UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
Date of Report (Date of earliest reported): January 11, 2005
VERTEX INTERACTIVE, INC.
(Exact name of registrant as specified in charter)
New Jersey 0-15066 22-2050350
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
3619 Kennedy Road, South Plainfield, New Jersey 07080
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 756-2000
Copies to:
Gregory Sichenzia, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas
New York, New York 10018
Phone: (212) 930-9700
Fax: (212) 930-9725
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[_] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[_] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[_] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[_] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
SECURITIES PURCHASE AGREEMENT
On January 11, 2005, we entered into a Securities Purchase Agreement with
AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New
Millennium Capital Partners II, LLC for the sale of (i) $1,850,000 in secured
convertible notes and (ii) warrants to purchase 1,850,000 shares of our common
stock.
The secured convertible notes bear interest at 10%, mature two years from
the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of:
o $0.09; or
o 40% of the average of the three lowest intraday trading prices for
the common stock on the Over-The-Counter Bulletin Board for the 20
trading days before but not including the conversion date.
The full principal amount of the secured convertible notes, plus a default
interest rate of 15%, is due upon a default under the terms of secured
convertible notes. In addition, we granted the investors a security interest in
substantially all of our assets, including the assets of our wholly owned
subsidiaries, and intellectual property. We are required to file a registration
statement with the Securities and Exchange Commission within 30 days of closing,
which will include the common stock underlying the secured convertible notes and
the warrants. If the registration statement is not declared effective within 60
days from the date of closing, we are required to pay liquidated damages to the
investors. In the event that we breach any representation or warranty in the
Securities Purchase Agreement, we are required to pay liquidated damages in
shares of our common stock or cash, at the election of the investors, in an
amount equal to three percent of the outstanding principal amount of the secured
convertible notes per month plus accrued and unpaid interest.
The warrants are exercisable until five years from the date of issuance at
a purchase price of $0.09 per share. The investors may exercise the warrants on
a cashless basis if the shares of common stock underlying the warrants are not
then registered pursuant to an effective registration statement. In the event
the investors exercise the warrants on a cashless basis, we will not receive any
proceeds. In addition, the exercise price of the warrants will be adjusted in
the event we issue common stock at a price below market, with the exception of
any securities issued as of the date of the warrants or issued in connection
with the secured convertible notes issued pursuant to the Securities Purchase
Agreement.
Upon an issuance of shares of common stock below the market price, the
exercise price of the warrants will be reduced accordingly. The market price is
determined by averaging the last reported sale prices for our shares of common
stock for the five trading days immediately preceding such issuance as set forth
on our principal trading market. The exercise price shall be determined by
multiplying the exercise price in effect immediately prior to the dilutive
issuance by a fraction. The numerator of the fraction is equal to the sum of the
number of shares outstanding immediately prior to the offering plus the quotient
of the amount of consideration received by us in connection with the issuance
divided by the market price in effect immediately prior to the issuance. The
denominator of such issuance shall be equal to the number of shares outstanding
after the dilutive issuance.
The conversion price of the secured convertible notes and the exercise
price of the warrants may be adjusted in certain circumstances such as if we pay
a stock dividend, subdivide or combine outstanding shares of common stock into a
greater or lesser number of shares, or take such other actions as would
otherwise result in dilution of the investors' position.
The investors have agreed to restrict their ability to convert their
secured convertible notes or exercise their warrants and receive shares of our
common stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.9% of the then issued and outstanding shares of our common stock.
Under a Guaranty and Pledge Agreement, Mr. Nicholas Toms, our Chief
Executive Officer agreed (i) to unconditionally guarantee the timely and full
satisfaction of all obligations, whether matured or unmatured, now or hereafter
existing or created and becoming due and payable to AJW Offshore, Ltd., AJW
Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital Partners
II, LLC, their successors, endorsees, transferees or assigns under the
Securities Purchase Agreement and other transaction documents to the extent of
2,006,418 shares of our common stock owned by Mr. Toms, and (ii) to grant to AJW
Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New
Millennium Capital Partners II, LLC, their successors, endorsees, transferees or
assigns a security interest in the 2,006,418 shares owned by Mr. Toms as
collateral security for such obligations.
2
STOCK PURCHASE AGREEMENT
On January 12, 2005, we entered into a Stock Purchase Agreement with Peter
B. Ayling, Elizabeth M. Ayling, Brad L. Leonard, Michael C. Moore, Cape Systems
and Consulting Services Ltd. and Cape Systems, Inc. (together with Cape Systems
and Consulting Services Ltd., "Cape Systems") pursuant to which we purchased all
of the issued and outstanding shares of common stock of Cape Systems and
Consulting Services Ltd. from Peter B. Ayling and Elizabeth M. Ayling and Cape
Systems, Inc. from Brad L. Leonard and Michael C. Moore for an aggregate
purchase price of $2,000,000. Pursuant to the Stock Purchase Agreement, the
parties executed an Escrow Agreement pursuant to which $200,000 of the purchase
price was placed in escrow for a period of 15 months as a fund for indemnity
claims arising out of the transaction.
Cape Systems is a provider of palletizing and packaging configuration, and
truck/container loading software that improves pallet and truck utilization, and
reduces packaging, storage and transportation costs. Its programs optimize
pallet patterns, create new case sizes and product packaging, create efficient
bundles of corrugated flat packs, build display pallet loads and test the
strength of corrugated board. Its customer base, numbering approximately 3,700,
includes, among others, such companies as Wal-Mart, Sam's Club, Kraft, Nestle,
Procter & Gamble, Smurfit-Stone and Coca-Cola.
In connection with the acquisition, we entered into an Employment
Agreement with Brad L. Leonard to serve as Vice President General Manager -
Sales, Cape Group. Pursuant to the Employment Agreement, Mr. Leonard will
receive an annual salary of $110,000, 200,000 stock options were granted upon
execution and Mr. Leonard will receive 160,000 stock options each year employed,
commencing January 12, 2006, for a period of five years. The Employment
Agreement can be terminated by the Company upon 30 days written notice to Mr.
Leonard and by Mr. Leonard upon written notice to the Company for just cause, as
defined therein.
In connection with the acquisition, we entered into a Consulting Agreement
with IMC Development Group, which is owned by Peter and Elizabeth Ayling.
Pursuant to the Consulting Agreement, we retained IMC Development Group for a
period of 18 months, which is then automatically renewable on a month-to-month
basis. IMC Development Group will be paid 7,500 pounds per month (approximately
$14,021 per month based on current exchange rates), 300,000 stock options were
granted upon execution and IMC Development Group will receive 500,000 stock
options each year while the Consulting Agreement is in place, commencing January
12, 2006, for a period of three years. Additionally, Mr. Ayling will serve as
our Vice President of Marketing.
ITEM 2.01 ACQUISITION OF ASSETS.
See Item 1.01 above.
ITEM 2.03 CREATION OF A DIRECT FINANCIAL OBLIGATION.
See Item 1.01 above.
ITEM 3.02 UNREGISTERED SALES OF EQUITY SECURITIES.
See Item 1.01 above.
