UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
--------- ----------
Commission file number: 000-15066
CAPE SYSTEMS GROUP, INC.
(Exact name of registrant as specified on its charter)
New Jersey 22-2050350
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3619 Kennedy Road
South Plainfield, New Jersey 07080
(Address of principle executive offices)
(908) 756-2000
(Registrant's telephone number, including area code)
VERTEX INTERACTIVE, INC.
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Common stock, par value $.005 per share: 78,632,690 shares outstanding as of May
10, 2005.
Preferred stock, Series "A", par value $.01 per share: 1,356,852 shares
outstanding as of May 10, 2005.
Preferred stock, Series "B", par value $.01 per share: 1,000 shares outstanding
as of May 10, 2005.
Preferred stock, Series "C-1", par value $.01 per share: 997 shares outstanding
as of May 10, 2005.
Preferred stock, Series "D", par value $.01 per share: 7,615 shares outstanding
as of May 10, 2005.
INDEX
PART I FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
as of March 31, 2005 (Unaudited) and
September 30, 2004 3-4
Condensed Consolidated Statements of Operations
for the three and six months Ended March 31, 2005
and 2004 (Unaudited) 5
Condensed Consolidated Statement of Changes
in Stockholders' Deficiency for the six months
ended March 31, 2005 (Unaudited) 6-7
Condensed Consolidated Statements of Cash Flows
for the six months ended March 31, 2005
and 2004 (Unaudited) 8
Notes to Condensed Consolidated Financial
Statements (Unaudited) 9-20
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 21-27
ITEM 3 Controls and Procedures 28
PART II OTHER INFORMATION
ITEM 1 Legal proceedings 29
ITEM 2 Unregistered sales of equity securities
and use of proceeds 30
ITEM 3 Defaults upon senior securities 31
ITEM 4 Submission of matters to a vote of security holders 31
ITEM 5 Other information 32
ITEM 6 Exhibits 33
SIGNATURES 34
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPE SYSTEMS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2005 (Unaudited) and September 30, 2004
ASSETS
March 31, September 30,
2005 2004
(Unaudited) (See Note 1)
CURRENT ASSETS:
Cash $ 221,056 $ 101,390
Restricted Cash - short-term -- 300,000
Accounts receivable, less
allowance for doubtful accounts of $456,358 764,252 350,935
Inventories, net of valuation allowance 275,123 368,086
Prepaid expenses and other current assets 246,460 71,696
---------- ----------
Total current assets 1,506,891 1,192,107
Equipment and improvements, net of
accumulated depreciation and
amortization of $1,368,991 and $1,359,090 52,585 33,748
Restricted cash - long-term -- 150,000
Deferred financing costs,
net of accumulated amortization of
$155,057 and $54,189 160,058 260,926
Goodwill 350,000 --
Other intangible assets, net of accumulated
amortization of $112,387 1,490,557 --
Other assets 134,461 111,273
---------- ----------
Total assets $3,694,552 $1,748,054
========== ==========
See notes to unaudited condensed consolidated financial statements.
3
CAPE SYSTEMS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2005 (Unaudited) and September 30, 2004
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Notes payable - unrelated parties $ 1,227,500 $ 1,227,500
Mandatory redeemable Series D preferred stock -
504 shares at redemption value 504,713 504,713
Accounts payable 3,894,037 3,653,751
Net liabilities associated with subsidiaries
in liquidation 8,053,871 7,714,783
Payroll and related benefits accrual 1,678,009 1,994,852
Litigation related accruals 3,655,323 3,655,323
Other accrued expenses and liabilities 3,485,379 3,749,685
Deferred revenue 453,221 354,203
------------- -------------
Total current liabilities 22,952,053 22,854,810
Long-term convertible notes payable -
unrelated parties, net of
unamortized debt discount 4,109,126 2,549,724
------------- -------------
Total liabilities 27,061,179 25,404,534
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Series A preferred stock, par value
$.01 per share; 2,000,000 shares authorized,
1,356,852 shares issued and outstanding
($10,000,000 aggregate liquidation preference) 13,569 13,569
Series B preferred stock, par value $0.01
per share; 1,000 shares authorized,
1,000 shares issued and outstanding
($1,000,000 aggregate liquidation prefer 10 10
Series C-1 preferred stock, par value $0.01
per share; 10,000 shares authorized, 997
shares issued and outstanding ($997,000
aggregate liquidation preference) 10 10
Series D preferred stock, par value $0.01
per share; 10,000 shares authorized, 7,111
shares issued and outstanding (excluding 504
shares subject to mandatory redemption)
($7,109,995 aggregate liquidated preference) 71 71
Common stock, par value $.005 per share;
400,000,000 shares authorized;
78,720,402 and 56,116,342 shares issued 393,603 280,583
Additional paid-in capital 167,236,303 164,442,227
Accumulated deficit (188,795,312) (186,517,047)
Accumulated other comprehensive loss (2,147,641) (1,808,663)
Less: Treasury stock, 87,712 shares of
common stock (at cost) (67,240) (67,240)
------------- -------------
Total stockholders' deficiency (23,366,627) (23,656,480)
------------- -------------
Total liabilities and stockholders' deficiency $ 3,694,552 $ 1,748,054
============= =============
See notes to unaudited condensed consolidated financial statements.
4
CAPE SYSTEMS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months For the Six Months
Ended March 31, Ended March 31,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
REVENUES $ 1,349,224 $ 517,816 $ 2,014,565 $ 1,350,086
COST OF SALES 647,094 235,738 896,433 775,715
------------ ------------ ------------ ------------
GROSS PROFIT 702,130 282,078 1,118,132 574,371
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling and administrative 1,265,956 504,209 1,970,852 1,103,649
Depreciation and
amortization of intangibles 118,717 39,885 122,290 83,080
------------ ------------ ------------ ------------
Total operating expenses 1,384,673 544,094 2,093,142 1,186,729
------------ ------------ ------------ ------------
OPERATING LOSS (682,543) (262,016) (975,010) (612,358)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (includes
beneficial conversion
charge of $1,428,375 in 2005) (1,655,019) (235,035) (1,937,700) (514,306)
Gain on settlements of
liabilities 137,485 -- 167,257 --
Gain on liquidation of 320,951 320,951
foreign subsidiaries
Other 5 (10,534) 13,206 (39,126)
------------ ------------ ------------ ------------
Net other expense (1,517,529) 75,382 (1,757,237) (232,481)
------------ ------------ ------------ ------------
LOSS BEFORE PROVISION
(CREDIT) FOR INCOME TAXES (2,200,072) (186,634) (2,732,247) (844,839)
------------ ------------ ------------ ------------
Provision for state income taxes 1,000 -- 2,881 --
Credit for sale of state tax
benefits -- -- (456,863) --
------------ ------------ ------------ ------------
Income tax provision credit 1,000 -- (453,982) --
------------ ------------ ------------ ------------
NET LOSS $ (2,201,072) $ (186,634) $ (2,278,265) $ (844,839)
============ ============ ============ ============
Net loss per share of
common stock:
Basic and Diluted ($.03) ($.01) ($.03) ($.02)
Weighted Average number
of shares outstanding:
Basic and Diluted 75,786,575 48,201,978 70,578,440 48,201,978
See notes to unaudited condensed consolidated financial statements.
