETS:
Cost in excess of net assets of companies
acquired, net of amortization
(accumulated amortization of $383,315 and
$350,395 at July 31, 1998
and 1997, respectively) 0 63,492
Deferred tax asset 400,000 195,000
Other assets 66,401 55,142
---------- ----------
Total other assets 466,401 313,634
---------- ----------
Total assets $3,228,066 $2,433,455
========== ==========
See notes to financial statements.
F-4
VERTEX INDUSTRIES, INC.
BALANCE SHEETS
JULY 31, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
CURRENT LIABILITIES:
Current portion of long-term debt $ 0 $2,567
Current portion of obligations under capital
leases 5,641 14,516
Accounts payable 273,726 129,622
Accrued expenses and other liabilities 257,094 170,643
Deferred revenue 343,612 267,630
-------- -------
Total current liabilities 880,073 584,978
-------- -------
LONG-TERM LIABILITIES:
Obligations under capital leases, net of
current portion 11,424 17,065
-------- -------
Total long-term liabilities 11,424 17,065
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;
5,156,979 and 5,137,979 shares issued at July
31, 1998 and 1997, respectively 25,785 25,690
Additional paid-in capital 5,223,293 5,201,138
Accumulated deficit (3,296,401) (3,344,847)
Unrealized gain on investment securities 429,061 0
----------- ----------
2,381,738 1,881,981
Less- Treasury stock, 10,000 and 12,872 shares
at cost at July 31, 1998 and 1997, respectively (45,169) (50,569)
----------- -----------
Total stockholders' equity 2,336,569 1,831,412
----------- -----------
Total liabilities and stockholders'
equity $3,228,066 $2,433,455
=========== ===========
See notes to financial statements.
F-5
VERTEX INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
For the Years Ended July 31
1998 1997 1996
OPERATING REVENUES $3,566,943 $3,228,598 $3,784,480
---------- ---------- ----------
OPERATING EXPENSES:
Cost of sales 1,733,152 1,800,276 1,729,058
Selling and administrative 1,549,726 1,511,949 1,285,538
Research and development 460,781 496,862 377,318
---------- ---------- ----------
Total operating expenses 3,743,659 3,809,087 3,391,914
---------- ---------- ----------
Operating income (loss) (176,716) (580,489) 392,566
---------- ---------- -----------
OTHER INCOME (EXPENSE):
Interest income 22,924 38,801 16,840
Interest expense (2,762) (6,372) (10,834)
Other 0 75,000 1,676
----------- ----------- ---------
20,162 107,429 7,682
----------- ----------- ---------
Income (loss) before
income taxes (156,554) (473,060) 400,248
----------- ----------- ---------
INCOME TAX PROVISION (BENEFIT):
Federal (174,455) 0 138,287
State (30,545) 0 24,213
----------- ----------- ---------
Income tax provision
(benefit) (205,000) 0 162,500
------------ ----------- ---------
Net income (loss) $48,446 ($473,060) $237,748
============ =========== =========
NET INCOME (LOSS) PER SHARE OF
COMMON STOCK:
Basic $.01 $(.09) $.05
Diluted $.01 $(.09) $.04
See notes to financial statements.
F-6
VERTEX INDUSTRIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
Unrealized
Additional Gain On
Common Stock Paid-In Accumulated Investment Treasury
Shares Amount Capital Deficit Securities Stock Total
BALANCE, July 31, 1995 5,080,879 $25,404 $5,167,951 $(3,109,535) 0 $(50,569) $2,033,251
Exercise of stock options 28,100 141 14,237 0 0 0 14,378
Net income 0 0 0 237,748 0 0 237,748
--------- ------- --------- ----------- --------- --------- ----------
BALANCE, July 31, 1996 5,108,979 25,545 5,182,188 (2,871,787) 0 (50,569) 2,285,377
Exercise of stock opitons 24,000 120 14,600 0 0 0 14,720
Issuance of stock in
consideration for services 5,000 25 4,350 0 0 0 4,375
Net loss 0 0 0 (473,060) 0 0 (473,060)
--------- -------- --------- ----------- --------- --------- ---------
BALANCE July 31, 1997 5,137,979 25,690 5,201,138 (3,344,847) 0 (50,569) 1,831,412
Issuance of stock
in consideration for services 19,000 95 22,155 0 0 0 22,250
Unrealized gain on
investment securities 0 0 0 0 429,061 0 429,061
Decrease in treasury stock 0 0 0 0 0 5,400 5,400
Net income 0 0 0 48,446 0 0 48,446
--------- ------- ---------- ------------ -------- --------- ----------
BALANCE July 31,1998 5,156,979 $25,785 $5,223,293 $(3,296,401) $429,061 $(45,169) $2,336,569
See notes to financial statements.