3
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
1. Audited Financial Statements of Cape Systems and Consulting
Services Ltd. for the years ended December 31, 2003 and 2002
(filed herewith).
2. Audited Financial Statements of Cape Systems, Inc. (a
subsidiary of Cape Systems and Consulting Services Ltd.) for
the years ended December 31, 2003 and 2002 (filed herewith).
(B) PRO FORMA FINANCIAL INFORMATION.
Pro forma Financial Information (filed herewith)
Unaudited pro forma condensed combined financial statements for
Vertex Interactive and Cape Systems.
(C) EXHIBITS.
4
EXHIBIT
NUMBER
DESCRIPTION
- --------------------------------------------------------------------------------
4.1 * Securities Purchase Agreement, dated January 11, 2005, by and among
Vertex Interactive, Inc., AJW Offshore, Ltd., AJW Qualified
Partners, LLC, AJW Partners, LLC and New Millennium Capital Partners
II, LLC.
4.2 * Callable Secured Convertible Note issued to AJW Offshore, Ltd.,
dated January 11, 2005.
4.3 * Callable Secured Convertible Note issued to AJW Qualified Partners,
LLC, dated January 11, 2005.
4.4 * Callable Secured Convertible Note issued to AJW Partners, LLC, dated
January 11, 2005.
4.5 * Callable Secured Convertible Note issued to New Millennium Capital
Partners II, LLC, dated January 11, 2005.
4.6 * Stock Purchase Warrant issued to AJW Offshore, Ltd., dated January
11, 2005.
4.7 * Stock Purchase Warrant issued to AJW Qualified Partners, LLC, dated
January 11, 2005.
4.8 * Stock Purchase Warrant issued to AJW Partners, LLC, dated January
11, 2005.
4.9 * Stock Purchase Warrant issued to New Millennium Capital Partners II,
LLC, dated January 11, 2005.
4.10 * Registration Rights Agreement, dated as of January 11, 2005, by and
among Vertex Interactive, Inc., AJW Offshore, Ltd., AJW Qualified
Partners, LLC, AJW Partners, LLC and New Millennium Capital Partners
II, LLC.
4.11 * Security Agreement, dated as of January 11, 2005, by and among
Vertex Interactive, Inc., Data Control Systems, Inc., Renaissance
Software, Inc., Xequte Solutions PLC, Xequte Solutions, Inc., Vertex
Interactive (UK), Ltd., Vertex Interactive (Ireland) Ltd., Vertex
Interactive (Mfg) Ltd., Trend Investments Ltd., ICS France
Indentcode-System S.A.., Vertex Support And Maintenance Italia SRL,
Vertex Interactive Italia SRL, Euronet Consulting SRL, AJW Offshore,
Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New
Millennium Capital Partners II, LLC.
4.12 * Intellectual Property Security Agreement, dated January 11, 2005, by
and among Vertex Interactive, Inc., Data Control Systems, Inc.,
Renaissance Software, Inc., Xequte Solutions PLC, Xequte Solutions,
Inc., Vertex Interactive (UK), Ltd., Vertex Interactive (Ireland)
Ltd., Vertex Interactive (Mfg) Ltd., Trend Investments Ltd., ICS
France Indentcode-System S.A.., Vertex Support And Maintenance
Italia SRL, Vertex Interactive Italia SRL, Euronet Consulting SRL,
AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC
and New Millennium Capital Partners II, LLC.
4.13 * Guaranty and Pledge Agreement, dated January 11, 2005, by and among
Vertex Interactive, Inc., Nicholas Toms, AJW Offshore, Ltd., AJW
Qualified Partners, LLC, AJW Partners, LLC and New Millennium
Capital Partners II, LLC.
10.1 * Stock Purchase Agreement, dated January 12, 2005, by and among
Vertex Interactive, Inc., Peter B. Ayling, Elizabeth M. Ayling, Brad
L. Leonard, Michael C. Moore, Cape Systems and Consulting Services
Ltd. and Cape Systems, Inc.
10.2 * Escrow Agreement, dated as of January 12, 2005, by and among Vertex
Interactive, Inc., Peter B. Ayling, Elizabeth M. Ayling, Brad L.
Leonard, Michael C. Moore and Law Office of Jeffrey D. Marks P.C.
10.3 * Employment Agreement, dated as of January 12, 2005, by and between
Vertex Interactive, Inc. and Brad L. Leonard
10.4 * Consulting Agreement, dated as of January 12, 2005, by and between
Vertex Interactive, Inc. andIMC Development Group
* Previously filed.
5
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
VERTEX INTERACTIVE, INC.
Date: March 28, 2005 /s/ NICHOLAS R. TOMS
--------------------------
Nicholas R. Toms, Chief Executive Officer
6
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
PROFIT AND LOSS ACCOUNT 01.01.02 - 31.12.02
Note 2002 2001
----------- ----------- -----------
(pound) (pound)
----------- -----------
Turnover (see footnote) 498037 391692
Cost of sales 336921 251098
----------- -----------
Gross Profit 161116 140594
Net Operating Expenses 157415 130316
----------- -----------
3701 10278
Interest Payable and Similar Payments 3305 4869
----------- -----------
Profit on Ordinary Activities 1 396 5409
Taxation 3 (506) 390
----------- -----------
Profit after taxation 902 5019
Dividends 0 0
----------- -----------
Retained Profit for the year 9 902 5019
----------- -----------
Footnotes
1. Turnover reflects the absorption of operations from Cape Systems Limited, a
subsidiary made dormant from 31.12.91. These activities are streamed with that
of the parent company and continue to be conducted.
2. The company had no recognised gains or losses other than those included in
profit and loss. No separate primary statement is required.
3. The profit for the year is the only movement on reserves.
7
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
BALANCE SHEET 31.12.02
Note 2002 2001
----------- ----------- -----------
(pound) (pound)
----------- -----------
Fixed Assets
Tangible Fixed Assets 4 8969 17934
Investment in Subsidiaries 5 40500 40500
----------- -----------
49469 58434
----------- -----------
Current Assets
Stocks 4500 3850
Debtors 6 71300 71670
Bank Balances and Cash 59403 42397
----------- -----------
135203 117917
Creditors due within one year 7 46422 39003
----------- -----------
Net Current Assets 88781 78914
----------- -----------
Total Assets less Current Liabilities 138250 137348
----------- -----------
Net assets 138250 137348
=========== ===========
Capital and Reserves
Called up Share Capital 8 25500 25500
Reserves 9 112750 111848
----------- -----------
138250 137348
=========== ===========
The accounts are prepared in accordance with the special provisions of Part VII
of the CA1985 relating to small companies.
