UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Year Ended:
September 30, 2001
Commission file number 0-15066
Vertex Interactive, Inc.
(Exact name of Company as specified in its charter)
New Jersey 22-2050350
(State of incorporation) (I.R.S. Employer Identification No.)
22 Audrey Place, Fairfield New Jersey 07004
(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. (X)
As of December 31, 2001 the aggregate market value of the voting common stock
held by non-affiliates of the Company was $27,135,510 based upon the closing
price of the common stock as reported on the NASDAQ National Market as of
December 31, 2001.
As of December 31, 2001 the Company had 35,663,059 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, Current
Reports filed on Form 8-K dated September 7, 2001, March 2, 2001, October 2,
2000, April 12, 2000, and October 7, 1999, Quarterly Report on Form 10Q filed on
August 14, 2001, Annual Report on Form 10-K filed on December 18, 2000 and
Transition Report on Form 10K filed on January 13, 2000.
1
PART I
ITEM 1. BUSINESS
General
Vertex Interactive, Inc. ("Vertex" or "we") is a global provider of supply chain
management ("SCM") technologies, including enterprise software systems and
applications, advance planning and scheduling capabilities, software
integration, solutions that enable our customers to manage their order,
inventory, warehouse and transportation needs, consultative services, and
software and hardware service and maintenance. We serve our clients through
three general product and service lines: (1) enterprise solutions; (2) point
solutions; and, (3) service and maintenance for our products and services,
including service and maintenance of software and hardware we resell for third
parties. Our enterprise solutions include a suite of Java'TM'-architected
software applications, applications devoted to the AS/400 customer base, as well
as a portfolio of "light-directed" systems for inventory, warehouse and
distribution center management. Our point solutions provide an array of products
and services designed to solve more specific customer needs from managing a
mobile field workforce, mobile data collection, distributed bar code printing
capabilities, compliance labeling applications, automated card devices, software
development tools and proprietary software serving SAP R/3 users. We provide a
full range of software and hardware services and maintenance on a 24-hour,
7-days a week, 365-days a year basis, including the provision of wireless and
wired planning and implementation services for our customers' facilities.
We have achieved our current product and service portfolio and our international
scale as a result of various acquisitions described in the "Acquisitions"
section of Note 1 to the Consolidated Financial Statements. Our customers are
able to maximize the efficiency of the flow of inventory through their supply
chains, by implementing our integrated systems. Our customers use our software
to reduce procurement and distribution costs, and manage and control inventory
along the supply chain, thereby increasing sales and improving customer
satisfaction and loyalty. Through a recent acquisition (completed in September
2001), we have expanded our portfolio of applications and services to include
advance planning and scheduling applications, which complement our expertise in
supply chain management solutions. We also resell third party software and
hardware as part of our integrated solutions. We provide global service and
support for all of our software and systems from established facilities in North
America and Europe.
We sell our products and services worldwide, but primarily in North America and
Europe, through a direct sales force and through strategic reseller alliances
with complementary software vendors and consulting organizations. We target
customers with a need to manage high volumes of activity along their supply
chains from order intake and fulfillment, through inventory, warehouse and
distribution center management to the ultimate delivery of goods to end users.
Our total sales for the fiscal year ended September 30, 2001 were $59.1 million,
approximately 51% of which were generated by our North American operations. For
the comparable period ended September 30, 2000 we reported $47.8 million in
sales, approximately 39% of which were generated by our North American
operations. Prior to fiscal 2000, 100% of our revenues were generated in North
America.
The successful implementation of our business plan has required, and will
require on an ongoing basis, substantial funds to finance (i) the growth of our
operations, (ii) the continuing development of our enterprise technologies,
(iii) historical and expected future operating losses, and (iv) from time to
time, selective acquisitions. We do not anticipate reaching the point at which
we generate cash in excess of our operating expenses until June 30, 2002 at
the earliest, about which there can be no assurance. In order to meet future
cash flow needs, we are aggressively pursuing additional equity and debt
financings, the sale of low margin, low growth services which we have decided
to exit, and continued cost cutting measures. Historically, we have financed
these activities through both equity and debt offerings. There can be no
assurance that we will continue to be successful in these efforts. As a result
there is substantial doubt as to our ability to continue as a going concern.
(See Management's Discussion and Analysis, Liquidity and Capital Resources.)
Our principal executive offices are located at 22 Audrey Place, Fairfield, New
Jersey 07004 and its telephone number is (973) 777-3500. The Company was
organized in the State of New Jersey in November 1974.
2
Fiscal 2001 Key Acquisition and Announced Merger Agreement
During the fiscal year ended September 30, 2001 we closed certain acquisitions,
discussed in detail in the "Acquisitions" section of Note 1 to the Consolidated
Financial Statements, that we believe are key to our future growth plans. In
particular, our acquisition of Renaissance Software, Inc. ("Renaissance"),
effective September 30, 2000, brought us leading edge enterprise level SCM
functionality. At the time we purchased Renaissance, a portion of its software
was still in its development stage, being implemented in several customer sites
in North America. Since the acquisition, we have invested significant amounts of
capital and management resources to accelerate the commercialization of the
Java'TM' based application set and to expand and enhance its functionality.
Delays in commercial availability of the newly developed enterprise software
applications had a negative impact on our internal financial forecasts and
actual financial results for fiscal 2001.
On August 24, 2001, we announced an agreement to a merger of equals with Plus
Integration Supply Chain Solutions, B.V., a private company based in Haarlem,
Holland. The companies have also agreed to review the capital needs of the
combined entity and to raise, prior to the closing of the merger, sufficient
free cash, expected to be at least $20 million, in connection with the
transaction to ensure adequate working capital going forward. This strategic
merger is an integral part of our goals of (1) focusing on increasing the
percentage of software in our revenue mix; (2) strengthening our presence
in key European growth markets; (3) increasing our scale; and (4) enhancing
our consulting service capabilities. As compensation, we agreed to exchange
40,000,000 newly issued shares of our common stock in exchange for all the
stock of Plus. On November 7, 2001 the shareholders of Plus approved the
terms of the transaction. In the case of Vertex, the agreement is subject
to shareholder approval that is expected to be solicited by May 2002,
following the mailing of a Proxy.
The Supply Chain Management Industry
Generally speaking, the term "supply chain management" refers to a wide spectrum
of software applications, consulting services, maintenance services and hardware
products intended to enable businesses to plan their supply chains and then to
execute against those plans in a dynamic manner as developments in their
business operations dictate. The primary goals of successful supply chain
planning and execution are to reduce the costs of sales, recognize early and
then act upon opportunities to increase sales and ultimately to increase
customer loyalty and satisfaction through more efficient, timely and accurate
delivery of promised goods and materials. The SCM industry is evolving toward a
more software-driven model as enterprises increasingly seek ways to manage their
supply chains in real-time at a lower cost and in a more decentralized
environment.
SCM spending falls within the Information Technology ("IT") industry, which
Gartner Dataquest forecasts to account for $1.7 trillion in worldwide sales in
2002. Because SCM technologies and services enable enterprises to manage a
mission-critical aspect of their operations, Vertex believes that, despite some
cyclicality that may always characterize investment in software, over the
long-term, SCM solutions are likely to remain significant factors in corporate
IT budgeting. Within the huge IT investment we believe applications and value-
added services such as implementation and consulting will play a significant
role as enterprises must focus on generating the highest return possible on
their asset base - the primary focus of SCM technology.
Vertex believes that there is an attractive growth opportunity in developing and
delivering to customers across a broad spectrum of industries an array of
software applications and integrated solutions and services designed to reduce
the costs inherent in the supply chain, increase sales and enhance customer
loyalty and satisfaction.
The Opportunity
There are only two reasons to invest in new technology: to increase your revenue
or to decrease your costs - ideally both at once. If technology doesn't make a
user more productive and profitable, the investment is
3
not worth it. We believe our applications today and those we are developing
respond to both these purchasing-decision requirements.
Recent analysis from Gartner Dataquest concludes that as macroeconomic factors
that negatively impacted spending on technology in 2001 ease in 2002 and beyond,
users will want to wring more value from effective integration of existing
products, and emphasize return on investment ("ROI"). According to Gartner
Dataquest outsourcing demand will continue to spur information technology growth
over the next few years, and pent-up demand for consulting as well as
development and integration of new technologies will be important growth
factors. Vertex can respond to these needs today and its strategy is to be able
to anticipate and respond to our customers' needs in these areas as the SCM
market matures.
According to the U.S. Bureau of Commerce, approximately 10% of the U.S. gross
domestic product, or more than $900 billion in 1999, is spent annually on the
movement and storage of raw materials, parts, finished goods and other
activities along the supply chain. Globalization and the rise of the Internet
are working in conjunction as catalysts for the emergence of supply chain
technologies designed not only to reduce the cost friction inherent in the
global economy, but to give enterprises unprecedented visibility into and
dynamic control over their supply chains. Vertex's strategy is grounded on the
conviction that supply chain optimization and management driven by software
applications and integrated systems is a long-term growth industry still in its
early stages of development, in which there is an attractive opportunity for
companies with sufficient scale and the right product set to emerge among a
handful of global leaders.
AMR Research forecasts the worldwide SCM industry to reach $21 billion by 2005,
a 5-year compound annual growth rate of approximately 32%. Application software
license revenues, which today comprise an estimated 41% of total SCM industry
sales, according to AMR, are forecast to continue to grow at a 29% CAGR and
reach nearly $8 billion by 2005. Software maintenance, which AMR estimates to
generate nearly $1 billion in industry revenues in 2001, is expected to grow at
a 36% CAGR and reach $3 billion by 2005.
The two largest geographic markets for SCM technology and services are North
America and Europe. AMR estimates that in 2001 these two markets accounted for
roughly 86% of worldwide sales, with the North American market expected to grow
at a 28% CAGR through 2005 and Europe expected to grow at a 38% CAGR over the
same period. In light of the lingering impact from the recessionary economies in
North American and Europe, AMR's current industry growth forecasts may prove to
be aggressive. While Asia/Pacific and Central and South America are forecast to
grow more rapidly over that period, today these markets account for an estimated
13% of industry sales and are forecast to reach about 17% by 2005.
Two Key Catalysts: Global Competition and the Internet
Many observers point to two fundamental drivers of long-term growth in the SCM
industry: (1) the increase in globalization and the competitive pressures that
trend is creating for businesses both large and small, and (2) the rise of the
Internet as a medium for commerce at virtually every level of the economy.
As competitive barriers fall around the world, companies face the challenge of
competing profitably over a wider landscape against a larger number of
competitors. Increasing efficiency of the supply chain can be a cornerstone of
keeping a competitive edge. While the Global 2000 or the Fortune 500 enterprises
are most likely to have the incentive and resources to invest in SCM technology,
they are by no means the only ones to potentially benefit from SCM investments.
Vertex believes that we are in the early stages of a secular trend toward more
open global commerce that has the potential to impact businesses of nearly every
size, creating an opportunity for us to penetrate enterprises large and small.
Coincidental with the increase in the pressures of global competition, the
Internet has arrived with the promise of an unprecedented opportunity for
companies and customers alike to have access to vast amounts of information at
the click of a mouse. This capability is still in its infancy, especially
outside the world's largest enterprises, but it offers corporations a far less
costly and far more dynamic means to manage their businesses, including their
supply chains, than ever before. At the same time, the Internet is changing the
way businesses must think about their operations and how they must plan their
business strategies and tactics and then execute to the plans. Gradually taking
shape around the trend toward more open markets
4
and the new medium of the Internet is a new and complex business model which is
characterized by more inter-dependent relationships among companies, their
vendors and their customers. Managing the supply chain lies at the heart of
planning and executing in this emerging new business environment.
An Industry Evolving
Since early 2000 the software industry generally and SCM software in particular
have been undergoing a significant new phase in their evolution. During the
decade of the 1990s corporate buyers of IT, especially Fortune 500 and Global
2000 companies, were eager to invest millions of dollars in software systems
marketed to be able to streamline enterprise functions and processes from
business-to-business marketplaces to enterprise resource planning to customer
relationship management in an integrated manner. In many instances the
expectations exceeded the day-to-day reality. Implementing complex software with
legacy applications turned out to be difficult, costly and time consuming. Then
re-inventing the corporation's functioning and internal processes around the
demands of the software added a new dimension: adapting the enterprise to the
technology rather than the other way around.
So, despite billions of dollars of capital investment in new software systems,
the benefits have been slower in coming than corporate buyers had expected and
planned for. Consequently, a degree of cynicism has arisen about the true return
on investment that large-scale, complex systems are able to deliver. The general
economic downturn was already highlighting these concerns when the events of
September 11th in the United States for a time put a majority of technology
buying decisions on hold and in some instances killed them altogether. As buyers
began to return to their technology needs, the approach had undergone a shift in
emphasis toward solutions that were affordable, whose functions were targeted
and whose ROI was justifiable in a new and more challenging economic landscape.
We understand this new phase demands more focused enterprise functionality
capable of solving a customer's supply chain challenges rapidly and in a manner
that disrupts our customers' business processes as little as possible. We are,
therefore, transitioning our own business model aggressively toward providing
enterprise level software systems that fit our client's near-term and long-term
needs, without overwhelming them with rigid new functionalities that require
entire new ways of doing business.
Beyond the "Four Walls"
Traditionally, companies have viewed their supply chains as a series of discrete
activities that could be managed largely independently of each other and almost
certainly independently of a company's vendors and customers. This approach is
changing. In its place Vertex sees emerging, among companies of nearly any size
recognition that every aspect of the process of moving raw materials through the
production process and eventually into commerce is intimately related to and
impacted by other processes along the supply chain. Having "visibility" into the
supply chain and events that need to be managed along the supply chain can
result in significant operational and financial efficiencies.
This transition to a new operating model poses challenges for corporate managers
because few internal IT systems or business practices are yet fully capable of
taking advantage of the new opportunity to access and manage enterprise
information in a decentralized environment. Increasingly, corporations are
taking advantage of opportunities (or responding to requirements) to add value
at many more places along the supply chain. This growing imperative is placing a
more complex set of functional needs on legacy supply chain management practices
and technologies. These challenges include:
o Implementing and managing more dynamic, customer-driven fulfillment
processes;
o Supporting a new array of relationships with partners, vendors,
trading partners and customers;
o Enhancing visibility into order, inventory, warehouse and
transportation status;
o Improving real-time co-ordination among enterprise facilities;
o Extending supply chain visibility beyond the enterprise;
o Permitting dynamic scalability to address unpredictable increases in
transaction volumes;
o Allowing least-cost routing;
o Enabling the application of value-added services along the supply
chain;
5
o Providing means to monitor activity along the supply chain; and
o Managing events in the supply chain in the optimum time to take
advantage of revenue opportunities and avoid costs.
A premium is developing on more integrated, scaleable, real-time capabilities
that can support a more complex and dynamic web of business relationships with
vendors, partners and customers. Vertex believes that its software and services,
coupled with its expertise in the areas of order fulfillment, inventory,
warehouse and transportation management offer important value-added in the
emerging SCM marketplace.
We also recognize that our customers' chief requirement in an SCM solution is a
rapid return on investment. Our strategy is to remain primarily focused on
providing solutions that solve our customers' tactical needs in managing the
production, storage and flow of their goods to the marketplace. While we have
recently acquired planning capabilities that we expect to complement our
execution solutions, we believe that in the foreseeable future the most
profitable opportunity for our continued growth rests in helping our customers
find ways to enhance their own efficiencies and improve their own bottom lines.
Strategy
Our mission is to be a leading global provider of enterprise level software
applications and consulting services designed to enhance our customers'
investment in and return on the assets comprising their supply chains. To
fulfill this mission we intend aggressively to pursue three key goals: (1) focus
our business on enterprise level software solutions in the supply chain to
achieve a significantly higher percentage of software revenues as a percentage
of our total sales; (2) continue aggressive steps both in cost cutting and
revenue growth to achieve a return to profitability; and (3) reach a scale we
believe is sufficient to sustain the company among the top tier of SCM providers
in the world. Our strategies for meeting these goals include:
CONTINUE TO ENHANCE AND EXPAND OUR SUITE OF ENTERPRISE-LEVEL SOLUTIONS.
Vertex believes that its eSeries Java'TM'-architected application suite is key
to its long-term competitive and profitable growth. The rise of the Internet has
established an unprecedented means for enterprises to access, share and manage
not only their own internal business data, but data from within the
organizations of their vendors, partners and customers. Still in its formative
stages, enterprise collaboration offers a new business model, especially the
enterprise supply chain management. But, in addition to developing applications
that support enterprise collaboration, we believe there is a significant and
long-lived opportunity for intra-enterprise applications that enable our
customers to access, share and manage their own corporate information in a more
timely, cost-effective manner that ultimately can help them generate more sales,
win and retain customers and be more competitive in their own markets. These
benefits are not fads in our view, but are the foundation of a trend in economic
productivity at the heart of which lies more efficient management of the
corporate supply chain.
FOCUS OUR RESEARCH AND DEVELOPMENT ON CUSTOMER DEMAND-DRIVEN SOFTWARE
APPLICATIONS.
We now emphasize a customer-driven research and development ("R&D")
discipline throughout our organization and across our application set. We listen
to our customers' need for applications that allow them to serve their customers
more efficiently. A recent study by AMR Research concluded that increased
customer focus is the most important issue for SCM clients when they are making
the technology purchase decision. Therefore, our product road map for the next
12-months is characterized by accelerated development of cross-platform and
cross-database capabilities, with particular emphasis on three vertical markets:
pharmaceuticals, third-party logistics ("3PL") and third-party warehousing
("3PW") functionalities. For instance, we have recently achieved commercial
availability of enhanced workflow management and third-party billing
functionality as two of our value-added deliverables. We are also focused on
applications that improve inter-enterprise real-time visibility of goods flow
status, as logistics executives have emphasized to us how key it is to them to
have in-transit shipment data access. In order to improve our own profitability,
to reduce implementation costs and time for our customers, and to streamline our
sales efforts, we are standardizing many of our core functionalities. We believe
that marketing to our customers a flexible, scaleable and highly standardized
set of applications with predictable implementation processes, enables our
customers to quantify their total cost of ownership, ease purchasing decisions,
shorten
6
sales cycles and ultimately strengthen our relationships with our customers and
their relationships with their customers.
CONCENTRATE ON HIGH MARGIN SOFTWARE APPLICATIONS.
We intend to continue to transition our operations and R&D initiatives to enable
us to expand our margins. Given the value of our applications and SCM solutions
to our customers, we believe we must pursue an operating model that concentrates
our resources on modular software applications that share a core, scaleable
functionality set.
As part of this strategy, we have assessed the long-term value and fit of
some of our current assets and operations for attractive opportunities to
generate the value from them that we believe they may have.
EXPAND OUR STRATEGIC ALLIANCES.
We intend to continue to actively pursue relationships with third-party
consultants to enable us to raise our penetration in the marketplace, building
upon our relationship with IBM, as an example. Partnering is a cost-effective
and more efficient method for raising our profile outside our current core
vertical markets, a strategy we already pursue, for example, through our
partnership with American Management Systems, a provider deeply entrenched in
the government vertical.
As an integral aspect of this strategy and as is described in more detail below,
(see "Acquisitions" in Note 1 to Consolidated Financial Statements), during
fiscal 2001 we developed a strategically vital relationship with Pitney Bowes
as a result of which we acquired Pitney Bowes' Transportation Management
Software and certain engineering assets in exchange for 1.356 million shares
of our Series A Convertible Preferred Stock and approved Pitney Bowes as a
reseller of our enterprise software suite. Subsequent to this transaction and
the end of fiscal 2001, Pitney Bowes invested approximately $1 million in
additional capital in exchange for Series B Convertible Preferred Stock and
named a member to our Board of Directors (see "Subsequent Events" in Note 17
to Consolidated Financial Statements). Today, Pitney Bowes and we are marketing,
under our own brands, Vertex's enterprise level suite of products and services.
CONSIDER ALTERNATIVE PRICING MODELS THAT CAN INCREASE THE PREDICTABILITY OF OUR
REVENUE GROWTH.
We anticipate a gradual transition among technology buyers toward alternative
means of investing in enterprise-level applications. Making investment in SCM
technology an easier decision for our customers from a financial standpoint
for our high-value applications will be an important factor in our continued
competitiveness. We are therefore continuing to explore ways to lower the
total cost of ownership associated with our products. One potentially important
new approach is to offer software on a subscription basis. AMR Research
forecasts that from a small base today, subscription-based industry revenues
could grow through 2005 at a 46% CAGR. We, too, see signs of interest among
customers in developing an alternative to a perpetual license model that would
make a subscription-based pricing structure available for those customers for
whom such a payment scheme would be more attractive. If the early signs of
this trend continue to strengthen, Vertex intends to be prepared to respond to
our customers' needs in this regard.
MONITOR OUR EXPENSES AGGRESSIVELY.
During fiscal 2001 we initiated cost reduction measures, including reductions in
the number of our employees, facilities consolidations, as well as reductions in
other expenses deemed redundant such as marketing and advertising and other
headcount-related expenses. We will continue to adjust our expense structure
toward our financial goal of returning to profitability in the near-term. We
believe we have further opportunities to align our expense level with our
internal revenue expectations in a way that will more effectively drive us to
cash profitability within a reasonable timeframe.
7
INCREASE OUR SCALE.
We believe that we must increase our scale in order to maintain and improve our
competitive profile in the industry. As the SCM market matures and consolidates,
we expect the most competitive players will increase scale in order to maintain
their pricing power as well as to be capable of responding to increasingly
complex customer demands for applications, consulting and implementation
services on a wider basis. In addition, as is typical in the software industry,
it is often faster and cheaper to acquire targeted capabilities than to develop
them internally, especially if there are opportunities to acquire capabilities
and personnel and live customers that can complement our own core competencies.
We will continue to assess such scale-enhancing opportunities globally.
Products
We are an international provider of supply chain management systems with
operations in North America and across Europe. Our portfolio of products
includes advance planning and scheduling systems with forecasting, purchasing,
and multi-sourcing; order management systems (OMS) with fixed and mobile order
entry, processing and fulfillment; inventory management (IMS); warehouse
management (WMS); "light-directed" systems for picking and packing, and
transportation management systems (TMS). Vertex's inventory and warehousing
product suite also covers a range of point solutions including software and
integration technology for handheld devices, auto ID and printing solutions (for
standard, 2D and 3D bar coding), a suite of mobile data collection solutions for
SAP R/3 implementations and software for mobile computing, namely VI Home
Service (a product developed to automate field insurance agents), SalesPro (for
the automation of field sales workers generally) and VanPro (for route
accounting functions). From point of order, to fulfillment, through
acknowledgement of receipt, we provide our customers with a complete supply
chain solution whether improving the pick rate in a single warehouse or
maximizing efficiencies across enterprise operations with a fully integrated
execution system in a collaborative environment. Our product suite includes:
Enterprise Products/Services:
Java'TM' architected, eSuite
The Company's core product offering are its Java'TM'-architected, enterprise
level, supply chain execution systems which includes order management (eOMS) and
warehouse management (eWMS) applications. The most recent edition to the eSuite
of products is the web-based transportation management system (eTMS). Vertex's
eSuite of products promotes collaboration and the exchange of "real-time"
critical information amongst users within their trading environment, including
employees, distributors, manufacturers, suppliers and customers. Portable by
design, the eSuite of products can operate across multiple operating and
hardware environments, incorporates the ability to utilize various database
options, and can easily be integrated with existing IT infrastructure and third
party applications.
eWMS is a Java'TM' engineered warehouse management system that provides
companies with real-time insight into warehouse operations and inventory
availability. eWMS is a true multi-warehouse/owner system that can be
deployed cross industry and has specific functionality for food and third
party warehouse/logistics environments. eWMS can be implemented to
interface with existing enterprise applications or as an integrated
component of eOMS and eTMS to facilitate a complete supply chain execution
solution.
eOMS is a web-based order management system that integrates all users in a
real-time environment: internal employees, external sales force, customers,
distributors, and customers, through any means of deployment: Internet,
Intranet, or Extranet. eOMS provides companies with maximized selling
opportunities by capturing valuable buying pattern information and then
uses this information to broadcast suggestive selling and promotional
opportunities as well as many other benefits.
8
eTMS is a web-based, enterprise-wide transportation management system that
provides users with up-to-the-minute shipment status, package tracking,
multi-carrier rate comparisons and reporting across all warehouse
operations. eTMS manages the transportation processes of multiple
warehouses and distribution centers from a centralized server location
while permitting access and distributed processing over the Web, from any
remote location. When negotiating carrier rates, presenting the data from
all warehouses collectively can result in larger discounts and better
carrier service.
iSeries WMS
Our iSeries WMS, iWMS, is the initial WMS product offering that was developed
exclusively for use in an AS/400 (RPG) legacy environment. iWMS provides the
stability, security and ease-of-implementation that AS/400 users have learned to
expect and mandate. iWMS is a well established, highly functional, Tier I WMS,
that is currently installed worldwide in a variety of industries including, 3PL,
Pharmaceutical, Cosmetic and Fragrance, Food, Office Supplies, Furniture,
consumer packaged goods ("CPG") among others.
Light-directed order fulfillment solutions
We offer a comprehensive selection of "light-directed" order fulfillment
solutions that enable companies to eliminate errors and wasted warehouse
resource activities, and to optimize customer care with expedient delivery and
quality of orders received.
The Vertex eFulfillment system provides a single point of contact between a
customer's host or enterprise system and all orders being processed within
the warehouse. eFulfillment controls all aspects of fulfillment including
RF, pick-to-light, carousel, cart and other paperless picking solutions, as
well as other mission critical processes such as electronic scales,
conveyors, diverters and sorters.
PicRite'r'
PicRite'r' is a pick-to-light system designed for all types of flow rack,
shelving, and pallet flow order-picking applications. PicRite guides each
picker by illuminating light panels at particular locations, to the
specified products for each carton and specifies the quantities required.