F-7
VERTEX INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended July 31
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $48,446 ($473,060) $237,748
------- ------------ ----------
Adjustments to reconcile net income
(loss) to net cash
Provided by operating activities-
Depreciation and amortization 141,811 194,382 147,347
Deferred taxes (205,000) 0 162,500
Gain on sale of fixed assets 0 0 2,000
Stock issued in consideration for services 22,250 4,375 0
(Increase) decrease in assets-
Accounts receivable, net (387,133) 157,898 (145,552)
Note and other receivables 28,107 75,304 (170,755)
Inventories 118,220 110,570 129,863
Prepaid expenses and other current assets 11,513 (18,976) 15,490
Increase (decrease) in liabilities-
Accounts payable 144,104 (40,010) (9,245)
Accrued expenses and other liabilities 86,451 71,406 (51,859)
Deferred revenue 75,982 181,510 (113,370)
-------- -------- ---------
Net adjustments 36,305 736,459 (33,581)
-------- -------- ---------
Net cash provided by
Operating activities 84,751 263,399 204,167
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (46,131) (27,892) (117,720)
Proceeds from sale of fixed assets 0 0 3,166
Other 1,272 (1,642) (3,791)
-------- -------- ---------
Net cash used for investing activities (44,859) (29,534) (118,345)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt (2,567) (2,800) (2,800)
Repayment of obligations under capital lease (14,516) (31,576) (24,937)
Proceeds from exercises of stock options 0 14,720 14,378
-------- -------- ---------
Net cash used for financing activities (17,083) (19,656) (13,359)
--------- -------- ---------
Net increase in cash 22,809 214,209 72,463
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 608,553 394,344 321,881
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $631,362 $608,553 $394,344
======== ======== ========
See notes to financial statements.
F-8
VERTEX INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
This summary of significant accounting policies of Vertex Industries,
Inc. (the Company) is presented to assist in understanding the
Company's financial statements.
Nature of Business-
The Company sells and distributes bar code scanners, printers, data
collection terminals, software, automated card devices and precision
weighing equipment to customers located primarily within the United
States. Sales of bar code printers are primarily to the health care
industry. Sales of precision weighing equipment are primarily to
retail pharmacies. The company also provides systems integration
for turnkey automated data collection solutions in real-time systems
and warehouse management systems. In addition through the Netweave
license agreement, the Company sells the Netweave middleware
product.
Use of Estimates in the
Preparation of Financial Statements-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Revenue Recognition-
The Company recognizes revenues related to software sales in
compliance with the American Institute of Certified Public
Accountants (AICPA) Statement of Position No. 91-1 "Software Revenue
Recognition." Product revenue is recorded at the time of shipment
provided that no significant vendor and post contract support
obligations remain outstanding and collection of the resulting
receivable is deemed probable of collection by management.
Maintenance and support service agreements are recognized on a
straight-line basis over the life of the service agreement,
generally twelve months, and is reflected in deferred revenue in the
accompanying balance sheets.
Inventories-
Inventories are valued at the lower of cost (first-in, first-out
basis) or market.
F-9
Property and Equipment-
All items of property and equipment, including amounts recorded
under capital leases, are stated at cost. It is the general policy
of the Company to depreciate property and equipment under the
straight-line method over their estimated useful lives. Leasehold
improvements are amortized over the lesser of the useful life of the
improvements or the remaining term of the lease.
The estimated useful lives of depreciable assets are as follows-
Machinery and equipment 12 years
Tools, dies and patterns 12 years
Office furniture and equipment 5-10
years
Computer equipment 3 years
Exhibit equipment 3 years
Capital leases 5 years
Cost in Excess of Net Assets
of Companies Acquired-
The excess of cost of purchased businesses over the fair value of
their assets at the acquisition date is being amortized on the
straight-line method over 5 years.
Net Income (Loss) Per Share of Common Stock-
The Company adopted SFAS No. 128, "Earnings per Share," on July 31,
1998. SFAS No. 128 establishes the new standard for computation and
presentation of net income per common share. Under the new
requirements both basic and diluted net income per common share are
presented. All prior period net income (loss) per common share data
has been restated.
