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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, 1999
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 29, 1999 the aggregate market value of the voting
stock held by non-affiliates of the Company was $ 28,992,245
(based upon the closing price of the common stock as reported on
the over-the-counter market as of October 28, 1999).
As of October 29, 1999 the Company had 16,921,121 shares of
Common Stock outstanding.
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, 1998 and Current Reports filed on Form 8-K dated
October 7, 1999, October 1, 1999, March 6, 1998, April 11, 1996,
July 22, 1987, and January 14, 1987, and Registration Statements
on Form S-8 filed on November 2, 1992, March 1, 1993, March 24,
1993, April 27, 1993, October 2, 1993, October 22, 1993, February
25, 1994, September 23, 1994, March 20, 1996, April 10, 1996,
January 23, 1997, July 8, 1997, July 10, 1998 and November 10,
1998. S-4 filed on July 20, 1994, 10KA filed on June 14, 1996,
Form 14(f) Information Statement dated July 1, 1999 and Amendment
thereto dated August 24, 1999. Forms S3, Statement of Beneficial
Ownership of Securities, filed on September 27, 1999 and Schedule
13D filed on September 27, 1999 and September 28, 1999.
-2-
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
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.
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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. No new sales
of this system have been made in the last few years.
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.
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
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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 was 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
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.
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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. 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.
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 is
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.
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.
-6-
Products
Bar Code Products
Vertex distributes bar code scanners, printers and data
collection terminals, both portable and fixed as part of their
total system solution concept. 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.
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 implemented on
Windows 95/98 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
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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,
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 pays 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. On December 28, 1998 the Company entered
into a Limited Enterprise License agreement with NetWeave to
support the Company's new product "evolve" in connection with
sales under the NetWeave product line.
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.
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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 been the primary offering in the Company's
Middleware Technologies group.
During Fiscal Year 1999, the Company recognized that the
Internet was producing a new requirement for a middleware product
which would provide an efficient and simple method for providing
software developers with the ability to connect data on the World
Wide Web to existing or legacy computer systems. A popular
example of this need is the case where shoppers on a Web Site are
given the ability to interact with data on the suppliers' host
computer system. The shopper makes his product selection, enters
his order and checks on product delivery status directly from his
home computer which is connected to the Internet.
During Fiscal 1999, the Company began the development of a
product called, evolve, which provides the tools necessary for
the software developer to produce the messages necessary to allow
the Web site to interact with the various host computers in the
marketplace. It is anticipated that evolve will be demonstrated
in the second quarter of Fiscal year 2000.
In December 1997, the Company entered into a Sales and
Marketing agreement with E.D.G. Enterprises, Inc., under the
terms of which Vertex would sell, install and maintain Trak-Star,
Part-Store and Acu-Lite software products.
In Fiscal Year 1999, this product was dropped and an effort
was begun to develop an in-house product. The Company anticipates
that initial systems will be installed in the first half of
Fiscal Year 2000.
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
tracked by date, lot and serial number and selected for
inspection by many different criteria. Hand Held batch and Radio
Frequency terminals are utilized to direct picking of customer
orders, replenishment of goods and cycle counting.
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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).
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
total contract value was at $4,100,000. Bell Atlantic has
acquired NYNEX and now covers the states from Virginia to Maine.
Add-on orders are expected from Bell Atlantic for this system in
Fiscal Year 2000. Vertex is discussing the sale of its Telephone
System to other telephone companies.
In Fiscal Year 1999, Vertex was successful in completing its
contract with Bell Atlantic, which generated revenue in excess of
$3,800,000. This contract was to replace the hardware, upgrade
the system software and add new features to the system previously
sold to Bell Atlantic.
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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, 1999.
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, 1999.
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
variable data, while the label formats and character sets are
stored within the printed circuit board itself.
During Fiscal Year 1999, 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
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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 $6000; (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
$1200(repairs and parts) and (e) Software Products where 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) 1999 1998 1997
Barcode Equipment $4,168,462 $412,883 $488,827
Card Devices $28,171 $66,472 $49,806
Weighing Equipment
and weights $1,520,489 $1,231,481 $1,291,054
Label Generating
Systems $51,112 $130,004 $688,195
Software $484,144 $753,202 $606,183
Middleware $967,053 $972,901 $104,533
(1) All of the above product lines include revenues from
repair services.
Manufacturing and Supply
Vertex's manufacturing operation for the precision balances
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.
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.
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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 distributors
internationally and through direct channels in the United States.
Vertex has discontinued its relationship with its Master
Distributor, SX Consultancy LTD., based in the UK, which was
responsible for sales of NetWeave in Europe, the Middle East and
Asia, but SX remains as a regional distributor for the UK. Vertex
has retained relationships with the distributors themselves on a
direct basis.
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 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
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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, 1999 the Company's backlog, was approximately
$581,000 as compared with a backlog of approximately $4,496,000
as of July 31, 1998. The Company currently anticipates
manufacturing and delivering substantially all of such total
backlog during the current fiscal year, which ends July 31,2000.
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, evolve 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
of new products and applications in the Automatic Identification
area and Electronic Commerce. For the fiscal years ended July
31, 1999 and 1998 the Company spent $777,263 and $460,781
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
-14-
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, 1999 the Company had 27 full time employees,
including its officers, of whom 7 were engaged in manufacturing,
14 in administration, 5 in engineering and research and
development, and 1 in repair services. As of July 31, 1998,
Vertex had a total of 25 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 product 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 among others Manhattan Associates, Kronos and Epic Data in
data collection software, a large number of companies including
McHugh Freeman and Robocom Systems in Warehouse Management
Systems, and Microsoft and IBM in middleware technologies, as
well as a variety of smaller software providers. Many of its
competitors have greater financial, technical and marketing
resources than the Company. Competition in these areas is
further complicated by possible shifts in market shares due to
technological innovation, changes in product emphasis and
applications and new entrants with greater capabilities or better
prospects.
In the 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
-15-
products. For all its products, the Company generally competes
on the basis of price, product performance and features.
Subsequent Events
On September 16, 1999, pursuant to a Subscription Agreement
by and among the Company, Edwardstone & Company, Incorporated, a
Delaware corporation ("Edwardstone") and MidMark Capital, L.P.,
a Delaware limited partnership ("MidMark", and together with
Edwardstone, the "Buyers"), dated as of June 21, 1999, as amended
on August 23, 1999 and September 13, 1999, Edwardstone purchased
five million four hundred forty nine thousand six hundred forty
two (5,449,642) shares of the Company's common stock and MidMark
purchased five million (5,000,000) shares of the Company's common
stock. The consideration paid by Edwardstone and its affiliates
for such shares was $5,000,000 and the consideration paid by
MidMark for such shares was $5,000,000. As a result of such
transactions, the Buyers beneficially own 60% of the Company's
16,896,121 common shares outstanding.