The accounts shown on pages 5 to 9 were approved by the Board of Directors on
06.11.03 and were signed on its behalf by
8
PB Ayling
Director
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
EXPLANATORY NOTES TO THE ACCOUNTS - 01.01.02 - 31.12.02
2002 2001
---- ----
(pound) (pound)
------- -------
NOTE 1: Profit/(loss) on ordinary activities before tax stated after charging:-
Depreciation and loss on disposal 10221 2911
Auditor's Remuneration 1532 1532
Operating Leases - Equipment 2567 4039
----------- -----------
NOTE 2: Directors' Emoluments Nil Nil
----------- -----------
Consultants fees include payments to a
business in which the directors have
an interest 93200 87200
----------- -----------
NOTE 3: Taxation
Based on chargeable profits at small company rate 0 300
Tax repayment (506) 90
----------- -----------
(506) 390
----------- -----------
NOTE 4: Tangible Fixed Assets
Office Computer
Euipment Equipment Software Total
-------- --------- --------- ---------
Cost
01.01.02 16515 31100 143251 190866
Additions 425 831 0 1256
Disposals 0
----- ----- ------ ------
31.12.02 16940 31931 143251 192122
----- ----- ------ ------
Depreciation
01.01.02 15865 26316 130751 172932
Charges 325 2946 6950 10221
Disposals 0
----- ----- ------ ------
31.12.02 16190 29262 137701 183153
----- ----- ------ ------
Net Values
31.12.02 750 2669 5550 8969
===== ===== ====== ======
31.12.01 650 4784 12500 17934
===== ===== ====== ======
9
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
EXPLANATORY NOTES TO THE ACCOUNTS - 01.01.02 - 31.12.02
2002 2001
---- ----
(pound) (pound)
------- -------
NOTE 5: Investment in Subsidiaries and Associates at cost
Cape Systems Limited 100 100
Cape Systems Incorp. (Formerly Techelm) 40400 40400
----- -----
40500 40500
----- -----
NOTE 6: Debtors
Trade Debtors 66752 66025
Other debtors and prepayments 4548 5645
----- -----
71300 71670
----- -----
NOTE 7: Creditors - due within one year
Trade Creditors 8647 10891
Other creditors and accruals 16141 6540
Bank Loan 3977 8856
Corporation Tax - -
Service and upgrade in advance 17657 12716
----- -----
46422 39003
----- -----
NOTE 8: Called up Share Capital
Authorised 50000 ordinary (pound)1 shares
Called up and fully paid (pound)1 shares 25500 25500
----- -----
10
NOTE 9: Reserves Capital
Redemption Profit &
Reserve Loss Total
---------- -------- -----
Balance 01.01.02 24500 87348 111848
Retained profit for the year - 902 902
----- ----- ------
24500 88250 112750
----- ----- ------
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
The following pages are prepared for the directors use only.
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
DETAILED PROFIT AND LOSS ACCOUNT 01.01.02 - 31.12.02
2002 2001
---- ----
(pound) (pound)
------- -------
Turnover 498037 391692
------ ------
Cost of Sales
Consulting and System Design 251581 172437
Salaries 82971 77453
Computer Consumables 2369 1208
------ ------
336921 251098
------ ------
Gross Profit 161116 140594
------ ------
Operating Costs
Freight and Packaging 17647 34920
Office Rent and Services 26594 22448
Euro and International Travel 24254 18923
Marketing and Promotions 26144 14322
Office Costs 22709 21420
Equipment Hire/Lease 2567 4040
Equipment Maintenance and General 4355 3559
Accounts and Legal 22924 7772
------ ------
147194 127404
------ ------
Operating Profit 13922 13190
------ ------
Other Income (132) (126)
Bank Interest and Charges 4122 3934
(Profit) / Loss on Exchange (685) 839
Bad Debts 222
------ ------
3305 4869
------ ------
Depreciation and Loss on Disposal
of Fixed Assets 10221 2912
------ ------
Profit for the Year before Taxation 396 5409
------ ------
11
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
Company No. 01770912
Registered Office
Suite 9.03
The Perfume Factory
140 Wales Farm Road
London W3 6XL
REPORTS AND ACCOUNTS
01.01.02 - 31.12.02
12
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
DIRECTORS REPORT
Activities
The principal activity of the company is to provide consulting services in
evaluating computer assisted packaging (Cape Systems). The Cape System is
designed to explore quicker ways of improving package design and space
utilisation through modular programmes. Users include leading companies
throughout the world.
Directors - and Directors Interests 01.01.02 - 31.12.02
PB Ayling 13000 Shares
EM Ayling 12500 Shares
VK Ayling -
The total directors' interests remained the same. The holdings were split in
October 1999 by transfer between PBA and EMA.
Status of Company
Advantage has been taken of the special provisions of Part VII CA1985 relating
to small companies.
PB Ayling
Director
06.11.03
13
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
Statement of directors responsibilities
Company law requires the directors to prepare financial statements which give a
true and fair view of the state of affairs of the company and of the profit of
the company for that period. In preparing those financial statements the
directors are required to :
(i) apply accounting policies consistently,
(ii) make judgements and estimates that are reasonable and prudent,
(iii) prepare the accounts on a going concern basis unless this is a wrong
assumption.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
company and comply with Companies Act 1985.
The directors have a general responsibility for safeguarding the assets of the
company and for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
This statement should be read in conjunction with the auditors statement of
their responsibilities in order to underline and distinguish the respective
responsibilities of directors and auditors in relation to the accounts.
In approving the accounts on page 7 the directors acknowledge these
responsibilities.
14
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF CAPE SYSTEMS & CONSULTING SERVICES
LIMITED
We have audited the accounts on pages 5 to 9 which have been prepared in
accordance with the Financial Reporting Standard for smaller entities under the
accounting policies set out on page 5.
Respective responsibilities of directors and auditors.
As described on page 3 the company's directors are responsible for the
preparation of the financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those accounts and to report our
opinion to you.
Basis of opinion
We conducted our audit in accordance with auditing standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the directors in preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed the audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion the financial statements give a true and fair view of the state
of the company's affairs as at 31 December 2002 and of the profit for the year
then ended and have been properly prepared in accordance with the provisions of
the Companies Act 1985.
/s/ LESLIE, WARD & DREW
- -----------------------
Leslie, Ward and Drew
Chartered Accountants
Registered Auditors
Bath
06.11.03
15
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
STATEMENT OF ACCOUNTING POLICIES
Basis of Accounting
The accounts are prepared in accordance with the provisions of the Companies Act
1985 applicable to small companies and the generally accepted accounting
standards on a basis of historical cost.
Tangible Fixed Assets
Tangible fixed assets are recorded at cost. Depreciation is calculated to write
off the cost over the period of the life of the asset.
Turnover
Represents the invoiced value of software sold exclusive of VAT.
System Users Support Package
Service and upgrade fees relating to commitments beyond the year end are treated
as prepaid income in order to match the costs to be incurred in the period of
that commitment.
Foreign Currencies
Assets and liabilities are translated at the rate operative at the balance sheet
date. Transactions are converted at the rate ruling at the time of the
transaction. Profits and losses are written off to the profit and loss account.
Leases - Equipment
Operating lease rentals are written off to profit and loss. Instalments under
finance leases are split between capital and interest elements. The capital
value of the obligation is treated as a fixed asset.
Consolidation
The company and its subsidiaries are a small group. The company takes advantage
of the exemption provided by section 248 of the CA 1985 not to prepare group
accounts.