Basic net income (loss) per common share is calculated by dividing net
income, by the weighted average common shares outstanding during the
period.
Diluted net income per common share is computed similar to that of
basic net income per common share except that the denominator is
increased to include the number of additional common shares that would
have been outstanding if all potentially dilutive common shares,
principally stock options, were issued during the reporting 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 Company has elected to continue to account for
employee stock-based compensation under Opinion 25 and has made the
required disclosures under SFAS 123 (see Note 11).
Investment Securities-
The Company has classified its investment securities as available for
sale. Such securities are measured at fair value in the financial
statements based on quoted market prices with unrealized gains and
losses included in stockholders' equity.
New Standards-
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130. "Reporting Comprehensive Income," which
establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those
resulting from investments by owners and distribution to owners.
Among other disclosures, SFAS No. 130 requires that all items that
are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements.
F-11
In addition, in June 1997, the FASB issued SFAS No. 131, "
Disclosures About Segments of an Enterprise and Related
Information," which establishes standards for reporting information
about operating segments. It also establishes standards for
disclosures regarding products and services, geographic areas and
major customers.
Both of these new standards are effective for periods beginning
after December 15, 1997 and require comparative information for
earlier years to be restated. The implementation of these new
standards will not affect the Company's results of operations and
financial position, but may have an impact on future financial
statement disclosures.
(2)SALE OF SUBSIDIARY AND INVESTMENT SECURITIES:
On March 4, 1998 the Company entered into an agreement with MPEL
Holdings Corp., parent company of Mortgage Plus Equity and Loan Corp.,
a mortgage banking company whereby MPEL Holdings Corp. merged with
Vertex's inactive subsidiary, Computer Transceiver Systems, Inc.
(OTCBB:CPTT). The agreement provided pre-merger CPTT shareholders with
4% of the merged company, of which Vertex owns approximately 2.7%.
The merged company is traded Over the Counter Bulletin Board under the
symbol MPEH. The Company currently owns 226,251 shares of MPEH. The
Company has recognized an unrealized gain of $429,061 as of July 31,
1998 based on the then current stock price of $2 per share. The stock
price of MPEH on October 14, 1998 was $.8125 per share.
(3) INVENTORIES:
Inventories consist of the following-
July 31
1998 1997
Raw materials $7,815 $7,071
Work in process 64,980 40,605
Finished goods and parts, net of
obsolescence reserves of
$235,419 and $139,419 in 1998 and
1997, respectively 391,594 534,933
------- -------
$464,389 $582,609
======== ========
F-12
(4) PROPERTY, EQUIPMENT AND CAPITAL LEASES:
Details of property, equipment and capital leases are as follows-
July 31
1998 1997
Property and equipment-
Leasehold improvements $283,926 $283,926
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 157,933 111,802
Exhibit equipment 120,176 120,176
-------- --------
Total 1,799,526 1,753,395
Less- Accumulated depreciation and
amortization (1,527,482) (1,427,119)
---------- ----------
Net property and equipment 272,044 326,276
---------- ----------
Capital leases-
Office equipment 86,448 86,448
Automobiles 55,309 55,309
---------- ----------
Total 141,757 141,757
Less- Accumulated amortization (126,480) (117,952)
---------- -----------
Net capital leases 15,277 23,805
---------- -----------
Net property, equipment and
capital leases $287,321 $350,081
=========== ===========
Depreciation and amortization of property, equipment and capital leases
for the fiscal years ended July 31, 1998, 1997 and 1996 was $108,891,
$151,969, and $122,835, respectively.
(5) LONG-TERM DEBT:
Long-term debt consists of the following-
July 31
1998 1997
Note payable to bank, due in monthly principal
installments of $233 plus interest at 1.25%
above the prime rate $ 0 $2,567
Less- Current portion of long-term debt 0 2,567
---------- ---------
Long-term debt 0 $0
=========== =========
The long-term debt matured in June 1998 and was collateralized by
telephone equipment of the Company.
F-13
(6) NOTE AND OTHER RECEIVABLES:
In 1996 the Company advanced NetWeave Corp., a related party, $100,000
for working capital purposes and received a promissory note. The note
bears interest at 6%. NetWeave Corp. has defaulted on the note and no
interest has been paid. The Company has restructured repayment of the
note and has recorded a reserve of $50,000 against the note.