PicRite allows the picker to indicate pick Complete or Shortages directly
at the pick location. The system supports lot and serial number control as
required.
PutRite'r'
PutRite'r' is used in a variety of carton-specific applications. When
products delivered in full cases are distributed to individual cartons
typically representing store orders, PutRite guides distribution of product
to the appropriate put location for each store carton by illumination of
light panels at particular locations.
TurnRite'r'
TurnRite'r' is used in all types of carousel batch order processing
applications. TurnRite controls all industry standard horizontal and
vertical carousels. TurnRite supports multiple workstation operations.
TurnRite combines carousel pick and batch put operations, as well as
carousel restocking and cycle counting functions.
CartRite'r'
CartRite'r' is used in applications with large numbers of medium-to-slow
moving SKUs. CartRite offers low cost, accurate, high-speed picking for
areas not equipped with a pick-to-light system. CartRite handles the 80% of
products that constitute 20% of a company's volume with ease.
Advance Planning and Scheduling
Through a recent acquisition of DynaSys, based in Strasbourg, France, we have
expanded our application set into several SCM planning-related functions that we
believe are highly complementary to our core SCM
9
execution solutions. Our new Systems & Knowledge for Effective Planning
applications (SKEP eXtended Solutions) comprise a comprehensive suite of
decision-support software modules in supply chain planning that includes
Planning, Forecasting, Purchasing, Multi-sourcing, Scheduling and Scoring. In
addition, we offer demand management and optimization modules as well as an
integration module designed to permit our customers to pool and synchronize the
data in their supply chains. SKEP eXt solutions provide process manufacturers
with improved delivery times and customer satisfaction; reduction in overall
inventory levels, production and distribution costs; and increases capacity
utilization and resource optimization.
Point Solution Products/Services:
Stradivari Warehouse Management System
Our Microsoft centric, browser-based warehouse management system,
Stradivari Premier, allows users to access up-to-the-minute critical warehouse
and inventory information via a browser, within or beyond the four walls of the
distribution center. Stradivari premier is a highly functional and flexible
system that benefits medium to large distribution centers, including complex
multi-facility installations. Stradivari Premier enables a "true" enterprise
configuration where all business logic runs on a central server location. Users
need only a browser workstation and a radio frequency ("RF") infrastructure
(access points, and handhelds) for real-time data exchange. Unlike other more
traditional WMS applications, Stradivari Premier is a web-based system that
requires no workstation software; further enhancing cost savings and ROI. In
addition, we offers a lower price point, Tier III, plug-and-play WMS called
Stradivari. Stradivari, built on the same technology and feature set as Premier,
was designed to meet the needs of smaller, less complex warehouse operations.
Mobile Data Collection Products
Vertex offers SAP R/3 products and services that allow companies to
leverage their existing investment in SAP R/3 by extending its
functionality to the warehouse floor. To assist in ease-of-implementation,
Vertex has developed tools for SAPConsole implementation including the
Universal Starter Transaction Set which allows transactions to be easily
modified by new users of ABAP, BC2SAP for rapid bar code label design,
Z-Builder which develops transactions in hours. Our UMDC is shrink-wrapped
software that enhances SAPConsole functionality. In addition, Vertex has
professional services to complete its SAP R/3 practice offering including
SAPConsole technical training, ABAP coding for data collection, bar
code/RF/Printer design, implementation, training and on-going support.
GTL'r' is an easy-to-use development tool that is used primarily to create
and run applications for portable data collection systems. GTL provides all
the functionality to read and write to ODBC/SQL databases and to
communicate over TCP/IP networks. GTL has been responsible for successful
custom projects in asset management, warehouse management, work in
progress, order fulfillment, UCC 128 compliance labeling, picking and
packing, labor tracking, inventory shipping and receiving, route
accounting, EDI/ASN, and time and attendance.
Mobile Computing Products
Software for mobile computing includes VI Home Service (a product developed to
automate field insurance agents), SalesPro (for the automation of field sales
workers generally) and VanPro (for route accounting functions).
Middleware Applications
Our NetWeave is a broad based messaging and database middleware system that
enables distributed applications to be integrated into a seamless environment.
The synergy that exists between the NetWeave product and the Company's supply
chain execution software, provides Vertex with access to new
10
customers with legacy systems and the need for supply chain management solutions
without having to change computer platforms or databases.
In addition to software systems, Vertex offers hardware systems, print systems,
and integration services.
Service and Maintenance:
Vertex offers a range of professional services in support of customers'
cost-effective and timely implementation of our solutions as well as integration
of our solutions with our customers' legacy systems. Our professional services
include project assessment, implementation management, on- and off-site
training, software modification and customization, a complete array of system
installation services and project consulting.
We provide 24/7 support for our software applications. Depending on the product
concerned, the Company offers a ninety-day to one-year warranty that includes
parts and labor. 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 performed in our facilities. Products we sell that
are manufactured by others are covered by the manufacturers' standard warranty
and service agreements.
Vertex encourages its customers to purchase annual maintenance contracts when
customers purchase our software. The normal fee for the maintenance contract is
15%-20% of the original purchase price of the software package depending upon
the nature of the support required. For this fee, the customer is entitled to
"bug" fixes and updates to the software, when and if made available by the
company during the period of the contract. The contract does not include
major revisions or customization.
Vertex offers one of the largest site survey, installation and maintenance
organizations in North America and Europe.
Product Prices and Revenues
The needs of the SCM market are highly varied and can be quite
business-specific, but typically center around order, inventory, warehouse and
transportation management systems. Needs may stretch back "up" the supply chain
to raw material procurement and "down" the supply chain to the point of sale to
the end user. Needs for solutions within these areas also vary by industry
vertical, putting a premium on a providers' experience in helping customers in
particular vertical markets manage their supply chains.
To address this, Vertex has developed and acquired a product portfolio that
allows Vertex to address broad market opportunities. The Company's product
prices and revenues vary according to the nature of the products and services
offered and the scale of a particular customer implementation. On average our
software license fees range from $25,000 for an initial shrink-wrapped
limited-user implementation, up to several hundred thousand dollars for more
complex, multi-site deployments. Many of our products are modular, which allows
the customer the flexibility to introduce new technologies into its own business
processes gradually. Vertex believes this approach also shortens the typical
sales cycle and creates an obvious and low-cost path to additional sources of
license fees and service and maintenance revenues.
Generally speaking, we are able to maintain higher prices in our North American
markets for similar functionalities than we are in our European markets.
We sell our software for a perpetual license fee. Additional revenues are
generated through maintenance contracts, implementation services, consulting
services, hardware that may be included as an integral ingredient of a
customer's overall solution, as well as license fees associated with updates and
enhancements to the original software. Maintenance contracts typically equal
15%-20% of the license fee and generally extend for one year. In some instances,
we price according to the number of sites that a customer may implement and/or
the number of concurrent users of a given system.
11
Sales and Marketing
Vertex sells its broad range of software and systems through a direct sales
force of approximately 30 employees worldwide. In addition we have strategic
alliances with complementary software/hardware vendors and consulting
organizations, including IBM, Scansource, Symbol Technologies, and Intermec
Technologies among others. The Company also has certain strategic distributor
channel agreements in place with recognizable companies such as Pitney Bowes,
American Management Systems, and Les Services Serti, Inc. out of Canada who
promote, sell and assist in the implementation of our product offerings.
Our sales and marketing strategy is evolving toward a higher level of
partnership and collaborative selling. We intend to pursue additional
partnership relationships by more closely aligning our marketing efforts and
overall market presence with consultants from complementary business segments
where we believe we can assist in helping them grow their footprint and extend
and deepen our own.
The sales force will be continually upgraded with industry experts brought in to
address new verticals as we expand our functionality to address any specific
requirements for that vertical.
We rely on all methods of marketing communication to build awareness of our
solutions and their benefits to the marketplace. Typical means for the
communication of our message includes seminars, advertising, business partners,
consultants, market analysts, public relations, direct marketing and other
marketing techniques. In addition, we frequently receive referrals from existing
satisfied customers.
International Operations
Vertex today operates in the following countries outside North America: France,
Germany, Italy, the Netherlands and the United Kingdom. In addition to sales &
marketing employees in these countries, we also support a services organization,
Vertex Service & Maintenance. In the fiscal year ended September 30, 2001 our
international operations accounted for approximately 51% of our revenue and 58%
of our workforce. We operate primarily in Germany, Italy and the United Kingdom.
Customers
Vertex targets companies in the vertical markets of Pharmaceuticals, Information
Technology, Consumer Packaged Goods, Automotive Products, Third Party Logistics
Providers, Bulk Food Distributors and Financial Services. These are generally
industries characterized by large product selections, high transaction volumes
and increasing demands for customer-specific order processing. A representative
sample of our largest customers in these industries include Andrew Corporation,
Air Express International, Applied Materials, Avery Dennison, Bacardi Martini,
Bristol-Myers Squibb, ConAgra, Daimler Chrysler, Express Dairies, Georg von
Opel, IBM, Kraft Foods, Maastricht University, Merck, Nestle, North Sea Ferries,
Parts Express, Pfizer, Warner Lambert and the McLane division of Wal-Mart, among
others.
No customer accounted for 10% or more of our total sales in the fiscal year
ended September 30, 2001. During the fiscal year ended September 30, 2000 one
customer accounted for approximately 11% of revenue.
Research and Development
Our R&D initiatives focus on enhancing our product set with additional
functionality aimed at our core vertical markets and our service geography. Our
R&D expenses increased substantially in 2001, as a result of recent
acquisitions, especially the acquisition during fiscal year 2000 of our
Java'TM'-architected, enterprise level SCM suite of software applications for
order, warehouse and transportation management.
During fiscal 2001, the Company expended approximately $7.0 million on Research
and Development, compared to approximately $1.2 million and $0.9 million in
fiscal 2000 and 1999, respectively. As a percentage of total sales, our R&D
expenses represented approximately 12% in fiscal 2001, compared with
approximately 3% in fiscal 2000. We expect to maintain a level of R&D necessary
to fulfill our internal
12
development goals. As new applications and enhancements to current applications
become commercially available, we expect that our R&D expense as a percentage of
our total sales will decline over time.
On September 21, 2001 we established the Vertex Global Products Group to reduce
the costs and time associated with our R&D and our project management
initiatives with the aim of strengthening the link between our R&D investment
and the needs emerging in the marketplace. We also anticipate that the more
streamlined structure can contribute to an increase in the return we achieve on
our R&D efforts.
Employees
At September 30, 2001 we had approximately 520 employees worldwide, with 58% of
our workforce in our European operations. In our North American operations,
approximately 50% of our workforce is in R&D, 14% in Installation and
Implementation, 11% in Sales and Marketing (including sales support) and the
balance in Executive/Administrative. In our European operations approximately
15% of our workforce is devoted primarily to Sales and Marketing (including
sales support) and approximately 60% is in Installation and Implementation
Services. Approximately 3% are in R&D, and the balance is in
Executive/Administrative. By country, 30% of our European employees are in
Italy, 27% in the United Kingdom, 21% in France, 17% in Germany and 5% in
Benelux.
Designing and implementing the Company's software solutions requires substantial
technical capabilities in many disparate disciplines, from mechanics and
computer science to electronics and mathematics. While the Company believes that
the capability and experience of its technical employees compare favorably with
other similar companies, there is no guarantee that it can retain existing
employees or attract and hire capable technical employees it may need in the
future, or, if it is successful, that such personnel can be secured on terms
deemed favorable to the Company.
Competition
The SCM industry is still evolving, thus is characterized by a highly fragmented
competitive landscape comprised of hundreds of small, private companies and a
handful of larger companies, about 15 of which are publicly traded in the United
States. Because the SCM industry we operate in today has its roots in a much
less sophisticated, cottage industry-like seedbed, the vast majority of
companies who offer products and services designed for the supply chain offer
limited applications for specific purposes. Competition today is based on
application functionality, service, price and often the provider's ability to
eventually provide additional SCM solutions as the customers' needs evolve.
Only within the past three years has the SCM industry of today taken shape. It
has not supplanted its origins, but it is evolving into an industry in which the
largest providers are typically pursuing a business model centered on the
integration of software applications along the full spectrum of the supply
chain. This emerging model of integrated functionality requires a more intense
capital investment from providers to continue to improve the level of
sophistication of the SCM applications and services. Thus, we believe that the
competitive landscape in the industry is in the early stages of a consolidation
trend that may last for several years, as larger players gain scale to capture
market share and gain pricing advantages.
The industry today is marked by competition in two industry segments: SCM
planning and SCM execution. Vertex competes primarily in the execution segment.
In this segment, we face competition from numerous foreign and domestic
companies of various sizes. In our opinion, dominant companies with which it
competes are, among others, Manhattan Associates, EXE Technologies, JDA
Software, McHugh Software and Robocom Systems, as well as a variety of smaller
software providers. Less often we will compete with companies such as i2
Technologies and IBM, who are also business partners, as well as ERP vendors
such as SAP, Baan and JD Edwards. Many of our competitors have greater
financial, technical and marketing resources than we do. Competition in these
areas is further complicated by possible shifts in market share due to
technological innovation, changes in product emphasis and applications and new
entrants with greater capabilities or better prospects.
Management believes that we compete favorably against our closest peers whenever
we face them.
13
ITEM 2. PROPERTIES
Vertex's corporate headquarters leases a building in Fairfield, New Jersey under
a month to month lease, occupying a total of approximately 30,000 square feet,
one third of which consists of office space.
The Company owns an 8,000 square foot building in Anaheim, California which
houses primarily technical and sales personnel, and a 10,000 square foot
building in Neu Anspach, Germany, near Frankfurt, which serves as the
headquarters for its ICS International AG subsidiary. Both of the owned
properties are subject to bank mortgages. In addition, the Company leases many
sites domestically and in Europe for sales, research and development, and
administrative purposes.
The Company believes that its current facilities and office space is sufficient
to meet its present needs and does not anticipate any difficulty securing
additional space, as needed, on terms acceptable to the Company.
ITEM 3: LEGAL PROCEEDINGS
On October 31, 2001, an action was commenced in the United States District
Court, Southern District of New York entitled Edgewater Private Equity Fund II,
L.P. et al. v. Renaissance Software, Inc. et al. The action, brought against
Renaissance Software, Inc., a subsidiary of Vertex, and Vertex, alleges the
default by Renaissance Software, Inc. in payment of certain promissory notes in
the principal aggregate sum of $1,225,000. Vertex guaranteed the notes. The
noteholders demand $1,225,000, together with interest accruing at the rate of 8%
per annum from June 30, 2001. We are currently negotiating with the noteholders
to accept preferred stock in payment of the balance of the notes payable and
interest thereon.
Vertex Interactive, Inc. v. Russell McCabe, et al. and Russell McCabe, et al. v.
Vertex Interactive, Inc. On September 28, 2001 Vertex filed a Demand for
Arbitration with the American Arbitration Association ("AAA") against Russell
McCabe, Daniel McCabe and David Motovidlak (the "ATS Shareholders"), the former
shareholders of Applied Tactical Systems, Inc., an entity which merged with
Vertex pursuant to a Merger Agreement dated December 29, 2000, seeking damages
resulting from the McCabe's interference with Vertex's employees and customers.
The ATS Shareholders also filed a Demand for Arbitration seeking $25,000,000 in
damages based on, among other things, Vertex's alleged failure to register the
ATS Shareholders' stock in Vertex by a certain date. At present, the arbitration
proceedings are in a very early stage, but we plan to contest the ATS
Shareholders' claims and pursue our own claims vigorously.
In a related action, on December 10, 2001 the ATS Shareholders filed a complaint
in the United States District Court for the District of New Jersey entitled
Russell McCabe, et al. v. Ernst & Young, LLP et al, against Ernst & Young LLP,
Nicholas R.H. Toms, Hugo Biermann, Gregory Thomas, Edwardstone & Company, Inc.,
Wayne Clevenger, Joseph Robinson, MidMark Capital, LP, Otto Leistner, Bunter
B.V.I., Ltd., George Powch, Stephen M. Duff, The Clark Estates, Inc., Raymond
Broek, Donald Rowley, Douglas
14
L. Davis, Barbara H. Martorano and Jacqui Gerrard. Vertex itself is not a
defendant in this action. The defendants are our auditors, and certain
shareholders, officers and directors individually. The ATS Shareholders are
seeking damages in the amount of $40,000,000 plus punitive and statutory treble
damages based upon, among other things, allegations that Vertex failed to
register stock of the ATS Shareholders by a certain date. Counsel has been
retained and we understand that the defendants intend to contest the ATS
shareholders' claims vigorously.
On November 20, 2001, an action was commenced in the Superior Court of
California, County of Los Angeles, SouthWest District entitled Reichman et al.
v. Vertex Interactive, Inc. et al. The action is brought against Vertex,
Nicholas R.H. Toms, our Chief Executive Officer, Douglas Davis, our former Vice
President of North America, Marketing and Business Development, Wayne Clevenger,
a director, Joseph R. Robinson, a director, Stephen M. Duff, a former director,
George Powch, a former director, Gregory N. Thomas, a former director and Otto
Leister, a director. Plaintiffs are former shareholders of Positive
Developments, Incorporated, a company we acquired on June 30, 2000. The suit
alleges that the common shares of Vertex issued to the Positive shareholders in
exchange for their respective interests in Positive Developments, Incorporated,
were not registered with the Securities and Exchange Commission on a timely
basis. The Positive shareholders allege that as a result they were not able to
sell their shares of Vertex during specific time periods and were damaged
thereby. The relief requested includes $4,000,000 in damages and a rescission of
the Stock Purchase Agreement between the parties. We have denied the allegations
and are vigorously defending the matter.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of securityholders during the
most recent fiscal quarter.
15
PART II
ITEM 5: MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Company's Common Equity
The principal market for the Company's shares of Common Stock, par value $.005
per share is the NASDAQ National Market System under the symbol VETX. Prior to
April 26, 2000 the Company's shares of common stock traded on the OTC Bulletin
Board under the same symbol.
The following table sets forth, for the periods shown, the high and low sale
prices concerning such shares of Common Stock:
High Low
2000
First Quarter $ 4.4375 $2.1875
Second Quarter 14.7500 3.2500
Third Quarter 14.1250 5.5000
Fourth Quarter 18.5000 9.6875
2001
First Quarter $18.5000 $5.3125
Second Quarter 8.7812 1.5625
Third Quarter 2.9500 1.4375
Fourth Quarter 1.9700 0.8800
The approximate number of holders of record of the Company's shares of Common
Stock as of December 31, 2001 was 474. This number includes numerous brokerage
firms that hold such shares in street name. The Company estimates that there are
more than 3,000 beneficial shareholders as of December 31, 2001. The Company's
shares of Series A Preferred Stock par value $.01 per share are held by one
holder of record.
The Company has not paid any cash dividends on its Common Stock and does not
intend to do so in the foreseeable future.
Recent Sales of Unregistered Securities
We have issued unregistered securities to (a) employees and (b) other
individuals and institutional investors. Each such issuance was made in reliance
upon the exemptions from registration requirements of the Securities Act of
1933, contained in Section 4(2) and/or Regulation D promulgated thereunder, or
Rule 701 promulgated thereunder on the basis that such transactions did not
involve a public offering. When appropriate, we determined that the purchasers
of securities described below were sophisticated investors who had the financial
ability to assume the risk of their investment in our securities and acquired
such securities for their own account and not with a view to any distribution
thereof to the public. At the time of issuance, the certificates evidencing the
securities contained legends stating that the securities are not to be offered,
sold or transferred other than pursuant to an effective registration statement
under the Securities Act of 1933 or an exemption from such registration
requirements. The following is a summary of transactions we made during the past
three years involving sales and issuances of securities that were not registered
under the Securities Act of 1933 at the time of such issuance or transfer.
Certain of these issuances of unregistered securities contained rights requiring
the Company to register the securities within a specified period of time. The
Company has not been able to timely register these securities in all instances.
See Notes 10 and 14 to the Company's consolidated financial statements included
herein.
16
ACQUISITIONS
Portable Software Solutions Limited and Related Companies. On September 27,
1999, we acquired all of the outstanding capital stock of Portable Software
Solutions Limited ("PSS"), Portable Software Solutions (Maintenance) Limited
("Maintenance") and Trend Investments Limited ("Trend", and together with PSS
and Maintenance, the "PSS Group"). The total purchase price payable to the
shareholders of the PSS Group was approximately $10.1 million, including
approximately $5.9 million in cash, two notes payable of approximately $800,000
each and 1,591,984 unregistered shares of our common stock. The unregistered
shares were issued to "accredited investors" in a "business combination" within
the meaning of Rule 501 and pursuant to Rule 506 of Regulation D under the
Securities Act of 1933.
Auto-ID, Inc. Effective April 1, 2000, we acquired all of the outstanding common
stock of Auto-ID, Inc. ("Auto-ID"). The total purchase price was $600,000 paid
for by the issuance to the shareholder of Auto-ID of 100,000 unregistered shares
of our common stock. The unregistered shares were issued to "purchaser" in a
"business combination" within the meaning of Rule 501 and pursuant to Rule 505
of Regulation D under the Securities Act of 1933.
Positive Developments, Inc. In June 2000, we completed a merger with Positive
Developments, Inc. ("PDI") by exchanging 400,000 shares of our unregistered
common stock for all of the common stock of PDI. The unregistered shares were
issued to "purchasers" in a "business combination" within the meaning of Rule
501 and pursuant to Rule 506 of Regulation D under the Securities Act of 1933.
Communication Services International Incorporated. Also in June 2000, we
completed a merger with Communication Services International, Incorporated
("CSI"), by exchanging 1,317,647 shares of our unregistered common stock for all
of the common stock of CSI. The unregistered shares were issued to "purchasers"
in a "business combination" within the meaning of Rule 501 and pursuant to Rule
506 of Regulation D under the Securities Act of 1933.
Software Rights of NetWeave Corporation. On August 31, 2000, we purchased all
rights to the NetWeave software product from NetWeave Corporation. Consideration
for the software was 80,386 unregistered shares of our common stock, which at
the time of the transaction had an aggregate fair market value of approximately
$1 million, and the cancellation of approximately $71,000 of debt. The
unregistered shares were issued to "accredited investors" and "purchasers"
within the meaning of Rule 501 and pursuant to Rule 505 of Regulation D under
the Securities Act of 1933.
Renaissance Software, Inc. Effective September 30, 2000, we acquired all of the
outstanding common stock of Renaissance Software, Inc. ("Renaissance"). As
consideration, we issued 3,571,144 shares of our unregistered common stock
(263,000 of which are held in escrow), which at the date of the transaction had
a fair market value of $13.42 per share. In addition, we reserved 535,644 shares
of our common stock for the issuance upon exercise of Renaissance stock options.
The estimated fair market value (included in the total consideration paid for
Renaissance) of the vested portion of these options was $6,217,000 and the
unvested portion was $461,000. The unregistered shares and options were issued
to "accredited investors" in a "business combination" within the meaning of Rule
501 and pursuant to Rule 506 of Regulation D under the Securities Act of 1933.
Assets of Genicom S. A. On October 6, 2000, we acquired certain assets of Finmek
Holdings N. V., a Belgian corporation, and its following affiliates, Genicom S.
A., a French corporation, Genicom SpA, an Italian corporation, and Genicom Ltd,
a United Kingdom corporation. In exchange for certain assets and the assumption
of certain liabilities, we agreed to pay $2,500,000 to Genicom S. A. and
affiliates, subject to certain post closing purchase price adjustments. Of the
total purchase price, we paid $2,000,000 at closing and agreed to fund the
balance by establishing an escrow account. We therefore deposited 31,746 of our
common shares, whose fair value was equal to $500,000. The unregistered shares
were issued to "accredited investors" in a "business combination" within the
meaning of Rule 501 and pursuant to Rule 506 of Regulation D under the
Securities Act of 1933.
17
Since the Escrow Agreement required the Company to maintain sufficient common
shares in escrow to provide a value of $500,000, the Company deposited an
additional 231,412 common shares in the escrow account on September 4, 2001. The
unregistered shares were issued to "accredited investors" in a "business
combination" within the meaning of Rule 501 and pursuant to Rule 506 of
Regulation D under the Securities Act of 1933.
Applied Tactical Systems, Inc. In December 2000, we completed a merger with
Applied Tactical Systems, Inc. ("ATS"). As consideration, we issued 3,000,000
shares of our unregistered common stock (210,000 of which are held in escrow, to
be released upon the first issuance of the combined companies audited financial
statements), which at the date of the transaction had a fair market value of
$8.30 per share. In addition, we reserved 153,600 shares of our common stock for
the issuance upon exercise of ATS stock options. The estimated fair market value
(included in the total consideration paid for ATS) of the vested portion of
these options was $620,000 and the unvested portion was $44,000. The
unregistered shares and options were issued to "accredited investors" in a
"business combination" within the meaning of Rule 501 and pursuant to Rule 506
of Regulation D under the Securities Act of 1933.
Binas Beheer B.V. On February 13, 2001, we acquired all of the capital stock of
Binas Beheer B.V. ("Binas"). The total purchase price was $570,000, paid for
with approximately $300,000 in cash and by the issuance to the Binas
shareholders of 42,686 unregistered shares of our common stock, which at the
date of the transaction had a fair market value of $6.34. The shares were issued
pursuant to Rule 903 of Regulation S under the Securities Act of 1933.
Assets of Pitney Bowes Transcape Division. On February 7, 2001, we acquired
certain assets of Pitney Bowes' Transcape division in exchange for the
assumption of certain liabilities and by the issuance to Pitney Bowes, Inc. of
1,356,852 shares of our unregistered Series A Convertible Preferred Stock, which
on the date of acquisition, was estimated to have a fair market value of
approximately $10.4 million. The unregistered Convertible Preferred Shares were
issued to an "accredited investor" within the meaning of Rule 501 and pursuant
to Rule 506 of Regulation D under the Securities Act of 1933.