5
CAPE SYSTEMS GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE SIX MONTHS ENDED MARCH 31, 2005
(UNAUDITED)
Preferred Stock Common Stock Additional
--------------------------- --------------------------- Paid-In
Shares Amount Shares Amount Capital
------------ ------------ ---------- ------------ ------------
Balance September 30, 2004 1,365,960 $ 13,660 56,116,342 $ 280,583 $164,442,227
------------ ------------ ---------- ------------ ------------
Conversion of notes payable
- unrelated parties into
common stock 11,245,615 56,228 256,870
Common stock issued for accrued
401(k) plan contribution and
other liabilities 6,182,915 30,914 331,234
Common stock issued in
exchange for services 5,175,530 25,878 472,097
Beneficial conversion feature
related to long-term convertible
debt 1,428,375
Effects of issuance of warrants
with notes payable - unrelated
parties 129,500
Stock options issued in exchange
for services 176,000
Net loss
Change in unrealized foreign
exchange translation gains/
(losses)(a) ------------ ------------ ---------- ------------ ------------
Balance March 31, 2005 1,365,960 $ 13,660 78,720,402 $ 393,603 $167,236,303
============ ============ ============ ============ ============
(a) Comprehensive gains/(losses) for the three and six months ended March 31,
2005 totaled $(1,857,682) and $(2,617,243) and totaled $(186,210) and
$1,174,679 for the three and six months ended March 31, 2004.
See notes to unaudited condensed consolidated financial statements.
6
CAPE SYSTEMS GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE SIX MONTHS ENDED MARCH 31, 2005
(UNAUDITED)
(CONTINUED)
Accumulated
Other
Accumulated Comprehensive Treasury
Deficit Loss Stock Total
---------------- ---------------- ---------------- ----------------
Balance September 30, 2004 $ (186,517,047) $ (1,808,663) $ (67,240) $ (23,656,480)
Conversion of notes payable -
unrelated parties into
common stock 313,098
Common stock issued for accrued
401(k) Plan contribution
and other liabilities 362,148
Common stock issued in exchange
for services 497,975
Beneficial conversion feature
related to long-term
convertible debt 1,428,375
Effects of issuance of warrants
with notes payable - unrelated
parties 129,500
Stock options issued in exchange
for services 176,000
Net loss (2,278,265) (2,278,265)
Change in unrealized foreign
exchange translation gains/
(losses)(a) (338,978) (338,978)
---------------- ---------------- ---------------- ----------------
Balance March 31, 2005 $ (188,795,312) $ (2,147,641) $ (67,240) $ 23,366,627)
See notes to unaudited condensed consolidated financial statements.
7
CAPE SYSTEMS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
March 31,
--------------------------
2005 2004
----------- -----------
Cash Flows from Operating Activities:
- -------------------------------------
Net loss ($2,278,265) ($ 844,834)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation and amortization 122,288 83,080
Common stock issued in exchange for services 497,975
Amortization of deferred financing costs and
debt discount 252,868 --
Charges to interest expense for warrants
issued with note payable - related parties 54,000
Charges to interest expense for beneficial
conversion features of notes payable -
unrelated parties 1,428,375 --
Gain on liquidation of foreign subsidiaries: -- (320,951)
Changes in operating assets and liabilities:
net of effects of acquisitions
Accounts receivable, net (198,555) 374,564
Inventory 128,449 62,032
Prepaid expenses and other current assets 47,740 (28,091)
Restricted cash and other assets 426,812 --
Accounts payable 215,694 15,868
Accrued expenses and other liabilities (268,020) 237,541
Deferred revenue (115,760) 176,332
----------- -----------
Net cash provided by (used in) operating
activities 259,601 (190,459)
----------- -----------
Cash Flows from Investing Activities:
- -------------------------------------
Acquisition of businesses - net of cash acquired (1,989,935) --
----------- -----------
Cash Flows from Financing Activities:
- -------------------------------------
Proceeds from notes and convertible notes payable:
Related parties 137,339
Unrelated parties 1,850,000 --
Cash overdraft -- 6,062
----------- -----------
Net cash provided by financing activities 1,850,000 143,401
Effect of exchange rate changes on cash -- 27,664
----------- -----------
Net increase (decrease) in cash 119,666 (19,394)
Cash at beginning of period 101,390 25,265
----------- -----------
Cash at end of period $ 221,056 $ 5,871
=========== ===========
Noncash investing and financing activities:
Long-term convertible notes payable -
unrelated parties converted into common stock $ 313,098
Common stock issued for payment of liabilities $ 362,148
Stock options issued for future services $ 176,000
See notes to unaudited condensed consolidated financial statements.
8
CAPE SYSTEMS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Background and Description of Business
CAPE SYSTEMS GROUP, Inc. ("Cape" or "Vertex" or "we" or "our" or the "Company")
is a provider of supply chain management technologies, including enterprise
software systems and applications, and software integration solutions, that
enable our customers to manage their order, inventory and warehouse management
needs, consultative services, and software and hardware service and maintenance.
We serve our clients through two general product and service lines: (1)
enterprise solutions; and (2) 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-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. 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.
In connection with an acquisition described below, we changed our name on April
8, 2005 from Vertex Interactive, Inc. to Cape Systems Group, Inc. We also
increased the number of authorized shares of common stock, par value $.005 per
share, of the Company from 400,000,000 shares to 1,000,000,000 shares.
In August 2002, Cape formed XeQute Solutions, Inc. ("XeQute"), a Delaware
corporation, which is an indirect, wholly-owned subsidiary. XeQute purchased
most of the operating assets and assumed certain liabilities of both Vertex and
its principal North American subsidiaries and became the principal operating
entity of the group effective October 1, 2002. These assets comprise
substantially all of the enterprise software businesses of Vertex. XeQute is a
wholly-owned subsidiary of XeQute Solutions PLC ("XeQute PLC") which is a
holding company that is a direct, wholly-owned subsidiary of Vertex.
The Company's securities received approval to return to the NASDAQ bulletin
board for trading as of March 31, 2004. From February 17, 2003 to March 30,
2004, the Company's securities were quoted on the Pink Sheets, under the symbol
"VETXE".