In 1996, the Company entered into a factoring agreement with NetWeave
Corp. whereby certain accounts receivable were to be factored by the
Company. As of July 31, 1998 the Company had a gross factored
receivable balance of $58,581 and an allowance for doubtful accounts
reserve of $35,918 related to the factored receivables. As of July
31, 1997 the Company had a gross factored receivable balance of $81,369
and allowance for doubtful accounts reserve of $35,918 related to the
factored receivables. The Company has restructured the repayment of
the factored receivables.
(7) ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued expenses and other liabilities consist of the following-
July 31
1998 1997
Professional fees $36,033 $37,384
Vacation salaries 6,627 1,366
Sales tax 22,623 20,979
Commissions 22,971 10,194
Payroll and deductions 47,740 48,910
Income taxes payable 0 1,810
Royalty Expense 62,649 0
Pension Expense 3,255 0
Miscellaneous 5,196 0
Accrued contingency reserve 50,000 50,000
$257,094 $170,643
The accrued contingency reserve relates to the estimated costs
associated with the restructuring of the NetWeave licensing agreement.
8) PENSION PLANS:
The Company maintains a 401(k) plan, which is a defined contribution
plan covering substantially all of the nonunion employees. Eligible
employees can contribute up to 17% of their compensation not to exceed
Internal Revenue Code limits. The Company will match 50% of the amount
contributed by employees, up to 3% of compensation as defined. Company
contributions for the years ended July 31, 1998, 1997 and 1996 were
$3,255, $5,787, and $14,865, respectively.
F-14
(9)INCOME TAXES:
Deferred income taxes are recognized for tax consequences of temporary
differences by applying enacted statutory tax rates to differences
between the financial reporting and the tax basis of existing assets
and liabilities.
The net deferred tax assets in the accompanying balance
sheets consist of the following-
1998 1997
Deferred tax assets-
Allowance for accounts, note and other receivables $48,000 $62,000
Deductible goodwill amortization 0 206,000
Inventory 73,000 55,000
Deferred revenue 106,000 107,000
Net operating loss carryforwards 1,433,000 1,759,000
--------- ----------
Total deferred tax assets 1,660,000 2,189,000
Deferred tax liabilities - Depreciation (12,000) (97,000)
Valuation allowance (1,248,000) (1,897,000)
---------- -----------
Net deferred tax asset $400,000 $195,000
========== ============
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.
A valuation allowance on the deferred tax assets has been provided
based on the Company's assessment of ability to realize such assets in
the future. The valuation allowance for net deferred tax assets
decreased by $649,000 in 1998. The reduction was the result of net
changes in temporary differences and the reversal of $340,000 of
valuation allowance based on projected operating results for 1999.
The components of the income tax provision (benefit) included in the
statements of operations for the fiscal years ended July
31, 1998, 1997 and 1996 consist of the following-
1998 1997 1996
Current-
Federal $ 0 $ 0 $ 0
State 0 0 0
Deferred (205,000) 0 162,500
--------- ------- --------
Total income tax provision (benefit) ($205,000) $ 0 $162,500
F-15
At July 31, 1998, the net operating loss carryforwards available to
offset future taxable income consist of approximately $4,357,000 in
Federal net operating losses which will expire in various amounts
through 2013, and state net operating losses of approximately
$3,528,000 which will expire in various amounts through 2005.
A reconciliation of income tax at the statutory rate to the Company's
effective rate is as follows-
1998 1997 1996
Statutory rate (34.0%) (34.0%) 34.0%
Effect of-
Valuation allowance (96.9) 34.0 0.0
Permanent differences 0.0 0.0 0.6
State income taxes, net of Federal tax effect 0.0 0.0 6.0
-------- --------- ------
Effective income tax rate (130.9%) 0.0% 40.6%
======== ========= ======
(10) COMMITMENTS AND CONTINGENT LIABILITIES:
Leases-
The Company leases phone equipment under a capital lease with an
expiration date of April 2001.
The Company leases its plant and office facilities located in
Clifton, New Jersey. The lease expires on May 31, 2003. Annual
rental is $164,340 for the first three years of the lease. For the
last two years of the lease the annual rent is $170,280. In
addition, the Company is obligated to pay applicable real estate
taxes, repairs and insurance.
The Company subleases under a 60-month lease a portion of its plant
in Clifton, New Jersey, which expires on May 31, 2003. Under the
terms of the sublease, the tenant is required to pay annual rent of
$53,010 for the first three years of the sublease and annual rent of
$54, 720 for the last two years of the sublease, plus a
proportionate share of utilities.