As a condition to the Buyers' purchase of the shares, the
Buyers and the Company entered into a Stockholders Agreement,
dated September 16, 1999 (the "Stockholders Agreement")
containing certain terms and conditions concerning the
acquisition and disposition of such shares of the Company and the
corporate governance of the Company. Pursuant to the terms of the
Stockholders Agreement, on September 16, 1999: (i) three of the
Company's five directors, James Maloy, Wilbur Highleyman and
Irwin Dorros, resigned from office; (effective September 27,
1999) (ii) the number of directors constituting the full Board of
Directors was increased to eight (8) members; and, (iii)
Edwardstone appointed three of its designees, Hugo H. Biermann,
Gregory N. Thomas and Nicholas R. H. Toms, and MidMark appointed
three of its designees, Wayne L. Clevenger, Denis Newman and
Joseph R. Robinson to serve as directors of the Company to fill
the vacancies on the Company's Board of Directors created by such
resignations. Ronald C. Byer and George Powch continue to serve
in that capacity.
In addition, on September 27, 1999, James Q. Maloy resigned
as Chairman of the Board and Ronald C. Byer resigned as Chief
Executive Officer of the Company. Hugo H. Biermann has been
appointed to serve as Chairman of the Board and Nicholas R.H.
Toms has been appointed to serve as Chief Executive Officer of
the Company to fill the vacancies created by the resignations of
Messrs. Maloy and Byer. Mr. Byer continues to serve as President
of the Company.
On September 27, 1999, the Company acquired all of the stock
of Portable Software Solutions Limited, a company organized under
the laws of England ("PSS"), Portable Software Solutions
(Maintenance) Limited, a company organized under the laws of
England ("Maintenance") and Trend Investments Limited, a company
organized under the laws of the Republic of Ireland ("Trend", and
together with PSS and Maintenance, the "PSS Group") pursuant to a
-16-
Share Purchase Agreement, dated as of June 21, 1999, by and among
the Company, St Georges Trustees Limited, a company organized
under the laws of Jersey, Channel Island, as trustee on behalf of
The John Kenny Settlement and The Godfrey Smith Settlement, John
Kenny, Bryan J. Maguire and Godfrey Smith (the "Share Purchase
Agreement). The PSS Group is the largest provider of handheld
terminal solutions to mobile workers in the U.K. and leads the
door-to-door insurance and dairy industries in the U.K.
To fund its acquisition, the Company transferred 1,207,500
unregistered common shares to the PSS Group and Edwardstone
transferred 384,484 of its Vertex shares to PSS. In addition,
the Company paid the PSS Group approximately $5.9 million in cash
and will make two additional payments of approximately $800,000
each, payable at the end of the six month period and the twelve
month period, respectively, following the closing of the
transaction. The shareholders of the PSS Group may be entitled
to additional incentive payments based upon target average annual
pre tax profits of the PSS Group for the two years ending
December 31, 1999 and 2000. The Company used a portion of the
cash consideration received from Edwardstone and MidMark when
Edwardstone and MidMark purchased 60% of the Company's common
shares on September 16, 1999.
On September 27, 1999, the Company acquired all of the
outstanding capital stock of ICS International AG ("ICS"), the
leading provider in Germany of integrated high-end wireless data
capture solutions to industrial users and one of the only multi-
national European providers of such solutions, pursuant to a
Share Purchase and Transfer Agreement, dated as of September 22,
1999, between Gregor von Opel and the Company (the "Share
Purchase and Transfer Agreement").
The total consideration paid to ICS was DM 9,000,000 of
which DM 6,000,000 was paid in cash at the closing and the
balance of DM 3,000,000 was in the form of a note redeemable in
amounts of DM 1,000,000 each on December 31, 1999, March 31, 2000
and June 30, 2000, respectively, together with the interest
thereon at a rate of 8% per annum. Further interest in the
amount of DM 726,000 was paid at the closing on the original
aggregate purchase price. The Company also assumed DM 4,000,000
of bank debt of which DM 3,000,000 was paid off at the closing.
In addition, the Company purchased ICS's headquarters located in
Neu Anspach near Frankfurt, Germany for DM 3,000,000, of which
3,000,000 was paid in cash and the remainder was financed through
a mortgage the principal amount of which is DM 2,300,000. The
Company used a portion of the cash consideration received from
Edwardstone and MidMark to acquire ICS.
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.
-17-
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 years, 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 Sombers
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 the Company. 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.
Item 4: Submission of Matters to a Vote of Security Holders
The Company submitted matters involving the election of
directors to a vote of security holders through the solicitation
of proxies or otherwise during the third quarter of the fiscal
year covered by this report.
-18-
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
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
1999
First Quarter 1 7/16 3/4
Second Quarter 2 1/4 15/16
Third Quarter 2 9/16 1
Fourth Quarter 3 1 7/16
(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, 1999 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 28, 1999. 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.
-19-
Item 6. Selected Financial Data
A SUMMARY OF SELECTED FINANCIAL DATA
For the Years Ended July 31, Are As Follows:
1999 1998 1997 1996 1995
Revenues $7,219,431 $3,566,943 $3,228,598 $3,784,480 $3,147,409
Net Income (Loss) $631,342 $48,446 $(473,060) $ 237,788 $(1,219,339)
Average Number
of Shares
Outstanding
Basic 5,191,579 5,133,674 5,102,003 5,090,719 5,060,832
Diluted 5,910,688 5,239,920 5,102,003 5,360,763 5,060,832
Net Income or
(Loss) Per Share
Basic $.12 $.01 $(.09) $.04 $(.24)
Diluted $.11 $.01 $(.09) $.05 $(.24)
Working Capital 2,134,769 $1,594,271 $ 1,184,762 $1,489,689 $1,077,890
Current Ratio 3.65:1 2.81:1 3.03:1 4.81:1 2.93:1
Property,
Equipment and
Capital Leases $2,055,227 $1,941,283 $ 1,895,152 $1,867,259 $1,725,122
Less:
Accumulated
Depreciation
& Amortization $1,764,863 $1,653,962 $ 1,545,071 $1,393,102 $1,268,462
Property,
Equipment
Capital
Leases and
Leased Equipment -Net $290,364 $287,321 $ 350,081 $ 474,157 $ 456,660
Total Assets $3,677,193 $3,228,066 $2,433,455 $2,715,856 $2,663,031
Long-Term Debt $5,155 $11,424 $ 17,065 $ 32,875 $ 38,926
Stockholder's
Equity $2,866,177 $2,336,569 $1,831,412 $2,285,377 $2,033,251
-20-
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Year ended July 31, 1999 compared with Year Ended July 31, 1998.