DynaSys S. A. On September 10, 2001, we acquired all the capital stock of
DynaSys S. A. ("DynaSys"). The total purchase price was 134,979 unregistered
shares of our common stock, which at the date of the transaction had a fair
value of $1.61 per share. The shares were issued pursuant to Rule 903 of
Regulation S under the Securities Act of 1933.
PRIVATE PLACEMENTS
Completed in 1999. On September 16, 1999, we issued to Edwardstone & Company,
Incorporated and MidMark Capital, L.P. 5,449,642 and 5,000,000 unregistered
shares of our common stock, respectively, for an aggregate cash purchase price
of $10,000,000. The unregistered shares were issued to "accredited investors"
within the meaning of Rule 501 and pursuant to Rule 506 of Regulation D under
the Securities Act of 1933.
Completed in 2000. On March 30, 2000, we completed the first tranche of a
private placement by issuing 2,950,000 unregistered shares of our common stock
to various individuals and institutional investors for $23,600,000. The
unregistered shares were issued to "accredited investors" within the meaning of
Rule 501 and pursuant to Rule 506 of Regulation D under the Securities Act of
1933.
On April 19, 2000, we completed the second tranche of the private placement and
sold an additional 343,750 unregistered shares of our common stock to various
individuals and institutional investors for $2,750,000. The unregistered shares
were issued to "accredited investors" within the meaning of Rule 501 and
pursuant to Rule 506 of Regulation D under the Securities Act of 1933.
On December 20, 2000, we completed a private placement by issuing 1,124,461
unregistered shares of our common stock and 337,341 unregistered options
exercisable at $7.50 to various individuals and institutional investors for an
aggregate purchase price of $5,600,000. The unregistered shares were issued to
"accredited investors" within the meaning of Rule 501 and pursuant to Rule 506
of Regulation D under the Securities Act of 1933.
18
On August 9, 2001, the Company granted the investors options to purchase an
additional 224,895 unregistered shares of our common stock at an exercise price
of $2.15. The options were issued to an "accredited investor" within the meaning
of Rule 501 and pursuant to Rule 506 of Regulation D under the Securities Act of
1933.
Completed in 2001. On April 3, 2001, we completed a private placement by issuing
2,783,904 unregistered shares of our common stock to various individuals and
institutional investors for an aggregate purchase price of $4,001,862. The
unregistered shares were issued to "accredited investors" within the meaning of
Rule 501 and pursuant to Rule 506 of Regulation D under the Securities Act of
1933.
The private placement, as described above, required that the issued shares be
registered in 45 days or incur a penalty of 10% of the shares issued. To the
extent that this was not completed, the Company issued an additional 278,390
unregistered shares of our common stock to the various individuals and
institutional investors. The unregistered shares were issued to "accredited
investors" within the meaning of Rule 501 and pursuant to Rule 506 of Regulation
D under the Securities Act of 1933.
On June 19, 2001, the Company issued in the aggregate $5,500,000 of convertible
notes payable to Midmark Capital L.P., Midmark Capital II L.P., and certain
individuals related to these two entities (collectively "Midmark Capital").
These notes were to automatically convert into 3,860,864 shares of Vertex
common stock on the day that the Company obtained the requisite shareholder
approval for the issuance of shares to Midmark Capital. Upon conversion, the
unregistered shares would be issued to "accredited investors" within the
meaning of Rule 501 and pursuant to Rule 506 of Regulation D under the
Securities Act of 1933.
On July 31, 2001, we completed a $359,375 private placement of a convertible
note with Partas AG, an affiliate of one of the Directors of the Company. This
note is, upon shareholder approval, convertible into 250,000 shares of
unregistered common shares. The unregistered shares are issuable to an
"accredited investor" within the meaning of Rule 501 and pursuant to Rule 506 of
Regulation D under the Securities Act of 1933.
FINANCIAL & OTHER CONSULTING SERVICES
Law Offices of Jeffrey Marks. On September 23, 1998, we retained the services of
Jeffery D. Marks, Esq. in connection with certain legal matters. As partial
compensation for Mr. Marks's services, options exercisable for 25,000
unregistered shares of our common stock were issued to Mr. Marks at an exercise
price of $ .94 per share. These options were issued to a "purchaser" within the
meaning of Rule 501 and pursuant to Rule 506 of Regulation D under the
Securities Act of 1933.
On February 28, 2000, we retained the services of Jeffery D. Marks, Esq.
Pursuant to an annual retainer agreement for a year. As partial compensation for
Mr. Marks's services, options exercisable for 16,000 unregistered shares of our
common stock were issued to Mr. Marks at an exercise price of $8.81 per share.
These options were issued to a "purchaser" within the meaning of Rule 501 and
pursuant to Rule 506 of Regulation D under the Securities Act of 1933.
On April 17, 2000 we retained the services of Jeffery D. Marks, Esq. in
connection with special consulting work outside the scope of the retainer
agreement. As compensation for Mr. Marks's services, options exercisable for
5,500 unregistered shares of our common stock were issued to Mr. Marks at an
exercise price of $6.00 per share. These options were issued to a "purchaser"
within the meaning of Rule 501 and pursuant to Rule 506 of Regulation D under
the Securities Act of 1933.
Strategic Growth International, Inc. On January 24, 2000, we retained the
services of Strategic Growth International, Inc. ("Strategic"), a financial
consulting firm, to assist us in raising additional funds through private
placements of our common stock. The Company immediately issued options for
800,000 shares of our unregistered common stock at $4.00 per share, which became
exercisable upon completion of the
19
March and April 2000 private placement offerings discussed above. These options
were issued to an "accredited investor" within the meaning of Rule 501 and
pursuant to Rule 506 of Regulation D under the Securities Act of 1933.
As compensation for Strategic's assistance in the private placements completed
in 2000 as described above, options exercisable for 125,000 unregistered shares
of our common stock were issued to Strategic. The option price for each of these
options is $6.94 per share. In addition, as compensation for Strategic's
assistance in the private placements completed in 2001, as described above, we
issued options for 34,809 unregistered shares of our common stock at $1.438 per
share. The options were issued to an "accredited investor" within the meaning of
Rule 501 and pursuant to Rule 506 of Regulation D under the Securities Act of
1933.
bcBlueprint. On January 25, 2000, we retained the services of bcBlueprint, in
connection with developing marketing and sales strategies and tactics. As
partial compensation for bcBlueprint's services, options exercisable for 30,000
unregistered shares of our common stock were issued to bcBlueprint at an
exercise price of $3.75 per share. These options were issued to a "purchaser"
within the meaning of Rule 501 and pursuant to Rule 506 of Regulation D under
the Securities Act of 1933.
Halpern Capital Advisors. On March 1, 2000, we retained the services of Halpern
Capital Advisors to assist us in raising additional funds through private
placements of our common stock. As compensation for Halpern Capital Advisors'
assistance in the private placements, options exercisable for 300,000
unregistered shares of our common stock were issued to Baruch and Shoshana
Halpern at an exercise price of $8.00 per share. The options were issued to
"accredited investors" within the meaning of Rule 501 and pursuant to Rule 506
of Regulation D under the Securities Act of 1933.
As compensation for Halpern Capital Advisors' assistance in the private
placements completed in April 2001, as described above, options exercisable for
94,426 unregistered shares of our common stock were issued to Baruch and
Shoshana Halpern and options exercisable for 10,000 unregistered shares of our
common stock were issued to Stephen J. Davis, an employee of Halpern Capital
Advisors. The option price for each of these options is $1.43 per share. The
options were issued to "accredited investors" and a "purchaser" within the
meaning of Rule 501 and pursuant to Rule 505 of Regulation D under the
Securities Act of 1933.
The private placement completed in April 2001, as described above, required that
the issued shares and options exercisable be registered in 45 days. To the
extent that this was not completed, the Company issued an additional 9,443
unregistered shares of our common stock to Baruch and Shoshana Halpern and
options exercisable for 1,000 unregistered shares of our common stock were
issued to Stephen J. Davis, an employee of Halpern Capital Advisors. The option
price for each of these options is $1.43 per share. The options were issued to
"accredited investors" and a "purchaser" within the meaning of Rule 501 and
pursuant to Rule 505 of Regulation D under the Securities Act of 1933.
H.C. Wainwright & Co. On April 24, 2000, we retained the services of H. C.
Wainwright & Co., Inc. ("Wainwright"), a financial consulting firm, to assist us
in evaluating various strategic growth alternatives. As partial compensation for
Wainwright's financial advisory services, options exercisable for 50,000
unregistered shares of our common stock were issued to Wainwright at an exercise
price of $8.00 per share. The options were issued to "accredited investors"
within the meaning of Rule 501 and pursuant to Rule 506 of Regulation D under
the Securities Act of 1933.
On December 20, 2000, we again retained the services of Wainwright in connection
with a private placement of 1,124,461 unregistered shares of our common stock
with options exercisable for 337,341 unregistered shares of our common stock at
$7.50 per share to various investors for $5,600,000. As partial compensation for
Wainwright's services, options exercisable for 25,000 unregistered shares of our
common stock were issued to Wainwright at an exercise price of $5.00 per share.
The options were issued to "accredited investors" within the meaning of Rule 501
and pursuant to Rule 506 of Regulation D under the Securities Act of 1933.
20
On August 9, 2001, the Company granted Wainwright options to purchase an
additional 16,667 unregistered shares of our common stock at an exercise price
of $2.15. The options were issued to "accredited investors" within the meaning
of Rule 501 and pursuant to Rule 506 of Regulation D under the Securities Act of
1933.
Ibis Consulting Group, Inc. On May 22, 2000, we retained the services of Ibis
Consulting Group ("IBIS"), a financial consulting firm, in connection with
potential capital raising and investor relations' services. As partial
compensation for these services, options exercisable for 250,000 unregistered
shares of our common stock were issued to IBIS at an exercise price of $6.50 per
share. The options were issued to a "purchaser" within the meaning of Rule 501
and pursuant to Rule 506 of Regulation D under the Securities Act of 1933.
Brookside Management Consultants, Inc. On July 5, 2000, we retained the services
of Brookside Management Consultants Inc., ("Brookside") a management consulting
firm controlled by Gerald R. Cioci, to assist us in developing cash management
systems. As partial compensation for Brookside's consulting services, options
exercisable for 1,000 unregistered shares of our common stock were issued to Mr.
Cioci at an exercise price of $10.25 per share. The options were issued to a
"purchaser" within the meaning of Rule 501 and pursuant to Rule 506 of
Regulation D under the Securities Act of 1933.
Michael C. Murphy, CPA. On December 20, 2000, we retained the services of
Michael C. Murphy, in connection with due diligence associated with a proposed
acquisition. As full compensation for Mr. Murphy's services, options exercisable
for 17,500 unregistered shares of our common stock were issued to Mr. Murphy at
an exercise price of $4.56 per share. These options were issued to a "purchaser"
within the meaning of Rule 501 and pursuant to Rule 506 of Regulation D under
the Securities Act of 1933.
Otto Leistner. On January 2, 2001, the Company awarded Mr. Leistner, one of its
Directors, options exercisable at a price of $5.72 per share for 20,000
unregistered shares of our common stock for the accounting services he performed
from September 22, 1999 thru April 17, 2000 prior to his becoming a Director.
These options were issued to an "accredited investor" within the meaning of Rule
501 and pursuant to Rule 506 of Regulation D under the Securities Act of 1933.
vFinance LC and vFinance Capital LC. On July 17, 2001, we retained the services
of vFinance LC, a financial consulting firm, to assist us in raising capital and
to provide strategic advice to maximize shareholder value. As partial
compensation for vFinance's services, options exercisable for 100,000
unregistered shares of our common stock were issued to vFinance at an exercise
price of $2.16 per share. These options were issued to an "accredited investor"
within the meaning of Rule 501 and pursuant to Rule 506 of Regulation D under
the Securities Act of 1933.
SETTLEMENT AGREEMENTS
Portable Software Solutions, Inc. In January and February 2001, we issued
398,000 unregistered shares of our common stock to former shareholders of
Portable Software Solutions, Inc., a U.K. company we purchased in September
1999. These shares, with a fair value of $2,272,000, were issued to settle all
outstanding balances owed to the former shareholders, including notes payable of
approximately $1,500,000 and the related interest thereon, and all additional
balances due with respect to their compensation agreements. The shares were
issued to "accredited investors" within the meaning of Rule 501 and pursuant to
Rule 506 of Regulation D under the Securities Act of 1933.
Peak Technologies Inc. In April 2001, we issued 31,500 shares of our common
stock to Peak Technologies, Inc. ("PTI"). These shares were issued in settlement
of a lawsuit commenced by PTI against the Company and Mr. Nicholas Toms with
respect to his Employment Agreement with PTI. The unregistered shares were
issued to an "accredited investor" within the meaning of Rule 501 and pursuant
to Rule 506 of Regulation D under the Securities Act of 1933.
Renaissance Software, Inc. Bondholders. On July 23, 2001, in consideration for
their forbearance in the payment of past due principal and the related interest
thereon, we issued 147,000 unregistered shares of our common stock to current
bondholders of Renaissance Software, Inc., a company we
21
acquired effective September 30, 2000. The shares were issued to "accredited
investors" within the meaning of Rule 501 and pursuant to Rule 506 of Regulation
D under the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto appearing on pages beginning on F-1. Such financial data for periods
prior to September 30, 1999 were restated, effective October 1, 1999, to reflect
the change in year end from July 31 to September 30 as described in Note 1 to
the Consolidated Financial Statements. Also, as discussed in Item 7. and Note 1
to the Consolidated Financial Statements, the Company has completed acquisitions
in fiscal 2001, 2000 and 1999 so the amounts shown in selected financial data
are not directly comparable.
SUMMARY OF SELECTED FINANCIAL DATA
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
OPERATIONS FOR THE YEAR:
- ------------------------------------------------------------------------------------------------------------
Revenues $ 59,087,470 $ 47,769,311 $10,106,332 $6,754,864 $4,078,127
Income (loss)
before amortization,
impairment of
long-lived assets and in-process
research and development
write-off (21,568,299) (198,157) 333,542 (20,500) (289,628)
Intangible amortization 14,571,757 1,063,775 -- -- --
Impairment of long-lived assets 78,364,560 -- -- -- --
In-process research and
development write-off(1) 3,600,000 7,500,000 -- -- --
Net (loss) income (122,952,102) (9,412,424) (160,413) 287,011 (597,500)
Basic Net Income (Loss)
Per Share (3.95) (0.46) (0.02) 0.04 (0.09)
FINANCIAL POSITION AT END OF YEAR:
- ------------------------------------------------------------------------------------------------------------
Total Assets $ 53,439,283 $110,219,476 $30,348,130 $5,399,704 $2,600,420
Long-Term Debt 7,129,260 1,927,943 1,495,337 115,530 271,412
Stockholders' Equity 11,950,527 84,407,725 13,725,628 2,071,507 1,534,550
(1) For fiscal years 2001 and 2000, the in-process research and development
write off is associated with the acquisitions of Transcape assets from Pitney
Bowes in February 2001 and the enterprise software applications of Renaissance
Software, Inc., effective September 30, 2000, respectively.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Annual Report on Form 10K contains, in addition to historical information,
certain forward-looking statements that involve significant risks and
uncertainties. Such forward-looking statements are based on management's belief,
as well as assumptions made by and information currently available to,
management pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Our actual results could differ materially from
those expressed in or implied by the forward-looking statements contained
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed herein and in Item 1: "Business", and
elsewhere in this Annual Report on Form 10-K. Vertex undertakes no obligation to
release publicly the result of any revisions to these forward-looking statements
that may be made to reflect events or circumstances after the date of this
Annual Report or to reflect the occurrence of other unanticipated events.
This discussion and analysis should be read in conjunction with the Selected
Financial Data and the audited consolidated financial statements and related
notes of the Company contained elsewhere in this report. In this discussion, the
years "2001", "2000" and "1999" refer to fiscal years ended September 30, 2001,
2000 and 1999, respectively.
Overview
Purchase Acquisitions:
As discussed in Note 1 to the Consolidated Financial Statements, we have
completed a number of acquisitions from September 1999 through September 2001,
which have substantially expanded our portfolio of products and services, as
well as our geographic reach throughout North America and into Europe. The
magnitude of these acquisitions had a significant impact on the comparability of
our results of operations from 1999 through 2001. The following summary of the
more significant purchase acquisitions closed during the last two years is
segregated by those first impacting operations in fiscal 2000 ("Fiscal 2000
Acquisitions") and those first impacting operations in fiscal 2001 ("Fiscal 2001
Acquisitions").
Fiscal 2000 Acquisitions:
Effective September 30, 1999, we acquired all of the stock of three commonly
owned companies in the United Kingdom and Ireland (together "PSS"). PSS
developed and sold point solution products that automated field insurance and
sales personnel, and route accounting functions.
Also effective September 30, 1999, we acquired all of the stock of ICS
International ("ICS"), based principally in Germany, and operating in Italy,
France and Benelux. ICS was a provider of point solutions systems, including
integrated wireless data capture solutions, which often contain hardware devices
manufactured by third parties, which we resell as part of the solution for the
customer.
Effective March 1, 2000, we acquired all of the outstanding capital stock of
Data Control Systems ("DCS"), a provider of enterprise level "light-directed"
warehouse management systems located in New Jersey.
Effective April 1, 2000, Vertex acquired all of the outstanding capital stock of
Auto-ID, Inc. ("Auto-ID"), a reseller of point solutions bar coding equipment,
primarily in the Southeast.
Effective June 30, 2000, we acquired all of the outstanding common stock of
Societe Italiana Servizi Italservice S.r.l. ("SIS"), a provider of after-market
computer maintenance and software support services, primarily in Italy.
23
Fiscal 2001 Acquisitions:
Effective September 30, 2000, Vertex acquired all of the outstanding common
stock of Renaissance Software Inc. ("RSI"), a developer of enterprise level
supply chain and warehouse management systems.
In October 2000, we purchased the assets and business of three former European
service and maintenance divisions of Genicom International (collectively
referred to as "ESSC"), which expanded our ability to provide hardware and
software maintenance to our European customers.
Effective December 31, 2000, Vertex completed a merger with Applied Tactical
Systems, Inc. ("ATS"), a provider of point solution connectivity software for
SAP installations.
Effective February 7, 2001, Vertex purchased from Pitney Bowes its
Transportation Management Software and certain engineering assets (the Transcape
Division, or "Transcape"), which broadened our portfolio of enterprise level
applications.
On February 13, 2001, we acquired all of the capital stock of Binas Beheer B.V.
("Binas") a Java'TM' IT consulting practice.
In September 2001, we acquired all of the outstanding stock of DynaSys, a
software developer of enterprise level advance planning and scheduling
applications. Results of operations for DynaSys will be included in our
consolidated financial statements beginning October 1, 2001.
The accompanying consolidated financial statements assume the PSS and ICS
acquisitions closed effective September 30, 1999, the DCS acquisition closed
effective March 1, 2000, the Auto-ID acquisition closed effective April 1, 2000,
The RSI acquisition closed effective September 30, 2000, the ESSC purchase
closed effective October 31, 2000, the ATS acquisition closed effective December
31, 2000, and the Transcape acquisition closed effective February 7, 2001.
Vertex has accounted for each of these acquisitions using the purchase method of
accounting in accordance with APB No. 16. Accordingly, the financial statements
include the results of operations from October 1, 1999 for PSS and ICS, from
March 1, 2000 for DCS, from April 1, 2000 for Auto-ID, from July 1, 2000 for
SIS, from October 1, 2000 for RSI, from November 1, 2000 for ESSC, from January
1, 2001 for ATS, from February 1, 2001 for Binas and from February 7, 2001 for
Transcape (collectively, the "Purchase Acquisitions").
Business Combinations:
In June 2000, we completed mergers with Positive Developments, Inc. ("PDI"), a
provider of point solution applications, and Communication Services
International, Incorporated ("CSI"), a provider of wireless and cable networking
services. These mergers were accounted for using the pooling of interests method
in accordance with APB No. 16. Accordingly, the accompanying consolidated
financial statements have been restated to include the results of PDI and CSI
for all periods presented.
Results Of Operations
Year ended September 30, 2001 compared to year ended September 30, 2000.
Operating Revenues:
Operating revenues increased by approximately $11.3 million (or 23.7%) to $59.1
million in 2001.
Point solutions products and services revenues decreased approximately $2.9
million, to $28.8 in 2001 from $31.7 million in 2000. This is due primarily to
our strategy of de-emphasizing lower margin product sales, which reduced
revenues by approximately $6.8 million, including $3.8 million resulting from
the sale of two divisions in the second half of 2000. Sales of our mobile
computing products, principally in the U.K., decreased approximately $2.1
million; as revenues in 2000 included a large contract with one customer
aggregating $5.1 million. Offsetting these decreases, point solutions revenues
also increased by approximately $6 million as a result of additional point
solution products and services acquired during 2001 aimed at inventory,
warehouse management, and the SAP market.
24
Enterprise solutions revenues increased to $9.9 million from $6.7 million in
2000. Our light directed order fulfillment systems revenues increased to $8.1
million in 2001 from $6.7 million in 2000. The revenues in 2000 were for the
seven-month period following the acquisition of our light-directed technology,
while 2001 includes a full year of revenues. Sales of these products have been
severely impacted by the general economic slowdown and the hesitancy of
customers to commit to large systems purchases. We expect this slowdown to have
a negative impact on the fiscal 2002 enterprise solutions revenues, at least
through our third fiscal quarter ending June 30, 2002. The remainder of the
increase in enterprise solutions revenues was generated by our eSuite of
Java'TM' architected products and services acquired during 2001 and by the
addition of the enterprise transportation management assets mid year. These
revenues fell substantially below expectations, both as a result of delays in
the development and roll out of the eSuite of products and the downturn in the
economy.
Service and maintenance revenues have increased approximately $11 million from
2000. The acquisitions of ESSC in 2001 and SIS in June 2000 expanded our
capability to provide hardware and software maintenance in Europe and resulted
in an additional $8.1 million of revenue in 2001. Our remaining service and
maintenance revenues grew approximately $2.9 million in 2001 resulting primarily
from service revenue on the products acquired in 2001 and a large $2.2 million
cable installation project.
Gross Profit:
Gross profit increased by approximately $6.3 million (or 41.4%) to $21.5 million
in 2001. As a percent of operating revenues, gross profit was 36.4% in 2001 as
compared to 31.8% in 2000. The increase in the gross profit percentage is due,
in part, to the higher margin software and system sales, principally from the
enterprise solutions products and services, which represented 17% of total
revenues in 2001 and 14% in 2000. The gross profit percentage was also favorably
impacted by our de-emphasis of low margin point solution products mentioned
above.
Operating Expenses:
Selling and administrative expenses increased $21.4 million (or 160%) to $34.8
million in 2001. The Fiscal 2001 Acquisitions accounted for $8.1 million of the
increase, and the impact of a full year of the Fiscal 2000 Acquisitions in 2001
added approximately $1.5 million. Additionally during 2001, we incurred
approximately $1.3 million on a consolidated corporate marketing, advertising
and communications program; which included the creation of corporate identity
and product collateral literature, development of advertising materials, as well
as advertising space, and attendance at key industry trade shows. In
anticipation of the roll out of our eSuite of products, together with a new
point solution warehouse management system, we recruited, hired and trained
additional sales personnel in North America and Europe. Corporate level general
and administrative expenses have increased approximately $6 million reflecting,
in part, a full year of expense related to the corporate infrastructure that we
began to establish during 2000, to integrate and manage the expansion of our
products and services through acquisitions. This included human resources, data
processing, finance, investor relations and administrative personnel. In
addition, professional fees (including legal, accounting, recruiting, financial
and strategic consulting) increased approximately $2.3 million.
Research and development expenses have increased approximately $5.8 million (or
472%) to $7.0 million in 2001 from $1.2 million in 2000. This increase reflects
our acquisition of the eSuite of Java'TM' architected products and, in part, the
transportation management system assets. In addition, following our acquisition
of the core eSuite functionality, we determined that it was not sufficiently
commercialized, consequently, we accelerated our R&D investment in these key
applications in order to achieve commercial stability.
The amortization of intangibles of $14.6 million in 2001, as compared to $1.1
million in 2000 is a direct result of the Purchase Acquisitions. These
intangibles were being amortized over their estimated lives ranging from 2 to 25
years. At September 30, 2001 we wrote off approximately $78.4 million
(see Note 13), as the result of an assessment of the carrying values of our
intangible assets recorded in connection with all of our acquisitions.
Management undertook this assessment because of the significant negative
economic trends impacting our current operations, lower expected future
growth rates, a decline in our stock price, and significantly lower valuations
for companies within our industry. At the time of our analysis, the net book
value of our assets exceeded our market capitalization. Based on our evaluation
of these factors, our belief that the decline in market conditions within our
industry was significant and permanent, the consideration of all other available
evidence, we determined that the Fair Market Value of our long-lived assets
was less than their carrying valaue.
Our intangible assets are assoicated with our acquisitions of technologies
and services capabilities that we have made as part of our growth and
competitive strategy described above. (See Item I, Strategy.) A number of
these acquisitions were closed during a period of rapid change and evolution
within the technology industry generally and within the developing supply
chain management industry in particular.
Since making some of our acquisitions we have concluded that some of our
original long-term assumptions about how the market we serve would evolve and
what customers would be requiring in supply chain management technologies have
changed. We now expect future cash flows from these acquired assets to be less
than our initial expectations. We have, therefore, reduced the carrying value
of these assets on our balance sheet, as described in detail in Note 13, and
recorded a $78.4 million write off at September 30, 2001.
25
As a result of the February 2001 acquisition of Transcape assets, $3.6 million
of the excess purchase price was charged directly to expense as a write-off of
in-process research and development costs. The allocation of $3.6 million of the
excess purchase price to in-process research and development costs was based on
a valuation made by an independent valuation firm, as more fully described in
Note 1 to the financial statements.