16
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
PROFIT AND LOSS ACCOUNT 01.01.03 - 31.12.03
Note 2003 2002
----------- ----------- -----------
(pound) (pound)
----------- -----------
Turnover (see footnote) 450370 498037
Cost of sales 281261 336921
----------- -----------
Gross Profit 169109 161116
Net Operating Expenses 142916 157415
----------- -----------
26193 3701
Interest Payable and Similar Payments 3651 3305
----------- -----------
Profit on Ordinary Activities 1 22542 396
Taxation 3 1811 (506)
----------- -----------
Profit after taxation 20731 902
Dividends 0 0
----------- -----------
Retained Profit for the year 9 20731 902
----------- -----------
Footnotes
1. Turnover reflects the absorption of operations from Cape Systems Limited, a
subsidiary made dormant from 31.12.91. These activities are streamed with that
of the parent company and continue to be conducted.
2. The company had no recognised gains or losses other than those included in
profit and loss. No separate primary statement is required.
3. The profit for the year is the only movement on reserves.
17
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
BALANCE SHEET 31.12.03
Note 2003 2002
----------- ----------- -----------
(pound) (pound)
----------- -----------
Fixed Assets
Tangible Fixed Assets 4 18750 8969
Investment in Subsidiaries and Associates at cost 5 40500 40500
----------- -----------
59250 49469
----------- -----------
Current Assets
Stocks 3300 4500
Debtors 6 110314 71300
Bank Balances and Cash 51144 59403
----------- -----------
164758 135203
Creditors due within one year 7 65027 46422
----------- -----------
Net Current Assets 99731 88781
----------- -----------
Total Assets less Current Liabilities 158981 138250
----------- -----------
Net assets 158981 138250
=========== ===========
Capital and Reserves
Called up Share Capital 8 25500 25500
Reserves 9 133481 112750
----------- -----------
158981 138250
=========== ===========
The accounts are prepared in accordance with the special provisions of Part VII
of the CA1985 relating to small companies.
The accounts shown on pages 5 to 9 were approved by the Board of Directors on
29.07.04 and were signed on its behalf by
PB Ayling
Director
18
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
EXPLANATORY NOTES TO THE ACCOUNTS - 01.01.03 - 31.12.03
2003 2002
---- ----
(pound) (pound)
------- -------
NOTE 1: Profit/(loss) on ordinary activities before tax stated after charging:-
Depreciation and loss on disposal 10249 10221
Auditor's Remuneration 1532 1532
Operating Leases - Equipment 2184 2567
----- -----
NOTE 2: Directors' Emoluments Nil Nil
----- -----
Consultants fees include payments to a
business in which the directors have
an interest 93250 93200
----- -----
NOTE 3: Taxation
Based on chargeable profits at small company rate 1811 0
Tax repayment - (506)
----- -----
1811 (506)
----- -----
NOTE 4: Tangible Fixed Assets
Office Computer
Euipment Equipment Software Total
-------- --------- --------- ---------
Cost
01.01.03 16940 31931 143251 192122
Leased Equipment 6266 0 0 6266
Additions 12973 791 13764
Disposals (16516) (30267) 0 (46783)
------- ------- ------- -------
31.12.03 19663 2455 143251 165369
------- ------- ------- -------
Depreciation
01.01.03 16190 29262 137701 183153
Charges 4389 2090 3770 10249
Disposals (16516) (30267) 0 (46783)
------- ------- ------- -------
31.12.03 4063 1085 141471 146619
------- ------- ------- -------
Net Values
31.12.03 15600 1370 1780 18750
======= ======= ======= =======
31.12.02 750 2669 5550 8969
======= ======= ======= =======
19
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
EXPLANATORY NOTES TO THE ACCOUNTS - 01.01.03 - 31.12.03
2003 2002
---- ----
(pound) (pound)
------- -------
NOTE 5: Investment in Subsidiaries and Associates at cost
Cape Systems Limited 100 100
Cape Systems Incorp. (Formerly Techelm) 40400 40400
----------- -----------
40500 40500
----------- -----------
NOTE 6: Debtors
Trade Debtors 90245 66752
Other debtors and prepayments 20069 4548
----------- -----------
110314 71300
----------- -----------
NOTE 7: Creditors - due within one year
Trade Creditors 15684 8647
Other creditors and accruals 18048 16141
Bank Loan 6013 3977
Corporation Tax 1811 --
Lease Creditor 4917 --
Service and upgrade in advance 18554 17657
----------- -----------
65027 46422
----------- -----------
NOTE 8: Called up Share Capital
Authorised 50000 ordinary (pound)1 shares
Called up and fully paid (pound)1 shares 25500 25500
----------- -----------
NOTE 9: Reserves Capital
Redemption Profit &
Reserve Loss Total
----------- ----------- -----------
Balance 01.01.03 24500 88250 112750
Retained profit for the year -- 20731 20731
----------- ----------- -----------
24500 108981 133481
----------- ----------- -----------
20
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
The following pages are prepared for the directors use only.
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
DETAILED PROFIT AND LOSS ACCOUNT 01.01.03 - 31.12.03
2003 2002
----------- -----------
(pound) (pound)
----------- -----------
Turnover 450370 498037
----------- -----------
Cost of Sales
Consulting and System Design 195640 251581
Salaries 82678 82971
Computer Consumables 2943 2369
----------- -----------
281261 336921
----------- -----------
Gross Profit 169109 161116
----------- -----------
Operating Costs
Freight and Packaging 24882 17647
Office Rent and Services 27498 26594
Euro and International Travel 20232 24254
Marketing and Promotions 22982 26144
Office Costs 11758 22709
Equipment Hire/Lease 2185 2567
Equipment Maintenance and General 6471 4355
Accounts and Legal 16659 22924
----------- -----------
132667 147194
----------- -----------
Operating Profit 36442 13922
----------- -----------
Other Income (412) (132)
Bank Interest and Charges 3732 4122
Other Interest 1261 --
(Profit) / Loss on Exchange (1555) (685)
Bad Debts 625
----------- -----------
3651 3305
----------- -----------
Depreciation and Loss on Disposal
of Fixed Assets 10249 10221
----------- -----------
Profit for the Year before Taxation 22542 396
----------- -----------
21
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
Company No. 01770912
Registered Office
Suite 9.03
The Perfume Factory
140 Wales Farm Road
London W3 6XL
REPORTS AND ACCOUNTS
01.01.03 - 31.12.03
22
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
DIRECTORS REPORT
Activities
The principal activity of the company is to provide consulting services in
evaluating computer assisted packaging (Cape Systems). The Cape System is
designed to explore quicker ways of improving package design and space
utilisation through modular programmes. Users include leading companies
throughout the world.
Directors - and Directors Interests 01.01.03 - 31.12.03
PB Ayling 13000 Shares
EM Ayling 12500 Shares
VK Ayling -
The total directors' interests remained the same. The holdings were split in
October 1999 by transfer between PBA and EMA.
Status of Company
Advantage has been taken of the special provisions of Part VII CA1985 relating
to small companies.