Operating Revenues
Operating revenues increased $3,652,488 or 102% to $7,219,431
for the fiscal year ended July 31, 1999 as compared to $3,556,943
for the same period in 1998. Revenue for the weighing equipment
product line increased 23% or $289,008 to $1,520,489 for the year
ended July 31, 1999 as compared to $1,231,481 in 1998. The increase
is due to an increase in product demand. Revenue for the bar code
product line increased $3,755,579 or 910% to $4,168,462 for 1999 as
compared to $412,883 for fiscal 1998. The increase is due primarily
from the Bell Atlantic contract for 1,000 data collection devices.
Revenue for the Card Reader product line decreased to $28,171 in
1999 from $66,472 for the same period in 1998. 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 decreased $269,058 or 36% to $484,144 in fiscal 1999 as
compared to $753,202 for the same period in 1998. The decrease is
primarily due to the Bell Atlantic software order, which was
delivered, in the fiscal 1998. The Company has added additional
software products in addition to BridgeNet to its current list of
products, such as warehouse management systems and its 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 $78,892 or 61% to $51,112
for the year ended July 31, 1999 as compared to $130,004 for the
same period in 1998. 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 decreased to $967,053 for fiscal 1999 as compared to
$972,901 for the same period in 1998.
Operating Expenses
Cost of Sales increased to 55% of revenues in 1998 as compared
to 48% in 1998. The increase is primarily attributable to the Bell
Atlantic contract, which was mostly hardware at lower gross margins.
As the Company moves to a more service oriented company, the cost of
sales should continue to decrease.
Selling and administrative expenses increased $150,979 or 10%
to $1,700,705 as compared to $1,549,726. The increase is partially
due to increased costs relating to the Bell Atlantic contract.
-21-
Research and development expenses increased 64% or $316,482 to
$777,263 for the year ended July 31, 1999 as compared to $460,781
for the same period in 1998. The increase is due to the hiring of
additional personnel in addition to the reduction in software
related jobs in which personnel within the R&D department would be
working on and would be allocated to cost of sales.
The Company recorded an operating profit of $753,466 for fiscal
1999 as compared to an operating loss of $176,716 in fiscal 1998.
The operating profit in 1999 is primarily attributed to the increase
in operating revenues generated from the Bell Atlantic contract.
Other income
Interest income increased $30,247 to $53,171 in 1999 as
compared to $22,924 in 1998. The increase is due to funds being
available to invest in the Company's money market account and
generate interest income. Interest expense increased $2,533 in
fiscal 1999 to $5,295 as compared to $2,762 in fiscal 1998. The
increase is due to the Company's working capital line of credit.
Income Tax Provision (Benefit)
The Company recorded an income tax provisions of $170,000 for
fiscal 1999 as compared to an income tax benefit or benefit for
fiscal 1998. (See footnote 11 on page F-15)
The income tax benefit for 1999 represents the Company's
ability to utilize the net operating loss carryforwards, which were
generated in past years in fiscal 2000 and beyond.
Net Income (Loss)
The Company recorded net income of $631,342 in 1999 as compared
to a net income of $48,446 in 1998. 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, its e-commerce products, including "evolve" and its mobile
computing systems. The Company continues its efforts on the BridgeNet
Data Collection management systems and the Netweave middleware product.
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.
-22-
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 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. The Company recognizes the need to remain
vigilant and is continuing its analysis, assessment and planning for
the various Year 2000 issues.
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 products and service offerings
have been designed to be Year 2000 compliant. 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 with respect to 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 has conducted a review of the above areas to
determine exposure to Year 2000 issues. In the financial and
information areas, a number of applications have been identified as
being Year 2000 compliant due to their recent implementation. The
Company has deemed its core financial and reporting systems Year
2000 compliant by obtaining a certificate of compliance from the
software vendor and by performing its own tests to verify that the
systems are Year 2000 compliant.
In the software and hardware area, the Company has identified
areas of exposure. The Company has determined from internal testing
that all versions of NetWeave are Year 2000 compliant, provided they
are operating on a Year 2000 compliant operating system. All
customers have been notified of the necessity of ascertaining the
Year 2000 compliance of their operating system from their respective
vendors. If the customers need to upgrade their operating systems
for Year 2000 compliance, they then may need to upgrade their
versions of NetWeave to accommodate the new operating system. The
Company has prepared such upgrades of NetWeave, which will operate
on the Year 2000 compliant operating systems, and has shipped them
to customers who requested such upgrades.
The Company has determined through internal testing that the
core versions of BridgeNet are Year 2000 compliant. It has been
determined that some of the BridgeNet application code written by
Vertex for certain customers is not Year 2000 compliant. Application
code for BridgeNet may be written or modified by the customer or
Vertex. The customers for whom the non-compliant code was written
have been notified and provided with new code, which will make their
application Year 2000 compliant. In addition, the customers were
given the choice of implementing the code with their own personnel
or contracting with Vertex to implement the change.
-23-
In the third-party area, the Company has assessed the Year 2000
readiness of its key suppliers, subcontractors and business
partners. This process 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. Where deemed necessary, the
Company has requested and received statements of compliance from
certain vendors. The Company has completed this process in fiscal
year 1999 and is satisfied that it can obtain an adequate supply of
supplies and components from alternative suppliers and vendors.
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 operating
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 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 evaluate and remedy a Year
2000 problem if one may occur upon reaching that year.
Finally, the Year 2000 represents a number of other risks and
uncertainties that could effect the Company, including utility
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 affected.
-24-
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 its 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
compared to $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.
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.
-25-
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.
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 11 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.
-26-
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.
Capital Resources and Liquidity:
Working capital increased to $2,134,769 at July 31, 1999 from
$1,594,271 on July 31, 1998. The increase is primarily due to an
increase in accounts receivable, a decrease in accounts payable, a
decrease in investment securities, a decrease in inventory, coupled
with a decrease in accrued expenses and other liabilities and a
decrease in deferred revenue in 1999 as compared to 1998. The
Company's cash position increased from $631,362 at July 31, 1998 to
$1,353,650 at July 31, 1999 due to the above factors. In June 1999
the Company secured a $600,000 working capital line of credit with a
New Jersey lending institution. The line of credit expires on
January 31, 2000.
Capital expenditures were approximately $114,000 and $46,000
for the fiscal years ended July 31, 1999 and 1998, 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.
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.
-27-
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) 67 Chairman
and Director
Ronald C. Byer(1) 66 President, CEO and
Director
Barbara H. Martorano 42 Secretary
Wilbur Highleyman(2) 66 Director
George Powch(2) 51 Director
Irwin Dorros(2) 70 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 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 remained Chairman of the
Board, and a Director.
-28-
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.
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 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 & Chief Executive Officer 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, Huber + Suhner
Integration, Inc. 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 Vice President & 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.