Interest income decreased approximately $170,000 (or 55%) in 2001. The decrease
is due to lower cash balances maintained during 2001 as compared to 2000.
Interest expense increased by approximately $560,000 to $1.0 million in 2001.
This increase is due to increased working capital borrowings, including $5.8
million of convertible notes payable, and acquisition related debt. Other
expenses increased $3.7 million primarily due to provisions for litigation
in 2001.
The income tax provision decreased $227,000 (or 60%) in 2001, due primarily to
increased losses. The income tax provision is comprised primarily of foreign
taxes provided on the profit of certain subsidiaries for which no net operating
losses are available or where the utilization of the pre-acquisition net
operating losses are an adjustment of goodwill.
Net Income (loss):
The 2001 net loss includes the impact of the amortization of intangibles,
increased operating expenses, the write-off of in-process research and
development costs, and the recognition of impairment of certain long-lived
assets.
Year ended September 30, 2000 compared to year ended September 30, 1999.
Operating Revenues:
Operating revenues increased by approximately $37.7 million (or 373%) to $47.8
million in 2000. The acquisitions of point solution capabilities through PSS,
ICS, Auto-ID, and SIS, and enterprise systems and applications through DCS (the
"Purchase Acquisitions") contributed approximately $9.2 million, $19.4
million,$0.6 million, $0.7 million and $7.4 million, respectively for an
aggregate increase of $37.3 million. The mergers with CSI and PDI (the
"Mergers"), through which we expanded our point solutions technology portfolio
and acquired a substantial facilities cabling operation, contributed to $3.5
million of the increase. The operating revenues for Vertex, excluding all
acquired technology, products and functionalities, decreased approximately $3.1
million from 1999 to 2000 due to the completion of a large contract during 1999.
Gross Profit:
Gross profit increased by approximately $10.8 million (or 245%) to $15.2 million
in 2000. As a percent of operating revenues, gross profit was 31.8% in 2000 as
compared to 43.6% in 1999. The Purchase Acquisitions contributed approximately
$11.4 million of gross profit in 2000, which is approximately 30.1% of their
operating revenues. The Mergers accounted for $0.7 million of the increase in
gross profit, while the gross profit for Vertex, excluding all acquired
companies, decreased $1.2 million as a result of the completion of a large
contract in 1999. The 2000 gross profit percentage reflects a higher than
average hardware sales component in operating revenues, which carries a lower
gross profit than software and system sales, and the 1999 gross profit was
favorably impacted as a result of the large contract noted above.
Operating Expenses:
Selling and administrative expenses increased $10.3 million (or 334%) to $13.4
million in 2000. The Purchase Acquisitions accounted for $8.4 million of the
increase, the Mergers accounted for $0.5 million, and Vertex, exclusive of all
acquired companies, accounted for $1.8 million. Included in the Vertex increase
are the costs of establishing a corporate infrastructure, which are offset by
reduced administrative costs at certain of the acquired entities. As a
percentage of revenue, selling and administrative expenses decreased from 30.5%
to 28.0% from 1999 to 2000.
26
Research and development expenses have increased approximately $370,000 (or
43.0%) from $0.9 million in 1999, to $1.2 million in 2000. In addition, $1.1
million of software development expenses incurred in 2000 were capitalized.
Thus, total research and development expenditures in 2000 were approximately
$2.3 million. This increase reflects the Company's transformation from primarily
producing and reselling hardware devices to developing sophisticated order
fulfillment solutions, with an increasing emphasis on providing Internet
enabling technologies. The research and development is being performed by
employees, and to a greater extent in 2000, by outside consultants.
The amortization of intangibles of $1.1 million in 2000 is a direct result of
the Purchase Acquisitions. These intangibles are being amortized over their
estimated lives ranging from 2 to 25 years.
As a result of the September, 2000 acquisition of Renaissance Software, Inc.,
$7.5 million of the excess purchase price was charged directly to expense as a
write-off of in-process research and development costs. The allocation of $7.5
million of the excess purchase price to in-process research and development
costs was based on a valuation made by an independent valuation firm, as more
fully described in Note 1 to the financial statements. In addition during 2000,
the Company incurred approximately $237,000 of expenses related to the Mergers.
Interest income increased approximately $248,000 (or 394%) in 2000. Interest
earning cash balances obtained with the Purchase Acquisitions accounted for
$103,000 of the increase, and approximately $145,000 is due to increased
earnings at Vertex as a result of the proceeds from the stock issuances
(approximately $24.0 million) in March and April 2000. Interest expense
increased by approximately $464,000 to $471,000 in 2000. A non cash imputed
interest charge of approximately $100,000 resulted from the closing of the DCS
purchase 30 days later than its effective date. The remainder of interest
expense was from working capital borrowings and acquisition related debt,
including the assumption of outstanding bank lines of credit and building
mortgages.
The income tax provision in 2000 includes U.S state and foreign taxes provided
on the profit of certain subsidiaries for which no net operating losses are
available or where the utilization of the pre-acquisition net operating losses
are an adjustment of goodwill. In 1999, the tax provision for Vertex, including
the Mergers, was based on pre-tax operating income at an expected annual
effective rate, adjusted for certain permanent differences and the valuation of
deferred tax assets which had not previously been reserved (see Note 11 to the
financial statements).
Net Income (loss):
Net loss in 1999 reflected the operations of Vertex, including the Mergers, but
excluding the Purchase Acquisitions. The 2000 net loss includes the operations
of the Purchase Acquisitions, as well as the impact of the amortization of
intangibles, the write-off of in-process research and development costs, and
interest expense related to these acquisitions.
Liquidity and Capital Resources
The successful implementation of our business plan has required, and will
require on a going forward basis, substantial funds to finance (i) the growth of
our operations, (ii) further development of our enterprise technologies, (iii)
historic and expected future operating losses, and (iv) additional selective
acquisitions to achieve the scale we believe will be necessary to remain
competitive in the global SCM industry.
Fiscal 2001
In fiscal 2001, the overall decline in the enterprise applications software and
telecommunications industries has had a substantial negative impact on our
results of operations. These factors, in combination with our continuing
negative operating cash flows, placed significant pressures on our financial
condition and liquidity position. Operating and investing activities resulted in
cash consumption of $21.5 million in 2001. During fiscal 2001, the Company
completed a series of transactions to fund its cash needs arising from the
27
foregoing, including private placement sales of common shares resulting in
approximately $8.8 million of proceeds (net of cash transaction costs totaling
$0.8 million) and the issuance of convertible notes in an aggregate principal
amount of $5.9 million. In addition, the exercise of stock options during the
period totaled $0.9 million. At September 30, 2001, the above activities
resulted in a net cash balance of $1.4 million (a decrease of $6.5 million) and
a negative working capital balance of $15.1 million.
Outlook
Between September 30, 2001 and December 31, 2001 our consolidated cash balance
continued to decline. We do not anticipate reaching the point at which we
generate cash in excess of our operating expenses until June 2002 at the
earliest, about which there can be no assurance. We have therefore required,
and currently expect to require, significant additional funds aggregating
approximately $15 million for the period from October 1, 2001 through June 30,
2002 to meet accrued non-operating obligations, working capital to fund
operating losses, interest, capital expenditures, expenses related to
cost-reduction initiatives, and potential liabilities related to pending
litigation (see Note 14 to Consolidated Financial Statements).
Our sources of ongoing liquidity include the cash flows of our operations, cash
available from various existing credit lines, potential new credit facilities,
potential additional equity investments, and sales of our non-core assets.
Consequently, Vertex is aggressively pursuing additional debt and equity
financing, is restructuring certain existing debt obligations, is continuing
to reduce its operating expenses, and is structuring its overall operations
and resources around high margin enterprise products and services.
In particular:
(i) As described in Note 17 to Consolidated Financial Statements, since
September 30, 2001 through December 31, 2001 we have raised $6 million
through the issuance of: (1) Series B Convertible Preferred Stock to
Pitney Bowes valued at $1 million; (2) $3 million in notes payable
convertible into Series C Convertible Preferred Stock to Midmark
Capital II, LP; and (3) $2 million in a convertible note payable
collateralized by certain North American accounts receivable. It is
our understanding that Midmark Capital II, LP will convert its note
payable to equity upon receipt of shareholder approval and that the
$2 million convertible note payable will also convert upon
registration of the underlying common shares;
(ii) We intend to convert certain of our current liabilities through
non-cash transactions, including approximately $1.5 million of
litigation-related accruals that we expect to settle by the issuance
of stock options, and another $110,000 that has been settled with the
issuance of common shares. Management anticipates that currently
ongoing negotiations will lead to an aggregate of approximately $2.3
million of past due notes payable being exchanged for convertible
preferred stock;
(iii) During 2001 we initiated cost reduction measures, including reduction
in the number of our employees, facilities consolidations, as well as
reductions in other expenses deemed redundant such as marketing and
advertising and other headcount-related expenses. During our fiscal
fourth quarter we reduced our operating expenses by approximately $1.5
million ($6 million annualized) compared with our fiscal third quarter
ended June 30, 2001, as a result of these actions. We are also
pursuing an opportunity to provide outsourced development services
over the next twelve months that would effectively reduce annualized
operating expenses by approximately $1.6 million;
(iv) We have retained a financial advisor to assist us in assessing
strategic alternatives regarding the possible disposition of any
products and services which management has determined are no longer
core to the achievement of our strategy of focusing on the development
and delivery of enterprise level supply chain management software
applications and services.
(v) As a result of their efforts, we have already agreed in principle to
sell our wireless and cabling installation division for $2 million, of
which $1.2 million is expected to be in cash. This transaction is
expected to close by the end of March 2002;
28
(vi) We are also actively considering offers to purchase our hardware
service and maintenance division which provides such services in
Italy, France and the United Kingdom, as well as the bar code reseller
portion of our businesses in Germany and the Netherlands;
(vii) We are negotiating with one of our strategic partners to increase its
investment in Vertex by up to $3.0 million;
While we are continuing our efforts to reduce costs, gain scale, sell non-core
business operations, resolve lawsuits on favorable or non-cash terms and obtain
shareholder approval for the conversion of notes payable, there is no assurance
that we will achieve these objectives. In addition, we continue to pursue
opportunities to raise both debt and equity financing. However, there can be no
assurance that we will be able to raise additional financing, or if such
financing is available, whether the terms or conditions would be acceptable to
us.
The financial statements have been prepared on a basis that contemplates
Vertex's continuation as a going concern and the realization of assets and
liquidation of liabilities in the ordinary course of business. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should we be unable to continue as a going
concern. If Vertex fails to raise capital when needed, the lack of capital will
have a material adverse effect on Vertex's business, operating results, and
financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
market prices and rates.
The Company is exposed to market risk because of changes in foreign currency
exchange rates as measured against the U.S. dollar and currencies of the
Company's subsidiaries and operations in Europe. Revenues from these operations
are typically denominated in European currencies thereby potentially affecting
the Company's financial position, results of operations, and cash flows due to
fluctuations in exchange rates. The Company does not anticipate that near-term
changes in exchange rates will have a material impact on future earnings, fair
values or cash flow of the Company. However, there can be no assurance that a
sudden and significant decline in the value of European currencies would not
have a material adverse effect on the Company's financial condition and results
of operations.
The Company's short-term bank debt bears interest at variable rates; therefore,
the Company's results of operations would only be affected by interest rate
changes to the short-term bank debt outstanding. An immediate 10 percent change
in interest rates would not have a material effect on the Company's results of
operations over the next fiscal year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this "Item 8" is included following the "Index to
Financial Statements and Schedules" appearing at the end of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a) On November 30, 1999 the registrant and Sax, Macy, Fromm & Co., P.C.("Sax,
Macy") mutually agreed to cease the client auditor relationship. Sax, Macy's
report upon registrant's financial statements for its fiscal years ended July
31, 1999 and 1998 did not contain an adverse opinion or a disclaimer of opinion,
nor was such report qualified or modified as to uncertainty, audit scope or
accounting principles. During registrant's fiscal years ended July 31, 1999 and
July 31, 1998, and the interim period from August 1, 1999 to November 30, 1999
(the "Interim Period"):
29
(i) there were no disagreements (of the nature contemplated by Item 304
(a) (1) (iv) of Regulation S-K) between registrant and Sax, Macy and
(ii) there were no reportable events of the nature contemplated by
Item 304 (a)(1) (v)(A)-(D) of Regulation S-K.
(b) On November 30, 1999, registrant engaged Ernst & Young, LLP as its
independent auditors for registrant's new fiscal year ending September 30, 1999.
The registrant's Audit Committee approved the appointment of Ernst & Young LLP
as the registrant's auditors through the distribution of the Ernst & Young LLP
engagement letter to the members of the Committee. During registrant's two
fiscal years ended July 31, 1999 and July 31, 1998 and the Interim Period,
registrant did not consult Ernst & Young LLP with respect to any of the matters
contemplated by Item 304 (a)(2)(i)-(ii) of Regulation S-K.
30
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Certain information about directors and officers of the Company is contained in
the following table as of September 30, 2001.
Director
Name of Director Age Principal Occupation Since
- ---------------- --- -------------------- --------
Hugo H. Biermann 52 Executive Chairman 1999
Vertex Interactive Inc.
Nicholas R. H. Toms 53 Chief Executive Officer 1999
Vertex Interactive Inc.
Wayne L. Clevenger 58 Managing Director 1999
MidMark Capital, L.P.
Stephen M. Duff(1) 38 Senior Investment Manager 2000
The Clark Estates, Inc
Otto Leistner 57 Managing & Senior Partner 2000
Leistner Pokoj Schnedler
George A. Powch(1) 54 President and CEO 1987
Huber+Suhner (North America) Corp.
Joseph R. Robinson 59 Managing Director 1999
MidMark Capital, L.P.
L.G. Schafran 63 Managing General Partner 2001
L.G. Schafran & Associates
(1) Mr. Duff and Mr. Powch, due to professional time restrictions have resigned
as members of the Board subsequent to September 30, 2001.
There is no family relationship between any of the foregoing directors or
between any of such directors and any of the Company's executive officers.
The Company's executive officers serve at the discretion of the Board of
Directors.
Hugo H. Biermann has served as Executive Chairman of the Board of Directors
since July 2001 and served as Joint Chairman and Joint Chief Executive Officer
and a Director of the Company from September 1999 through June 2001. Mr.
Biermann has been a principal in Edwardstone & Company, Incorporated
("Edwardstone"), an investment management company, since 1986 as well as serving
as President of Edwardstone since 1989. From 1988 to 1995 Mr. Biermann served as
Director and Vice Chairman of Peak Technologies Group, Incorporated ("Peak
Technologies"), a company involved in automated data capture technologies.
Nicholas R. H. Toms has served as Chief Executive Officer since July, 2001 and
served as Joint Chairman of the Board of Directors, Joint Chief Executive
Officer and a Director of the Company from September 1999 through June 2001. Mr.
Toms has been a principal of Edwardstone, an investment management
31
company, since 1986 and Chairman and Chief Executive Officer of Edwardstone
since 1989. From 1988 to 1997, Mr. Toms served as Chairman, President and Chief
Executive Officer of Peak Technologies.
Wayne L. Clevenger has been a Director of the Company since September 1999. Mr.
Clevenger has been a managing director of MidMark Advisors, Inc., the general
partner of MidMark Equity Partners, L.P., since 1994 and a managing director of
MidMark Associates, Inc., the general partner of MidMark Capital L.P., since
1994. MidMark Capital L.P. is an investment limited partnership holding equity
securities in several private portfolio companies.
Stephen M. Duff has been a Director of the Company since June 2000 and is the
Senior Investment Manager of The Clark Estates, Inc. Prior to joining The Clark
Estates in 1995, Mr. Duff was a Vice President of The Portfolio Group, Inc., a
subsidiary of The Chemical Banking Corporation, Inc. from 1990.
Otto Leistner has been a Director since April 2000. He has been a Partner since
1995 in Leistner Pokoj Schnedler, a midsize accounting and consulting firm in
Frankfurt, Germany with a staff of approximately 100.
George A. Powch has served as a Director of the Company since 1987. Since 1996
Mr. Powch has been the President and Chief Executive Officer of Huber + Suhner
(North America) Inc., responsible for the North American units of Huber + Suhner
AG of Switzerland. Prior to becoming President and CEO, Mr. Powch served as a
consultant to Huber+Suhner. Mr. Powch serves as a Director on the boards of
Huber+Suhner (North America) Corp., Huber+Suhner Integrations, Inc.,
Huber+Suhner, Inc., Champlain Cable Corporation as well as the Vermont Business
Round Table.
Joseph R. Robinson has been a Director of the Company since September 1999. Mr.
Robinson has been a managing director of MidMark Advisors, Inc., the general
partner of MidMark Equity Partners, L.P., since 1994 and a managing director of
MidMark Associates, Inc., the general partner of MidMark Capital L.P., since
1994. MidMark Capital L.P. is an investment limited partnership holding equity
securities in several private portfolio companies.
L. G Schafran has been a Director of the Company since August 2001.
Mr. Schafran, is the Managing General Partner of L. G. Schafran & Associates
since 1984; a Director, since 1999 and Chairman/Interim CEO and President, since
2000, of Banyan Strategic Realty Trust; the Chairman, since 1986 and Co-CEO,
since 1991, of Delta-Omega Technologies, Inc.; a Director of PubliCard, Inc.,
since 1986, a Director of Tarragon Realty Investors, Inc., since 1995; a
Director of WorldSpace Corporation, since 2000 and a Director and COO of
CancerAdvisors, Inc., since 2001.
Operation of Board of Directors and Committees
The Board of Directors met 17 times during the fiscal year ended September 30,
2001. Standing committees of the Board include an Audit Committee, which met 5
times, and a Stock Option/Compensation Committee, which met 5 times. The Company
does not have a Nominating Committee. All directors attended in excess of
75% of the meetings.
As of September 30, 2001, the Audit Committee was comprised of Messrs. Duff
(Chair), Powch and Leistner. All members were non-employee directors. Pursuant
to the Audit Committee Charter, the Committee's primary duties and
responsibilities are to 1) serve as an independent and objective party to
monitor the Corporation's financial reporting process and internal control
system; 2) review and appraise the audit efforts of the Corporation's
independent accountants; and 3) provide an open avenue of communication among
the independent accountants, financial and senior management and the Board of
Directors. All members attended 100% of the meetings.
As of September 30, 2001 the Stock Option/Compensation Committee was comprised
of Messrs. Clevenger (Chair), Duff and Leistner. The Committee's primary
functions are to determine remuneration policies applicable to the Company's
executive officers and to determine the bases of the compensation of the Chief
Executive Officer, including the factors and criteria on which such compensation
is to be based. The Committee also administers the Company's Stock Option Plan.
All directors attended in excess of 75% of the meetings.
32
Compensation of Directors
With the exception of Messrs. Clevenger and Robinson who are partners in Midmark
Associates, which firm is paid a management fee by Vertex, non-employee
directors presently receive compensation of 15,000 stock options per
year for their services as a director. The Company reimburses directors for
their reasonable out-of-pocket expenses with respect to board meetings and other
Company business. Steve Duff(2), Otto Leistner and George Powch(2) each received
30,000 in-plan non-qualified options on February 6, 2001 at an exercise price of
$8.50. 15,000 of these options vested immediately for services provided in the
year 2000 and 15,000 vested on December 31, 2001 for services provided during
2001. In August, 2001 L. G. Schafran received 15,000 in-plan, non-qualified
options at an exercise price of $1.51 which vested on December 31, 2001 for
services provided during 2001.
In addition, in January 2000, the Company granted options to purchase 100,000
shares of common stock at $3.85 (110% of the fair market value of the stock on
the date of grant) to each of Mr. Clevenger, Mr. Robinson, Mr. Thomas(1) and Mr.
Denis Newman (a former Director, who resigned from the Board effective August 9,
2000). These options were granted to compensate these individuals for
consultation, advice, due diligence and other work performed in addition to the
standard scope of responsibilities of an outside director. Such options were
fully vested on the date of grant and expire five years from that date.
(1) Mr. Thomas resigned from the Board January, 2001.
(2) Mr. Duff and Mr. Powch due to professional time restrictions have resigned
from the Board subsequent to September 30, 2001.
EXECUTIVE OFFICERS
In addition to Messrs. Biermann and Toms the following persons were executive
officers of Vertex Interactive, Inc. as of September 30, 2001:
Name Age Position
- ---- --- ---------
Raymond J. Broek 50 Treasurer and Vice President - Finance
Mark A. Flint 55 Chief Financial Officer
Jacqui Gerrard 47 Chief Operating Officer - Europe
Barbara H. Martorano 45 Corporate Secretary
Donald W. Rowley 50 Executive Vice President - Strategic Development
Raymond J. Broek has been with Vertex since March 2000 and, previously had been
a consultant to Vertex and other middle market companies. From 1973 to 1999, Mr.
Broek was with Ernst & Young LLP; the last 12 years as a partner providing
accounting and auditing services.
Mark A. Flint joined Vertex in June 2001. From December 2000 to May 2001, he was
Chief Financial Officer of Industria Solutions, a Silicon Valley B2B supply
chain software company. From October, 1998 to December, 2000 he was an
independent management consultant. From September, 1996 to September, 1998 he
served as the CFO of Dart Group, as the COO of Crown Books, and CEO of Shoppers
Food Warehouse. He has held additional positions in several other distribution,
retail and professional service companies as a Board member, Chairman of the
Executive Committee, CFO, and CIO.
33
Jacqui Gerrard joined Vertex in March 2000. From March 1999 to February 2000 Ms.
Gerrard served as the Director of Human Resources for Logical, the systems
integration division of Datatec, a software networking corporation. From
February 1998 to February 1999 she managed the European organization of Peak
Technologies, after first serving as the Human Resource Director for the
European Division from September 1997. Prior to that, Ms. Gerrard was a Director
of Human Resources for ICL, an information technology systems company.
Barbara H. Martorano joined the Company in June 1990 and has served in a variety
of positions, including Sales Coordinator, Office Administrator, Executive
Assistant to the President, CEO and Chairman of the Board, as well as, Corporate
Secretary as of January 17, 1996.
Donald W. Rowley joined the Company in December 2000. Previously, Mr. Rowley was
with Brightstar Information Technology Group from January 1999, when he was
appointed its Chief Financial Officer and Secretary, and was elected to the
Brightstar Board. Prior to that appointment, he was interim Chief Financial
Officer and a director of PetroChemNet, Inc., a business-to-business
internet-based marketplace serving the petrochemical and petroleum segments of
the energy industry, from 1998 to 1999. From 1995 to 1998, he was an independent
management consultant and worked with several companies, which included serving
as interim Chief Financial Officer of Norand Corporation, a public company
engaged in the design and development of mobile computing systems and wireless
data networks. From 1994 to 1995 Mr. Rowley was President and a director of VTX
Electronics Corporation, a public company engaged in the distribution of
electronic components and cable, and manufacture of electronic cable assemblies.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and long-term
compensation for services in all capacities to the Company for the fiscal years
ended September 30, 2001, 2000, and 1999 of those persons who were, at September
30, 2001, executive officers of the Company and earned $100,000 or more in any
of the respective fiscal years:
Long Term
Annual Compensation
Compensation ------------
------------ Securities
Bonus & Other Underlying
Name and Principal Position Year Salary Cash Items Options(#)
Hugo H. Biermann 2001 $300,000 -- --
Executive Chairman 2000 300,000 -- 475,000
of the Board of Directors 1999 -- -- --
Nicholas R. H. Toms 2001 300,000 -- --
Chief Executive Officer 2000 300,000 -- 475,000
And Director 1999 -- -- --
Jacqui Gerrard 2001 188,500 $71,050 50,000
Chief Operating Officer 2000 95,425 39,800 100,000
Europe 1999 -- -- --
Raymond J. Broek 2001 152,885 -- 50,000
Treasurer and 2000 83,654 -- 125,000
Vice President - Finance 1999 -- -- --
Donald W. Rowley 2001 206,731 -- 200,000
Executive Vice President 2000 -- -- --
Strategic Development 1999 -- -- --
34
(1) All officers and U.S. based employees of Vertex are eligible to participate
in the 401k Savings and Retirement plan that is funded by voluntary
employee and Company contributions. See "401(k) Savings and Retirement
Plan".
(2) In accordance with the rules of the Securities and Exchange Commission,
other compensation received in the form of perquisites and other personal
benefits has been omitted because such perquisites and other personal
benefits constituted less than the lesser of $50,000 or 10% of the total
annual salary and bonus for the Named Executive Officer for such year.
Employment Agreements
Effective October 1, 1999, Edwardstone entered into an agreement with the
Company pursuant to which Edwardstone agreed to provide the services of Messrs.
Biermann and Toms to act as the Joint Chairmen and Joint Chief Executive
Officers of the Company. Such Agreement provides for aggregate annual
compensation of $600,000 and entitles them to participate in all employee
benefit plans sponsored by Vertex in which all other executive officers of
Vertex participate. The agreement has an initial five-year term and continues
thereafter on a year-to-year basis on the same terms and conditions existing at
the time of renewal, unless terminated by either the Company or the employee
upon thirty days written notice prior to the end of either the initial (5 year)
term or any subsequent one-year term, as the case may be.
On April 17, 2000, the Company entered into an agreement with employee,
Mr. Raymond J. Broek, commencing on March 6, 2000 for a period of five (5)
years. The employment agreement provides for an annual base salary of at
least $150,000 and a bonus of up to $100,000 per annum based on performance
goals established. The agreement further provides Mr. Broek with options to
purchase up to 125,000 shares of the Company's common stock at an exercise price
of $6.00 per share. Of these options, 25,000 vested immediately and the balance
vest ratably over 5 years. In the event Mr. Broek is discharged without cause,
he will be entitled to receive the greater of his base salary for the remaining
term of the Agreement or, his base salary for 12 months, in a lump sum payment.