Rent expense for the years ended July 31, 1998, 1997 and 1996 was
$158,920, $154,660 and $121,032, respectively.
F-16
Minimum lease payments and sublease rental income are as follows-
Equipment Sublease
Capital Operating Rental
Year Ended July 31 Leases Leases Income
1999 $7,180 $205,476 $53,010
2000 7,180 203,676 53,010
2001 5,385 192,434 53,295
2002 0 196,805 54,720
-------- --------- --------
Total 19,745 $798,391 $214,035
========== ========
Less- Amount representing interest (2,680)
---------
Present value of net
minimum lease payments 17,065
Less- Current portion of obligations
under capital leases 5,641
--------
Long-term portion of obligations
under capital leases $11,424
========
Employment Agreements-
On May 1, 1998 the Company entered into a three year employment
contract with its Vice President of Sales and Marketing. The
contract provides for an annual salary of $95,000 per year, a
Company paid automobile, 1 % commission on operating revenues and
stock options. On September 10, 1998 the Company entered into a two
year employment contract with its Director of Middleware
Technologies. The Contract provides for an annual salary of
$104,500 for the first year and $109,725 in the second year. The
contract also provides for stock options.
Other-
In June 1997, a customer terminated an agreement to purchase certain
product from the Company. The agreement was originally for a two-
year period. The customer paid $75,000 to terminate the agreement.
This amount is reflected as other income in the accompanying
statements of operations.
F-17
(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 2,000,000. 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.
July 31
1998 1997 1996
Options outstanding, beginning of
year 667,600 341,600 338,200
Granted 170,000 450,000 159,000
Exercised 0 (24,000) (28,100)
Canceled (10,000) (100,000) (127,500)
-------- --------- ---------
Options outstanding, end of year 827,600 667,600 341,600
========= ========= =========
Options price range $.475-$8.12 $.475-$8.12 $.475-$8.12
Options exercisable 373,800 144,600 99,400
Options available for grant 1,050,000 534,000 384,000
The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation. In accordance with the provisions the Company
accounts for its stock option plans under Opinion 25 and,
accordingly, does not recognize compensation cost. If the Company
had elected to recognize compensation cost based on the fair value
of the options granted at grant date as prescribed by SFAS 123, net
income (loss) and earnings (loss) per share would have been reduced
to the pro forma amounts indicated in the table below-
1998 1997 1996
Net income (loss) - as reported $48,446 ($473,060) $237,748
Net income (loss) - pro forma $(95,244) ($499,529) $229,479
Earnings (loss) per share - as reported $.01 ($.09) $.04
Earnings (loss) per share - pro forma $(.02) ($.10) $.04
F-18
The weighted average fair value at date of grant for options granted
in 1998, 1997 and 1996 was $.50, $.46 and $.50, respectively. The
fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model based on the weighted
average market price of $0.81 in 1998, $0.85 in 1997 and 1996 using
the following assumptions-
Expected stock price volatility 92%
Risk-free interest rate 6.67%
Weighted average expected life of options 3 years
The effects of applying SFAS 123 and the results obtained through
the use of the Black-Scholes option pricing model are not
necessarily indicative of future values.
Other Stock Options-
In connection with an employment agreement, the Company granted an
employee an option to purchase up to 300,000 shares of common stock,
at an option price of $7.875 per share, expiring the earlier of June
29, 2003, one year after death, or 30 days after termination. The
agreement allowed the employee to retire these options at their
original grant price, should the market price of the Company's
common stock drop below the exercise price of the options, and have
the options granted again at the then market price. During 1996,
the employee retired all 300,000 options exercisable at $7.875 and
was subsequently granted 300,000 at an exercise price of $.50 per
option the then market value of the common stock. During 1997, the
employee left the Company and the Company agreed to waive the
termination clause in the agreement. In 1998, in connection with an
employment agreement, the Company granted an employee an option to
purchase 70,000 shares of common stock, at an option price of $.68.
Of the 70,000 options, 35,000 are currently exercisable with the
additional 35,000 becoming exercisable on January 1, 1999.
During 1998, the Company granted 20,000 options to the Company's
legal counsel for legal services. The options are exercisable at
$.38 and expire on December 23, 2000. These options are currently
exercisable. During 1997, the Company granted 20,000 and 120,000
options to two service firms as partial payment for legal, financial
and consulting services. The 20,000 options are exercisable at
$1.00; are currently exercisable and expire on January 9, 2000. The
120,000 options expired on July 7, 1998. 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.