PB Ayling
Director
29.07.04
23
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
Statement of directors responsibilities
Company law requires the directors to prepare financial statements which give a
true and fair view of the state of affairs of the company and of the profit of
the company for that period. In preparing those financial statements the
directors are required to:
(i) apply accounting policies consistently,
(ii) make judgements and estimates that are reasonable and prudent,
(iii) prepare the accounts on a going concern basis unless this is a wrong
assumption.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
company and comply with Companies Act 1985.
The directors have a general responsibility for safeguarding the assets of the
company and for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
This statement should be read in conjunction with the auditors statement of
their responsibilities in order to underline and distinguish the respective
responsibilities of directors and auditors in relation to the accounts.
In approving the accounts on page 7 the directors acknowledge these
responsibilities.
24
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF CAPE SYSTEMS & CONSULTING SERVICES
LIMITED
We have audited the accounts on pages 5 to 9 which have been prepared in
accordance with the Financial Reporting Standard for smaller entities under the
accounting policies set out on page 5.
Respective responsibilities of directors and auditors.
As described on page 3 the company's directors are responsible for the
preparation of the financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those accounts and to report our
opinion to you.
Basis of opinion
We conducted our audit in accordance with auditing standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the directors in preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed the audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion the financial statements give a true and fair view of the state
of the company's affairs as at 31 December 2003 and of the profit for the year
then ended and have been properly prepared in accordance with the provisions of
the Companies Act 1985.
/s/ LESLIE, WARD & DREW
- -----------------------
Leslie, Ward and Drew
Chartered Accountants
Registered Auditors
Bath
BA1 1LA
29.07.04
25
CAPE SYSTEMS AND CONSULTING SERVICES LIMITED
STATEMENT OF ACCOUNTING POLICIES
Basis of Accounting
The accounts are prepared in accordance with the provisions of the Companies Act
1985 applicable to small companies and the generally accepted accounting
standards on a basis of historical cost.
Tangible Fixed Assets
Tangible fixed assets are recorded at cost. Depreciation is calculated to write
off the cost over the period of the life of the asset.
Turnover
Represents the invoiced value of software sold exclusive of VAT.
System Users Support Package
Service and upgrade fees relating to commitments beyond the year end are treated
as prepaid income in order to match the costs to be incurred in the period of
that commitment.
Foreign Currencies
Assets and liabilities are translated at the rate operative at the balance sheet
date. Transactions are converted at the rate ruling at the time of the
transaction. Profits and losses are written off to the profit and loss account.
Leases - Equipment
Operating lease rentals are written off to profit and loss. Instalments under
finance leases are split between capital and interest elements. The capital
value of the obligation is treated as a fixed asset.
Consolidation
The company and its subsidiaries are a small group. The company takes advantage
of the exemption provided by section 248 of the CA 1985 not to prepare group
accounts.
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Cape Systems, Inc.
We have audited the accompanying balance sheets of Cape Systems, Inc. (A
Subsidiary of Cape Systems and Consulting Services Ltd) as of December 31, 2003
and 2002, and the related statements of operations and retained earnings and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Cape Systems, Inc. as of
December 31, 2003 and 2002, and its results of operations and cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
/s/ J.H. COHN LLP
-----------------
Roseland, New Jersey
March 24, 2005
27
CAPE SYSTEMS, INC.
(A Subsidiary of Cape Systems and Consulting Services Ltd.)
Cape Systems, Inc.
Balance Sheets
December 31, 2003 and 2002
ASSETS 2003 2002
--------- ---------
CURRENT ASSETS
Cash $ 153,000 $ 34,830
Accounts receivables net of allowance for
doubtful accounts of $2,554 and $1,000 83,083 157,231
Prepaid expenses and other current assets 18,619 34,204
Deferred tax assets 67,800 67,400
--------- ---------
Total current assets 322,502 293,665
Equipment, furniture and fixtures, net of accumulated
depreciation of $42,330 and $38,400 12,054 18,294
Other assets 3,704 3,704
--------- ---------
Total assets $ 338,260 $ 315,663
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 6,613 $ 7,786
Accounts payable 24,960 34,060
Accrued expenses and other liabilities 17,399 3,836
Deferred revenue 166,890 168,476
--------- ---------
Total current liabilities 215,862 214,158
Long-term debt, net of current portion 9,493 19,054
Deferred tax liabilities 4,200 5,600
--------- ---------
Total liabilities 229,555 238,812
--------- ---------
Commitments
- -----------
STOCKHOLDERS' EQUITY
Common stock par value $1 per share;
100,000 shares authorized, 28,690 issued and outstanding 28,690 28,690
Additional paid-in capital 106,911 106,911
Retained earnings 34,103 2,249
Less: Treasury stock, 11,813 shares of common stock, at cost (60,999) (60,999)
--------- ---------
Total stockholders' equity 108,705 76,851
--------- ---------
Total liabilities and stockholders' equity $ 338,260 $ 315,663
========= =========
See notes to the financial statements
28
CAPE SYSTEMS, INC.
(A Subsidiary of Cape Systems and Consulting Services Ltd.)
Cape Systems, Inc.
Statements of Operations and Retained Earnings
For the Years Ended December 31, 2003 and 2002
2003 2002
--------- ---------
REVENUE $ 769,172 $ 756,777
COST OF SALES 134,233 172,409
--------- ---------
GROSS PROFIT 634,939 584,368
OPERATING EXPENSES
Selling, general and administrative 561,802 538,310
Depreciation 8,236 14,165
Research and development 24,132 38,912
--------- ---------
Total operating expenses 594,170 591,387
--------- ---------
Operating income (loss) 40,769 (7,019)
OTHER EXPENSE
Interest expense (2,565) (3,863)
Other (3,937) 0
--------- ---------
Other expense (6,502) (3,863)
--------- ---------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME TAXES 34,267 (10,882)
Provision (credit) for income taxes 2,413 (3,763)
--------- ---------
NET INCOME (LOSS) 31,854 (7,119)
Retained earnings beginning of year 2,249 9,368
--------- ---------
Retained earnings end of year $ 34,103 $ 2,249
========= =========
See notes to financial statements
29
CAPE SYSTEMS, INC.
(A Subsidiary of Cape Systems and Consulting Services Ltd.)
Cape Systems, Inc.
Statements of Cash Flows
For the Years Ended December 31, 2003 and 2002
2003 2002
--------- ---------
Cash Flows from Operating Activities
Net Income (loss) $ 31,854 ($ 7,119)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 8,236 14,165
Bad debts 2,554 5,108
Change in operating assets and liabilities
Accounts receivable 71,594 (39,550)
Deferred taxes (1,800) (4,600)
Prepaid expense and other current assets 15,585 (3,005)
Accounts payable (9,100) 27,670
Accrued expenses and other liabilities 11,977 7,526
--------- ---------
Net cash provided by operating activities 130,900 195
--------- ---------
Cash flows from investing activities -
additions to equipment, furniture and fixtures (1,996) (6,276)
--------- ---------
Cash flows from financing activities
Proceeds from notes payable -- 20,000
Repayment of notes payable (10,734) (7,691)
--------- ---------
Net cash provided by (used in) financing activities (10,734) 12,309
Net increase in cash 118,170 6,228
Cash at beginning of year 34,830 28,602
--------- ---------
Cash at end of year $ 153,000 $ 34,830
========= =========
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Income taxes $ 4,314 $ 837
Interest $ 2,565 $ 3,863
See notes to financial statements
30
CAPE SYSTEMS, INC.