On May 30, 2001, the Company entered into an agreement with employee,
Mr. Donald W. Rowley, commencing on December 4, 2000. The employment agreement
provides for an annual base salary of $250,000, and a bonus of up to 100% of
base salary based on performance goals established. The agreement further
provides Mr. Rowley with the option to purchase up to 200,000 shares of the
Company's common stock. These options vest ratably over 5 years. In the event
Mr. Rowley is discharged without cause, he will be entitled to receive his base
salary and bonus for 12 months.
Stock Option Grants in Last Fiscal Year
The following table describes certain information regarding stock options
granted to each of the named executive officers in the fiscal year ended
September 30, 2001, including the potential realizable value over the ten-year
term of the options, based on assumed rates of stock appreciation of 5% and 10%,
compounded annually. These assumed rates of appreciation comply with the rules
of the Securities and Exchange Commission and do not represent Vertex's estimate
of future stock price. Actual gains, if any, on stock option exercises will be
dependent on the timing of such exercises and the future performance of Vertex's
common stock.
35
Potential realizabale
Percent value at assumed
Number of of total annual rates of stock
Securities options price appreciation
Underlying granted to Exercise for options term
Options employees in Price Expiration ---------------------
Granted fiscal year ($/share) Date 5% 10%
- -------------------------------------------------------------------------------------------------------
Raymond J. Broek 50,000 1.82% $2.42 5/11/11 0 0
Jacqui Gerrard 50,000 1.82% 1.10 8/9/11 20,815 64,604
Donald W. Rowley 200,000 7.27% 9.00 12/04/10 0 0
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table describes for the named executive officers, the
exercisable and unexercised options held by them as of September 30, 2001. No
options were exercised by the named executive officers in fiscal 2001. The
"Value of Unexercised In-the-Money Options at Fiscal Year End" is based on a
value of $.94 per share, the closing price of Vertex's common stock on The
Nasdaq Stock Market's National Market, on September 30, 2001, less the per share
exercise price, multiplied by the number of shares to be issued upon exercise of
the options. Of the unexercisable stock options for Mr. Toms and Mr. Biermann,
75,000 options were granted under Vertex's Incentive Stock Option Plan (the
"Plan") and vest at a rate of 20% per year. The remaining 200,000 of
unexercisable stock options for Mr. Toms and Mr. Biermann were granted outside
of the Plan and vest at a rate of 50% per year. The 200,000 of exercisable stock
options for Mr. Toms and Mr. Biermann were granted outside of the Plan and were
immediately exercisable.
Number of Securities Value of unexercised
Underlying unexercised in-the-money options at
Options at fiscal year end fiscal year end
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------
Hugo Biermann 350,000 125,000 n/a n/a
Nicholas Toms 350,000 125,000 n/a n/a
Jacqui Gerrard 60,000 90,000 n/a n/a
Raymond Broek 45,000 130,000 n/a n/a
Donald Rowley -- 200,000 n/a n/a
401(k) Savings And Retirement Plan
Vertex maintains a 401(k) savings plan (the "401(k) Plan") for the benefit
of all U.S. based employees age 18 or over who have worked for at least three
months and who are not covered by a collective bargaining agreement. The 401(k)
Plan is qualified under Section 401(a) of the Code and is intended to qualify
under Section 401(k) of the Code. The assets accumulated by the 401(k) Plan are
held in a trust.
Under the current terms of the 401(k) Plan, employees may elect to defer
from Federal income tax up to 17% of their annual compensation, not to exceed
Internal Revenue Code limits and have it contributed to the 401(k) Plan on their
behalf. In addition, Vertex makes a discretionary contribution of up to 3% of a
contributing employee's salary. Beginning January 1, 2001, the Company will
contribute 50% of an employee's salary deferral up to 6% or a 3% match. The
Company's contribution will be funded after each calendar year end, with either
cash or Vertex common stock, at the Company's option. The salary deferrals are
fully vested, while the Company's contributions vest 20% upon the completion
of the first year of service with the Company or its subsidiaries, 20% upon
completion of the second year of service, 20% upon the completion of the third
year of service, 20% upon the completion of the fourth year of service and the
remaining 20% upon the completion of the fifth year of service or, if earlier,
upon the death, disability or retirement of the participant. Benefits under
the 401(k) Plan are generally distributed in a lump sum following the
participant's retirement, death, disability or termination of employment, or in
a case of hardship, prior to the termination of the participant's employment.
No Company contributions were made for the year ended September 30, 2000.
Company contributions for the years ended September 30, 2001 and 1999 were
approximately $290,000 and $18,000 respectively.
36
Compensation Committee Interlocks and Insider Participation
The following non-employee directors were the members of the Stock
Option/Compensation Committee of the Board of Directors during 2001: Wayne
Clevenger, George Powch and Otto Leistner. During 2001 the Company paid $250,000
to MidMark Associates for consulting services pursuant to a five year management
agreement entered into in September 1999. Mr. Clevenger is a managing director
of MidMark Associates. On February 6, 2001 the Board awarded Messrs. Leistner
and Powch each 30,000 options to purchase the Company's stock at an exercise
price of $8.50 per share.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers, and holders of more
than 10% of the Company's Common Stock, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Such
executive officers, directors and 10% stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
Based on its review of such forms that it received, or written
representations from reporting persons that no Forms 5 were required for such
persons, the Company believes that, during fiscal 2001, all Section 16(a) filing
requirements had been satisfied on a timely basis for members of the Board of
Directors and Executive Officers.
37
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
General
Notwithstanding any statement to the contrary in any of the Company's
previous or future filings with the Securities and Exchange Commission, this
Report shall not be incorporated by reference into any such filings.
The Stock Option/Compensation Committee of the Company's Board of Directors
(the "Committee") has furnished the following report on Executive Compensation
in accordance with the rules and regulations of the Securities and Exchange
Commission. This report outlines the duties of the Committee with respect to
executive compensation, the various components of the Company's compensation
program for executive officers and other key employees, and the basis on which
the 2001 compensation was determined for the executive officers of the Company,
with particular detail given to the compensation for the Company's Chief
Executive Officer.
Compensation of Executive Officers Generally
The Committee is responsible for establishing compensation levels for the
executive officers of the Company, including the annual bonus plan for executive
officers and for administering the Company's Stock Option Plan. The Committee
was comprised of three non-employee directors: Messrs. Clevenger (Chair), Powch
and Leistner. The Committee's overall objective is to establish a compensation
policy that will (i) attract, retain and reward executives who contribute to
achieving the Company's business objectives; (ii) motivate executives to obtain
these objectives; and (iii) align the interests of executives with those of the
Company's long-term investors. The Company compensates executive officers with a
combination of salary and incentives designed to focus their efforts on
maximizing both the near-term and long-term financial performance of the
Company. In addition, the Company's compensation program rewards individual
performance that furthers Company goals. The executive compensation program
includes the following: (i) base salary; (ii) incentive bonuses; (iii) long-term
equity incentive awards in the form of stock option grants; and (iv) other
benefits. Each executive officer's compensation package is designed to provide
an appropriately weighted mix of these elements, which cumulatively provide a
level of compensation roughly equivalent to that paid by companies of similar
size and complexity engaged in the same or similar business.
Base Salary. Base Salary levels for each of the Company's executive
officers, including the Chief Executive Chairman and the Chief Executive
Officer, are generally set within a range of base salaries that the Committee
believes are paid to similar executive officers at companies deemed comparable
based on the similarity in revenue level, industry segment and competitive
employment market to the Company. In addition, the Committee generally takes
into account the Company's past financial performance and future expectations,
as well as the performance of the executives and changes in the executives'
responsibilities. With the exception of the Chief Operating Officer - Europe,
there were no increases in the base salary for any of the Executive Officers of
the Company during fiscal 2001 reflecting the Company's objectives of cash
preservation.
Incentive Bonuses. The Committee recommends the payment of bonuses to
provide an incentive to executive officers to be productive over the course of
each fiscal year. These bonuses are awarded only if the Company achieves or
exceeds certain corporate performance objectives. The incentive bonus to each
executive officer is based on the individual executive's performance as it
relates to the Company's performance. With the exception of the Chief Operating
Officer - Europe, there were no incentive bonuses granted to any of the
executive officers of the Company in 2001, reflective of the operating losses
and the desire to preserve cash.
Equity Incentives. Stock options are used by the Company for payment of
long-term compensation to provide a stock-based incentive to improve the
Company's financial performance and to assist in the recruitment, retention and
motivation of professional, managerial and other personnel. Generally, stock
options are granted to executive officers upon commencement of employment with
the Company and from
38
time to time thereafter, based primarily upon the individual's actual and/or
potential contributions to the Company and the Company's financial performance.
Stock options are designed to align the interests of the Company's executive
officers with those of its shareholders by encouraging executive officers to
enhance the value of the Company, the price of the Common Stock, and hence, the
shareholder's return. In addition, the vesting of stock options over a period of
time is designed to create an incentive for the individual to remain with the
Company. The Company has granted options to the executives on an ongoing basis
to provide continuing incentives to the executives to meet future performance
goals and to remain with the Company. During the fiscal year ended September 30,
2001, options to purchase an aggregate of 715,000 shares of Common Stock were
granted to the Company's executive officers based on the Committee's assessment
of the individual contributions of the executive officers receiving options.
None of the options granted to the Company's executive officers were granted to
Messrs. Biermann or Toms.
Other Benefits. Benefits offered to the Company's executive officers are
provided to serve as a safety net of protection against the financial
catastrophes that can result from illness, disability, or death. Benefits
offered to the Company's executive officers are substantially the same as those
offered to all of the Company's regular employees. The Company also maintains a
tax-qualified deferred compensation 401(k) Savings and Retirement Plan covering
all of the Company's eligible U.S. based employees.
Compensation of the Chief Executive Officer
The Committee annually reviews the performance and compensation of the
Chief Executive Officer based on the assessment of his past performance and its
expectation of his future contributions to the Company's performance. Messrs.
Biermann and Toms served as Joint CEOs from September 27, 1999 through June
2001, at which time Mr. Biermann became Executive Chairman and Mr. Toms became
the Chief Executive Officer. Both Mr. Biermann and Mr. Toms serve under a five
year agreement with compensation at $300,000 each per annum, which compensation
remains unchanged from fiscal 2000. The Committee believes the compensation paid
to Messrs. Biermann and Toms was reasonable given the competitive nature of the
market place for executive talent, given the implementation of cost and expense
reductions to align the company's business with its core competencies and the
lack of base pay increases and bonuses to reflect the results achieved.
Policy with Respect to Qualifying Compensation for Deductibility
Section 162(m) of the Internal Revenue Code imposes a limit on tax
deductions for annual compensation (other than performance-based compensation)
in excess of one million dollars paid by a corporation to its Chief Executive
Officer and the other four most highly compensated executive officers of a
corporation. The Company has not established a policy with regard to Section
162(m) of the Code, since the Company has not and does not currently anticipate
paying cash compensation in excess of one million dollars per annum to any
employee. None of the compensation paid by the Company in 2001 was subject to
the limitations on deductibility. The Board of Directors will continue to assess
the impact of Section 162(m) on its compensation practices and determine what
further action, if any, is appropriate.
Stock Option/Compensation Committee
Wayne L. Clevenger, Chairman
George A. Powch
Otto Leistner
39
STOCK PERFORMANCE GRAPH
The following line-graph provides a comparison of the cumulative total
shareholder return on our Common Stock for the period September 30, 1996 through
September 30, 2001, against the cumulative shareholder return during such period
achieved by The Nasdaq Stock Market (U.S. Companies) ("Nasdaq US") and a Peer
Index ("The JP Morgan H&Q Technology Index"). The graph assumes that $100 was
invested on September 30, 1996 in our Common Stock and in each of the comparison
indices, and assumes reinvestment of dividends.
NASDAQ Stock J P Morgan H&Q
Measurement Period Vertex Market (U.S. Technology
(Fiscal Year Covered) Interactive Companies) Index
- --------------------- ----------- ------------ --------------
September 30, 1996 $ 100.00 $100.00 $100.00
September 30, 1997 86.84 137.27 149.10
September 30, 1998 86.84 139.44 138.53
September 30, 1999 242.11 227.82 266.83
September 30, 2000 1,542.15 302.47 434.45
September 30, 2001 86.74 123.64 144.15
The Stock Performance Graph shall not be deemed incorporated by reference
by any general statement incorporating by reference this proxy statement into
any filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended (collectively, the "Acts"), except to the
extent that the Company specifically incorporates this information by reference,
and shall not otherwise be deemed filed under such Acts.
40
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG VERTEX INTERACTIVE, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE JP MORGAN H & Q TECHNOLOGY INDEX
[PERFORMANCE GRAPH]
*$100 INVESTED ON 9/30/1998 IN STOCK
OR INDEX.
INCLUDING REINVESTMENT OF
DIVIDENDS.
41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the amount and percent of shares of Common
Stock that, as of December 31, 2001, are deemed under the rules of the
Securities and Exchange Commission (the "Commission") to be "beneficially owned"
by each member of the Board of Directors of the Company, by each Named Executive
Officer of the Company, by all Directors and Executive Officers of the Company
as a group, and by any person or "group" (as that term is used in the Securities
Act of 1934, as amended) known to the Company as of that date to be a
"beneficial owner" of more than 5% of the outstanding shares of Common Stock.
Shares Beneficially Owned
-------------------------
Number(1) Percent(2)
--------- ----------
5% Beneficial Owners:
MidMark Capital L.P.(3) 5,300,000 14.74%
177 Madison Avenue
Morristown, NJ 07960
Russell E. McCabe 2,100,000 5.89%
16 Carriage Hill Drive
Far Hills, NJ 07931
Federal Partners, LP 1,960,326 5.50%
Clark Estates Inc.
One Rockefeller Plaza
New York, NJ 10020
Non-Employee Directors:
Wayne L. Clevenger(3) 5,300,000 14.74%
Stephen M. Duff (4) 30,000 *
Otto Leistner (5) 572,875 1.60%
George A. Powch (6) 112,000 *
Joseph R. Robinson (3) 5,300,000 14.74%
L. G. Schafran (7) 45,000 *
Named Executive Officers:
Hugo H. Biermann (8) 863,010 2.39%
Nicholas R. H. Toms (9) 1,279,610 3.54%
Raymond J. Broek (10) 45,000 *
Jacqui Gerrard (11) 70,000 *
Donald W. Rowley(12) 40,000 *
All directors and executive officers
as a group(13 persons) (13) 8,465,495 22.68%
* Less than 1%
(1) Represents shares held directly and with sole voting and investment power,
except as noted, or with voting and investment power shared with a spouse.
(2) For purposes of calculating the percentage beneficially owned, the number
of shares of common stock deemed outstanding include (i) 35,663,059 shares
outstanding as of December 31, 2001 and
42
(ii) shares issuable by us pursuant to options held by the respective
person or group which may be exercised within 60 days following December
31, 2001 ("Presently Exercisable Options"). Presently Exercisable Options
are considered to be outstanding and to be beneficially owned by the person
or group holding such options for the purpose of computing the percentage
ownership of such person or group, but are not treated as outstanding for
the purpose of computing the percentage ownership of any other person or
group.
(3) Includes 300,000 shares issuable pursuant to Presently Exercisable Options
and 5,000,000 shares owned by MidMark Capital, L.P. Mr. Joseph R. Robinson
and Wayne L. Clevenger, directors of Vertex and managing directors of
MidMark Capital, L.P., have dispositive and voting power over the MidMark
Capital shares, but disclaim beneficial ownership of the shares.
(4) Includes 30,000 shares issuable pursuant to presently exercisable options.
(5) Includes 50,000 shares issuable pursuant to presently exercisable options
(6) Includes 32,000 shares issuable pursuant to presently exercisable options.
(7) Includes 45,000 shares issuable pursuant to presently exercisable options.
(8) Includes 475,000 shares issuable pursuant to presently exercisable options
and 388,010 shares held in the name of Bunter BVI Limited of which Mr.
Biermann may be deemed to be a beneficiary. Mr. Biermann, however,
disclaims such beneficial ownership.
(9) Includes 475,000 shares issuable pursuant to presently exercisable options.
(10) Includes 45,000 shares issuable pursuant to presently exercisable options.
(11) Includes 70,000 shares issuable pursuant to presently exercisable options.
(12) Includes 40,000 shares issuable pursuant to presently exercisable options.
(13) Includes 1,670,000 shares issuable pursuant to presently exercisable
options; 5,000,000 shares owned by MidMark Capital L.P. for which Messrs.
Clevenger and Robinson have dispositive and voting power; and 388,010
shares held by a company for which by Mr. Biermann disclaims beneficial
ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Wayne L. Clevenger and Joseph R. Robinson, directors of the Company, are
partners in Midmark Associates, which firm provides consulting services to the
Company. During fiscal 2001, the Company paid $250,000 to Midmark Associates
for consulting services pursuant to a five-year management agreement entered
into in September 1999. In addition, during the year ended September 30, 2001,
the Company issued in the aggregate $5,500,000 of convertible notes payable to
Midmark Capital L.P., Midmark Capital II L.P., and certain individuals related
to these two entities (collectively "Midmark Capital"). (See Note 6 to the
Consolidated Financial Statements).
On January 2, 2001, the Company awarded Otto Leistner, one of its
Directors, options exercisable at a price of $5.72 per share for 20,000
unregistered shares of our common stock for the accounting services he
performed from September 22, 1999 thru April 17, 2000 prior to his becoming a
Director. On July 31, 2001, the Company completed a $359,375 private placement
of a convertible note with Partas AG, an affiliate of Otto Leistner. This note
is convertible into 250,000 shares of unregistered common stock upon
shareholder approval.
43
L. G. Schafran, a director of the Company, provided consulting services to
the Company prior to his election as a Director on August 9, 2001. For these
services Mr. Schafran received 30,000 non-qualified, in-plan options at an
exercise price of $1.51, all of which vested on the date of grant, August 14,
2001.
44
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
Report of Independent Auditors
Balance Sheets as of September 30, 2001 and 2000
Statements of Operations for the years ended September 30, 2001, 2000
and 1999.
Statements of Cash Flows for the years ended September 30, 2001, 2000
and 1999.
Statements of Changes in Stockholders' Equity for the years ended
September 30, 2001, 2000 and 1999.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Schedules for the three years ended September 30, 2001, 2000 and 1999.
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 on Form S-18 filed under the Securities Act of 1933, as
amended and effective June 2, 1986 (File No. 33-897-NY), those filed pursuant to
Registration Statement on Form 8-A under the Securities Exchange Act of 1934, as
amended, and those material contracts of the Company previously filed pursuant
to the Securities Act of 1934 as amended, and those filed herewith.
Exhibit
Number Description
- ------- -----------
2.1 Form of Common Stock Certificate (incorporated by reference to the
Registration Statement on Form S-18 filed under the Securities Act of
1933, as amended and effective June 2, 1986 (File No. 33-897-NY).
3.1 Certificate of Amendment to the Certificate of Incorporation of Vertex
Interactive, Inc. filed with the Secretary of State, State of New
Jersey on February 7, 2001 (filed herewith).
3.2 Amended By-laws, amended as of August 9, 2001 (filed herewith).
45
10.5 Incentive Stock Option Plan dated October 10, 1985, and amended
February 14, 2000. (incorporated by reference to the Form 10K filed on
December 18, 2000).
10.54 Management agreement between the Company and Edwardstone & Company,
Inc. dated September 27, 1999 (incorporated by reference to the Form
10K filed on January 13, 2000).
10.55 Share Purchase Agreement, by and among Vertex Industries, Inc. St.
Georges Trustees Limited, as trustee on behalf of the John Kenny
Settlement and the Godfrey Smith Settlement, John Kenny and Bryan J.
Maguire and Godfrey Smith dated June 21, 1999, as amended September 27,
1999, (incorporated by reference to the Form 8K filed October 7, 1999).
10.56 Share Purchase and Transfer Agreement, 1999, between Gregor von Opel
and Vertex Industries, Inc. dated as of June 21, 1999 and as amended
September 27, 1999, (incorporated by reference to the Form 8K filed
October 7, 1999).
10.57 Stock Purchase Agreement by and among Vertex Interactive, Data Control
Systems and The Stockholders of Data Control Systems, Inc. dated March
31, 2000 (incorporated by reference to the Form 8K filed April 12,
2000).
10.58 Agreement and Plan of Merger, dated September 18, 2000, by and among
Vertex Interactive, Rensoft Acquisition Corp. and Renaissance Software,
Inc. (incorporated by reference to the Form 8K filed October 2, 2000).
10.59 Form of Note Purchase Agreement dated June 19, 2001 between Vertex
Interactive, Inc. and MidMark Capital II, LP with respect to the
Convertible Notes Payable (incorporated by reference to the Form 10Q
filed August 14, 2001).
10.60 Form of Subscription Agreement dated April 3, 2001 with respect to the
private placement of common shares (incorporated by reference to the
Form 10Q filed August 14, 2001).
10.61 Agreement and Plan of Merger, dated December 29, 2000, between Vertex
Interactive and Applied Tactical Systems, Inc. (incorporated by
reference to the Form 8K filed March 2, 2001 and Form 8Ka filed March
14, 2001.)
10.62 Asset Purchase Agreement and Ancillary Agreements between Vertex
Interactive, Inc. and Finmek Holding N.V. - Genicom S.p.A., Genicom
Ltd., Genicom S.A. dated October 6, 2000 (filed herewith).
10.63 Transaction Agreement among Vertex Interactive, Inc., Pitney Bowes Inc.
and Renaissance Software, Inc. dated February 7, 2001 (filed herewith).
10.64 Note Purchase Agreement dated July 31, 2001 by and among Vertex
Interactive and Partas AG (filed herewith).
10.65 Employment Agreement dated April 17, 2000 between Vertex Interactive,
Inc. and Raymond J. Broek, (filed herewith).
10.66 Employment Agreement dated May 30, 2001 between Vertex International,
Inc. and Donald W. Rowley (filed herewith).
21.0 Subsidiaries of Vertex Interactive, Inc.
23.1 Consent of Ernst & Young LLP.
(b) Reports on Form 8-K
1) Form 8-K filed September 7, 2001 relating to the definitive Stock
Purchase Agreement with Plus Integration Supply Chain Solutions, BV
dated August 23, 2001.
46
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: January 24, 2002 VERTEX INTERACTIVE, INC.
/s/ Mark A. Flint
------------------------------------
Mark A. Flint
Chief Financial Officer
/s/ Raymond J. Broek
------------------------------------
Raymond J. Broek
Treasurer/Vice President - Finance
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:
January 24, 2002 /s/ Hugo H. Biermann
------------------------------------
Hugo H. Biermann
Executive Chairman
and Director
January 24, 2002 /s/ Nicholas R. H. Toms
------------------------------------
Nicholas R. H. Toms
Chief Executive Officer
and Director
January 24, 2002 /s/ Wayne L. Clevenger
------------------------------------
Wayne L. Clevenger
Director
January 24, 2002 /s/ Joseph R. Robinson
------------------------------------
Joseph R. Robinson
Director
January 24, 2002 /s/ Otto Leistner
------------------------------------
Otto Leistner
Director
January 24, 2002 /s/ L.G. Schaffran
------------------------------------
L.G. Schafran
Director
January 24, 2002 /s/ Michael Monahan
------------------------------------
Michael Monahan
Director
47
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS:
Report of Independent Auditors .............................................. F-2
Balance Sheets as of September 30, 2001 and 2000 ............................ F-3, F-4
Statements of Operations for the years ended
September 30, 2001, 2000, and 1999 .......................................... F-5
Statements of Cash Flows for the years ended
September 30, 2001, 2000, and 1999 .......................................... F-6
Statements of Changes in Stockholders' Equity for the years ended
September 30, 2001, 2000, and 1999 .......................................... F-7, F-8
Notes to Consolidated Financial Statements .................................. F-9
SUPPLEMENTAL SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts
for the years ended September 30, 2001, 2000, and 1999 ...................... F-33
F-1
Report of Independent Auditors
The Board of Directors and Shareholders of
Vertex Interactive, Inc.
We have audited the accompanying consolidated balance sheets of Vertex
Interactive, Inc. and subsidiaries as of September 30, 2001 and 2000, and the
related consolidated statements of operations, cash flows and changes in
stockholders' equity for each of the three years in the period ended
September 30, 2001. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits 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 audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Vertex
Interactive, Inc. and subsidiaries at September 30, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 2001 in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As more fully discussed in Note 1 to the consolidated financial statements, the
Company's recurring losses from operations, negative working capital, rate of
cash consumption and lack of sufficient current financing raise substantial
doubt about its ability to continue as a going concern. Management's plans as
to these matters are also described in Note 1. The 2001 consolidated financial
statements and financial statement schedule do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
MetroPark, New Jersey
January 25, 2002
F-2
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, September 30,
2001 2000
------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,411,222 $ 7,892,774
Accounts receivable, less allowance for doubtful accounts
of $380,568 and $180,630 at September 30, 2001 and 2000 11,224,533 11,093,348
Inventories, net 5,065,214 4,463,218
Prepaid expenses and other current assets 1,521,730 2,236,331
----------- ------------
Total current assets 19,222,699 25,685,671
PROPERTY, EQUIPMENT, AND CAPITAL LEASES
Property and Equipment 6,283,848 4,401,827
Capital Leases 350,168 373,996
----------- ------------
Total property, equipment and capital leases 6,634,016 4,775,823
Less: Accumulated depreciation and amortization (2,270,097) (1,485,958)
----------- ------------
Net property, equipment and capital leases 4,363,919 3,289,865
OTHER ASSETS:
Intangible Assets, net of amortization of $15,593,219 at
September 30, 2001 and $1,063,775 at September 30, 2000 27,543,621 78,649,413
Capitalized software, net of amortization of $24,426
at September 30, 2001 and $86,054 at September 30, 2000 420,554 1,037,350
Other assets 1,888,490 1,557,177
----------- ------------
Total other assets 29,852,665 81,243,940
----------- ------------
Total assets $53,439,283 $110,219,476
=========== ============
See notes to consolidated financial statements.
