EXHIBIT 99.1
APPLIED TACTICAL SYSTEMS, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 2000
APPLIED TACTICAL SYSTEMS, INC.
CONTENTS
REPORT OF INDEPENDENT AUDITORS ............................................. 1
FINANCIAL STATEMENTS:
Balance Sheet ....................................................... 2
Statement of Operations and Retained Earnings ....................... 3
Statement of Cash Flows ............................................. 4
Notes to Financial Statements ....................................... 5 - 9
Report of Independent Auditors
The Board of Directors and Shareholders of
Applied Tactical Systems, Inc.
We have audited the accompanying balance sheet of Applied Tactical Systems, Inc.
as of December 31, 2000, and the related statements of operations and retained
earnings and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Applied Tactical Systems, Inc.
at December 31, 2000, and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States.
/s/Ernst & Young LLP
MetroPark, New Jersey
March 1, 2001
APPLIED TACTICAL SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 2000
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 425,138
Accounts receivable, less allowance for doubtful
accounts of $20,000 1,416,212
Inventories, net 301,750
Prepaid expenses and other current assets 63,016
------------
Total current assets 2,206,116
------------
PROPERTY AND EQUIPMENT:
Property and equipment 800,591
Less Accumulated depreciation and amortization (472,342)
------------
Net property and equipment 328,249
------------
Total assets $ 2,534,365
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $552,039
Dividends payable 230,000
Accrued expenses and other liabilities 317,843
Deferred revenue 248,513
------------
Total current liabilities 1,348,395
STOCKHOLDERS' EQUITY:
Common stock, no par, 5,000,000 shares
authorized; 4,000,000 shares outstanding 200,000
Additional paid-in-capital 167,800
Retained earnings 818,170
------------
Total stockholders' equity 1,185,970
------------
Total liabilities and stockholders' equity $ 2,534,365
============
See notes to financial statements.
2
APPLIED TACTICAL SYSTEMS, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 2000
OPERATING REVENUES $ 9,255,294
COST OF SALES 4,793,790
-------------
GROSS PROFIT 4,461,504
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OPERATING EXPENSES:
Selling and administrative 3,043,065
Research and development 593,796
Depreciation and amortization 171,863
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Total operating expenses 3,808,724
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OPERATING INCOME 652,780
OTHER INCOME AND (EXPENSES):
Interest income 19,805
Interest expense (17,239)
Other (16,347)
-------------
Net other income (expense) (13,781)
-------------
INCOME BEFORE INCOME TAXES 638,999
Income Tax Provision 12,225
-------------
NET INCOME 626,774
RETAINED EARNINGS, JANUARY 1, 2000 721,396
LESS DIVIDENDS 530,000
-------------
RETAINED EARNINGS, DECEMBER 31, 2000 $ 818,170
=============
See notes to financial statements.
3
APPLIED TACTICAL SYSTEMS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
Cash Flows from Operating Activities:
Net Income $626,774
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 171,863
Net loss on disposal of assets 16,347
Changes in assets and liabilities
Accounts receivable, net (130,036)
Inventories, net 33,364
Prepaid expenses and other current assets (17,220)
Accounts payable 350,677
Accrued expenses and other liabilities (82,460)
Deferred revenue 80,397
----------------
Net cash provided by operating activities 1,049,706
----------------
Cash Flows from Investing Activities:
Additions to property and equipment (66,404)
Proceeds from sale of fixed assets 6,350
----------------
Net cash used for investing activities (60,054)
----------------
Cash Flows from Financing Activities:
Dividends paid (300,000)
Loans payable bank, net (350,000)
----------------
Net cash used in financing activities (650,000)
----------------
Net Increase in Cash 339,652
Cash and Cash Equivalents at Beginning of Period 85,486
----------------
Cash and Cash Equivalents at End of Period 425,138
================
See notes to financial statements.
4
1. Business and Summary of Significant Accounting Principles
Business
Applied Tactical Systems, Inc. (the "Company") offers a suite of software
products and services to assist in the implementation of automated data
collection and "bar-code" systems. The Company also provides services to a
variety of clients in the areas of manufacturing, management information
systems, software and hardware design, manufacturing cost controls, detail
communications implementation and manufacturing systems development.
Sale of Company
On December 29, 2000, the Company merged with Vertex Interactive, Inc.
("Vertex"). Vertex is a public company that is a provider of web-enabled
business-to-business fulfillment solutions that enhance productivity across the
supply chain in such critical areas as customer relationship management,
enterprise applications integration, logistics, inventory and warehouse resource
management, route accounting and sales management. Vertex has operations
throughout North America and Europe. The Company's shareholders received
3.0 million shares of Vertex common stock, with an approximate fair market
value of $25 million, in exchange for all of its outstanding shares of common
stock. In addition, Vertex reserved 153,600 shares for issuance upon exercise
of the Company's stock options. The vested portion of these options was
estimated to have a total fair market value of approximately $600,000.
The sale of the Company closed effective with the close of business
on December 31, 2000.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Equipment Sales:
Revenue related to sales of equipment is recognized when the products are
delivered, title has passed and no obligations remain.
Software License Sales:
The Company recognizes license fees as revenue in accordance with SOP 97-2,
"Software Revenue Recognition" as amended by SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions". The
revenue related to software license sales is recorded at the time of shipment
provided that (i.) no significant vendor obligations remain outstanding at the
time of sale; (ii.) the collection of the related receivable is deemed probable
by management; and (iii.) that vendor specific objective evidence (V.S.O.E.) of
fair value exists for all significant elements, including postcontract customer
support (PCS) in multiple element arrangements.