(A Subsidiary of Cape Systems and Consulting Services Ltd.)
Notes to the Financial Statements
Note 1: Organization and summary of significant accounting policies
Organization:
Cape Systems, Inc (the "Company") was incorporated in Texas on July 27, 1987.
The Company is a 60% owned subsidiary of Cape Systems and Consulting Services
Ltd. (the "Parent"). The Company is a provider of palletizing and packaging
configuration, and truck and container loading software that improves pallet and
truck utilization, and reduces packaging, storage and transportation costs. Its
programs optimize pallet patterns, create new case sizes and product packaging,
create efficient bundles of corrugated flat packs, build display pallet loads
and test the strength of corrugated board.
Use of Estimates:
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. Accordingly, actual results could differ from those estimates.
Revenue Recognition:
Software 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 reasonably
assured by management; and (iii) vendor specific objective evidence ("V.S.O.E.")
of fair value exists for all significant elements, including post contract
customer support ("PCS") in multiple element arrangements.
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 post contract
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.
31
CAPE SYSTEMS, INC.
(A Subsidiary of Cape Systems and Consulting Services Ltd.)
Notes to the Financial Statements
Deferred Revenue:
Deferred revenue represents the unearned portion of revenue related to PCS.
Equipment, furniture and fixtures:
Equipment, furniture and fixtures are stated at cost, less accumulated
depreciation and amortization. Depreciation is computed on the straight-line
basis over the estimated useful lives of individual assets or classes of assets.
Improvements to leased properties or fixtures are amortized over the shorter of
their estimated useful lives or the related lease terms.
Concentration of Credit Risk:
The Company's financial instruments that are exposed to concentration of credit
risk consist primarily of cash and accounts receivable. The Company maintains
its cash in bank accounts that, at times, have balances that exceed the
federally insured limit of $100,000 (there was a balance of $7,000 in excess of
the limit at December 31, 2003). The Company reduces its exposure to credit risk
by maintaining its cash deposits with major financial institutions and
monitoring their credit ratings.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base, their
dispersion across different geographic areas, and generally short payment terms.
There were no significant concentrations in 2003 and 2002. In addition, the
Company closely monitors the extension of credit to its customers while
maintaining allowances for potential credit losses. On a periodic basis, the
Company evaluates its trade accounts receivable and will establish an allowance
for doubtful accounts, based on a history of past write-offs and collections and
current credit considerations if necessary.
Income Taxes:
The Company accounts for income taxes pursuant to the asset and liability method
that requires deferred income tax assets and liabilities to be computed for
temporary differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. The income tax provision or credit is the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.
32
CAPE SYSTEMS, INC.
(A Subsidiary of Cape Systems and Consulting Services Ltd.)
Notes to the Financial Statements
Advertising:
The Company expenses the cost of advertising and promotions as incurred.
Advertising cost charges to operations amounted to approximately $26,900 and
$28,600 in 2003 and 2002 respectively.
Research and development:
Research and development expenditures are charged to expense as incurred.
Note 2: Equipment, furniture and fixtures:
Equipment, furniture and fixtures, consist of the following:
Range of
Estimated
Useful Lives 2003 2002
------------ ---- ----
Equipment, furniture and fixtures 3 - 10 years $42,777 $202,810
Computer equipment 3 - 5 years 7,677 54,837
--------- ----------
50,454 257,647
Less: accumulated depreciation 38,400 239,353
--------- ----------
Totals $12,054 $18,294
======= =======
Note 3: Line of credit borrowings:
At December 31, 2003, the Company had no outstanding borrowings under its
$25,000 line of credit. Any outstanding borrowings bear interest at 1.25% above
the prime rate, are collateralized by all of the Company's assets and guaranteed
by certain stockholders of the Company. The line of credit expires on December
31, 2005.
Note 4: Long-term debt:
Long-term debt consists of the following:
2003 2002
---- ----
Unsecured note payable in monthly installments of $306,
including interest at 7.5% through May 2009 $12,034 $16,999
Note payable in monthly installments of $523 including
interest at 11.49%, through September 2004; collateralized
33
CAPE SYSTEMS, INC.
(A Subsidiary of Cape Systems and Consulting Services Ltd.)
Notes to the Financial Statements
by all of the Company's assets:
4,072 9,841
------- -------
16,106 26,840
Less current portion 6,613 7,786
------- -------
Long-term portion $ 9,493 $19,054
------- -------
The principal payments due under the notes payable for each of the subsequent
years after December 31, 2003 were as follows
Year Ending
December 31 Amount
- ----------- ------
2004 $6,613
2005 2,738
2006 2,952
2007 3,180
2008 623
Note 5: Income Taxes
Provision (credit) for income taxes consist of the following:
2003 2002
------- -------
Current:
Federal $ 4,213 $ 837
------- -------
Total Current $ 4,213 $ 837
------- -------
Deferred:
Federal $(1,800) $(4,600)
------- -------
Total Deferred $(1,800) $(4,600)
------- -------
Totals $ 2,413 $(3,763)
======= =======
The provision for income taxes differs from the amount which would have been
reported by applying the statutory rates. These differences are due primarily to
certain nondeductible expenses.
34
CAPE SYSTEMS, INC.
(A Subsidiary of Cape Systems and Consulting Services Ltd.)
Notes to the Financial Statements
At December 31, 2003 and 2002, the deferred tax asset relates to the allowance
for doubtful accounts and deferred revenue. At December 31, 2003 and 2002, the
deferred tax liability relates to depreciation.
In assessing the realizability of the deferred tax asset, management considers
whether it is more likely that some portion or all of the deferred tax asset
will not be realized. The ultimate realization of the deferred tax asset is
dependent upon the generation of future taxable income during the periods in
which the temporary differences become deductible. Management has determined
that the realization of the recorded deferred tax asset is reasonably assured;
accordingly, no valuation allowance has been recorded.
Note 6: Commitment:
Leases:
The Company has a lease for its office facility which expires in April 2006. The
minimum annual lease payment under the operating lease is $35,556.
Rent expense for 2003 and 2002 was approximately $44,000 and $36,000
respectively.
Royalty payments:
A royalty agreement was entered into in June 1998 as part of software license
for its Truckfill Software Product. As part of the agreement, the Company is
required to make a royalty payment of $450 for each Truckfill software license
sold. During 2003, the Company incurred royalty expenses of approximately
$19,350.
Note 7: Related Party Transactions:
The Company receives certain administrative and management services from the
Parent. The Company paid $8,500 in 2003 and $33,000 in 2002 for such services
performed.
In addition, the Company paid approximately $24,000 during 2003 and 2002 to a
corporation owned by an Officer of the Company for various consulting services.
Accounts receivable at December 31, 2003 includes amount receivable from Parent
for reimbursement of expenses of $3,890.
35
CAPE SYSTEMS, INC.
(A Subsidiary of Cape Systems and Consulting Services Ltd.)