Going Concern Matters
Based upon our substantial working capital deficiency ($21,445,000) and
stockholders' deficiency ($23,367,000) at March 31, 2005, our recurring losses,
our historic rate of cash consumption, the uncertainty arising from our default
on one of our notes payable, the uncertainty of our 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 our ability
to continue as a going concern will require on a going forward basis, the
Company to raise substantial funds to finance (i) continuing operations, (ii)
the further development of our enterprise software technologies, (iii) the
settlement of existing liabilities including past due payroll obligations to our
employees, officers and directors, and our obligations under existing or
possible litigation settlements, (iv) possible selective acquisitions to achieve
the scale we believe will be necessary to enable us to remain competitive in the
global SCM industry and (v) the integration of the recently completed
acquisition of Cape Systems (as hereinafter defined). There can be no assurance
that we will be successful in raising the necessary funds or integrate the
recently completed acquisition.
9
CAPE SYSTEMS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Outlook:
In light of current economic conditions, we now anticipate, but cannot assure,
reaching the point at which we will generate cash in excess of our operating
expenses in the quarter ending September 30, 2005. However, we had current
obligations at March 31, 2005 accumulated during the past several years that
substantially exceeded our current assets and, to the extent we cannot settle
existing obligations in stock or defer payment of our obligations until we
generate sufficient operating cash, we will require significant additional funds
to meet accrued non-operating obligations, to fund operating losses, if
required, short-term debt and related interest, capital expenditures and
expenses related to cost-reduction initiatives, and to pay liabilities that
could arise from litigation claims and judgments.
Our sources of ongoing liquidity include the cash flows from our operations,
potential new credit facilities and potential additional equity investments.
Consequently, the Company continues to aggressively pursue obtaining additional
debt and equity financing, the restructuring of certain existing debt
obligations, and the reduction of its operating expenses. In addition, it has
structured its overall operations and resources around high margin enterprise
products and services. However, in order to remain in business, the Company must
raise additional cash in a timely fashion.
Initiatives Completed or in Process:
The following initiatives related to raising required funds, settling
liabilities and/or reducing expenses have been completed or are in process:
(i) The Company completed the sale of certain entities and assets during fiscal
2002. After being unsuccessful in attempting to sell its five remaining European
operations (Vertex UK, Vertex Service and Maintenance Italy, Vertex Italy,
Euronet and Vertex France), and based on the continuing cash drain from these
operations, during fiscal 2002 the respective boards of directors determined
that in the best interest of their shareholders that they would seek the
protection of the respective courts in each country, which have agreed to an
orderly liquidation of these companies for the benefit of their respective
creditors. During the year ended September 30, 2004, we recognized a noncash
gain of $321,000 from the approval by creditors of the liquidation of the net
liabilities of the Company's U.K. subsidiary. Upon legal resolution of the
approximately $8,054,000 of net liabilities of these remaining European entities
as of March 31, 2005, we expect to recognize a non-cash gain (and no significant
cash outlay), however the amount and timing of such gain and cash outlay, if
any, is totally dependent upon the decisions to be issued by the respective
court appointed liquidators.
(ii) The Company is negotiating with vendors to settle balances at substantial
discounts. In addition, the Company is negotiating to settle certain notes
payable and approximately $3,700,000 of litigation accruals at a discount or
with the issuance of shares of Cape.
(iii) During the six months ended March 31, 2005, we realized net gains of
$167,257 from settlements of liabilities totaling $517,257 through the payments
of approximately $350,000 in cash.
(iv) During the six months ended March 31, 2005 convertible notes payable to
unrelated parties in the principal amount of $313,098 were converted into
11,245,615 shares of common stock.
10
CAPE SYSTEMS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(v) On January 11, 2005, we entered into a Securities Purchase Agreement and
sold (i) $1,850,000 in secured convertible notes and (ii) warrants to purchase
1,850,000 shares of our common stock to accredited investor through a private
placement. 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 $0.09 per share or 40% of the average of the
three lowest intraday trading prices for the common stock on the NASDAQ 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 the 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 which includes the common
stock underlying the secured convertible notes and the warrants. If the
registration statement is not filed and 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 3%
of the outstanding principal amount of the secured convertible notes per month
plus accrued and unpaid interest.
We are currently in default pursuant to secured convertible notes issued
pursuant to a securities purchase agreement dated April 28, 2004 (the "SPA").
Pursuant to the SPA, we are obligated to have two times the number of shares
that the secured convertible notes are convertible into registered pursuant to
an effective registration statement. We filed a registration statement on Form
S-1, as amended, that was declared effective by the Securities and Exchange
Commission on August 9, 2004. All of the shares of common stock underlying the
secured convertible notes that were registered on the S-1 have been issued. On
April 26, 2005, we filed a registration statement on Form SB-2 registering
additional shares to be issued upon conversion of the secured convertible notes
pursuant to the SPA, however, the SB-2 registration statement is currently being
review and has not been declared effective.
The warrants are exercisable until January 2010 at a purchase price of $0.09 per
share. The exercise price of the warrants is subject to anti-dilution
provisions.
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 to unconditionally guarantee the timely and full satisfaction of
all obligations under the notes and has pledged 2,006,418 shares of the
Company's common stock he owns as collateral.
(vi) 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. (the "CSCS Ltd.") and Cape Systems, Inc. ("CSI")
pursuant to which we purchased on that date all of the issued and outstanding
shares of common stock of Cape Systems and Consulting Services Ltd.
(collectively "Cape Systems") 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. The acquisition was accounted for
pursuant to the purchase method in accordance with Statement of Financial
Accounting Standards No. 141, "Business Combinations" effective as of January
12, 2005.
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.
11
CAPE SYSTEMS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
While we are continuing our efforts to reduce costs, increase revenues, resolve
lawsuits on favorable terms and settle certain liabilities on a non-cash basis
there is no assurance that we will achieve these objectives. In addition, we
will continue to pursue strategic business combinations and opportunities to
raise both debt and equity financing. However, there can be no assurance that we
will be able to raise additional financing in the timeframe necessary to meet
our immediate cash needs, or if such financing is available, whether the terms
or conditions would be acceptable to us.
The accompanying unaudited condensed consolidated financial statements have been
prepared on a basis that contemplates Cape's continuation as a going concern and
the realization of its assets and liquidation of its liabilities in the ordinary
course of business. Such financial statements do not include any adjustments,
with the exception of the provision to adjust the carrying values of the assets
of the subsidiaries in liquidation to their estimated net realizable value,
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 Cape fails to raise additional
capital when needed, the lack of capital will have a material adverse effect on
Cape's business, operating results, financial condition and ability to continue
as a going concern.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-QSB. Accordingly, they do not include all of the information and notes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended March 31, 2005 are not necessarily indicative of the results that may be
expected for the year ending September 30, 2005.