-29-
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.
On January 20, 1999 Robert T. McLaughlin resigned his post as
Chief Financial Officer and Treasurer, the positions which he
held since joining the Company in November, 1995.
On September 27, 1999 the members of the Board of Directors
changed and Mr. Byer resigned as Chief Executive Officer. See
"Item 1, Business, Subsequent Events" section in Part 1 of this
filing.
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, 1999, 1998 and
1997 of those persons who were, at July 31, 1999, executive
officers of the Company earning annually $100,000 or more:
SUMMARY COMPENSATION TABLE
Annual Long-Term Compensation All Other
Compensation Compensation
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted All
Name and Annual Stock LTIP Other
Principal Salary Bonus Compensation Award(s) Options/ Payout Compensation
Position Year ($) ($) ($) ($) SARs (#) ($) ($)
Ronald C. 1999 $115,000 - $5,910 - - - -
Byer 1998 $115,000 - $5,553 - - - -
CEO, 1997 $115,000 - $6,150 - - - -
President
-30-
(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 9
of Notes to Financial Statements.
(2) Mr. 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. On January 20,
1999 Mr. McLaughlin resigned his post as Chief Financial Officer and
Treasurer, the positions which he held since joining the Company in
November, 1995. On December 29, 1997 Mrs. Barbara Martorano,
Corporate Secretary, was granted 5,000 stock options at an exercise
price of $.56 which vest over five years and expire on December 29,
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 1999 by
the above named officers.
The Company had no other executive officers other than Mr. Maloy,
Mr. Byer, and Mrs. Martorano.
On May 28, 1999 the Company entered into a one-year employment
contract with its President. The contract provides for an annual
salary of $150,000 per year and a Company paid automobile. The term
commences on August 1, 1999.
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 May 25, 1999 Mr. Robert Morsch was
granted 100,000 stock options at an exercise price of $1.625 which
vest over five years and expire on May 25, 2004.
-31-
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. On May 25,
1999 Mr. Ron Byer Jr. was granted 175,000 stock options at an
exercise price of $1.625 which vest over five years and expire on
May 25, 2004.
On February 12, 1999 the Company entered into a two (2) year
employment contract with Ronald Hopson to serve as the Company's
Middleware Technologies Technical Director. Under this contract Mr.
Hopson is to receive as compensation: (a) an annual salary of
$101,000 per annum for the first year and $106,050 per annum for the
second year; (b) a grant of a five year stock option to purchase up
to 10,000 shares of the Company's common stock under its Incentive
Stock Option Plan at an exercise price of $1.375; (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 40,000 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 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.
-32-
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, 1999 options to acquire 1,422,000 shares of the
Company's Common Stock at exercise prices of $.475 to $8.12 per
share have been granted under the Plan to 14 employees and three
directors of the Company. As of July 31, 1999, 365,400 options have
been exercised and 1,056,600 options are outstanding, with 430,400
options presently exercisable.
During 1999, the Company granted 25,000 options to the
Company's legal counsel for legal services. The options are
exercisable at $.94 and expire on September 23, 2001. These options
are currently exercisable. The underlying shares have been
registered under the securities Act of 1933 on Form S-8.
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, 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.
-33-
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.
The charge against income for matching contributions for fiscal
1999, 1998 and 1997 were $18,386, $3,255, and $5,787, 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:
Initial Exercise
Name of Date of Number of Price Options Options
Director Grant Option Shares(1)(3) Per Option Exercised Exercisable
Wilbur Highleyman 6/11/97 10,000 1.00 -- --
1/20/93 40,000 4.25 8,000 32,000
Irwin Dorros 6/11/97 10,000 1.00 -- --
1/20/93 40,000 4.25 8,000 32,000
George Powch 6/11/97 10,000 1.00 -- --
1/20/93 40,000 4.25 16,000 24,000
(1) Adjusted for 2 for 1 stock split effective April 19, 1993.
(2) No options were granted to Directors in Fiscal 1999.
(3) The above options were granted under the incentive stock option plan
as discussed on page 32.
-34-
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, 1999 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(4)(7) (1)(2)(4)
5% Shareholders Number Percent
MidMark Capital L.P. 5,000,000 29.5
466 Southern Blvd.
Chatham, NJ 07928
James Q. Maloy 1,202,208 7.1
23 Carol Street
Clifton, New Jersey
Nicholas Toms 1,151,120 6.8
23 Carol Street
Clifton, New Jersey
Ronald C. Byer 448,422 2.7
23 Carol Street
Clifton, New Jersey
Bunter, B.V.I., Ltd 413,010 2.4
C/O Ansbacher, B.V.I. Ltd.
Roadtown, Tortola, B.V.I.
Gregory Thomas 294,117 1.7
4 Acorn Street
Boston, MA
All officers and directors 7,356,669 43.4
as a group (8 persons)(3)(5)(6)
(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. George
Powch.
-35-
(4) On September 27, 1999 control of the Company changed. See
"Item 1, Business, Subsequent Events" section in Part I of this
filing.
(5) Includes 413,010 shares held in the name of Bunter, B.V.I., Ltd.
of which Mr. Hugo Biermann may be deemed a beneficiary.
Mr. Biermann disclaims such beneficial ownership.
(6) Includes 5,000,000 shares held in the name of MidMark Capital
L.P. of which Mr. Joseph R. Robinson, Mr. Denis Newman and
Mr. Wayne L. Clevenger are managing directors, but disclaim
beneficial ownership.
(7) Mr. Joseph R. Robinson, Mr. Denis Newman and Mr. Wayne L.
Clevenger are managing directors of Midmark Capital L.P.
but disclaim beneficial ownership of the shares.
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. 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.
-36-
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, 1999 and 1998
Statements of Operations for the Years Ended July 31,
1999, 1998 and 1997
Statements of Changes in Stockholders' Equity for the
Years Ended July 31, 1999, 1998 and 1997
Statements of Cash Flows for the Years Ended July 31,
1999, 1998 and 1997.
Notes to Financial Statements
2. Financial Statement Schedules:
Schedules for the Years Ended July 31, 1999, 1998 and
1997.
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.
3. Exhibits:
The following is a list of exhibits incorporated by
reference from the Company's Registration Statement filed
under the Securities Act of 1933, as amended (File No. 33-
897-NY), those filed pursuant to Registration Statement on
Form 8-A under the Securities Exchange Act of 1934, as
amended, and those material contracts of the Company
previously filed pursuant to the Securities Act of 1934 as
amended, and those filed herewith.
1.1 Form of Underwriter's Warrant Agreement and Warrant.
2.1 Form of Common Stock Certificate.
-37-
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.
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.
-38-
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.
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.
-39-
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 Assignments 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.
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.