F-19
(12) NET INCOME (LOSS) PER COMMON SHARE:
The following table summarizes the computation of basic and diluted net
income per common share for each of the three years ended July 31:
1998 1997 1996
Net income (loss) available
to common shareholders $48,446 $(473,060) $237,748
========= ========== ========
Weighted-average common
shares outstanding 5,133,674 5,102,033 5,090,719
Plus: Common stock equivalents 106,246 0 270,044
--------- --------- ---------
Diluted weighted-average
common shares outstanding 5,239,920 5,102,033 5,360,763
========== ========= =========
Net income (loss) per common
share:
Basic $.01 $(.09) $.05
Diluted .01 (.09) .04
The Company did not pay dividends for each of the three years ending July
31, 1998, 1997 and 1996.
(13) MAJOR CUSTOMERS:
The Company had one customer which accounted for approximately 17% of
revenue for the fiscal year ended July 31, 1998. At July 31, 1998,
approximately $245,994 of accounts receivable were due from this
customer. The Company had no customer which accounted for more than
10% of revenue for the fiscal year ended July 31, 1997.
During July 31, 1996, the Company had two customers which accounted for
13.5% and 12.5% of revenue. At July 31, 1996, approximately $229,000
and $101,000, respectively, of accounts receivable were from those
customers.
(14) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
July 31
1998 1997 1996
Interest paid $2,762 $6,372 $10,834
Stock issued in consideration for 22,050 4,735 0
services
Noncash investment and financing
activities-
Capitalized lease and note payable
transactions related to purchases of
property and equipment 0 0 27,778
========= ======= ========
F-20
(15) LICENSE AGREEMENT WITH NETWEAVE CORPORATION:
On February 17, 1997 the Company entered into a license agreement (the
"Agreement") with NetWeave Corporation (NetWeave) to develop, market,
sell and support the NetWeave product worldwide. The Company will pay
NetWeave a royalty on the initial licenses sold and on annual license
fees paid by the customer for maintenance and support of the NetWeave
product. Under terms of the Agreement, the NetWeave Corporation
assigns its existing customer base to the Company along with the
existing sales representative agreements in the U. S. and the master
distributor with SX Consultancy for Europe and Asia. SX Consultancy is
a European software distributor and developer of custom software based
in the UK. For the year ended July 31, 1998, the NetWeave Licensing
agreement generated revenues of approximately $973,000. During 1998,
the Company paid approximately $74,000 of royalties to NetWeave
Corporation. For the year ended July 31, 1997, the NetWeave Licensing
agreement generated revenues of $105,000. During 1997, the Company
paid $20,000 of royalties to NetWeave Corporation.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of the Company's financial instruments approximates the
carrying amounts.
F-21
SCHEDULE II
VERTEX INDUSTRIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
Balance at Additions Deductions Balance at
Beginning Charged to From End of
of Period Expense Allowances Period
Year Ended July 31, 1998-
Deducted from accounts receivable for
doubtful accounts $75,985 $0 $0 $75,985
Deducted from inventory as valuation
allowance $139,419 $96,000 $0 $235,419
Year Ended Ended July 31, 1997-
Deducted from accounts receivable for
doubtful accounts $75,985 $0 $0 $75,985
Deducted from inventory as
valuation allowance $34,619 $204,000 $99,200 $139,419
Year Ended July 31, 1996-
Deducted from accounts
receivable for doubtful accounts $75,985 $0 $0 $75,985
Deducted from inventory as valuation
allowance $59,444 $48,000 $72,825 $34,619
F-22
SIGNATURES
Pursuant to the requirements of Section 13 or 15
(d) of the Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: October 28, 1998 VERTEX INDUSTRIES, INC.
s/Ronald C. Byer
Chief Executive Officer,
President
Pursuant to the requirements by the Securities
Exchange Act of 1934, this report has been signed by the
following persons on behalf of the Company and in the
capacities and on the dates indicated:
October 28, 1998 s/James Q. Maloy
Chairman of the Board,
and Director
October 28, 1998 s/Ronald C. Byer
Chief Executive Officer,
President and Director
October 28, 1998 s/Robert T.McLaughlin
Chief Financial
Officer and
Treasurer
October 28, 1998 s/Irwin Dorros
Director
October 28, 1998 s/Wilbur Highleyman
Director
October 28, 1998 s/George Powch
Director