The balance sheet at September 30, 2004 has been derived from the audited
financial statements at that date but does not include all of the information
and notes required by accounting principles generally accepted in the United
States for complete financial statements.
For further information, refer to the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended September 30, 2004 (the "2004 Form 10-K").
2. Sales or Divestitures of Non-Core Businesses
The Company developed and initiated a plan in the quarter ended June 30, 2002
that would result in the sale or divestiture of assets or closings of businesses
that are not part of the Company's current strategic plan or have not achieved
an acceptable level of operating results or cash flows. In connection with this
plan, the Company has completed the sale of certain businesses and assets (see
Note 2 in the 2004 Form 10-K). After being unsuccessful in attempting to sell
its five remaining European operations (Vertex UK-previously PSS, Vertex Service
and Maintenance Italy - previously SIS, Vertex Italy, Euronet and Vertex France
- - previously ICS France) and based on the continuing cash drain from these
operations, the respective boards of directors determined that in the best
interest of their shareholders that they would seek the protection of the
respective courts in each country, which have agreed to an orderly liquidation
of these companies for the benefit of their respective creditors. During the
second quarter of fiscal 2004, the Company recognized a noncash gain from the
approval by creditors of the liquidation of the net liabilities of the Company's
U.K. subsidiary, as explained below. Accordingly, the remaining net assets and
retained liabilities of these businesses are classified as net liabilities
associated with subsidiaries in liquidation in the accompanying March 31, 2005
and September 30, 2004 condensed consolidated balance sheets. While the Company
expects the liquidation process to take through at least December 31, 2005,
significant variations may occur based on the complexity of the entity and
requirements of the respective country.
12
CAPE SYSTEMS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Retained liabilities are generally carried at their contractual or historical
amounts. The ultimate amounts required to settle these retained liabilities will
differ from estimates based on contractual negotiations, and the outcome of
certain legal actions and liquidation procedures.
The following is a summary of net assets and retained liabilities as of March
31, 2005 and September 30, 2004:
March 31, September 30,
2005 2004
----------- -----------
Cash $ 209,383 $ 200,504
Receivables, net 1,233,937 1,181,413
Inventories, net 681,040 652,053
Accounts payable (2,390,193) (2,288,560)
Accrued liabilities (5,286,374) (5,065,009)
Deferred revenue (1,300,444) (1,245,093)
Loans payable - banks (1,201,220) (1,150,091)
----------- -----------
Net liabilities associated with
subsidiaries in liquidation $(8,053,871) $(7,714,783)
=========== ===========
The Company received notice that the liquidation of Vertex UK, which was under
liquidation as of December 31, 2003, had been approved and finalized by the UK
creditors as of January 5, 2004. Based on such notice, management reduced the
Company's net liabilities associated with subsidiaries in liquidation by
approximately $1,400,000, reclassed approximately $1,073,000 of translation loss
from accumulated other comprehensive loss to the consolidated statement of
operations and recognized a gain of approximately $321,000 in the second quarter
of fiscal 2004.
Except for the gain from the liquidation of the U.K. subsidiary and changes in
the unrealized foreign translation loss, the results of operations of these
businesses for the three months and six months ended March 31, 2005 and 2004
were not significant.
3. Business Combination
As explained in Note 1, on January 12, 2005, the Company entered into a stock
purchase agreement pursuant to which it acquired all of the issued and
outstanding shares of common stock of CSCS Ltd. and its subsidiary, CSI, for an
aggregrate purchase price of $2,000,000, excluding acquisition costs of
$198,700. The acquisition was financed primarily through the sale of $1,850,000
of secured convertible notes and warrants to purchase 1,850,000 shares of the
Company's common stock (see Note 5).
In addition, prior to January 12, 2005, the Company had made restricted cash
deposits of $418,750 that were held by the purchasers of the secured convertible
notes and had made prepayments of interest of $31,250 on other loans from the
purchasers of the secured convertible notes. In connection, with the
acquisitions and the issuance of the secured convertible notes, the purchasers
released the restricted deposits and returned the prepaid interest.
13
CAPE SYSTEMS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The acquisition was accounted for as a purchase pursuant to Statement of
Financial Accounting Standards No. 141, "Business Combinations." Accordingly,
the assets and liabilities of the Acquired Companies were recorded based on
their fair values as of the acquisition date with the excess of the acquisition
costs over the fair value of the net assets acquired initially allocated to
goodwill. The cost of the acquisition of $2,198,700 was allocated to the
estimated fair values of the assets and liabilities of the Acquired Companies as
follows:
Cash $ 208,765
Accounts receivable 214,762
Inventories 35,486
Prepaid expenses 41,134
Equipment, furniture and fixtures 34,108
Accrued expenses (42,406)
Deferred revenue (214,778)
Notes payable (6,723)
Accounts payable (24,592)
Other intangible assets 1,602,944
Goodwill 350,000
-----------
Total cost allocated $ 2,198,700
===========
Other intangible assets are comprised of customer lists which are being
amortized over a period of three years. The amortization expense in each of the
three years subsequent to January 12, 2005 will be approximately $53,400.
The accompanying consolidated financial statements assume the acquisition closed
effective January 12, 2005 and, accordingly, include the results of operations
of the acquired companies from January 12, 2005.
The following table presents unaudited pro forma results of operations of the
Company as if the above described acquisition had occurred at October 1, 2003:
Three Months Six Months
Ended March 31, Ended March 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenues $ 1,400,000 $ 900,000 $ 2,400,000 $ 2,100,000
Net loss* (800,000) (500,000) (1,300,000) (1,500,000)
Net loss
per share* (.01) (.01) (.02) (.03)
* Excludes a nonrecurring charge of $1,400,000 ($.02 and $.02 per share) for the
three and six months ended March 31, 2005 for the beneficial conversion feature
given to the investors that provided financing for the acquisition (See Note 5).
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 2005, nor do they purport to be
indicative of the future results of operations of the Company.
The estimated purchase price for each acquisition may be subject to certain
purchase price adjustments.
14
CAPE SYSTEMS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. NOTES PAYABLE TO UNRELATED PARTIES
Notes payable to unrelated parties classified as current liabilities consist of
past due notes payable to Renaissance Software, Inc. in the amount of $1,227,500
as of March 31, 2005. For additional information, see Note 10 in the 2004 Form
10-K.