10.43 Legal Services Agreement between the Company and
Jeffrey D. Marks, Esq. P.C. dated December 24, 1997.
10.44 Purchase Agreement between the Company and
Mortgage Plus; dated March 3, 1998.
10.45 Employment Contract between the Company and Robert
Morsch; dated May 1, 1998.
10.46 Sub-lease between the Company and Thea and Schoen,
Inc.; May 4, 1998.
10.47 Agreement between the Company and Middleberg &
Associates; dated June 1, 1998.
10.48 Employment Contract between the Company and
Ronald Byer, Jr.; dated September 10, 1998.
10.49 Legal Services agreement between the Company and
Jeffrey D. Marks, Esq.,P.C. dated January 11,1999 and
Amendment thereto dated January 15, 1999 (filed
herewith).
-40-
10.50 Employment Agreement between the Company and Ronald
Hopson; dated February 12, 1999. (filed herewith)
10.51 Employment Agreement between the Company and Ronald
C. Byer; dated May 28, 1999 (filed herewith)
10.52 Consulting Agreement between the Company and Ronald
C. Byer; dated May 28, 1999 (filed herewith)
10.53 Consulting Agreement between the Company and James Q.
Maloy; dated May 28, 1999 (filed herewith)
(b) Reports on Form 8-K
There have been no reports on Form 8-K which were filed during the
last quarter of the period covered by this report.
-41-
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, 1999 and 1998 F-4, F-5
Statements of Operations for the Years Ended
July 31, 1999, 1998 and 1997 F-6
Statements of Changes in Stockholders' Equity
for the Years Ended July 31, 1999, 1998 and 1997 F-7
Statements of Cash Flows for the Years Ended
July 31, 1999, 1998 and 1997 F-8
Notes to Financial Statements F-9 to F-21
SUPPLEMENTAL SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts
for the Years Ended July 31, 1999, 1998 and 1997 F-22
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 sheets of Vertex Industries as of
July 31, 1999 and 1998 and the related statements of operations, changes in
stockholders' equity, and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
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, 1999 and 1998 and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
Our audits were 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
September 16, 1999
except for Note 1 as to which the
date is September 27, 1999
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vertex Industries, Inc. and subsidiary:
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity and cash flows of Vertex Industries, Inc.
and subsidiary (a New Jersey Corporation) as of July 31, 1997 and for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion onthese consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
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 year then ended, in conformity
with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in
the index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not
part of the basic consolidated financial statements. This schedule has
been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Roseland, New Jersey
October 7, 1997
F-3
VERTEX INDUSTRIES, INC.
BALANCE SHEETS
JULY 31, 1999 AND 1998
ASSETS
1999 1998
CURRENT ASSETS:
Cash and cash equivalents $1,353,650 $631,362
Accounts receivable, less allowance for doubtful accounts
of $30,666 at July 31,1999 and $75,985 at July 31, 1998 914,717 837,399
Notes and other receivables, net 64,044 67,344
Inventories, net 295,457 464,389
Investment securities 282,814 452,502
Prepaid expenses and other current assets 29,948 21,348
--------- ---------
Total current assets 2,940,630 2,474,344
--------- ---------
PROPERTY, EQUIPMENT, AND CAPITAL LEASES
Property and Equipment 1,913,470 1,799,526
Capital Leases 141,757 141,757
--------- ---------
Total property, equipment and capital leases 2,055,227 1,941,283
Less: Accumulated depreciation and amortization (1,764,863) (1,653,962)
----------- -----------
Net property, equipment and capital leases 290,364 287,321
----------- -----------
OTHER ASSETS:
Deferred tax asset 230,000 400,000
Licensing Cost, net of amortization of $19,320 at July 31, 1999 118,680 --
Other assets 97,519 66,401
---------- -----------
Total other assets 446,199 466,401
---------- -----------
Total assets $3,677,193 $3,228,066
========== ===========
See notes to financial statements.
F-4
VERTEX INDUSTRIES, INC.
BALANCE SHEETS
JULY 31, 1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
CURRENT LIABILITIES:
Current portion of obligations under capital leases $6,269 $5,641
Accounts payable 226,251 273,726
Accrued expenses and other liabilities 272,567 257,094
Deferred revenue 300,774 343,612
---------- ----------
Total current liabilities 805,861 880,073
---------- ----------
LONG-TERM LIABILITIES:
Obligations Under Capital Leases, net of current portion 5,155 11,424
---------- ----------
Total long-term liabilities 5,155 11,424
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; 2,000,000 shares
authorized, none issued and outstanding -- --
Common stock, par value $.005 per share; 20,000,000 shares
authorized; 5,238,979 and 5,156,979 shares
issued at July 31, 1999 and 1998, respectively 26,195 25,785
Additional paid-in capital 5,290,837 5,223,293
Accumulated deficit (2,665,059) (3,296,401)
Accumulated other comprehensive income 259,373 429,061
---------- -----------
2,911,346 2,381,738
Less: Treasury stock, 10,000 at cost at July 31, 1999
and 1998, respectively (45,169) (45,169)
---------- -----------
Total stockholders' equity 2,866,177 2,336,569
---------- -----------
Total liabilities and stockholders' equity $3,677,193 $3,228,066
=========== ===========
See notes to financial statements.
F-5
VERTEX INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
For the Years Ended July 31,
1999 1998 1997
OPERATING REVENUES $7,219,431 $3,566,943 $3,228,598
---------- ---------- -----------
OPERATING EXPENSES:
Cost of sales $3,987,997 $1,733,152 $1,800,276
Selling and administrative $1,700,705 $1,549,726 $1,511,949
Research and development $777,263 $460,781 $496,862
---------- ---------- -----------
Total operating expenses $6,465,965 $3,743,659 $3,809,087
---------- ----------- -----------
Operating income (loss) $753,466 ($176,716) ($580,489)
---------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income $53,171 $22,924 $38,801
Intereset expense ($5,295) ($2,762) ($6,372)
Other -- -- $75,000
----------- ----------- -----------
$47,876 $20,162 $107,429
----------- ----------- -----------
Income (loss) before
income taxes $801,342 ($156,554) ($473,060)
------------ ----------- -----------
INCOME TAX PROVISION (BENEFIT):
Federal $134,000 ($174,455) --
State $36,000 ($30,545) --
------------ ------------ ------------
Income tax provision (benefit) $170,000 ($205,000) --
------------ ------------ ------------
Net income (loss) $631,342 $48,446 ($473,060)
============ ============ ============
NET INCOME(LOSS)PER SHARE OF COMMON STOCK:
Basic $0.12 $0.01 ($0.09)
Diluted $0.11 $0.01 ($0.09)
See notes to financial statements.