Notes to the Financial Statements
Note 8: Subsequent Events:
On January 12, 2005, the Company and the stockholders of the Company entered
into a Stock Purchase Agreement with Vertex Interactive, Inc ("Vertex") pursuant
to which Vertex purchased all of the issued and outstanding shares of the
Company.
36
INTRODUCTION TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
This Current Report on Form 8-K/A amends the Current Report on Form 8-K of
Vertex Interactive, Inc. ("Vertex") dated January 11, 2005 and is being filed
solely for the purposes of including financial statements of Cape Systems and
Consulting Services, Ltd. and its subsidiary, Cape Systems, Inc. (together,
"Cape"). Vertex filed the January 11, 2005, Current Report on Form 8-K with the
Securities and Exchange Commission to report, among other items, information
concerning the acquisition on January 11, 2005, of 100% of the capital stock of
Cape for a purchase price of approximately $1.8 million excluding closing costs.
The accompanying unaudited pro forma condensed combined statements of operations
initially combine the historical consolidated statements of operations of the
businesses of Vertex for the year ended September 30, 2004 and Cape that Vertex
acquired on January 11, 2005 and reflect the acquisition as if those
transactions had been consummated on October 1, 2003. The accompanying unaudited
pro forma condensed combined balance sheet initially combines the historical
consolidated balance sheet of Vertex as of December 31, 2004 with those of Cape
as of December 31, 2003 and reflects the acquisition and certain financial
transactions as if those transactions had been consummated on December 31, 2004.
On January 11, 2005, Vertex entered into a Securities Purchase Agreement with
AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New
Millennium Capital Partners II, LLC for the sale of (i) $1,850,000 in secured
convertible notes and (ii) warrants to purchase 1,850,000 shares of our common
stock.
The secured convertible notes bear interest at 10%, mature two years from the
date of issuance, and are convertible into our common stock, at the investors'
option, at the lower of:
o $0.09; or
o 40% of the average of the three lowest intraday trading prices for
the common stock on the Over-The-Counter Bulletin Board for the 20
trading days before but not including the conversion date.
You should read this information in conjunction with:
o the accompanying notes to the unaudited pro forma condensed combined
financial statements;
o the separate audited and unaudited historical financial statements of
Vertex included in its Annual Report on Form 10-KSB for the year ended
September 30, 2004 and its Quarterly Report on Form 10-QSB for the
quarterly period ended December 31, 2004, which were previously filed with
the Securities and Exchange Commission;
o the separate audited historical financial statements of Cape Systems and
Consulting Services Ltd as of and for the years ended December 31, 2002
and 2003, which are included in this amended report on Form 8-K; and
o the separate audited historical financial statements of Cape Systems, Inc.
a subsidiary of Cape Systems and Consulting Services Ltd as of December
31, 2002 and 2003, which are included in this amended report on Form 8-K.
We have presented the accompanying unaudited pro forma condensed combined
financial statements for informational purposes only. The accompanying unaudited
pro forma condensed combined financial statements are not necessarily indicative
of what our financial position or results of operations actually would have been
had we completed the acquisition on October 1, 2003. In addition, the unaudited
pro forma condensed combined financial statements do not purport to project the
future financial position or operating results of the combined companies.
We prepared the accompanying unaudited pro forma condensed combined financial
statements using the purchase method of accounting with Vertex treated as the
accounting acquirer. Accordingly, Vertex's allocation of costs to acquire Cape
will be based upon historical values as of the date of acquisition for the
assets acquired and the liabilities assumed.
37
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
PROFORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 2004
Historical
--------------------------------------------------------------------
Cape Systems and Consulting Services, Ltd
------------------------------------------------- Pro forma
Vertex Interactive Cape Systems Ltd. Cape Systems. Inc. Total Adjustments Notes Total
------------------ ----------------- ------------------ ------------ ------------- -------------
ASSETS
CURRENT ASSETS
Cash $ 50,698 $ 137,067 $ 71,698 $ 208,765 $ 0 1,2 $ 259,463
Restricted cash, short
term 300,000 0 0 0 (300,000) 1 0
Accounts receivable,
net 406,178 120,141 118,483 238,624 (23,862) 620,940
Inventories, net 386,295 7,089 32,340 39,429 (3,943) 421,781
Prepaid expenses and
other assets 43,973 35,252 71,000 106,252 (41,875) 108,350
Deferred tax assets
------------- ------------- ------------- ------------- ------------- -------------
Total current assets 1,187,144 299,549 293,521 593,070 (369,680) 1,410,534
0
Equipment and fixtures,
net 30,541 25,854 12,044 37,898 (3,790) 64,649
Other intangible assets 1,548,451 1,548,451
Restricted cash - long
term 118,750 0 0 0 (118,750) 1 0
Deferred financing, net 194,355 0 0 0 194,355
Other assets 111,273 77,885 3,704 81,589 (81,589) 111,273
Goodwill 350,000 1 350,000
------------- ------------- ------------- ------------- ------------- -------------
Total assets $ 1,642,063 $ 403,288 $ 309,269 $ 712,557 $ 1,324,642 $ 3,679,262
============= ============= ============= ============= ============= =============
LIABILITIES AND
STOCKHOLDERS' EQUITY/
(DEFICIENCY)
CURRENT LIABILITIES
Notes payable $ 1,227,500 $ 0 $ 6,723 $ 6,723 1,234,223
Mandatorily redeemable
preferred stock 504,713 0 0 0 504,713
Accounts payable 3,518,291 9,165 15,427 24,592 (101,300) 2 3,441,583
Net liabilities -
subsidiaries in
liquidation 8,397,181 0 0 0 8,397,181
Payroll and related
benefits accrual 1,764,974 0 0 0 1,764,974
Accrued litigation 3,655,323 0 0 0 3,655,323
Other accrued expenses
and liabilities 3,580,975 27,010 15,396 42,406 0 1,3,4 3,623,381
Deferred revenue 340,377 38,320 176,458 214,778 555,155
Deferred tax liabilitie 0 0 4,600 4,600 (4,600) 0
0 0
------------- ------------- ------------- ------------- ------------- -------------
Total current
liabilities 22,989,334 74,495 218,604 293,099 (105,900) 23,176,533
Long-term convertible
notes payable 2,338,662 0 0 0 1,850,000 1 4,188,662
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities 25,327,996 74,495 218,604 293,099 1,774,100 27,365,195
------------- ------------- ------------- ------------- ------------- -------------
STOCKHOLDERS' EQUITY
(DEFICIENCY)
Common stock 369,240 48,858 28,690 77,548 (77,548) 369,240
Preferred stock 13,660 0 0 0 13,660
Additional paid-in
capital 165,083,708 0 106,911 106,911 (106,911) 165,083,708
Accumulated equity
(deficit) (186,594,240) 279,935 16,063 295,998 (295,998) 1,3,4, (186,594,240)
Accumulated other