5. CONVERTIBLE NOTES PAYABLE - UNRELATED PARTIES
Non-current convertible notes payable to unrelated parties with a carrying value
of $4,109,126 at March 31, 2005 ($4,438,656 of principal, net of unamortized
discount of $329,530) arose from loans under (a) a Securities Purchase Agreement
(the "2004 Agreement") with four accredited investors on April 28, 2004 and
January 11, 2005 for the private placement (the "2004 Private Placement") of (i)
$3,000,000 in convertible notes (the "2004 Convertible Notes") and (ii) warrants
(the "2004 Warrants") to purchase 3,000,000 shares of our common stock; and (b)
a Securities Purchase Agreement (the "2005 Agreement") for the private placement
(the "2005 Private Placement") of (i) $1,850,000 in convertible notes (the "2005
Convertible Notes") and (ii) warrants (the "2005 Warrants") to purchase
1,850,000 shares of common stock.
2004 Convertible Notes
- ----------------------
The 2004 Convertible Notes bear interest at 10% and mature two years from the
date of issuance. At the investors' option, 50% of the 2004 Convertible Notes
will be convertible into our common stock at the lower of $0.30 or 60% of the
average of the three lowest intraday trading prices for the common stock on a
principal market for the 20 trading days before but not including the conversion
date and the other 50% of the 2004 Convertible Notes will be convertible into
our common stock at the lower of $0.30 or 55% of the same average over the same
trading period. The full principal amount of the 2004 Convertible Notes would
become due upon any default under the terms of the 2004 Convertible Notes. The
2004 Warrants are exercisable until five years from the date of issuance at a
purchase price of $0.11 per share. In addition, we have granted the investors a
security interest in substantially all of our assets and intellectual property
and registration rights. The Company allocated proceeds of $427,500 to the fair
value of the warrants and the remaining $2,572,500 to the fair value of the 2004
Convertible Notes. Based on the excess of the aggregate fair value of the common
shares that would have been issued if the 2004 Convertible Notes had been
converted immediately over the proceeds allocated to the 2004 Convertible Notes,
the investors received a beneficial conversion feature that had an aggregate
intrinsic value of approximately $1,096,000 as of the commitment date.
Accordingly, the Company recorded an increase in additional paid-in capital and
debt discount of $1,524,000 in connection with the issuance of the 2004
Convertible Notes and 2004 Warrants, of which $1,171,000 was amortized to
interest expense during the year ended September 30, 2004 and $247,230 during
the six months ended March 31, 2005.
In connection with the acquisitions and related financing transactions, the 2004
Convertible Notes were amended and became convertible at the lower of $0.09 or
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 modification to the conversion terms in
January 2005 resulted in an additional charge for the beneficial conversion
feature had an aggregate intrinsic value of approximately $396,000 as of the
modification date. Accordingly, the Company recorded an increase in additional
paid-in capital and the additional debt discount of $396,000 which was amortized
to interest expense immediately since these notes can be converted immediately.
15
CAPE SYSTEMS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2005 Convertible Notes
- ----------------------
The 2005 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 $0.09 per share or 40% of the average of the three
lowest intraday trading prices for the common stock on the NASDAQ bulletin board
for the 20 trading days before but not including the conversion date. The 2005
Warrants are exercisable until five years from the date of issuance at a
purchase price of $0.09 per share. In addition, we have granted the investors a
security interest in substantially all of our assets and intellectual property
and registration rights.
Based on the excess of the aggregate fair value of the common shares that would
have been issued if the 2005 Convertible Notes had been converted immediately
over the proceeds allocated to the 2005 Convertible Notes, the investors
received a beneficial conversion feature that had an aggregate intrinsic value
of approximately $1,161,500 as of the commitment date. Accordingly, the Company
recorded an increase in additional paid-in capital and the additional debt
discount of $1,032,000 which was amortized to interest expenses immediately
since these notes can be converted immediately. In addition the aggregate
intrinsic value of the 2005 Warrants was $129,500 which was recorded as
additional paid-in capital and debt discount, $5,640 of which was amortized to
interest expense during the six months ended March 31, 2005.
During August and September 2004, the Company issued 1,754,384 common shares
upon the conversion of 10% Convertible Notes with an approximate principal
balance of $98,000 at conversion prices of $0.054 and $0.055 per share. In
addition, during the three months ended to December 31, 2004, the Company issued
11,245,615 common shares upon the conversion of 10% Convertible Notes with an
approximate principal balance of $313,000 at conversion prices ranging from
$0.02 to $0.05 per share.
6. STOCKHOLDERS' DEFICIENCY
Shares Issued for Services and Directors' Fees and Accrued Liabilities
During the six months ended March 31, 2005, the Company issued 5,175,530 shares
of common stock for various consulting and professional services rendered and
recorded charges of approximately $498,000 based on the fair value of the shares
issued.
During the six months ended March 31, 2005, the Company issued: 697,059 shares
of common stock to settle various outstanding payroll obligations totaling
approximately $45,000; 1,951,452 shares to its 401K Retirement Plan in
satisfaction of its accrued calendar 2002 and 2003 matching contribution
obligation of approximately $137,000; and 3,534,404 shares in satisfaction of
accrued Directors Fees and other liabilities of $180,000.
Preferred Stock
Midmark Capital L.P. and its affiliate, Midmark Capital II, L.P., and certain
individuals related to these two entities, which are referred to collectively as
"Midmark", own shares of Vertex's preferred and common stock and have the
ability to purchase a majority interest in Vertex (see Note 12 in the 2004 Form
10-K). As also explained in Note 12 in the 2004 Form 10-K, in September 2004,
the Company issued 7,615 share of Series "D" convertible preferred stock to
Midmark upon conversion of approximately $7,615,000 of convertible and demand
notes payable and accrued interest. Vertex and Midmark also entered into a
Redemption Agreement providing for the redemption of a number of shares of
Series D preferred stock with a value of $504,713 based on the per share
liquidation value of the Series D preferred stock by no later than December 31,
2004. However, the payment was not made and, accordingly, a total of 504 shares
of Series D preferred stock with an aggregate liquidation value of $504,713
remains in current liabilities as mandatory redeemable Series D preferred stock
in the accompanying condensed consolidated balance sheets as of March 31, 2005
and September 30, 2004.
16
CAPE SYSTEMS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pro Forma and Other Disclosures Related to Stock Options
As of September 30, 2004, the Company had granted options to purchase a total of
6,808,514 shares of common stock. A total of 3,420,000, including 1,800,000
granted to consultants (see Note 9) options were granted and no options were
cancelled during the six months ended March 31, 2005.