Support and Services:
The Company accounts for revenue related to PCS over the life of the
arrangements, generally twelve months. The Company also provides consulting and
other services on a per-diem billing basis and recognizes such revenues as the
services are performed.
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Deferred Revenue
Deferred revenue represents the unearned portion of revenue related to PCS
not yet completed.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with maturities of
three months or less at date of purchase to be cash equivalents.
Inventories
Inventories consist primarily of equipment used in the implementation of an
integrated system or equipment purchased for resale and is stated at the lower
of cost (first-in first-out) or market.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line and declining balance methods over the estimated useful lives of
the assets.
The Company reviews its property and equipment 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 its property and equipment.
Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and trade accounts
receivable. The Company maintains its cash balances with a high credit quality
financial institution and from time to time, certain balances may exceed the
amount of federal deposit insurance.
At December 31, 2000, one customer represented approximately 38% of the
outstanding accounts receivable and for the year ended December 31, 2000,
another customer accounted for approximately 11% of revenues.
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, and accounts payable are carried at cost, which
approximates their fair value because of the short-term maturity of these
instruments.
Stock Based Compensation
The Company accounts for its stock based compensation in accordance with SFAS
No. 123, "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 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 8).
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Comprehensive Income
Comprehensive income is defined to include all changes in equity except those
resulting from investments by shareholders and distribution to shareholders. For
the year ended December 31, 2000, the Company's comprehensive income consists
entirely of net income from operations.
Income Taxes
The Company has elected by unanimous consent of its shareholders to be taxed
under the provisions of subchapter S of the Internal Revenue Code. Under those
provisions, the Company does not pay federal corporate income taxes on its
taxable income. Instead, the shareholders include their respective share of the
Company's net income in their individual federal income tax returns. The Company
is liable for certain state and local taxes notwithstanding S corporation
status.
2. Property and Equipment
Property and equipment at December 31, 2000 consists of the following:
Estimated
Useful Lives
------------
Furniture and fixtures $ 167,500 7 years
Leasehold improvements 268,231 4 - 6 years
Computer equipment 246,747 3 - 5 years
Office equipment 118,113 5 years
-----------
800,591
Less: Accumulated depreciation
and amortization (472,342)
-----------
Net Property and Equipment $ 328,249
==========
3. Accrued Expenses
The components of accrued expenses and other liabilities at December 31, 2000
consist of the following:
Payroll and related deductions $ 152,862
Sales and other taxes, excluding income and payroll 43,593
Inventory purchases 30,277
Other 91,111
---------
$ 317,843
=========
4. Indebtedness
The Company has a revolving line of credit up to $1,500,000 that bears interest
at the bank prime rate and is secured by a first lien on all business assets of
the Company. At December 31, 2000, there were no balances outstanding under the
line of credit. As a result of the merger with Vertex, the line of credit was
terminated.
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5. Related Party Transactions
The Company leases office and warehouse space (for its principal offices in New
Jersey) from a shareholder. The lease is classified as an operating lease and is
on a month-to-month basis at a rate of $16,667 per month. In addition, the lease
obligates the Company to pay all real estate taxes and assessments for the
premises while the Company occupies the space. The total 2000 rent and real
estate tax expense for this lease were $200,000 and $31,940, respectively.
The Company also leases office space (in Rochester, N.Y.) from an entity that is
wholly owned by certain shareholders. The lease is classified as an operating
lease and is on a month-to-month basis at a rate of $11,000 per month. In
addition, the lease obligates the Company to pay all real estate taxes and
assessments for the premises while the Company occupies the space. The total
2000 rent and real estate tax expense for this lease were $132,000 and $18,875,
respectively.
During the year ended December 31, 2000, the Company incurred $50,000 of
consulting fees to the spouse of a shareholder, and approximately $36,000 of
transportation costs to a company that is owned 50% by a shareholder.
6. Commitments
Future minimum lease payments under non-cancelable operating leases that have
remaining terms in excess of one year as of December 31, 2000 are:
Years Ended December 31,
2001 39,540
2002 13,180
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$ 52,720
========
Rent expense for the year ended December 31, 2000, including amounts with
related parties (see Note 7), was $371,775.
7. Stockholders' Equity
Dividends
During the year ended December 31, 2000, the Company declared $530,000 of
dividends to its shareholders of which $230,000 was unpaid and recorded as
dividends payable at December 31, 2000.
Stock Option Plan
The Company has a Stock Option Plan (the "Plan") that provides for the granting
of nonqualified stock options to employees to purchase shares of the Company's
common stock. Options granted under the Plan generally vest over five years and
expire after seven years. No options were granted, exercised or cancelled during
2000. At December 31, 2000, there were 204,800 options outstanding at an
exercise price of $3 per share, of which 122,880 options were exerciseable.
Pro-forma SFAS 123 Disclosure
In accordance with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company
accounts for its issuances of stock options under Accounting Principles Board
Opinion 25 and, accordingly, does not recognize compensation cost for those
options issued at the stock's fair market value on the date of grant. If the
Company had elected to recognize compensation cost based on the fair value of
the options granted at the grant date as proscribed
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by SFAS 123, net income for the year ended December 31, 2000 would have
decreased approximately $25,000 from $626,774 to $601,774.
The fair value of each option grant is estimated on the date of grant using the
minimum value option-pricing model with the following assumptions:
Expected dividend yield 0%
Risk-free interest rate 5.5%
Expected life of options 5 years
The effects of applying SFAS 123 and the results obtained through the use of the
minimum value option-pricing model are not necessarily indicative of future
values.
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