F-3
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, September 30,
2001 2000
------------- -------------
CURRENT LIABILITIES:
Current portion of obligations under capital leases $ 163,425 $ 194,140
Bank credit lines 1,824,528 1,875,463
Convertible notes payable - related parties 359,375 --
Notes payable 2,677,517 3,771,817
Mortgage notes payable current portion 75,793 73,293
Accounts payable 8,432,386 5,222,658
Acquisition related accruals 179,485 1,847,291
Payroll and related benefits accruals 4,916,639 2,514,089
Litigation accruals 3,856,948 971,953
Accrued expenses and other liabilities 5,521,480 2,860,928
Advances from customers 612,077 636,355
Deferred revenue 5,739,843 3,915,821
------------- ------------
Total current liabilities 34,359,496 23,883,808
LONG-TERM LIABILITIES:
Convertible notes payable - related parties 5,500,000 --
Obligations under capital leases 106,201 245,098
Mortgage notes payable 1,392,858 1,433,417
Other long term liabilities 130,201 249,428
------------- ------------
Total long-term liabilities 7,129,260 1,927,943
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; 2,000,000 shares
authorized, 1,356,852 issued and outstanding
($10,000,000 aggregate liquidation preference) 13,569 --
Common stock, par value $.005 per share; 75,000,000 shares
authorized; 34,909,506 and 26,267,947 shares issued at
September 30, 2001 and September 30, 2000, respectively 174,548 131,340
Additional paid-in capital 149,321,766 99,563,198
Deferred compensation (180,557) (461,012)
Accumulated deficit (135,907,323) (12,955,221)
Accumulated other comprehensive loss (1,426,307) (1,825,411)
------------- ------------
11,995,696 84,452,894
Less: Treasury stock, 40,055 and 10,000 shares (at cost)
at September 30, 2001 and 2000, respectively (45,169) (45,169)
------------- ------------
Total stockholders' equity 11,950,527 84,407,725
------------- ------------
Total liabilities and stockholders' equity $ 53,439,283 $110,219,476
============= ============
See notes to consolidated financial statements.
F-4
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended September 30,
-------------------------------------------
2001 2000 1999
------------- ----------- -----------
OPERATING REVENUES $59,087,470 $47,769,311 $10,106,332
COST OF SALES 37,586,253 32,562,140 5,704,282
------------- ----------- -----------
GROSS PROFIT 21,501,217 15,207,171 4,402,050
------------- ----------- -----------
OPERATING EXPENSES:
Selling and administrative 34,810,749 13,407,440 3,086,922
Research and development 7,039,014 1,230,511 860,806
Depreciation and amortization
of intangibles 15,791,510 1,594,152 120,780
In-process R&D write-off and
merger related expenses 3,600,000 7,737,000 --
Impairment of long-lived assets 78,364,560 -- --
------------- ----------- -----------
Total operating expenses 139,605,833 23,969,103 4,068,508
------------- ----------- -----------
OPERATING INCOME (LOSS) (118,104,616) (8,761,932) 333,542
OTHER INCOME AND (EXPENSES):
Interest income 141,358 311,103 62,989
Interest expense (1,035,140) (470,867) (7,191)
Provision for litigation and other (3,803,228) (113,470) --
------------- ----------- -----------
Net other income (expense) (4,697,010) (273,234) 55,798
------------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (122,801,626) (9,035,166) 389,340
Income Tax Provision 150,476 377,258 549,753
------------- ----------- -----------
NET LOSS ($122,952,102) ($9,412,424) ($160,413)
============= =========== ===========
Net loss per share of Common Stock:
Basic and diluted ($3.95) ($.46) ($.02)
Weighted Average Number of
Shares Outstanding:
Basic and diluted 31,128,185 20,598,502 7,363,018
See notes to consolidated financial statements.
F-5
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30,
--------------------------------------------
2001 2000 1999
------------- ------------ -----------
Cash Flows from Operating Activities:
Net Loss ($122,952,102) ($ 9,412,424) ($ 160,413)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation and amortization 15,791,510 1,594,152 120,780
Impairment of long-lived assets 78,364,560 --
Net loss on disposal of assets 6,951 201,458 --
Imputed interest 100,000
Stock and stock options issued in consideration
for services and other obligations 2,325,850 404,896 61,299
Deferred taxes -- -- 461,753
Amortization of deferred compensation costs 324,655 -- --
In-process R&D write-off 3,600,000 7,500,000 --
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable, net 781,789 (764,924) 681,158
Inventories, net 530,699 1,018,739 1,252,198
Prepaid expenses and other current assets (750,052) (1,333,781) 52,706
Other assets 252,945 (673,760) (92,911)
Accounts payable 2,548,730 2,849,172 (1,868,256)
Accrued expenses and other liabilities 3,577,123 (1,174,310) 1,163,976
Advances from customers 184,663 (3,239,030) (368)
Deferred revenue (406,502) (734,287) 140,424
------------- ------------ -----------
Net cash (used for) provided by
operating activities (15,819,181) (3,664,099) 1,812,346
------------- ------------ -----------
Cash Flows from Investing Activities:
Additions to property and equipment (1,070,668) (1,102,932) (110,956)
Proceeds from sale of fixed assets 18,378 930,020 --
Acquisition of businesses, net of cash acquired (4,626,222) (13,712,087) (9,805,366)
------------- ------------ -----------
Net cash used for investing activities (5,678,512) (13,884,999) (9,916,322)
Cash Flows from Financing Activities:
Loans payable bank, net (183,158) (460,629) --
Payment of notes payable (272,500) (958,201) --
Payment of mortgages (69,205) (108,659) (86,506)
Payment of capitalized lease obligations (625,422) (151,056) (5,741)
Proceeds from convertible notes payable 5,859,375 -- --
Proceeds from long term borrowing 437,816 572,600 --
Net proceeds from issuance of stock 8,773,373 24,012,569 9,439,500
Proceeds from exercise of stock options 910,484 882,940 96,704
------------- ------------ -----------
Net cash provided by
financing activities 14,830,763 23,789,564 9,443,957
------------- ------------ -----------
Effect of exchange rate changes on cash 185,378 (335,084) --
------------- ------------ -----------
Net Increase (decrease) in Cash (6,481,552) 5,905,382 1,339,981
Cash and Cash Equivalents at Beginning of Period 7,892,774 1,987,392 647,411
------------- ------------ -----------
Cash and Cash Equivalents at End of Period $ 1,411,222 $ 7,892,774 $ 1,987,392
============= ============ ===========
Cash paid for:
Interest $ 671,000 $ 411,000 $ 7,000
Income taxes $ 134,000 $ 98,000 $ 19,000
See notes to consolidated financial statements.
F-6
VERTEX INTERACTIVE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Additional
-------------------- --------------------- Paid-In Deferred
Shares Amount Shares Amount Capital Compensation
--------- -------- ---------- -------- ------------ ------------
Balance September 30, 1998 $ -- 6,762,604 $ 33,813 $ 5,255,251 $ (6,842)
Exercise of stock options 107,000 535 96,169
Deferred non cash compensation
to employees 75,766 (75,766)
Amortization of deferred compensation 61,298
Issuance of stock in connection with
new investors and acquisitions 11,657,142 58,285 11,796,217
Other comprehensive income:
Net loss
Change in unrealized gain/(loss)
on investment
Comprehensive income (loss)
--------- -------- ---------- -------- ------------ ---------
Balance September 30, 1999 -- -- 18,526,746 92,633 17,223,403 (21,310)
Exercise of stock options 583,899 2,920 880,020
Issuance of stock in connection with
new investors , net of expenses 3,293,750 16,469 20,199,600
Stock options issued to non-employees 5,061,615
Issuance of stock and stock options
in connection with acquisitions 3,671,144 18,356 54,738,510
Issuance of stock in connection with
license acquisition 80,386 402 999,598
Amortization of deferred compensation 21,310
Stock grants to employees 112,022 560 (560)
Deferred compensation 461,012 (461,012)
Other Comprehensive income (loss), net of tax:
Net loss
Change in unrealized gain/(loss)
on investment
Change in unrealized foreign
exchange translation
gains/losses
Comprehensive income (loss)
--------- -------- ---------- -------- ------------ ---------
Balance September 30, 2000 -- $ -- 26,267,947 131,340 99,563,198 (461,012)
Exercise of stock options 437,481 2,187 908,297
Issuance of stock in connection with
new investors, net of expenses 4,186,754 20,933 7,830,033
Stock options issued to non-employees 1,465,756
Issuance of stock in connection
with retirement of debt and other
obligations 576,501 2,883 2,496,009
Issuance of stock and stock options
in connection with acquisitions 1,356,852 13,569 3,440,823 17,205 37,014,273
Deferred compensation 44,200 (44,200)
Amortization of deferred compensation 324,655
Other Comprehensive income (loss), net of tax:
Net loss
Change in unrealized foreign
exchange translation
gains/losses
Comprehensive income (loss)
--------- -------- ---------- -------- ------------ ---------
Balance September 30, 2001 1,356,852 $ 13,569 34,909,506 $174,548 $149,321,766 $(180,557)
========= ======== ========== ======== ============ =========
Accumulated
Other
Accumulated Comprehensive Comprehensive Treasury
Deficit Income Income Stock Total
------------- ------------- ------------- ----------- ------------
Balance September 30, 1998 $ (3,382,384) $ 216,838 $ (45,169) $ 2,071,507
Exercise of stock options 96,704
Deferred non cash compensation
to employees
Amortization of deferred compensation 61,298
Issuance of Stock in connection with
new investors and acquisitions 11,854,502
Other comprehensive income:
Net loss (160,413) $ (160,413) (160,413)
Change in unrealized gain/(loss)
on investment (197,970) (197,970) (197,970)
-------------
Comprehensive income (loss) (358,383)
------------- ============= ----------- ----------- -------------
Balance September 30, 1999 (3,542,797) 18,868 (45,169) 13,725,628
Exercise of stock options 882,940
Issuance of stock in connection with
new investors , net of expenses 20,216,069
Stock options issued to non-employees 5,061,615
Issuance of stock and stock options
in connection with acquisitions 54,756,866
Issuance of stock in connection with
license acquisition 1,000,000
Amortization of deferred compensation 21,310
Stock grants to employees --
Deferred compensation --
Other Comprehensive income (loss), net of tax:
Net loss (9,412,424) $ (9,412,424) (9,412,424)
Change in unrealized gain/(loss)
on investment (18,868) (18,868) (18,868)
Change in unrealized foreign
exchange translation
gains/losses (1,825,411) (1,825,411) (1,825,411)
-------------
Comprehensive income (loss) $ (11,256,703)
------------- ============= ----------- ----------- -------------
Balance September 30, 2000 (12,955,221) (1,825,411) (45,169) 84,407,725
Exercise of stock options 910,484
Issuance of stock in connection with
new investors, net of expenses 7,850,966
Stock options issued to non-employees 1,465,756
Issuance of stock in connection
with retirement of debt and other
obligations 2,498,892
Issuance of stock and stock options
in connection with acquisitions 37,045,047
Deferred compensation --
Amortization of deferred compensation 324,655
Other Comprehensive income (loss), net of tax:
Net loss (122,952,102) $(122,952,102) (122,952,102)
Change in unrealized foreign
exchange translation
gains/losses 399,104 399,104 399,104
-------------
Comprehensive income (loss) $(122,552,998)
------------- ============= ----------- ----------- -------------
Balance September 30, 2001 $(135,907,323) $(1,426,307) $ (45,169) $ 11,950,527
============= =========== =========== =============
See notes to consolidated financial statements
F-7
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. RECENT DEVELOPMENTS AND NATURE OF PRESENTATION
Background
Vertex Interactive, Inc. ("Vertex" or "we" or the"Company") is a global provider
of supply chain management ("SCM") technologies, including enterprise software
systems and applications, advance planning and scheduling capabilities, software
integration, solutions that enable our customers to manage their order,
inventory, warehouse and transportation needs, consultative services, and
software and hardware service and maintenance. We serve our clients through
three general product and service lines: (1) enterprise solutions; (2) point
solutions; and, (3) service and maintenance for our products and services,
including service and maintenance of software and hardware we resell for third
parties. Our enterprise solutions include a suite of Java'TM'-architected
software applications, applications devoted to the AS/400 customer base, as well
as a portfolio of "light-directed" systems for inventory, warehouse and
distribution center management. Our point solutions provide an array of products
and services designed to solve more specific customer needs from managing a
mobile field workforce, mobile data collection, distributed bar code printing
capabilities, compliance labeling applications, automated card devices, software
development tools and proprietary software serving SAP R/3 users. We provide a
full range of software and hardware services and maintenance on a 24-hour,
7-days a week, 365-days a year basis, including the provision of wireless and
wired planning and implementation services for our customers' facilities. As a
result of various acquisitions beginning in September 1999, as described in
detail below, Vertex has substantially increased its portfolio of products and
services that it can provide to customers through its operations in North
America and Europe.
Recent Developments
On August 24, 2001, the Company announced the execution of a definitive stock
purchase agreement with Plus Integration Supply Chain Solutions, BV, ("Plus") a
private supply chain management software and solutions provider headquartered in
Haarlem, the Netherlands, wherein Vertex is to issue 40 million new shares of
Vertex common stock in exchange for all issued and outstanding capital stock of
Plus in a transaction intended to be a combination of equals. The companies have
also agreed to review the capital needs of the combined entity and to raise
prior to the closing of the merger sufficient free cash, expected to be at
least $20 million, in connection with the transaction to ensure adequate
working capital going forward. On November 7, 2001, the shareholders of Plus
approved the terms of the agreement. The agreement is still subject to Vertex
shareholder approval that is expected to be obtained by May 2002, following
the mailing of a Proxy. The Company believes that this transaction will
provide additional scale of operation in North America and Europe, enhance
our consulting service capabilities and increase our software product
offerings.
Going Concern
Based upon our current rate of cash consumption, the uncertainty of
liquidity-related initiatives described in detail below, and the reasonable
possibility of on-going negative impacts on our operations from the overall
economic environment for a further unknown period of time, there is substantial
doubt as to our ability to continue as a going concern.
The successful implementation of our business plan has required, and will
require on a going forward basis, substantial funds to finance (i) the growth of
our operations, (ii) further development of our enterprise technologies, (iii)
historic and expected future operating losses, and (iv) additional selective
acquisitions to achieve the scale we believe will be necessary to remain
competitive in the global SCM industry.
F-8
Fiscal 2001:
In fiscal 2001, the overall decline in the enterprise applications software and
telecommunications industries, has had a substantial negative impact on our
results of operations. These factors, in combination with our continuing
negative operating cash flows, placed significant pressures on our financial
condition and liquidity position. Operating and investing activities resulted in
cash consumption of $21.5 million in 2001. During fiscal 2001, the Company
completed a series of transactions to fund its cash needs arising from the
foregoing, including private placement sales of common shares resulting in
approximately $8.8 million of proceeds (net of cash transaction costs totaling
$0.8 million) and the issuance of convertible notes in an aggregate principal
amount of $5.9 million. In addition, the exercise of stock options during the
period totaled $0.9 million. At September 30, 2001, the above activities
resulted in a net cash balance of $1.4 million (a decrease of $6.5 million) and
a negative working capital balance of $15.1 million.
Outlook:
Between September 30, 2001 and December 31, 2001 our consolidated cash balance
continued to decline. We do not anticipate reaching the point at which we
generate cash in excess of our operating expenses until June 2002 at the
earliest, about which there can be no assurance. We have therefore required,
and currently expect to require, significant additional funds aggregating
approximately $15 million for the period from October 1, 2001 through June 30,
2002 to meet accrued non-operating obligations, working capital to fund
operating losses, interest, capital expenditures, expenses related to
cost-reduction initiatives, and potential liabilities related to pending
litigation (see Note 14 to Consolidated Financial Statements).
Our sources of ongoing liquidity include the cash flows of our operations, cash
available from various existing credit lines, potential new credit facilities,
potential additional equity investments, and sales of our non-core assets.
Consequently, Vertex is aggressively pursuing additional debt and equity
financing, is restructuring certain existing debt obligations, is continuing
to reduce its operating expenses, and is structuring our overall operations
and resources around high margin enterprise products and services.
In particular:
(i) As described in Note 17 to Consolidated Financial Statements, since
September 30, 2001 through December 31, 2001 we have raised $6 million
through the issuance of: (1) Series B Convertible Preferred Stock to
Pitney Bowes valued at $1 million; (2) $3 million in notes payable
convertible into Series C Convertible Preferred Stock to Midmark
Capital II, LP; and (3) $2 million in a convertible note payable
collateralized by certain North American accounts receivable. It is
our understanding that Midmark Capital II, LP will convert its note
payable to equity upon receipt of shareholder approval and that the
$2 million convertible note payable will also convert upon
registration of the underlying common shares;
(ii) We intend to convert certain of our current liabilities through
non-cash transactions, including approximately $1.5 million of
litigation-related accruals that we expect to settle by the issuance
of stock options, and another $110,000 that has been settled with the
issuance of common shares. Management anticipates that currently
ongoing negotiations will lead to an aggregate of approximately $2.3
million of past due notes payable being exchanged for convertible
preferred stock;
(iii) During 2001 we initiated cost reduction measures, including reduction
in the number of our employees, facilities consolidations, as well as
reductions in other expenses deemed redundant such as marketing and
advertising and other headcount-related expenses. During our fiscal
fourth quarter we reduced our operating expenses by approximately $1.5
million ($6 million annualized) compared with our fiscal third quarter
ended June 30, 2001, as a result of these actions. We are also
pursuing an opportunity to provide outsourced development services
over the next twelve months that would effectively reduce annualized
operating expenses by approximately $1.6 million;
(iv) We have retained a financial advisor to assist us in assessing
strategic alternatives regarding the possible disposition of any
products and services which management has determined are no longer
core to the achievement of our strategy of focusing on the development
and delivery of enterprise level supply chain management software
applications and services.
(v) As a result of their efforts, we have already agreed in principle to
sell our wireless and cabling installation division for $2 million, of
which $1.2 million is expected to be in cash. This transaction is
expected to close by the end of March 2002;
F-9
(vi) We are also actively considering offers to purchase our hardware
service and maintenance division which provides such services in
Italy, France and the United Kingdom, as well as the bar code reseller
portion of our businesses in Germany and the Netherlands;
(vii) We are negotiating with one of our strategic partners to increase its
investment in Vertex by up to $3.0 million;
While we are continuing our efforts to reduce costs, gain scale, sell non-core
business operations, resolve lawsuits on favorable or non-cash terms and obtain
shareholder approval for the conversion of notes payable, there is no assurance
that we will achieve these objectives. In addition, we continue to pursue
opportunities to raise both debt and equity financing. However, there can be no
assurance that we will be able to raise additional financing, or if such
financing is available, whether the terms or conditions would be acceptable to
us.
The financial statements have been prepared on a basis that contemplates
Vertex's continuation as a going concern and the realization of assets and
liquidation of liabilities in the ordinary course of business. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should we be unable to continue as a going
concern. If Vertex fails to raise capital when needed, the lack of capital will
have a material adverse effect on Vertex's business, operating results, and
financial condition.
Business Combinations
Pooling of Interests Method
In June 2000, the Company completed a merger with Positive Developments, Inc.
("PDI"), a designer of software solutions for supply chain applications, by
exchanging 400,000 shares of its common stock (40,000 of which were held in
escrow, until released in July 2001) for all of the common stock of PDI.
Also in June 2000, the Company completed a merger with Communication Services
International, Incorporated ("CSI"), a designer and installer of wireless
communications and cabling networks, by exchanging 1,317,647 shares of its
common stock (50,000 of which were held in escrow, pending resolution of any
claims) for all of the common stock of CSI. During the quarter ended June 30,
2001, the Company filed a claim against the sellers for shares held in escrow.
The claim was settled in the fourth quarter, resulting in 30,055 shares being
returned to the Company treasury.
Prior to these mergers, PDI's fiscal year ended on December 31, and CSI's fiscal
year ended on February 28. In recording the business combinations, PDI's and
CSI's prior period financial statements have been restated to a year ended
September 30, to conform to Vertex's fiscal year end. These mergers constituted
tax-free reorganizations and have been accounted for as pooling of interests
under Accounting Principles Board Opinion No. 16 "Business Combinations". The
Company's financial statements were previously restated to include the results
of PDI and CSI for all periods presented.
There were no transactions between Vertex and PDI or CSI prior to the respective
combinations.
The revenues and net income (loss) for Vertex, the pooled entities and the
combined amounts presented in the consolidated financial statements for the
periods prior to consummation of the mergers, follow:
F-10
Nine Months Ended Year Ended
June 30, 2000 September 30, 1999
----------------- ------------------
Revenues
Vertex $28,214,342 $ 6,429,466
Pooled Entities 4,620,103 3,676,866
----------- -----------
Combined $32,834,445 $10,106,332
=========== ===========
Net Income (loss)
Vertex $ (993,661) $ (332,876)
Pooled Entities 162,943 172,463
----------- -----------
Combined $ (830,718) $ (160,413)
=========== ===========
Purchase Method
On September 27, 1999, the Company acquired all of the stock of Portable
Software Solutions Limited ("PSS"), Portable Software Solutions (Maintenance)
Limited ("Maintenance") and Trend Investments Limited ("Trend", and together
with PSS and Maintenance, the "PSS Group"). The PSS Group is a leading provider
of handheld terminal solutions to mobile workers in the U.K., primarily in the
door-to-door insurance and dairy industries. The total purchase price was
approximately $10.1 million, including approximately $5.9 million in cash, two
notes payable of approximately $800,000 each and 1,591,984 common
shares. The shareholders of the PSS Group were 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. No incentive payments were
earned based on the PSS Group profits.
On September 22, 1999, the Company acquired all of the outstanding capital stock
of ICS International AG ("ICS"), a leading provider in Germany of integrated
high-end wireless data capture solutions to industrial users and one of the few
multi-national European providers of such solutions. The total consideration
paid to ICS was $5,161,700 of which $3,570,000 was paid in cash at the closing
and the balance was in the form of three notes payable of $531,000 each. In
addition, the Company purchased ICS's headquarters building located in Neu
Anspach near Frankfurt, Germany for $1,593,000 of which $372,000 was paid in
cash and the remainder was financed through mortgages, the principal amounts of
which were $1,221,000.
Effective March 1, 2000, the Company acquired all of the outstanding capital
stock of Data Control Systems ("DCS"), a provider of "light-directed" warehouse
management systems located in New Jersey. The Company paid the shareholders
$14,250,000 in cash. The purchase price was also subject to a working capital
adjustment, which amounted to an additional $120,000 paid to the shareholders.
Effective April 1, 2000, the Company acquired all of the outstanding common
stock of Auto-ID, Inc. ("Auto-ID"), a reseller of bar coding equipment. As
consideration, the Company issued 100,000 shares of its common stock, which at
the date of the transaction had a fair market value of $6 per share.
Effective June 30, 2000, the Company acquired all of the outstanding common
stock of Societe Italiana Servizi Italservice S.r.l. ("SIS"), a provider of
after-market computer maintenance and software support services. Total
consideration paid was $1,750,000 and was subject to an additional incentive
payment based upon targeted profits for the fiscal year ended December 31, 2000,
up to a maximum of $270,000. No incentive payments were earned based on the SIS
profits.
Effective September 30, 2000, the Company acquired all of the outstanding common
stock of Renaissance Software Inc. ("RSI"), a developer of supply chain and
warehouse management systems. As consideration, Vertex issued 3,571,144 shares
of common stock (263,000 of which are held in escrow), which at the date of the
transaction had a fair market value of $13.42 per share. In addition, Vertex
reserved 535,644 shares for issuance upon exercise of RSI stock options. The
vested portion of these options (included in the total consideration paid for
RSI) was estimated to have a total fair market value of $6,217,000. The Company
engaged an independent valuation firm to assist in the identification and
determination of the fair market value of the acquired RSI intangible assets. A
portion of the RSI purchase price was identified, using proven valuation
procedures and techniques, as in-process Research and Development (R&D)
projects. The revenue projections used to value the in-process R&D were based on
estimates of relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product introductions by us
and our competitors. At the date of the acquisition, the products under
development
F-11
had not reached technological feasibility and had no alternative future use.
Accordingly, $7,500,000 was expensed as in-process R&D in fiscal 2000. The value
assigned to in-process R&D was comprised of various research and development
projects. These projects included the introduction of new technologies as well
as revisions or enhancements to certain existing technologies, and were expected
to begin generating net cash inflows in fiscal 2001. There is risk associated
with the completion of the projects, and there is no assurance that each will
attain either technological feasibility or commercial success.
In October 2000 the Company purchased the assets and business of three former
European service and maintenance divisions of Genicom International
(collectively referred to as "ESSC") for approximately $2 million in cash at
closing and a deferred cash payment of $500,000 due on September 1, 2001. The
Company has paid $125,000 in December 2001 and has agreed to pay the balance
by March 31, 2002. At September 30, 2001, 263,158 shares of Vertex common stock
collateralize the $500,000 payment.