As further explained in Note 3 in the 2004 Form 10-K, as permitted by Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" the Company accounts for its employee stock option plans using the
intrinsic value method under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees". Accordingly, it does not recognize
compensation cost for options granted to employees with exercise prices at or
above fair market value on the date of grant and, instead, it is required by
SFAS 123 and SFAS 148, "Accounting for Stock- Based Compensation - Transition
and Disclosure" to make pro forma disclosures of net income (loss) and earnings
(loss) per share as if the fair value based method of accounting under SFAS 123
had been applied. The Company granted 1,620,000 stock options to employees and
consultants during the six months ended March 31, 2005 at exercise prices equal
to the fair value at the date of the grant, and did not grant any options to
employees in the six months ended March 31, 2004. If the Company had elected to
recognize compensation cost based on the fair value of the options granted at
the grant date in all periods and had amortized the cost over the vesting period
pursuant to SFAS 123, net loss, loss applicable to common stock and net loss per
common share would have been increased to the pro forma amounts indicated in the
table below:
Three Months Six Months
Ended March 31, Ended March 31,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net loss-as reported ($2,201,072) ($ 186,634) $(2,278,265) $ (844,839)
Deduct total stock -
based employee
compensation expense
determined under a
fair value based method
for all awards, net of
related tax effects (213,729) (247,621) (453,674) (495,302)
----------- ----------- ----------- -----------
Net loss - pro-forma $(2,414,801) $ (434,255) $(2,731,939) $(1,340,141)
=========== =========== =========== ===========
Basic and diluted
loss per common share
- as reported $ (.03) $ (.01) $ (.03) $ (.02)
Basic and diluted
loss per common share
- pro-forma $ (.03) $ (.01) $ (.04) $ (.03)
17
CAPE SYSTEMS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used in
fiscal 2005 (no options were granted in fiscal 2004):
Expected dividend yield 0.00%
Expected stock price volatility 157%
Risk-free interest rate 3.5
Expected life of options 5 years
As a result of amendments to SFAS 123, the Company will be required to expense
the fair value of all employee stock options over the vesting period beginning
with its fiscal quarter ending December 31, 2006.
7. EARNINGS (LOSS) PER SHARE
The Company presents "basic" earnings (loss) per share and, if applicable,
"diluted" earnings per share pursuant to the provisions of SFAS 128, "Earnings
per Share". Basic earnings (loss) per shares is calculated by dividing net
income or loss (there are no dividend requirements on the Company's outstanding
preferred stock) by the weighted average number of common shares outstanding
during each period.
The calculation of diluted earnings per share is similar to that of basic
earnings per 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, such as those issuable upon the exercise of
stock options and warrants and the conversion of convertible securities, were
issued during the period and appropriate adjustments were made for the
application of the treasury stock method and the elimination of interest and
other charges related to convertible securities.
As of May 10, 2005, there were 381,189,461 shares of common stock potentially
issuable upon the exercise of stock options (10,228,514 shares), warrants
(4,850,000 shares) and the conversion of convertible securities (366,110,947
shares). However, diluted per share amounts have not been presented in the
accompanying condensed consolidated statements of operations for the three and
six months ended March 31, 2005 and 2004 because the Company had net loss in
each period and the assumed effects of the exercise of all of the Company's
outstanding stock options and warrants and the conversion of all of its
convertible securities would have been anti-dilutive.
8. Income Taxes
The State of New Jersey has enacted legislation permitting certain corporations
located in New Jersey to sell state tax loss carryforwards and state research
and development credits, in order to obtain tax benefits. For the state fiscal
years through 2004 (July 1, 2003 to June 30, 2004) the Company had approximately
$7,976,000 of total available net operating loss carryforwards that were
saleable, of which New Jersey permitted the Company to sell approximately
$5,835,000. On December 17, 2004, the Company received approximately $457,000
from the sale of these benefits which was recognized as an income tax credit
during the six months ended March 31, 2005.
18
CAPE SYSTEMS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
If still available under New Jersey law, the Company will attempt to obtain
approval to sell the remaining available net operating losses of approximately
$2,141,000 between July 1, 2004 and June 30, 2005. This amount, which is a
carryover of its remaining tax benefits from state fiscal year 2004, may
increase if the Company incurs additional tax benefits during state fiscal year
2005. The Company cannot estimate, however, what percentage of its saleable tax
benefits New Jersey will permit it to sell, how much it will receive in
connection with the sale, if it will be able to find a buyer for its tax
benefits or if such funds will be available in a timely manner.
9. COMMITMENTS AND CONTINGENCIES
Pending Litigation
We are party to a number of claims, which have been previously disclosed by the
Company, and claims by vendors, landlords and other service providers seeking
payment of balances owed. Since such amounts have already been recorded in
accounts payable or accrued liabilities, these claims are not expected to have a
material affect on the stockholders' deficiency of the Company. However, they
could lead to involuntary bankruptcy proceedings.
a) On April 16, 2003, an action was commenced in the Supreme Court of the State
of New York, County of Suffolk, entitled Bautista v. Vertex Interactive, Inc and
Renaissance Software, Inc. The action, which demands $394,000, is brought by a
former employee claiming breach of his employment agreement. On March 29, 2004,
a judgment was granted against the Company in the amount of $350,482. However,
given the Company's current cash position, the judgment has not been paid.
b) 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, alleged the
default by Renaissance Software, Inc. in payment of certain promissory notes in
the principal aggregate sum of $1,227,500. Vertex guaranteed the notes. The
noteholders demanded $1,227,500, together with interest accruing at the rate of
8% per annum from June 30, 2001. On March 12, 2002, the noteholders were
successful in obtaining a judgment against Renaissance Software, Inc. in the
aggregate amount of $1,271,407 including interest, late charges and attorneys'
fees. However, given the Company's current cash position, we have been unable to
pay the judgment and have been pursuing non cash alternatives.
c) As part of the settlement entered into between the Company and three former
principals of a company acquired by Vertex in 2000, consent judgments in the
amount of approximately $1,000,000 each were entered against Vertex on July 19,
2002. However, given the Company's current cash position, we have been unable to
pay the judgment and have been pursuing non cash alternatives. The Company is
currently negotiating with the former owners to accept forms of payment other
than cash. However, there can be no assurance that a non-cash settlement will be
concluded. In July 2002, the former owners obtained a court levy upon several of
the Company's bank accounts, placing a hold on approximately $70,000 of the
Company's funds. The Company, together with its secured lenders, objected to the
turnover of these funds, however a turnover order was granted by the court in
October 2002.
d) On February 9, 2003, in the matter captioned Scansource, Inc. vs. Vertex
Interactive, Inc., Superior Court of New Jersey, Essex County, a judgment was
granted against the Company in the amount of $142,155. The action alleged non
payment by the Company for computer hardware. However, given the Company's
current cash position, we have been unable to pay the judgment and have been
pursuing non cash alternatives.