F-6
VERTEX INDUSTRIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1999, 1998 AND 1997
Accumulated
Additional Other
Common Stock Paid-In Accumulated Comprehensive Comprehensive Treasury
Shares Amount Capital Deficit Income Income Stock Total
BALANCE July 31, 1996 5,108,979 $25,545 $5,182,188 ($2,871,787) ($50,569) $2,285,377
Exercise of stock options 24,000 120 14,600 14,720
Issuance of stock in
consideration for services 5,000 25 4,350 4,375
Net loss (473,060) (473,060)
--------- ------ --------- ----------- ------------- ------------ -------- -----------
BALANCE July 31, 1997 5,137,979 25,690 5,201,138 (3,344,847) (50,569) 1,831,412
Issuance of stock in consideration
for service 19,000 95 22,155 22,250
Other comprehensive income, net of tax
Net income 48,446 48,446 48,446
Unrealized gain on investment security 429,061 $429,061 429,061
-------------
Comprehensive income 477,507
-------------
Decrease in treasury stock 5,400 5,400
--------- ------ --------- ---------- ------------- ----------- --------- -----------
BALANCE July 31, 1998 5,156,979 25,785 5,223,293 (3,296,401) 429,061 (45,169) 2,336,569
Exercise of stock options 82,000 410 67,544 67,954
Other comprehensive income, net of tax
Net income 631,342 631,342 631,342
Market fluctuation on investment security (169,688) (169,688) (169,688)
-------------
Comprehensive income 461,654
=============
BALANCE July 31, 1999 5,238,979 $26,195 $5,290,837 ($2,665,059) $259,373 ($45,169) $2,866,177
========= ======= ========== ============ ========= ========= ===========
See notes to financial statements
F-7
VERTEX INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $631,342 $48,446 ($473,060)
--------- -------- -----------
Adjustments to reconcile net income (loss) to net cash
Provided by operating activities
Depreciation and amortization 130,221 141,811 194,382
Stock issued in consideration for services -- 22,250 4,375
Deferred taxes 170,000 (205,000) --
(Increase) or decrease in operating assets:
Accounts receivable (122,637) (387,133) 157,898
Allowance for doubtful Accounts 45,319 -- --
Inventories, net 168,932 118,220 110,570
Notes and other receivables (134,700) 28,107 75,304
Prepaid expenses and other current assets (8,600) 11,513 (18,976)
Other Assets (31,118) -- --
Increase or (decrease) in operating liabilities:
Accounts payable (47,475) 144,104 (40,010)
Accrued expenses and other liabilities 15,473 86,451 71,406
Deferred revenue (42,838) 75,982 181,510
--------- -------- -------
Net adjustments 142,577 36,305 736,459
--------- -------- --------
Net cash provided by
operating activities 773,919 84,751 263,399
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (113,944) (46,131) (27,892)
Other -- 1,272 (1,642)
--------- -------- --------
Net cash used forinvesting activities (113,944) (44,859) (29,534)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long term debt -- (2,567) (2,800)
Repayment of capitalized lease obligations (5,641) (14,516) (31,576)
Proceeds from short term borrowing 100,000 -- --
Repayments of short term borrowing (100,000) -- --
Proceeds from exercise of stock options 67,954 -- 14,720
--------- --------- --------
Net cash provided by
(used for) financing activities 62,313 (17,083) (19,656)
--------- --------- ---------
Net increase in Cash 722,288 22,809 214,209
CASH AND CASH EQUIVALENTS AT BEGINNING OF OF YEAR 631,362 608,553 394,344
---------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,353,650 $631,362 $608,553
========== ======== ========
See notes to financial statements.
F-8
VERTEX INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT TRANSACTIONS
On September 16, 1999, the Company entered into a Subscription agreement
with Edwardstone & Company, Incorporated, ("Edwardstone") and Midmark
Capital, L.P. ("Midmark", and together with Edwardstone, the "Buyers").
Edwardstone purchased five million four hundred forty nine thousand six
hundred forty two (5, 449,642) shares of the Company's common stock and
MidMark purchased five million (5,000,000) shares of the Company's
common stock. The consideration paid by Edwardstone and its affiliates
for such shares was $5,000,000 and the consideration paid by MidMark for
such shares was $5,000,000. As a result of such transactions, the Buyers
beneficially own 60% of the Company's 16,896,121 common shares
outstanding. As a condition to the Buyers' purchase of the shares, the
Buyers and the Company entered into a Stockholders Agreement, dated
September 16, 1999 (the "Stockholders Agreement") containing certain
terms and conditions concerning the acquisition and disposition of such
shares of the Company and the corporate governance of the Company.
On September 27, 1999, the Company acquired all of the stock of
Portable Software Solutions Limited, a company organized under the laws
of England ("PSS"), Portable Software Solutions (Maintenance) Limited,
a company organized under the laws of England ("Maintenance") and Trend
Investments Limited, a company organized under the laws of the Republic
of Ireland ("Trend", and together with PSS and Maintenance, the "PSS
Group"). The PSS Group is the largest provider of handheld terminal
solutions to mobile workers in the U.K. and leads the door-to-door
insurance and dairy industries in the U.K.
To fund its acquisition, the Company transferred 1,207,500 unregistered
common shares to the PSS Group and Edwardstone transferred 384,484 of
its Vertex shares to PSS. In addition, the Company paid the PSS Group
approximately $5.9 million in cash and will make two additional
payments of approximately $800,000 each, payable at the end of the six
month period and the twelve month period, respectively, following the
closing of the transaction. The shareholders of the PSS Group may be
entitled to additional incentive payments based upon target average
annual pre tax profits of the PSS Group for the two years ending
December 31, 1999 and 2000. The Company used a portion of the cash
consideration received from Edwardstone and MidMark when Edwardstone
and MidMark purchased 60% of the Company's common shares on September
16, 1999.
On September 27, 1999, the Company acquired all of the outstanding
capital stock of ICS International AG ("ICS"), the leading provider in
Germany of integrated high-end wireless data capture solutions to
industrial users and one of the only multi-national European providers
of such solutions.
F-9
The total consideration paid to ICS was DM 9,000,000 of which DM
6,000,000 was paid in cash at the closing and the balance of DM
3,000,000 was in the form of a note redeemable in amounts of DM
1,000,000 each on December 31, 1999, March 31, 2000 and June 30, 2000,
respectively, together with the interest thereon at a rate of 8% per
annum. Further interest in the amount of DM 726,000 was paid at the
closing on the original aggregate purchase price. The Company also
assumed DM 4,000,000 of bank debt of which DM 3,000,000 was paid off at
the closing. In addition, the Company purchased ICS's headquarters
located in Neu Anspach near Frankfurt, Germany for DM 3,000,000, of
which 3,000,000 was paid in cash and the remainder was financed through
a mortgage the principal amount of which is DM 2,300,000. The Company
used a portion of the cash consideration received from Edwardstone and
MidMark to acquire ICS. The exchange rate on September 27, 1999 was
1.8961.