In December 2000, the Company completed a merger with Applied Tactical Systems,
Inc. ("ATS"), a provider of connectivity software for SAP installations
worldwide, by exchanging 3,000,000 shares of its common stock (210,000 of which
are held in escrow, to be released upon the first issuance of the combined
companies audited financial statements) for all of the common stock of ATS. Such
shares had a fair market value of approximately $8.30 per share at the date of
the transaction. In addition, Vertex reserved 153,600 shares for issuance upon
exercise of ATS stock options. The vested portion of these options (included in
the total consideration paid for ATS) was estimated to have a fair market value
of approximately $620,000. (See Note 14)
In February 2001, the Company purchased from Pitney Bowes its Transportation
Management Software and certain engineering assets (the Transcape Division, or
"Transcape"). Consideration for Transcape was 1,356,852 shares of the Company's
Series A preferred stock, which on the date of acquisition, was estimated to
have a fair market value of approximately $10.4 million. A portion of the
Transcape purchase price was identified, using proven valuation procedures and
techniques, as in-process Research and Development (R&D) projects. The revenue
projections used to value the in-process R&D were based on estimates of relevant
market sizes and growth factors, expected trends in technology and the nature
and expected timing of new product introductions by us and our competitors. At
the date of the acquisition, the product under development had not reached
technological feasibility and had no alternative future use. Accordingly,
$3,600,000 was expensed as in-process R&D in fiscal 2001. The value assigned
to in-process R&D was comprised of one research and development project that
would introduce new web-enabling technologies, and was expected to begin
generating net cash inflows in fiscal 2002. There is risk associated with the
completion of the project, and there is no assurance that it will attain either
technological feasibility or commercial success.
Also in February 2001, the Company acquired all of the capital stock of Binas
Beheer B.V. ("Binas"). The total purchase price was $570,000, paid for with
approximately $300,000 in cash and by the issuance to the Binas shareholders of
42,686 shares of our common stock, which at the date of the transaction had a
fair market value of $6.34 per share.
In September 2001, the Company acquired all of the outstanding stock of DynaSys,
a software developer of advance supply chain planning and scheduling
applications. Total consideration paid was $565,000, which included 134,979
shares of Vertex common stock, which had an estimated fair market value of
$217,000 on the date of acquisition.
The accompanying consolidated financial statements assume the PSS and ICS
acquisitions closed effective September 30, 1999, the DCS acquisition closed
effective March 1, 2000, the Auto-ID acquisition closed on April 1, 2000, the
SIS acquisition closed effective June 30, 2000, the RSI acquisition closed
effective September 30, 2000, the ESSC acquisition closed effective October 31,
2000, the ATS acquisition closed effective December 30, 2000, the Transcape
acquisition closed effective February 7, 2001 and the DynaSys acquisition closed
effective September 30, 2001. The Company has accounted for these acquisitions
using the purchase method of accounting in accordance with APB No. 16 (and SFAS
141 for DynaSys) and accordingly, the financial statements include the results
of operations from October 1, 1999 for PSS and ICS, March 1, 2000 for DCS, April
1, 2000 for Auto-ID, July 1, 2000 for SIS, October 1, 2000 for RSI, November 1,
2000 for ESSC, January 1, 2001 for ATS, February 8, 2001 for Transcape, February
1, 2001 for Binas, and October 1,
F-12
2001 for DynaSys. An allocation of the purchase price for DCS, Auto-ID, SIS,
RSI, ESSC, ATS, Transcape, Binas, and DynaSys has been made to the assets and
liabilities acquired as of March 1, April 1, June 30, September 30, October 31,
December 31, 2000, February 7, 2001 and September 30, 2001, respectively, based
on their estimated fair market values.
During the quarter ended June 30, 2001, the Company completed an analysis of the
fair market value of the net assets acquired in two purchase method acquisitions
completed in fiscal 2000. As a result, the Company increased the goodwill
associated with the purchases of Renaissance Software Inc. by approximately $1.8
million and Societe Italiana Servizi Italservice (SIS) by approximately
$700,000, respectively. These adjustments are not reflected in the schedule
below.
The table below represents the allocation of the purchase price for acquisitions
completed in each of the respective years:
September 30,
-------------
2001 2000
----------- -----------
Accounts Receivable $ 1,928,403 $ 5,860,616
Inventories 1,135,853 4,461,560
Other assets 1,381,507 693,738
Intangible assets (including
in-process R&D of $3,600,000
and $7,500,000 in 2001 and
2000, respectively) 41,474,337 73,622,084
Short-term debt (468,308) (3,317,972)
Deferred revenue and
customer advances (1,911,491) (4,684,192)
Other liabilities (3,123,080) (8,166,881)
----------- -----------
Total consideration paid, less
cash acquired 40,417,221 68,468,953
Less stock issued to sellers 36,923,444 54,756,866
----------- -----------
Net cash paid $ 3,493,777 $13,712,087
=========== ===========
The following table presents unaudited pro forma results of operations of the
Company as if the above described purchase method acquisitions had occurred at
October 1, 1999:
Year Ended September 30,
2001 2000
------------- ------------
Revenues $ 65,493,190 $ 77,970,076
Net loss (121,120,060) (32,472,330)
Net loss per share (3.37) (1.13)
Loss before amortization of
intangibles and write-off
of long-lived assets $ (27,028,692) $ (6,164,436)
The unaudited pro forma results of operations are not necessarily indicative of
what the actual results of operations of the Company would have been had the
acquisitions occurred at the beginning of fiscal 2000, nor do they purport to be
indicative of the future results of operations of the Company.
The pro forma amounts reflect the following:
o The estimated amortization of the excess of the purchase price over
the fair value of net assets acquired
o The exclusion of the in process research and development write-offs of
$3,600,000 and $7,500,000 in 2001 and 2000, respectively
F-13
o The estimated federal tax benefit of a consolidated U.S. tax return
o The approximate number of shares issued to complete the acquisitions
The estimated purchase price for each acquisition may be subject to certain
purchase price adjustments. During the quarter ended June 30, 2001, the Company
filed a claim against the sellers for all of the 263,000 shares held in escrow
for one of the acquisitions completed in fiscal 2000. The claim has not yet been
settled and thus the full amount of shares held in escrow remains outstanding
and no accounting adjustments have been made.
Disposals
Weighing Product Line
On June 30, 2000, the Company sold all of its tangible and intangible assets
related to its weighing product line. As consideration, the Company received
$255,000 in cash, and the right to earn a percentage of the buyer's gross sales
of the weighing product line over the next three years. Included in the sale
were inventory, furniture and equipment, a customer base, trade names, and
patents. The book value of the assets sold was approximately $230,000, and
accordingly, the Company recorded a gain on the sale of $25,000. The percentage
of the buyer's sales that can be earned by the Company will range from 0% to 18%
based on the buyer's annual sales volumes of weighing products. For the year
ended September 30, 2000, the revenue from weighing products represented less
than 2% of consolidated revenues.
PSD
In September 2000, the Company sold the Printscan (PSD) subsidiary of ICS in
Germany. The Company received approximately $600,000 in cash for the stock of
PSD. In connection with the sale, the Company wrote off related unamortized
goodwill of approximately $634,000. As a result of this transaction, the Company
recognized a net loss of approximately $195,000, which is included in other
income (expense). For the year ended September 30, 2000, the revenue from PSD
represented less than 6 % of consolidated revenues.
Change in fiscal year end
Effective October 1, 1999 the Company changed its year-end from July 31 to
September 30. In the Company's Form 10K Transition Report filed in January 2000,
the Company included a two-month transition period (August 1, 1999 to September
30, 1999). The accompanying financial statements for the year ended September
30, 1999 have been compiled from the records of the Company and restated to
reflect the results of operations and cash flows of the Company on the basis of
a September 30 fiscal year. Accordingly, the restated consolidated financial
statements presented herein are the Company's primary historical financial
statements for the periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Equipment Sales:
F-14
Revenue related to sales of equipment is recognized when the products are
delivered, title has passed, the collection of the related receivable is deemed
probable by management and no obligations remain.
Software License Sales:
Revenue related to software license sales is recorded at the time of shipment
provided that (i.) no significant vendor obligations remain outstanding at the
time of sale; (ii.) the collection of the related receivable is deemed probable
by management; and (iii.) vendor specific objective evidence (V.S.O.E.) of fair
value exists for all significant elements, including postcontract customer
support (PCS) in multiple element arrangements.
Where the services relate to arrangements requiring significant production,
modification or customization of software, and the service element does not meet
the criteria for separate accounting, the entire arrangement, including the
software element, is accounted for in conformity with either the
percentage-of-completion or completed contract accounting method.
Percentage-of-completion generally uses input measures, primarily labor costs,
where such measures indicate progress to date and provide a basis to estimate
completion.
Professional Services:
The Company provides consulting and other services on a per-diem billing basis
and recognizes such revenues as the services are performed.
Support and Service:
The Company accounts for revenue related to service contracts and postcontract
customer support over the life of the arrangements, usually twelve months,
pursuant to the service and/or licensing agreement between the customers and
the Company.
Deferred Revenue
Deferred revenue represents the unearned portion of revenue related to PCS and
other service arrangements not yet completed and revenue related to multiple
element arrangements that could not be unbundled pursuant to SOP 97-2 or, in the
case of projects accounted for using percentage of completion or completed
contract accounting in accordance with SOP 81-1.
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
Category Years
-------- -----
Buildings 20-25
Office furniture and equipment 3-10
Computer equipment 3-7
Other 3-10
F-15
Intangible Assets
Intangible assets consist primarily of the excess of cost over the value of
identifiable net assets of businesses acquired and are amortized on a
straight-line basis over their estimated useful lives which range from 5 to 25
years. The Company's policy is to evaluate its intangible assets based on an
evaluation of such factors as the occurrence of a significant adverse event or
change in the environment in which the business operates or if the expected
future net cash flows (undiscounted and without interest) would become less than
the carrying amount of the asset. An impairment loss would be recorded in the
period such determination is made based on the fair value of the related
businesses. As a result of its review as of September 30, 2001, the Company
wrote off approximately $77.7 million of intangible assets (See Note 13).
Net Income (Loss) Per Share of Common Stock
Basic net income (loss) per common share is calculated by dividing net income
(loss), 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. For periods in which a net loss occurs, such
additional shares would not be included, as their effect would be anti-dilutive.
Cash Equivalents
The Company considers all investments with an original maturity period within
three months to be cash equivalents.
Long-Lived Assets
The Company reviews its long-lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined to include all changes in equity except
those resulting from investments by shareholders and distribution to
shareholders and is reported in the Statement of Changes in Stockholders'
Equity. Included in the Company's comprehensive income (loss) are net income
(loss), unrealized gains (losses) on investments and foreign exchange
translation adjustments.
Stock Based Compensation
The Financial Accounting Standards Board issued 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 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 10).
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and related Emerging Issues Task
Force interpretations, which generally require that such equity instruments are
recorded at their fair value on the measurement date.
F-16
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentration of credit
risks consist primarily of cash and cash equivalents and accounts receivable.
The Company maintains its cash and cash equivalents in bank accounts that, at
times, exceed federally insured limits. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to significant
credit risk on cash and cash equivalents. Concentration of credit risks with
respect to accounts receivable are limited because of the credit worthiness of
the Company's major customers.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, short-term borrowings and accounts payable are carried at
cost, which approximates their fair value because of the short-term maturity of
these instruments. The fair value of long-term borrowings are estimated based on
current interest rates available to the Company for debt instruments with
similar terms, degrees of risk and remaining maturities. The carrying values of
these obligations approximate their fair values.
Investment Securities
The Company classified its investment securities as available for sale. Such
securities were measured at fair value in the financial statements based on
quoted market prices with unrealized gains and losses included in stockholders'
equity.
Foreign Currency Translation
Assets and liabilities of the Company's foreign affiliates are translated at
current exchange rates, while revenue and expenses are translated at average
rates prevailing during the respective period. Translation adjustments are
reported as a component of comprehensive income in stockholders' equity.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $1,868,000
and 206,000 in fiscal 2001 and 2000, respectively. Advertising expense in fiscal
1999 was not material.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS
141"). SFAS No. 141 requires that all business combinations initiated after June
30, 2001 be accounted for under the purchase method and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. We adopted SFAS No. 141 effective as of July 1, 2001.
The adoption of SFAS No. 141 did not have any effect on the Company's
consolidated financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 provides that separable intangible assets that
have finite lives will continue to be amortized over their useful lives and that
goodwill and indefinite-lived intangible assets will no longer be amortized but
will be reviewed for impairment annually, or more frequently if impairment
indicators arise. Under the provisions of SFAS 142, any impairment loss
identified upon adoption of this standard is recognized as a cumulative effect
of a change in accounting principle. Any impairment loss recognized subsequent
to initial adoption of SFAS 142 will be recorded as a charge to current period
earnings. The provisions of SFAS 142 are required to be applied starting with
fiscal years beginning after December 15, 2001 and must be applied as of the
beginning of a fiscal year. Early adoption is permitted for companies with
fiscal years beginning after March 15, 2001. We have elected to adopt the
provisions of SFAS No. 142, including the provisions for nonamortization of
intangible assets, on October 1, 2001. Pre-tax amortization was approximately
$14.6 million and $1.1 million during fiscal years 2001 and 2000, respectively.
Application of the nonamortization provisions of SFAS 142 is expected to result
in a decrease in amortization expense of approximately $2.1 million in fiscal
year 2002. We are evaluating the transitional goodwill impairment
F-17
provisions of SFAS No. 142 but currently do not expect the adoption of these to
have a material impact on our consolidated financial statements.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," that is effective for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years, with
early adoption permitted. These new rules on asset impairment supersede FASB
Statement 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and portions of APB Opinion 30, "Reporting
the Results of Operations." This Standard provides a single accounting model for
long-lived assets to be disposed of and significantly changes the criteria that
would have to be met to classify an asset as held-for-sale. Classification as
held-for-sale is an important distinction since such assets are not depreciated
and are stated at the lower of fair value and carrying amount. This Standard
also requires expected future operating losses from discontinued operations to
be displayed in the period(s) in which the losses are incurred, rather than as
of the measurement date as presently required. We are currently evaluating the
potential impact, if any, that the adoption of SFAS 144 will have on our
financial position and results of operations and assessing whether we will early
adopt effective October 1, 2001.
3. INVENTORIES
Inventories consist of the following:
September 30,
2001 2000
---------- ----------
Raw materials $1,796,980 $1,486,574
Work in process 345,364 429,741
Finished goods and parts, net of
reserves of $10,000 each
year 2,922,870 2,546,903
---------- ----------
$5,065,214 $4,463,218
========== ==========
4. PROPERTY, EQUIPMENT AND CAPITAL LEASES
September 30,
2001 2000
----------- -----------
Property and Equipment:
Land $ 313,611 $ 307,287
Buildings 1,762,668 1,754,645
Leasehold improvements 336,953 363,560
Other equipment 641,634 241,364
Office furniture and equipment 1,797,785 1,027,626
Computer equipment 1,431,197 707,345
----------- -----------
Total 6,283,848 4,401,827
Accumulated depreciation and
amortization (2,056,632) (1,336,170)
----------- -----------
Net property and equipment 4,227,216 3,065,657
Capital Leases:
Office equipment 191,884 175,308
Computer equipment 35,037 34,847
F-18
Automobiles 123,247 163,841
----------- -----------
Total 350,168 373,996
Accumulated amortization (213,465) (149,788)
----------- -----------
Net capital leases 136,703 224,208
----------- -----------
Net property and equipment
and capital leases $ 4,363,919 $ 3,289,865
=========== ===========
Depreciation expense for 2001, 2000 and 1999 was $1,220,000, $530,000 and
$121,000.
5. BANK LINES OF CREDIT
The Company has several foreign lines of credit, which allow it to borrow in the
applicable local currency. These lines of credit total approximately $2,100,000
and are concentrated in Germany, Italy and the United Kingdom. The Company's
lines of credit generally are collateralized by the accounts receivable of the
respective subsidiary. As of September 30, 2001 the Company had outstanding
balances of approximately $1,800,000 on these foreign lines of credit. These
loans bear interest at rates ranging from 4.2% to 11.9%. At September 30, 2001
the Company had a total of approximately $300,000 available under all of its
lines of credit.
6. CONVERTIBLE NOTES PAYABLE - RELATED PARTIES
Long-Term:
During the year ended September 30, 2001, the Company issued in the aggregate
$5,500,000 of convertible notes payable to Midmark Capital L.P., Midmark Capital
II L.P., and certain individuals related to these two entities (collectively
"Midmark Capital"). These notes originally were to automatically convert into
3,860,864 shares of Vertex common stock on the day that the Company obtains the
requisite shareholder approval for the issuance of shares to Midmark Capital,
since Midmark Capital L.P. is an existing significant shareholder of Vertex. In
the event that shareholder approval was not obtained by October 17, 2001, the
principal amount plus any accrued interest (at prime rate, which was 6.0% at
September 30, 2001) would have become immediately due and payable. In November
2001, the Company issued an additional $3,000,000 of convertible notes payable
to Midmark Capital, and amended the terms of the $5,500,000 convertible notes
payable for the requisite shareholder approval deadline, the common stock
conversion, and the interest rate. The original automatic conversion to
3,860,864 shares of Vertex common stock at $1.43 per share was amended to
convert, subject to future events, into (i) Vertex common stock at a future
market price no higher than $1.31 per share or (ii) 5,500 shares of Series C
Preferred Stock, each of which is convertible into 1,190 common shares at $0.84
per share (See Note 17). The original requirement for shareholder approval of
October 17, 2001 was extended to September 30, 2003. The original interest rate
of prime was changed to 14%.
Current:
During July 2001, the Company issued a $359,375 convertible note payable to
PARTAS AG, which is owned by one of its Directors. This note will automatically
convert into 250,000 shares of Vertex common stock on the day that the Company
obtains the requisite shareholder approval for the issuance of shares to PARTAS
AG. In the event that shareholder approval is not obtained by February 22, 2002,
the principal amount plus any accrued interest (at prime rate which was 6.0% at
September 30, 2001) will become immediately due and payable.
F-19
7. NOTES PAYABLE
The Company has a note payable with a remaining balance of approximately
$500,000 bearing interest at 8% for the September 1999 acquisition of ICS
International AG (ICS) in Germany. This note and a non-interest bearing loan of
approximately $350,000 are currently past due, and the Company has been
negotiating to settle these obligations through the issuance of Vertex stock.
The Company has approximately $1.5 million in promissory notes payable, bearing
interest at 8%, related to the September 2000 acquisition of Renaissance
Software, Inc., which were originally due on June 30, 2001. On August 9, 2001,
the Company renegotiated the terms of these notes and in return for 147,000
shares of stock (valued at approximately $162,000), the notes were payable in
two installments: $250,000 due on August 15, 2001, and the remaining balance,
plus accrued interest from June 30, 2001, due on September 30, 2001. The Company
paid the August 15, 2001 installment and has been renegotiating to settle the
remaining past due $1.25 million obligation through the issuance of Vertex
stock.
In September 2001, in connection with its acquisition of DynaSys, the Company
assumed certain notes payable to banks and their entities. These notes payable
had an aggregate balance of $435,000 at September 30, 2001 and were principally
due by December 31, 2001 with no interest. Approximately $110,000 of this
balance was settled through the issuance of Vertex common stock in December
2001.
In January 2001, the Company issued 398,000 shares of common stock, which had a
fair market value of $2,274,000, in settlement of the $1,500,000 note payable
and other obligations to the sellers of the Portable Software Solutions (PSS)
Group, which was purchased by Vertex in September 1999.
8. LONG-TERM DEBT
Long-term debt consists of the following:
September 30,
2001 2000
---------- ----------
Capital lease obligations:
Obligations under capital leases, due
in varying quarterly/monthly principal
installments and at varying interest rates
not exceeding 11 1/2% $ 269,626 $ 439,238
Less-Current portion 163,425 194,140
---------- ----------
Long Term capitalized leases $ 106,201 $ 245,098
========== ==========
Mortgage notes payable:
Mortgage notes payable bearing interest
at rates from 6% to 8%, collateralized by
buildings, due in monthly installments
through 2030 $1,468,651 $1,506,710
Less-Current portion 75,793 73,293
---------- ----------
Long Term mortgage notes payable $1,392,858 $1,433,417
========== ==========
Other Long Term Liabilities
Other long-term liabilities include approximately $130,000 and $123,000 at
September 30, 2001 and 2000, respectively, of Irish government non-interest
bearing loans that are repayable at rates linked to future revenues earned.
Under the terms of the agreement, the loan is repaid at a rate of 4.2% of
project sales made in the United States by PSS in the period from July 1998 to
June 2001 and is due for repayment commencing in July 1999 and ending in July
2002. If the repayments calculated as a percentage of sales are not sufficient
to repay the loans in full, the Irish government may write-off the balance. PSS
has not
F-20
made any sales in the United States to date and thus no repayments have been
made against these borrowings through September 30, 2001 nor has the Irish
government agreed to write off the balance.
In addition, the long-term liabilities at September 30, 2000 included deferred
rent expense of approximately $126,000 related to an office lease, which was
terminated during fiscal 2001.
9. OTHER ACCRUED EXPENSES AND LIABILITIES
The components of other accrued expenses and liabilities consist of the
following:
September 30,
2001 2000
---------- ----------
Professional fees $1,658,102 $ 599,343
Sales and other taxes, excluding income
and payroll 1,349,855 567,267
Income taxes 390,400 374,256
Project costs 405,239 433,494
Accrued interest 322,388 120,006
Other 1,395,496 766,562
---------- ----------
$5,521,480 $2,860,928
========== ==========
10. STOCKHOLDERS' EQUITY
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 and
Midmark purchased 5,449,642 shares and 5,000,000 shares, respectively, of the
Company's common stock. The total consideration paid by Edwardstone and Midmark
for such shares was $10,000,000. As a result of such transactions, the Buyers
beneficially owned approximately 60% of the Company's common shares outstanding
at the time of the transaction. 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.
The shares of the Company's Common Stock issued in connection with the
consummation of the transactions set forth above and the purchase of the PSS
Group carried certain registration rights. A Registration Statement on Form S-3
was filed with the Securities and Exchange Commission to register such shares
and was effective on May 24, 2000.
During March and April, 2000, the Company closed on the sale of 3,293,750
unregistered common shares through private placement offerings, resulting in net
proceeds (after deducting issuance costs of $2,337,000) of approximately
$24,013,000. The Company registered all of the common shares issued in these
private placement offerings in February 2001. In addition, the company granted
options to financial advisors to purchase an aggregate of 1,100,000 common
shares at prices ranging from $4.00 to $8.00 per share contingent upon raising
at least $25 million, which became fully earned and exercisable in April 2000 on
completion of the private placement offerings discussed above. The fair market
value of these options was approximately $3,797,000 and was determined in
accordance with SFAS #123 using the Black-Scholes formula. This amount was
recorded as additional paid in capital, as well as a direct charge against
equity as a cost of the private placement offerings.
Pursuant to employment and consulting agreements, one of the pooled entities
granted 112,022 restricted shares that were earned from fiscal 1998 through the
date of the share issuance in January 2000; this resulted in compensation
expense of $21,310 and $61,299 in 2000 and 1999, respectively.
F-21
On August 31, 2000, the Company purchased all rights to the NetWeave software
product from Netweave Corporation. Consideration for the software was 80,386
shares of Vertex stock, which at the time of the transaction had an aggregate
fair market value of approximately $1 million, and the cancellation of
approximately $71,000 of debt. The total cost of this software is included in
other assets and is being amortized over the five year estimated life of the
product. Prior to the acquisition, the Company sold the Netweave software under
a licensing agreement with NetWeave Corporation. For the years ended September
30, 2001, 2000, and 1999, the NetWeave software product generated revenues of
approximately $776,000, $926,000, and $799,000, respectively.
During December 2000, the Company closed on the sale of 1,124,461 unregistered
common shares, together with 337,341 options to purchase common stock at $7.50,
through a private placement offering, resulting in net proceeds (after deducting
cash issuance costs of $562,000) of approximately $5,053,000. All of the common
shares issued in this private placement offering were registered in an S-3 filed
in February 2001.
In April 2001, the Company closed on the sale of 3,062,293 unregistered common
shares (including 278,930 penalty shares for not registering the shares in 45
days), through a private placement offering, resulting in net proceeds (after
deducting cash issuance costs of $281,000) of approximately $3,720,000. All of
the common shares issued in this private placement offering carry registration
rights requiring the Company to register such shares.
In addition, the Company granted options to financial advisors to purchase an
aggregate of 289,678 common shares at prices ranging from $1.44 to $5.00 per
share, which were fully earned and exercisable on completion of the December
2000 and April 2001 private placement offerings discussed above. The fair market
value of these options was approximately $922,000 and was determined in
accordance with SFAS #123 using the Black-Scholes formula. This amount was
recorded as additional paid in capital, as well as a direct charge against
equity as a cost of the private placement offerings.
Pursuant to certain acquisition agreements and private placement offerings, the
Company committed to register the common shares issued or issuable pursuant
to options issued within specified periods of time. The Company has been
unable to register the shares on a timely basis for certain of the transactions.
The Company's present intent is to file a registration statement on Form S-1
as soon as possible. At September 30, 2001, the Company's obligation was to
register approximately 8 million shares and 1 million shares underlying
options. (See Note 14 Commitments - Litigation)
Preferred Stock
In connection with the Transcape acquisition (See Note 1), the Company issued
1,356,852 shares of Series A Preferred Stock. The Series A Preferred Stock is
convertible, at the option of the holder, into common stock on a one for one
basis and the preferred stockholders are entitled to vote their shares as though
such conversion had taken place. In addition, preferred stockholders are not
entitled to preferred dividends, but are entitled to their pro rata share of
dividends, if any, declared on common stock under the assumption that a
conversion to common stock had occurred. All of the common shares issuable on
conversion of the Series A Preferred Stock must be registered by the Company.
Stock Option Plan
The Company has an Incentive Stock Option Plan (the "Plan") that provides for
the granting of options to employees, directors, and consultants to purchase
shares of the Company's common stock. During fiscal 2001, the Company's Board of
Directors approved an increase in the number of shares available for issuance
from 4,000,000 to 8,000,000. Options granted under the Plan generally vest over
five years and expire after ten years. The exercise price per share may not be
less than the fair market value of the stock on the date the option is granted.
Options granted to persons owning more than 10% of the voting shares of the
Company may not have a term of more than five years and may not be granted at
less than 110% of fair market value.