19
CAPE SYSTEMS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
e) On or about March 22, 2004, an action against Vertex and Renaissance
Software, Inc. was commenced in New York State Supreme Court, Nassau County,
captioned Great Oak LLC vs. Vertex Interactive, Inc. et al. The action, which
demands $327,676, alleges two months rent totaling $23,737 and an early
termination fee of $303,939 to be due Great Oak LLC, the landlord of premises
leased to Renaissance Software Inc. We vigorously contest the allegations and
anticipate defending the case vigorously.
Settled Litigation
a) On or about October 29, 2004, an action against Vertex was commenced in New
York State Supreme Court, New York County, captioned NautaDutilh vs Vertex
Interactive, Inc. The action, which demanded $434,189, alleged nonpayment by
Vertex of attorneys' fees allegedly incurred by Vertex in connection with a
potential acquisition transaction and the reorganization of Vertex's foreign
business operations. The Company had accrued the amount demanded. In January
2005, this action was settled for $300,000 and the gain on settlement of
approximately $134,000 was recognized in the three and six months ended March
31, 2005.
Payroll Obligations
As a result of its severe cash constraints (see Note 1 - Going Concern section),
the Company had fallen as much as two to three months behind in meeting its
payroll obligations to its employees subsequent to September 30, 2002. The
Company has been meeting its current payroll obligations, and has attempted to
pay overdue employee payroll obligations as cash resources become available.
However, in a letter dated April 3, 2003, the New Jersey Department of Labor
(N.J.D.O.L.) has assessed the Company a penalty of $154,000 for failure to pay
payroll on a timely basis. The Company entered into Consent Order and Agreement
with the N.J.D.O.L. to pay down this obligation, starting with an initial
payment on April 30, 2004 of $18,000, which the Company has made, and then
monthly payments of $30,000 starting on June 1, 2004, which the Company has
made, until the balance of the payroll obligations are paid.
In addition, a number of former employees of a California based division of the
Company had filed claims with the California Department of Labor for non payment
of wages for the second half of July 2002; the final payroll prior to the
closing of the division. The Company had disputed the claims, primarily on the
basis of the lack of documentation for hours worked during the period. However
in July 2003, these claims were heard by the California DOL and the amounts
claimed, together with interest and penalties aggregating approximately $100,000
which remain unpaid as of March 31 2005, were granted to these former employees.
The Company believes, although there can be no assurances, that the payroll
obligations including penalties as of March 31, 2005 totaling approximately
$428,000 to both the N.J.D.O.L and the California DOL will be satisfied by the
fiscal quarter ending September 30, 2006.
Employment Agreements
In connection with the acquisition, we entered into an employment agreement with
Brad L. Leonard to serve as Vice President General Manager - Sales, Cape
Systems. Pursuant to the employment agreement, Mr. Leonard will receive an
annual salary of $110,000. He was granted options to purchase 1,000,000 shares
of common stock upon execution, of which 200,000 options vest immediately and
the balance of 800,000 options vest over 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.
20
CAPE SYSTEMS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In connection with the acquisition, we entered into a consulting agreement with
IMC Development Group ("IMC"), which is owned by Peter and Elizabeth Ayling.
Pursuant to the IMC consulting agreement, we retained IMC for a period of 18
months to July 2006 to provide administrative and management advisory services.
The consulting agreement is automatically renewable on a month-to-month basis.
IMC will be paid approximately $14,000 per month based on current exchange
rates. IMC was granted options to purchase 1,800,000 shares of common stock upon
execution, of which 300,000 options vest immediately and the balance of
1,500,000 options vest over a period of three years. Additionally, Mr. Ayling
will serve as our Vice President of Marketing. The fair value of the options
granted of $176,000 is being amortized over the service period.
10. Geographic Area Data
The Company operated in one business segment and in North America in 2004 and
prior to the acquisition of Cape Systems in January 2005. After the acquisition
of Cape Systems, the Company still operates only in one segment and has
operations in North America and the United Kingdom.
The following geographic information presents total revenues, gross margins and
identifiable assets for the three months ended March 31, 2005:
Revenues
North Americ $1,188,428
United Kingdom 160,796
----------
$1,349,224
==========
Gross profit
North America $ 630,515
United Kingdom 71,615
----------
$ 702,130
==========
Identifiable assets
North America $3,355,747
United Kingdom 338,805
----------
$3,694,552
==========
21
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
This Quarterly Report on Form 10-QSB 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", included
in our Annual Report on Form 10-K for the year ended September 30, 2004. Cape
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 Quarterly Report or to reflect the
occurrence of other unanticipated events.
This discussion and analysis should be read in conjunction with the unaudited
condensed consolidated financial statements and related notes of the Company
contained elsewhere in this report. In this discussion, the years "2005" and
"2004" refer to the three and six months ended March 31, 2005 and 2004,
respectively.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosure of contingent
assets and liabilities. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Management continuously evaluates its
estimates and judgments, and actual results may differ from these estimates
under different assumptions or conditions.
Those estimates and judgments that were most critical to the preparation of the
financial statements involved the allowance for doubtful accounts, inventory
freserves, recoverability of intangible assets and the estimation of the net
liabilities associated with subsidiaries in liquidation as further explained in
the Company's Annual Report on Form 10-K for the year ended September 30, 2004.
RECENT ACCOUNTING PRONOUNCEMENTS:
In December 2004, the Financial Accounting Standards Board, (the "FASB") issued
SFAS No. 123(R) "Share-Based Payment" ("SFAS 123(R)"), which amends SFAS 123 and
will be effective for public companies that are small business issuers for
annual periods beginning after December 15, 2005. The new standard will require
us to expense all employee stock options and other share-based payments over the
service period. The FASB believes the use of a binomial lattice model for option
valuation is capable of more fully reflecting certain characteristics of
employee share options compared to the Black-Scholes options pricing model. The
new standard may be adopted in one of three ways - the modified prospective
transition method, a variation of the modified prospective transition method or
the modified retrospective transition method. We are currently evaluating how we
will adopt the standard and evaluating the effect that the adoption of SFAS
123(R) will have on our financial position and results of operations. Since we
have used the intrinsic value method for employee stock options and, generally,
have not recorded any related expense, the adoption of a fair value method for
employee stock options is likely to generate additional compensation expense.