(2) 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-
Product revenue related to software sales 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.
F-10
Inventories-
Inventories are valued at the lower of cost (first-in, first-out
basis) or market.
Property and Equipment-
All items of property and equipment, including amounts recorded
under capital leases, are stated at cost. It is the general policy
of the Company to depreciate property and equipment under the
straight-line method over their estimated useful lives. Leasehold
improvements are amortized over the lesser of the useful life of the
improvements or the remaining term of the lease.
The estimated useful lives of depreciable assets are as follows-
Leasehold improvements 10 years
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
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.
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
F-11
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 3).
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.
(3) 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.
As of July 31, 1999 the company has recorded market fluctuation of the
F-12
investment in MPEH, based on the current stock price of $1.25 per
share. The stock price of MPEH on September 16, 1999 was $.625 per
share.
(4) INVENTORIES:
Inventories consist of the following-
July 31
1999 1998
------ --------
Raw materials $8,836 $7,815
Work in process $36,004 64,980
Finished goods and parts, net of
obsolescence reserves of $201,208 and
$235,419 in 1999 and 1998, respectively 250,617 391,594
-------- --------
$295,457 $464,389
======== ========
(5) PROPERTY, EQUIPMENT
AND CAPITAL LEASES:
Details of property, equipment and capital leases are as follows-
July 31
1999 1998
Property and equipment-
Leasehold improvements $299,956 $283,926
Machinery and equipment 223,911 223,911
Tools, dies and patterns 454,067 451,682
Office furniture and equipment 611,491 561,898
Computer equipment 203,868 157,933
Exhibit equipment 120,177 120,176
------------ -----------
Total 1,913 ,470 1,799,526
Less- Accumulated depreciation and
amortization (1,632,828) (1,527,482)
------------ -----------
Net property and equipment 280,642 272,044
------------ -----------
Capital leases-
Office equipment 86,448 86,448
Automobiles 55,309 55,309
------------ ------------
Total 141,757 141,757
Less- Accumulated amortization (132,035) (126,480)
------------ ------------
Net capital leases 9,722 15,277
------------ ------------
Net property, equipment and
capital leases $290,364 $287,321
============ ============
Depreciation and amortization of property, equipment and capital leases
for the fiscal years ended July 31, 1999, 1998 and 1997 was $110,901,
$108,891, and $151,969, respectively.
F13
(6) SHORT TERM BORROWING:
In June 1999, the Company obtained a $600,000 working capital line of
credit from a New Jersey Bank. The interest rate is prime plus 1%.
The Company must maintain certain financial covenants to stay in
compliance with the bank. The lines expire on January 31, 2000. As of
July 31, 1999 there was no balance due on the loan.
(7) LONG-TERM DEBT:
Long-term debt consists of the following-
July 31
1999 1998
Obligations under capital leases, due in monthly
principal installments of $598 plus interest
at 10 9/16% interest $11,424 $17,065
Less- Current portion of long-term debt
6,269 5,641
--------- --------
Long-term debt $5,155 $11,424
========= ========
(8) 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%. On December 28, 1998 the Company amended its
license agreement with NetWeave Corp. The Company paid NetWeave Corp.
a one-time paid up Limited Enterprise License fee of $138,000. This
payment consisted of canceling certain debt owed the Company.
Specifically, debt was cancelled on interest on the factoring debt, the
factoring debt, interest on the promissory note and the promissory note
itself. As a result of this agreement the promissory note was reduced
to $62,851. The Company has restructured repayment of the note and has
recorded a contingency reserve of $50,000 against the note.
F-13
(9) ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued expenses and other liabilities consist of the following-
July 31
1999 1998
Professional fees $50,502 $36,033
Vacation salaries -- 6,627
Sales tax 1,484 22,623
Commissions 17,641 22,971
Payroll and deductions 57,962 47,740
Royalty Expense 82,497 62,649
Pension Expense 5,870 3,255
Accrued contingency reserve 50,000 50,000
Miscellaneous 6,611 5,196
-------- --------
$272,567 $257,094
======== ========
F-14
(10) 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, 1999, 1998 and 1997
were $18,386, $3,255, and $5,787, respectively.
(11) 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-
1999 1998
------ ------
Deferred tax assets-
Allowance for accounts, note and other
receivables $32,000 $48,000
Inventory 80,000 73,000
Deferred revenue -- 106,000
Net operating loss carryforwards 1,363,000 1,433,000
--------- ---------
Total deferred tax assets 1,475,000 1,660,000
Deferred tax liabilities -
Depreciation (19,000) (12,000)
Deferred revenue (120,000) --
---------- -----------
Total deferred tax liabilities (139,000) (12,000)
Valuation allowance (1,106,000) (1,248,000)
----------- -----------
Net deferred tax asset $230,000 $400,000
=========== ===========
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
increased by $54,000 in 1999. The increase was the result of net
changes in temporary differences and the reversal of $70,000 of
valuation allowance based on projected operating results for 1999.
F-15
The components of the income tax provision (benefit) included in the
statements of operations for the fiscal years ended July 31, 1999,
1998 and 1997 consist of the following-
1999 1998 1997
------ -------- ------
Current-
Federal $290,000 -- --
State 77,000 -- --
Deferred (197,000) (205,000) --
---------- ---------- ---------
Total income tax provision (benefit) $170,000 ($205,000) --
============ ========== ==========
At July 31, 1999, the net operating loss carryforwards available to
offset future taxable income consist of approximately $4,433,000 in
Federal net operating losses which will expire in various amounts
through 2014, and state net operating losses of approximately
$3,466,000 which will expire in various amounts through 2006.
A reconciliation of income tax at the statutory rate to the Company's
effective rate is as follows-
1999 1998 1997
------- ------- -------
Statutory rate (34.0%) (34.0%) (34.0%)
Effect of-
Valuation allowance 55.2 (96.9) 34.0
Permanent differences 0.0 0.0 0.0
State income taxes, net of
Federal tax effect 0.0 0.0 0.0
----- -------- -------
Effective income tax rate 21.2% (130.9%) 0.0%
===== ======== =======
(12) 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.
F-16
Rent expense for the years ended July 31, 1999, 1998 and 1997 was
$164,340, $158,920, and $154,660, respectively.