comprehensive loss (2,491,061) 0 0 0 (2,491,061)
Treasury stock (67,240) 0 (60,999) (60,999) 60,999 (67,240)
------------- ------------- ------------- ------------- ------------- -------------
Total Stockholders'
deficiency (23,685,933) 328,793 90,665 419,458 (419,458) (23,685,933)
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities and
stockholders' equity $ 1,642,063 $ 403,288 $ 309,269 $ 712,557 $ 1,324,642 $ 3,679,262
============= ============= ============= ============= ============= =============
1 Purchase Price Adjustment
Cash 101,300
Cash 208,765
Accounts Receivable 214,762
Inventories 35,486
Prepaid Expenses 95,627
Equipment and Fixtures 34,108
Other Intangible assets 1,548,451
Goodwill 350,000
Accrued Expenses 42,406
Deferred Revenue 214,778
Notes Payable 6,723
Accounts Payable 24,592
Restricted Cash - short term 300,000
Restricted Cash - long term 118,750
Prepaid interest 31,250
Long Term Convertible Debt 1,850,000
2 Cash proceeds of $101,300 used for operating payables
3 Interest expense for long term debt accrues at 10% per annum $185,000
4 Three months Interest expense $46,250 for long term debt accrues at 10% per annum
40
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2004
Historical
--------------------------------------------------------------------
Cape Systems and Consulting Services Ltd
------------------------------------------------- Pro forma Total
Vertex Interactive Cape Systems Ltd. Cape System, Inc Total Adjustments Combined
------------------ ----------------- ---------------- ----------- ----------- -----------
REVENUE $ 665,340 $ 205,823 179,608 $ 385,431 $ 1,050,771
COST OF SALES 249,338 145,000 25,233 170,233 419,571
----------- ----------- ----------- ----------- ----------- -----------
GROSS PROFIT 416,002 60,823 154,375 215,198 0 631,200
OPERATING EXPENSES
Selling and administrative 704,898 122,759 156,738 279,497 0 984,395
Depreciation and
amortization 3,572 4,740 983 5,723 9,295
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses 708,470 127,499 157,721 285,220 0 993,690
Operating income/(loss) (292,468) (66,676) (3,346) (70,022) 0 (362,490)
OTHER INCOME (EXPENSE)
Interest income 0 0 89 89 89
Interest expense (282,640) 0 (224) (224) (47,900) (330,764)
Gain on settlement of
liabilities 29,712 0 (38) (38) 29,674
Other 13,221 0 0 13,221
----------- ----------- ----------- ----------- ----------- -----------
Net other income (expense) (239,707) 0 (173) (173) (47,900) (287,780)
INCOME/(LOSS) BEFORE
PROVISION FOR INCOME TAXES (532,175) (66,676) (3,519) (70,195) (47,900) (650,270)
Provision for income taxes 1,881 0 0 0 1,881
Credit for sale of state
tax benefits (456,863) 0 0 0 (456,863)
----------- ----------- ----------- ----------- ----------- -----------
Net income tax credit (454,982) 0 0 0 0 (454,982)
----------- ----------- ----------- ----------- ----------- -----------
NET LOSS ($77,193) ($66,676) ($3,519) ($70,195) ($47,900) ($195,288)
=========== =========== =========== =========== =========== ===========
Note:
C 3 months interest expense
41
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2004
Historical
--------------------------------------------------------------------
Cape Systems and Consulting Services Ltd
------------------------------------------------- Pro forma Total
Vertex Interactive Cape Systems Ltd. Cape System, Inc Total Adjustments Combined
------------------ ----------------- ---------------- ----------- ----------- -----------
REVENUE $ 2,566,520 $ 833,185 $ 769,172 $ 1,602,357 $ 4,168,877
COST OF SALES 1,287,435 520,333 134,233 654,566 1,942,001
----------- ----------- ----------- ----------- ----------- -----------
GROSS PROFIT 1,279,085 312,852 634,939 947,791 0 2,226,876
OPERATING EXPENSES
Selling and administrative 2,925,051 245,434 585,934 831,368 15,200 A 3,771,619
Depreciation and
amortization 154,694 18,961 8,236 27,197 181,891
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses 3,079,745 264,395 594,170 858,565 15,200 3,953,510
Operating income/(loss) (1,800,660) 48,457 40,769 89,226 (15,200) (1,726,634)
OTHER INCOME (EXPENSE)
Interest income 0 0 0 0 0
Interest expense (1,969,074) (6,754) (2,565) (9,319) (185,000) B (2,163,393)
Other gain/(loss) 1,586,477 0 (3,937) (3,937) 1,582,540
0 0
----------- ----------- ----------- ----------- ----------- -----------
Net other income (expense) (382,597) (6,754) (6,502) (13,256) (185,000) (580,853)
INCOME/(LOSS) BEFORE
PROVISION FOR INCOME TAXES (2,183,257) 41,703 34,267 75,970 (200,200) (2,307,487)
Provision for income taxes 1,735 3,350 2,413 5,763 7,498
----------- ----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) ($2,184,992) $ 38,353 $ 31,854 $ 70,207 ($200,200) ($2,314,985)
=========== =========== =========== =========== =========== ===========
Notes:
A Insurance premiums $15,000 and bank fees $200
B 12 month interest expense
42
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
(1) Description of the Transactions and Basis of Presentation:
On January 11, 2005, Vertex entered into a Securities Purchase Agreement with
AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New
Millennium Capital Partners II, LLC for the sale of (i) $1,850,000 in secured
convertible notes and (ii) warrants to purchase 1,850,000 shares of our common
stock. The proceeds of the Securities Purchase Agreement were used primarily to
acquire 100% of the capital stock of Cape for a purchase price of approximately
$1.8 million excluding closing costs on January 11, 2005.
The acquisition will be accounted for as a purchase by Vertex under accounting
principles generally accepted in the United States of America. Under the
purchase method of accounting, the assets and liabilities of Cape will be
recorded by Vertex at fair value which approximates their historical values as
of the acquisition date and combined with those of Vertex and its subsidiaries
as of that date, with any excess purchase price being allocated to both
identifiable intangible assets and goodwill
(2) Pro Forma Adjustments:
(a) As explained above, Vertex completed the acquisition of 100% of the assets
and the assumption of 100% of the liabilities of Cape on January 11, 2005 which
will be accounted for as a purchase. Accordingly, the accompanying unaudited pro
forma condensed combined statements of operations assume that Cape had been
acquired on October 1, 2003. Total consideration for the purchase was estimated
at $2,198,700 comprised of cash paid to principals of Cape in the amount of
$1,800,000 and fees and expenses estimated at $398,700. The accompanying
unaudited pro forma condensed combined balance sheet reflects historical amounts
for all of the assets and liabilities of Cape. Accordingly, pro forma
adjustments have been made to record the acquisition of Cape as follows:
Cash $ 208,765
Accounts Receivable 214,762
Inventories 35,486
Prepaid Expenses 95,627
Equipment, furniture and fixtures 34,108
Accrued Expenses (42,406)
Deferred Revenue (214,778)
Notes Payable (6,723)
Accounts Payable (24,592)
Other Intangibles 1,548,451
Goodwill 350,000
(b) Pro forma adjustments have been made to record interest expense on the 10%
note payable which was issued in connection with the acquisition of Cape
43