F-22
The following table summarizes the common stock options granted, cancelled or
exercised under the Plan:
2001 2000 1999
---- ---- ----
Common Weighted Common Weighted Common Weighted
Stock Average Stock Average Stock Average
Options Exercise Price Options Exercise Price Options Exercise
--------- -------------- --------- --------------- --------- ---------
Price
Outstanding at
beginning of year 3,257,600 $ 5.95 1,016,600 $ 1.75 871,600 $ 1.63
Granted 2,094,000 3.28 2,635,000 7.11 325,000 1.60
Exercised (238,600) (1.14) (295,800) (2.34) (77,000) (0.87)
Cancelled (421,900) (8.07) (98,200) (4.57) (103,000) (0.86)
--------- --------- ---------
Outstanding at
end of year 4,691,100 4.81 3,257,600 5.95 1,016,600 1.75
========= ========= =========
Weighted average
fair value of
options granted
during the year $ 2.14 $ 4.28 $ 0.92
The following table summarizes information on stock options outstanding under
the Plan at September 30, 2001:
Options Outstanding Options Exercisable
------------------- -------------------
Options Weighted Weighted Options Weighted
Outstanding Average Average Exercisable Average
Range of at September 30, Exercise Remaining at September 30, Exercise
Exercise Prices 2001 Price Contractual Life 2001 Price
- --------------- ---------------- -------- ---------------- ---------------- --------
$.50 to $1.50 776,000 $ 1.04 $8.85 228,000 $ 1.00
1.51 to 2.25 548,500 1.69 7.82 212,000 1.74
2.26 to 3.40 969,100 2.42 9.51 3,600 2.50
3.41 to 5.00 863,000 3.96 8.07 248,200 3.96
5.01 to 7.65 295,000 5.98 8.12 125,000 5.96
7.66 to 11.50 764,500 9.44 8.95 131,000 9.59
11.51 to 15.80 475,000 12.81 8.56 91,000 12.71
--------- ---------
4,691,100 1,038,800
========= =========
Other Stock Options
In addition to the stock options granted under the "Plan" discussed above, the
Company periodically grants stock options to non-employees in consideration for
services rendered, as well as for services to be rendered. Options issued for
services rendered were accounted for under SFAS #123 and EITF Issue 96-18, using
the Black-Scholes formula to determine their fair market value. In fiscal 2001,
options for 467,561 shares were granted to non-employees, which resulted in
additional paid in capital of approximately $665,000 and non-cash expenses of
approximately $474,000 and non cash acquisition costs of $191,000. In fiscal
2000, options for 367,691 shares were granted to non-employees, which resulted
in additional paid in capital of approximately $1,275,000 and non-cash expenses
of approximately $393,000 and prepaid expenses of $882,000. In certain
instances, options issued for services to be rendered are contingent upon
specific performance by the grantee, and will be valued when performance is
completed.
In connection with the purchase of Renaissance Software Inc., the Company
assumed 535,644 outstanding stock options of Renaissance employees. The fair
market value of the vested portion of these options
F-23
amounted to $6,217,472 and was included as part of the consideration paid for
Renaissance. The unvested portion of these options was $461,000 and is included
as deferred compensation in Shareholders' Equity and will be amortized as
compensation expense over the employees remaining vesting period.
In connection with the purchase of Applied Tactical Systems, Inc. in December
2000, the Company assumed 153,600 outstanding stock options of Applied Tactical
Systems employees. The fair market value of the vested portion of these options
amounted to $620,000 and was included as part of the consideration paid for
Applied Tactical Systems, Inc. The unvested portion of these options was
$44,000 and is included as deferred compensation in Shareholders' Equity and
will be amortized as compensation expense over the employees remaining vesting
period.
During fiscal 2001, the Company granted non-qualified options aggregating
595,200 to various employees in connection with their employment by the Company.
In January 2000, the Company also granted non-qualified options aggregating
1,200,000 to directors and officers of the Company at an exercise price of $3.85
(110% of the fair value on the date of grant).
The following table summarizes common stock options granted, cancelled and
exercised in addition to those in the Plan:
2001 2000 1999
---- ---- ----
Common Weighted Common Weighted Common Weighted
Stock Average Stock Average Stock Average
Options Exercise Price Options Exercise Price Options Exercise
--------- -------------- --------- --------------- ------- ---------
Price
Outstanding at
beginning of year 3,390,236 $ 3.88 475,000 $ .61 505,000 $ .64
Granted 1,764,877 5.50 3,203,335 4.07 -- --
Exercised (198,881) (3.22) (288,099) (.66) (30,000) (1.00)
Cancelled (383,840) (6.55) -- -- -- --
--------- --------- -------
Outstanding at
end of year 4,572,392 $ 4.31 3,390,236 $3.88 475,000 $ .61
========= ========= =======
Options exercisable 4,203,892 $ 4.10
=========
Pro-forma SFAS 123 Disclosure
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). In accordance with the provisions, the Company accounts for its stock
option plans under Accounting Principles Board 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 the grant
date as proscribed by SFAS 123, net loss and net loss per share would have been
increased to the pro forma amounts indicated in the table below:
2001 2000 1999
---- ---- ----
Net loss--as reported $(122,952,102) $ (9,412,424) $(160,413)
Net loss--pro-forma (125,682,128) (11,861,944) (206,588)
Loss per share--as reported (3.95) (.46) (.02)
Loss per share--pro-forma (4.04) (.58) (.03)
F-24
The fair value of each option grant is estimated on the date of grant using the
Black Scholes option-pricing model with the following assumptions:
2001 2000 1999
---- ---- ----
Expected dividend yield 0.00% 0.00% 0.00%
Expected stock price volatility 106.35 88.70 84.20
Risk-free interest rate 4.50 6.98 6.67
Expected life of options 3 years 3 years 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.
11. PENSION PLANS
The Company and certain of its subsidiaries maintain 401(k) plans, which are
defined contribution plans (the "Plans") covering substantially all employees in
the United States. During fiscal 2001, all subsidiary plans were merged into the
Company plan. Eligible employees can contribute up to 17% of their compensation
not to exceed Internal Revenue Code limits. In fiscal 2001, the Company amended
its plan to provide matching contributions of 50% of the employees' contribution
up to 3% of gross pay. The Company's contribution will be funded after each
calendar year end in either cash or in Vertex stock, at the Company's option.
Prior to fiscal 2001, the Plans provided for matching contributions based on
management's discretion. No Company contributions were made for the year ended
September 30, 2000. Company contributions for the years ended September 30, 2001
and 1999 were approximately $290,000 and $18,000.
12. INCOME TAXES
The Company accounts for income taxes under FASB Statement No. 109, "Accounting
for Income Taxes (FASB 109)." Deferred income tax assets and liabilities are
determined based upon differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
The components of the income tax provision included in the statements of
operations for the years ended September 30, 2001, 2000, and 1999 consist of the
following;
September 30,
2001 2000 1999
-------- -------- --------
Current:
Federal $ -- $ -- $ 63,000
Foreign 131,007 227,686 --
State 19,469 149,572 25,000
-------- -------- --------
Total Current 150,476 377,258 88,000
-------- -------- --------
Deferred:
Federal -- -- 461,753
Foreign -- -- --
State -- -- --
-------- -------- --------
Total Deferred -- -- 461,753
-------- -------- --------
Total income tax provision $150,476 $377,258 $549,753
======== ======== ========
F-25
The net deferred tax assets in the accompanying balance sheets consist of the
following:
September 30,
2001 2000
------------ -----------
Deferred tax assets:
Allowance for doubtful accounts $ 151,544 $ 149,188
Inventory 4,003 63,904
Net operating loss carryforwards 11,778,076 2,506,000
Accruals 1,530,203
Other 115,755 59,373
------------ -----------
Total deferred tax assets 13,579,581 2,778,465
------------ -----------
Deferred tax liabilities:
Depreciation (18,891) (20,292)
Capitalized software (168,351) (266,915)
Deferred revenue (50,755) (255,459)
------------ -----------
Total deferred tax liabilities (238,017) (542,666)
------------ -----------
Valuation allowance (13,341,564) (2,235,799)
------------ -----------
Net deferred tax assets $ -- $ --
============ ===========
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 statements and tax
returns of certain inventory costs, bad debt allowances on receivables,
depreciation on fixed assets and amortization of certain intangible assets.
A valuation allowance on the net deferred tax assets has been provided based on
the Company's assessment of its ability to realize such assets in the future.
For the year ended September 30, 2001 the valuation allowance for net deferred
tax assets increased by $11,105,765, as a result of net changes in temporary
differences.
The tax provision for the year ended September 30, 1999 is directly related to
an increase in the tax asset valuation reserve. The Company believes that as of
September 30, 1999, an ownership change under Section 382 of the Internal
Revenue Code occurred. The effect of the ownership change would be the
imposition of annual limitations on the use of the NOL carryforwards
attributable to the periods before the change. Prior to the fiscal year ended
September 30, 1999, management had believed that certain of the tax assets would
be realizable.
At September 30, 2001, the net operating loss carryforwards available to offset
future taxable income consist of approximately $22,368,000 in Federal net
operating losses, which will expire in various amounts through 2021, and state
net operating losses of approximately $23,421,000 which will expire in various
amounts through 2008. These net operating losses also may be limited due to
ownership changes, the effect of which has not yet been determined by the
Company. Total net operating losses available in foreign jurisdictions are
approximately $8,844,000, of which $2,935,000 relate to periods prior to the
acquisition of certain subsidiaries by Vertex. When the Company utilizes
pre-acquisition net operating losses, the benefit will be reflected as a
reduction of goodwill related to the respective subsidiary. No pre-acquisition
net operating losses were utilized during fiscal 2001, and approximately
$200,000 of pre-acquisition net operating losses were utilized during fiscal
2000, with the resulting reduction of tax liability being credited directly
to goodwill.
F-26
A reconciliation of income tax at the statutory rate to the Company's effective
rate is as follows:
September 30,
2001 2000 1999
---- ---- -----
Statutory rate 34.0% 34.0% 34.0%
Effect of:
Valuation allowances (8.4) (4.2) 103.0
Permanent differences (26.8) (32.0)
State income taxes, net 1.1 (2.0) 4.0
----- ----- -----
Effective income tax rate (0.1%) (4.2%) 141.0%
===== ===== =====
For 2001 and 2000, the primary permanent differences relate to the impairment
and amortization of goodwill, and an in-process R&D write-off, which are not
deductible for tax purposes.
There are no undistributed earnings of the Company's foreign subsidiaries at
September 30, 2001. In the event of a distribution of foreign earnings in the
form of dividends or otherwise, the Company would be subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and withholding taxes
payable to the various foreign countries.
13. IMPAIRMENT OF LONG-LIVED ASSETS
As of September 30, 2001, the Company performed an assessment of the carrying
values of its intangible assets recorded in connection with all of its
acquisitions. This assessment was initiated because of the significant negative
economic trends impacting our current operations, lower expected future growth
rates, a decline in our stock price, and significantly lower valuations for
companies within our industry. Additionally, at the time of our analysis, the
net book value of the Company's assets significantly exceeded its market
capitalization. Market capitalization is the product of (i) the number of shares
of common stock issued and outstanding and (ii) the closing market price of the
common stock. At September 30, 2001, with approximately 35 million common shares
issued and outstanding and a closing common stock price of $1.03 per share, our
market capitalization approximated $36 million, as compared to our book value of
approximately $92 million (prior to a write down). Based upon these indications,
the belief that the decline in market conditions within our industry was
significant and permanent, the consideration of all other available evidence,
and, in particular, the methodology described below, the Company determined that
the Fair Market Value of these assets was less than their carrying value.
The Company's intangible assets are associated with specific identifiable
acquisitions and their respective product lines. However, we now expect future
cash flows from these acquisitions and products to be significantly less than
our initial expectations. The fair value assessment of intangible assets was
determined by discounting the Company's estimates of the expected future cash
flows related to these assets when the non discounted cash flows indicated that
the long-lived assets would not be recoverable. The rate used to discount our
cash flow expectations was based on our risk adjusted estimated cost of capital.
After considering all of the above, we recorded a $78.4 million write-down of
the intangible assets, which was equal to the amount in excess of the estimated
fair market value of the respective assets as of September 30, 2001.
Also at September 30, 2001, the Company performed an assessment of the carrying
values of its capitalized software costs. This assessment was initiated in light
of new product developments and changes in marketing strategies that included
the discontinuation of certain products. Total capitalized software written off
in fiscal 2001 was approximately $621,000.
14. COMMITMENTS AND CONTINGENT LIABILITIES
Leases
The Company and its subsidiaries lease office facilities and certain office
equipment under operating leases that expire at various dates through 2007.
F-27
Rent expense for the years ended September 30, 2001, 2000, and 1999 was
approximately $2,645,000, $780,000, and 230,000, respectively.
Minimum lease payments and sublease rental income are as follows:
Sublease
Operating Rental
Year Ended September 30, Leases Income
---------- --------
2002 $1,898,329 $107,027
2003 1,646,366 100,333
2004 1,482,962 58,433
2005 1,297,702 22,433
2006 823,192 10,433
Thereafter 20,000 0
---------- --------
Total $7,168,551 $298,659
========== ========
Litigation
We are party to certain judicial actions and an arbitration proceeding, the
outcomes of which may, together, or individually, have a material negative
impact on our financial condition if we do not prevail. The items of litigation
are summarized as follows:
1) On October 31, 2001, an action was commenced against Vertex alleging the
default in payment of certain promissory notes in the principal aggregate sum of
$1,225,000. The noteholders demand $1,225,000, together with interest accruing
at the rate of 8% per annum from June 30, 2001. As indicated in Note 7, the
principal balance of the Notes is included in Notes Payable and we are currently
negotiating with the noteholders to accept preferred stock in payment of the
balance of the notes payable and interest thereon.
2) Vertex Interactive, Inc. v. Russell McCabe, et al. and Russell McCabe, et al.
v. Vertex Interactive, Inc. On September 28, 2001 Vertex filed a Demand for
Arbitration with the American Arbitration Association ("AAA") against Russell
McCabe, Daniel McCabe and David Motovidlak (the "ATS Shareholders"), the former
shareholders of Applied Tactical Systems, Inc., an entity which merged with
Vertex pursuant to a Merger Agreement dated December 29, 2000, seeking damages
resulting from the McCabe's interference with Vertex's employees and customers.
The ATS Shareholders also filed a Demand for Arbitration seeking $25,000,000 in
damages based on, among other things, Vertex's alleged failure to register the
ATS Shareholders' stock in Vertex by a certain date. At present, the arbitration
proceedings are in a very early stage, but we plan to contest the ATS
Shareholders' claims and pursue our own claims vigorously.
In a related action, on December 10, 2001 the ATS Shareholders filed a complaint
in the United States District Court for the District of New Jersey entitled
Russell McCabe, et al. v. Ernst & Young, LLP et al., against Ernst & Young LLP,
Nicholas R.H. Toms, Hugo Biermann, Gregory Thomas, Edwardstone & Company, Inc.,
Wayne Clevenger, Joseph Robinson, MidMark Capital, LP, Otto Leistner, Bunter
B.V.I., Ltd., George Powch, Stephen M. Duff, The Clark Estates, Inc., Raymond
Broek, Donald Rowley, Douglas L. Davis, Barbara H. Martorano and Jacqui Gerrard.
Vertex itself is not a defendant in this action. The defendants are our
auditors, and certain shareholders, officers and directors individually. The ATS
Shareholders are seeking damages in the amount of $40,000,000 plus punitive and
statutory treble damages based upon, among other things, allegations that Vertex
failed to register stock of the ATS Shareholders by a certain date. Counsel has
been retained and we understand that the defendants intend to contest the ATS
shareholders' claims vigorously.
3) On November 20, 2001, an action was commenced in the Superior Court of
California, County of Los Angeles, SouthWest District entitled Reichman et al.
v. Vertex Interactive, Inc. et al. The action is brought against Vertex,
Nicholas R.H. Toms, our Chief Executive Officer, Douglas Davis, our former Vice
President of North America, Marketing and Business Development, Wayne Clevenger,
a director, Joseph R. Robinson, a director, Stephen M. Duff, a former director,
George Powch, a former director, Gregory N. Thomas, a former director and Otto
Leister, a director. Plaintiffs are former shareholders of Positive
Developments, Incorporated, a company we acquired on June 30, 2000. The suit
alleges that the common shares of Vertex issued to the Positive shareholders in
exchange for their respective interests in Positive Developments, Incorporated,
were not registered with the Securities and Exchange Commission on a timely
basis. The Positive shareholders allege that as a result they were not able to
sell their shares of Vertex during specific time periods and were damaged
thereby. The relief requested includes $4,000,000 in damages and a rescission of
the Stock Purchase Agreement between the parties. We have denied the allegations
and are vigorously defending the matter.
F-28
4) We also continue to defend two subsidiary customer claims resulting from
projects that were in process at the time of our acquisition of the respective
subsidiary. Management believes that any potential exposure with respect to
these two matters are covered by accruals established at the time of the
respective acquisition.
In addition to the pending litigation discussed above, on January 25, 2002 we
reached an agreement to settle a claim for alleged failure to timely register
shares of the Company's stock filed by the former principals of a company
purchased by us in 2000. The settlement has been accrued at September 30, 2001
and reflected in other expense in the 2001 Statement of Operations.
Employment Agreements and Other Commitments
The Company has employment agreements with certain key employees, the terms of
which expire at various times through 2004. Such agreements provide for minimum
salary levels as well as for incentive bonuses.
On September 27, 1999 the Company entered into a five-year investment banking
agreement with another shareholder, MidMark Associates, Inc., for $250,000 per
annum.
Effective October 1, 1999, Edwardstone entered into an agreement with the
Company pursuant to which Edwardstone agreed to provide the services of Messrs.
Biermann and Toms to act as the Executive Chairman and Chief Executive Officer
of the Company. Such Agreement provides for aggregate annual compensation of
$600,000 and entitles them to participate in all employee benefit plans
sponsored by Vertex in which all other executive officers of Vertex participate.
The agreement has an initial five-year term and continues thereafter on a
year-to-year basis on the same terms and conditions existing at the time
F-29
of renewal, unless terminated by either the Company or the employee upon thirty
days written notice prior to the end of either the initial (5 year) term or any
subsequent one-year term, as the case may be.
On April 24, 2001 the Company entered into an investment banking agreement with
Harris, Hoover and Lewis, LLC to provide financial advisory and consulting
services with respect to the acquisition of Plus Integration. This agreement
provides for a transaction fee of 2% of the value of the deal, together with
related options, with a minimum transaction fee of $500,000.
15. SEGMENT INFORMATION AND INTERNATIONAL OPERATIONS
The Company operates in one business segment, which is the design, development,
marketing and support of supply chain management solutions.
Geographic Area Data
The following geographic information presents total revenues, gross margins and
identifiable assets for the years ended September 30, 2001, 2000, and 1999 (in
thousands):
2001 2000 1999
--------- --------- --------
Revenues
North America $ 30,378 $ 18,514 $ 10,106
Europe(1) 28,709 29,255 --
--------- --------- --------
$ 59,087 $ 47,769 $ 10,106
========= ========= ========
Gross Margin
North America $ 12,705 $ 7,430 $ 4,402
Europe(1) 8,796 7,777 --
--------- --------- --------
$ 21,501 $ 15,207 $ 4,402
========= ========= ========
Identifiable assets
North America $ 60,174 $ 102,390 $ 24,145
Europe(1) 13,233 31,097 27,68
Eliminations (19,968) (23,268) (21,484)
--------- --------- --------
$ 53,439 $ 110,219 $ 30,348
========= ========= ========
(1) The Company operates throughout Europe, but principally in the United
Kingdom, Germany and Italy.
Products and Services
Sales to external customers by the three significant product and service line
groupings for the years ended September 30, 2001, 2000 and 1999 (in thousands)
are as follows:
2001 2000 1999
------- ------- -------
Point Solutions $28,849 $31,744 $ 7,671
Enterprise Solutions 9,921 6,737 --
Service and Maintenance 20,317 9,288 2,435
------- ------- -------
$59,087 $47,769 $10,106
======= ======= =======
Major Customers
The Company had no customers that accounted for more than 10% of revenue for the
fiscal year ended September 30, 2001. For the fiscal year ended September 30,
2000, one customer accounted for 11% of revenues, and for the fiscal year ended
September 30, 1999, two other customers accounted for 48% of revenues.
F-30
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the years ended September 30, 2001 and 2000.
Dec. 31 Mar. 31 Jun. 30 Sept. 30
------------ ------------ ------------ ------------
2001
Operating revenues $ 14,747,017 $ 15,341,053 $ 14,128,256 $ 14,871,144
Gross profit 3,755,637 5,944,242 5,758,492 6,042,846
Net loss excluding in-process
R&D and impairment
of long-lived assets write-off (A) (8,046,728) (9,653,780) (10,466,754) (12,820,280)
Net loss (8,046,728) (13,253,780) (10,466,754) (91,184,840)
Weighted average
shares outstanding 26,626,072 31,132,917 33,523,078 33,951,085
Net loss per share $ (0.30) $ (0.43) $ (0.31) $ (2.69)
2000
Operating revenues $ 10,149,433 $ 10,428,391 $ 12,256,621 $ 14,934,866
Gross profit 3,112,033 2,807,523 4,272,263 5,015,352
Net loss excluding in-process
R&D write-off (A) (164,657) (573,232) (92,829) (1,081,706)
Net loss (164,657) (573,232) (92,829) (8,581,706)
Weighted average
shares outstanding 18,654,709 18,822,150 $ 22,310,414 22,603,175
Net loss per share $ (0.01) $ (0.03) (0.00) $ (0.38)
(A) In the second quarter of fiscal 2001, the Company recorded an in-process
research & development write off of $3.6 million related to the acquisition
of Transcape assets (see Note 1), and in the fourth quarter, the Company
recorded an impairment of long-lived assets write off of $78.4 million (see
Note 13). In the fourth quarter of fiscal 2000, the Company recorded an
in-process research & development write off related to the acquisition of
Renaissance Software, Inc. of $7.5 million (see Note 1).
17. SUBSEQUENT EVENTS
On August 24, 2001 the Company executed a definitive stock purchase agreement
pursuant to which Vertex will purchase all of the issued and outstanding capital
stock of Plus Integration Supply Chain Solutions, BV (Plus Integration ) in
exchange for 40 million newly issued shares of Vertex common stock in a
transaction intended to be a combination of equals. Plus Integration, a provider
of supply chain management software and services, is headquartered in Haarlem,
the Netherlands, and has operations in the Benelux countries, the United Kingdom
and the U.S., where its operations are based in Morristown, N.J. Completion of
the transaction is subject to certain conditions, including, among other things,
approval by both companies' shareholders. The companies have also agreed to
review the capital needs of the combined entity and to raise prior to the
closing of the merger sufficient free cash, expected to be at least $20 million,
in connection with the transaction to ensure adequate working capital going
forward. Plus Integration shareholders approved the terms of the agreement on
November 7, 2001. In the case of Vertex, the agreement is subject to shareholder
approval that is expected to occur by May 2002, following the mailing of a
proxy statement.
In October 2001, the Company acquired Euronet Consulting S.r.l. ("Euronet"), an
Italian software applications consulting firm. The value of the transaction was
approximately $1.1 million. The Company acquired all of the outstanding shares
of Euronet for approximately 1.2 million shares of Vertex common stock.
In October 2001, the Company raised $1,000,000 in cash through the issuance and
sale of 1,000 shares of Series "B" Convertible Preferred Stock to Pitney Bowes,
with each share of Series "B" Preferred being convertible into 1,190 shares of
common stock at a price of $.84 per share. The Company is required to register
the underlying common shares. In connection with this transaction Pitney Bowes
has named Michael Monahan to Vertex's Board of Directors.
F-31
In November 2001, the Company issued $3,000,000 of convertible notes payable to
Midmark Capital II, LP that can convert into 3,000 shares of Vertex Series "C"
Preferred Stock at the option of Midmark on the day that the Company obtains the
requisite shareholder approval for the issuance of Series "C" Preferred Stock to
Midmark Capital, since Midmark Capital L.P. is an existing significant
shareholder of Vertex. Midmark Capital can convert the Series "C" Preferred
Shares into 3,570,026 shares of Vertex common stock at $0.84 per share. The
Company is required to register the underlying common shares. In the event that
shareholder approval is not obtained by November 1, 2002, the principal amount
plus any accrued interest (at 14%) will become immediately due and payable.
In November 2001, the Company closed on a $2.0 million, 7% convertible Note
Payable, collateralized by certain North American accounts receivable. The Note
is convertible into 2,352,941 common shares, which the Company is required to
register. In connection with this agreement the Company also issued options to
purchase 180,000 of the Company's Common Stock at $1.284 per share to the
lender.
F-32
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
Balance at Additions Deductions Balance
Beginning Charged to From at End of
of Year Expense Reserves Year
---------- ---------- ---------- ---------
Year Ended September 30, 2001:
Deducted from accounts receivable
for doubtful accounts $180,630 $439,764 $239,826 $380,568
Deducted from inventory as valuation
allowance $ 10,000 $ 0 $ 0 $ 10,000
Year Ended September 30, 2000:
Deducted from accounts receivable
for doubtful accounts $125,166 $ 69,470 $ 14,006 $180,630
Deducted from inventory as valuation
allowance $225,290 $ 34,664 $249,954(1) $ 10,000
Year Ended September 30, 1999:
Deducted from accounts receivable
for doubtful accounts $ 75,985 $ 94,500 $ 45,319 $125,166
Deducted from inventory as valuation
allowance $253,419 $119,406 $147,535 $225,290
(1) Primarily related to sale of weighing product line.
F-33
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................. 'TM'
The registered trademark symbol shall be expressed as.................. 'r'
The section symbol shall be expressed as............................... 'SS'