Minimum lease payments and sublease rental income are as follows-
Equipment Sublease
Capital Operating Rental
Year Ended July 31 Leases Leases Income
2000 $7,180 $ 203,676 $53,010
2001 5,385 192,434 53,295
2002 -- 177,005 54,720
2003 -- 141,900 45,600
------ -------- --------
Total 12,565 $715,015 $206,625
======== ========
Less- Amount representing interest 1,141
------
Present value of net
minimum lease payments 11,424
Less- Current portion of obligations
under capital leases 6,269
----------
Long-term portion of
obligations under capital leases $5,155
=========
Employment Agreements-
On May 28, 1999 the Company entered into a one-year employment
contract with its President. The contract provides for an annual
salary of $150,000 per year and a Company paid automobile. The term
commences on August 1, 1999.
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.
(13) 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.
F-17
July 31
1999 1998 1997
Options outstanding, beginning of
year 821,600 667,600 341,600
Granted 375,000 170,000 450,000
Exercised (82,000) -- (24,000)
Canceled (58,000) (16,000) (100,000)
--------- --------- ---------
Options outstanding, end of year 1,056,600 821,600 667,600
========= ========= =========
Options price range $.475-$8.12 $.475-$8.12 $.475-8.12
Options exercisable 430,400 373,800 144,600
Options available for grant 578,000 1,050,000 534,000
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-
1999 1998 1997
Net income (loss)-as reported $631,342 $48,446 ($473,060)
Net income (loss)-pro forma $397,842 $(94,470) ($499,529)
Earnings (loss) per share-as reported $.12 $.01 ($.09)
Earnings (loss) per share-pro forma $.08 $(.02) ($.10)
The weighted average fair value at date of grant for options granted
in 1999, 1998 and 1997 was $1.55, $.50 and $.46, 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 $1.38 in 1999, $.81 in 1998 and $.85 in 1997
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
F-18
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.
All 70,000 options are currently exercisable.
During 1999, the Company granted 25,000 options to the Company's
legal counsel for legal services. The options are exercisable at
$.94 and expire on September 23, 2001. These options are currently
exercisable. 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.
(14) 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:
1999 1998 1997
Net income (loss) available to
common shareholders $631,342 $48,446 $(473,060)
========== ========== ===========
Weighted-average common shares
outstanding 5,191,579 5,133,674 5,102,003
Plus: Common stock equivalents 719,109 106,246 --
---------- --------- -----------
Diluted weighted-average common
shares outstanding 5,910,688 5,239,920 5,102,003
=========== ========= ===========
Net income (loss) per common
share:
Basic $.12 $.01 $(.09)
Diluted $.11 .01 (.09)
The Company did not pay dividends for each of the three years ending July
31, 1999, 1998 and 1997.
(15) MAJOR CUSTOMERS:
The Company had one customer which accounted for approximately 57% of
revenue for the fiscal year ended July 31, 1999. As of July 31, 1999,
approximately $230,519 of accounts receivable were due from this
customer. For the fiscal year ended July 31, 1998 the same customer
accounted for 17% of revenue. The Company had no customer which
accounted for more than 10% of revenue for the fiscal year ended July
31, 1997.
F-19
(16) SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
July 31
1999 1998 1997
Interest paid $5,295 $2,762 $6,372
Stock issued in consideration for
services -- 22,050 4,735
The Company recorded a $138,000 non-cash transaction for the
cancellation of debt related to the Limited Enterprise License fee.
(see Note 8)
(17) 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 years ended July 31, 1999, 1998, and 1997 the
NetWeave Licensing agreement generated revenues of approximately
$967,000, $973,000 and $105,000, respectively, and Company incurred
royalty expenses related to the revenues in the amount of $185,444,
$137,909 and $15,759, respectively.
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of the Company's financial instruments approximates the
carrying amounts.
(19) CONCENTRATION OF CREDIT RISKS:
From time to time the Company maintains cash balances that are in excess
of Federally insured limits.
(20) OPERATING SEGMENTS:
In June 1997, SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information," was issued effective for fiscal
years beginning after December 15, 1997. The statement allows, and
the Company has chosen to present information for operating segments
for the years ended July 31, 1999, 1998 and 1997, respectively.
The Company has six distinct product lines that offer different
products and services.
The following tables list the operating revenues and gross margins of
each segment:
F-20
Operating Revenues 1999 1998 1997
Barcode Equipment $4,168,462 $412,883 $488,827
Card Devices 28,171 66,472 49,806
Weighing Equipment and weights 1,520,489 1,231,481 1,291,054
Label Generating Systems 51,112 130,004 688,195
Software 484,144 753,202 606,183
Middleware 967,053 972,901 104,533
---------- ---------- ----------
$7,219,431 $3,566,943 $3,228,598
========== ========== ==========
Gross Margins 1999 1998 1997
Barcode Equipment $1,305,281 $147,657 $175,431
Card Devices 16,623 23,905 22,208
Weighting Equipment and
weights 724,282 449,471 463,038
Label Generating Systems 31,326 53,668 299,919
Software 411,962 521,060 418,128
Middleware 741,960 638,030 49,598
---------- ---------- ----------
$3,231,434 $1,833,791 $1,428,322
========== ========== ==========
All of the Company's business is conducted from its facility in Clifton,
New Jersey. All management decisions regarding sales, purchases,
pricing and shipping are performed by the Company's management team. At
present, Selling, Research and Development and General and
Administrative Expenses are not specifically allocated to each product
segment. In the future the Company plans to identify all costs relating
to each product line to further ascertain the profitability of each
segment.
F-21
VERTEX INDUSTRIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JULY 31, 1999, 1998 AND 1997
Balance Additions Deductions Balance
at Charged From at End
Beginning to Allowance Of
of Period Expense Period
Year Ended July 31, 1999-
Deducted from accounts
receivable for $75,985 $-- $45,319 $30,666
doubtful accounts
Deducted from inventory as
valuation allowance $235,419 $103,324 $199,604 $139,139
Year Ended July 31, 1998-
Deducted from accounts receivable
for doubtful accounts $75,985 $-- $-- $75,985
Deducted from inventory as
valuation allowance $139,419 $96,000 $-- $235,419
Year Ended July 31, 1997-
Deducted from accounts
receivable for doubtful accounts $75,985 $-- $-- $75,985
Deducted from inventory as
valuation allowance $34,619 $204,000 $99,200 $139,419
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 27, 1999 VERTEX INDUSTRIES, INC.
/s/Ronald C. Byer
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 27, 1999 /s/Hugo H. Biermann
Joint Chairman of the Board,
Joint Chief Executive Officer
and Director
October 27, 1999 /s/Nicholas R. Toms
Joint Chairman of the Board
Joint Chief Executive Officer
and Director
October 27, 1999 /s/Ronald C. Byer
President and Director
October 27, 1999 /s/Gregory N. Thomas
Director
October 27, 1999 /s/Joseph R. Robinson
Director
October 27, 1999 /s/George A. Powch
Director
October 27, 1999 /s/Wayne L. Clevenger
Director
October 27, 1999 /s/Denis Newman
Director
-42-