22
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of Accounting Research Bulletin No. 43, Chapter 4" ("SFAS 151"). This statement
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4,
previously stated that "...under some circumstances, items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs may be so
abnormal as to require treatment as current period charges ..." SFAS 151
requires that those items be recognized as current-period charges regardless of
whether they meet the criterion of "so abnormal." In addition, this statement
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
provisions of SFAS 151 shall be applied prospectively and are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005, with
earlier application permitted for inventory costs incurred during fiscal years
beginning after the date this Statement was issued. The adoption of SFAS 151 is
not expected to have a material impact on our financial position and results of
operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29" ("SFAS 153") The guidance in APB
Opinion No. 29, "Accounting for Nonmonetary Transactions," ("APB 29") is based
on the principle that exchanges of nonmonetary assets should be measured based
on the fair value of assets exchanged. The guidance in APB 29, however, included
certain exceptions to that principle. This Statement amends APB 29 to eliminate
the exception for nonmonetary exchanges of similar productive assets that do not
have commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS 153 is effective for nonmonetary exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS
153 is not expected to have a material impact on our financial position and
results of operations.
Results of Operations
Three months ended March 31, 2005 ("2005") compared to the three months ended
March 31, 2004 ("2004").
Operating Revenues:
- -------------------
Operating revenues increased by approximately $831,000 (or 160.4%) from
approximately $518,000 in 2004 to approximately $1,349,000 in 2005.
Revenues generated by the operations in London and Dallas which were not owned
by us in 2004 accounted for approximately $360,000 (or 69.5%) with the balance
of the increase generated primarily by the addition of three hardware/software
sales in the period.
Products and Services
Sales to customers by the two significant product and service line groupings for
the three months ended March 31, 2005 and 2004 (in thousands) are as follows:
March 31
----------------------
2005 2004
--------- --------
Enterprise Solutions $ 575 $ 0
Service, Maintenance and Other 774 518
--------- --------
$ 1,349 $ 518
========= ========
23
Enterprise Solutions revenues increased by $575,000 during the period mainly due
to a warehouse expansions by customers which did not occur in 2004 due primarily
to a weak economy and our financial position.
Service, maintenance and other revenues have increased approximately $256,000
from 2004. The increase was due to revenues generated in London and Dallas
($360,000), operations which were not owned by us in 2004 partially offset by
the loss of service contracts in the period.
We anticipate that our revenues will, at a minimum, stabilize at these levels or
improve slightly as we continue to restructure and look for target acquisitions.
Gross Profit:
- -------------
Gross profit increased by approximately $420,000 (or 148.9%) to $702,000 in
2005. As a percent of operating revenues, gross profit was 52.0% in 2005 as
compared to 54.4% in 2004. The gross profit was unfavorably impacted by the loss
of higher margin service and maintenance revenues.
Operating Expenses:
- -------------------
Selling and administrative expenses increased approximately $762,000 (or 151.2%)
from approximately $504,000 in 2004 to $1,266,000 in 2005. Approximately
$254,000 of the increase is due to the London and Dallas operations which were
not owned by us in 2004 and the balance of approximately $508,000 due to
professional fees incurred resulting from numerous regulatory filings and
contractual obligations. During 2005, we continued to maintain our various cost
control initiatives and anticipate these costs to be stable.
There were no research and development expenses ("R&D"). As a result of the slow
economy and our cost cutting efforts, we suspended R&D, focusing our technical
resources on maintenance services.
The increase in depreciation and amortization expense to approximately $119,000
in 2005, as compared to approximately $40,000 in 2004, is primarily due to the
amortization of intangible assets in connection with the Cape Systems purchase
($113,000) offset by the amortization of computer software of approximately
$30,000 in 2004 that was completely amortized in fiscal year ended September 30,
2004.
Interest expense increased by approximately $1,420,000 to $1,605,000 in 2005.
The increase is due to a charge for the beneficial conversion of convertible
debt of $1,428,000 and reduced amortization of deferred financing cost.
Gain on settlements increased approximately $138,000 mainly due to our ability
to settle certain debts and obligations for less than their book value.
The current income tax provision in both years was negligible due primarily to
the net operating loss carryforwards.
The net loss for the period increased by approximately $2,014,000 to
approximately $2,201,000 from a loss of $187,000 in 2004, mainly due to the
factors mentioned above.
24
Six months ended March 31, 2005 ("2005") compared to the six months ended March
31, 2004 ("2004").
Operating Revenues:
- -------------------
Operating revenues increased by approximately $665,000 (or 49.3%) from
approximately $1,350,000 in 2004 to $2,015,000 in 2005.
Revenues from the London and Dallas operations, which were not owned by us in
2004, accounted for approximately $360,000 of the increase with the balance of
approximately $305,000 resulting from increased enterprise solution sales
partially offset by the loss of service contracts.
Products and Services
Sales to customers by the two significant product and service line groupings for
the three months ended March 31, 2005 and 2004 (in thousands) are as follows:
March 31
----------------------
2005 2004
--------- --------
Enterprise Solutions $ 810 $ 84
Service, Maintenance and Other 1,205 1,266
--------- --------
$ 2,015 $ 1,350
========= ========
Enterprise Solutions revenues increased by $726,000 during the period mainly due
to a number of warehouse expansions by customers.
Service, maintenance and other revenues have decreased approximately $61,000
from 2004. The decrease was a result of the loss of service contracts offset
partially by revenues from the London and Dallas operations ($360,000), which
were not owned by us in 2004.
We anticipate that our revenues will, at a minimum, stabilize at these levels or
improve slightly as we continue to restructure and look for target acquisitions.
Gross Profit:
- -------------
Gross profit increased by approximately $544,000 (or 94.7%) to $1,118,000 in
2005. As a percent of operating revenues, gross profit was 55.5% in 2005 as
compared to 42.5% in 2004. The gross profit was favorably impacted primarily by
the addition of the London and Dallas operations (65.7%) which we did not own in
2004.
Operating Expenses:
- -------------------
Selling and administrative expenses increased approximately $867,000 (or 78.5%)
from approximately $1,104,000 in 2004 to $1,971,000 in 2005. Approximately
$254,000 of the increase is due to the London and Dallas operations which were
not owned by us in 2004 and the balance of approximately $613,000 due to
professional fees incurred resulting from numerous regulatory filings and
contractual obligations. During 2005 we continued to maintain our various cost
control initiatives and anticipate these costs to be stable.
25
There were no research and development expenses ("R&D"). As a result of the slow
economy and our cost cutting efforts, we suspended R&D, focusing our technical
resources on maintenance services.
The increase in depreciation and amortization expense to approximately $123,000
in 2005, as compared to approximately $83,000 in 2004, is primarily due to the
amortization of intangible assets recorded in connection with the Cape Systems
purchase ($113,000) offset by the amortization of computer software of
approximately $30,000 in 2004 that was completely amortized in fiscal year ended
September 30, 2004.
Interest expense increased by approximately $1,424,000 to $1,938,000 in 2005.
The increase is due to a charge for the beneficial conversion of convertible
debt of $1,428,000 and reduced amortization of deferred financing cost.
Gain on settlements increased approximately $167,000 mainly due to our ability
to settle certain debts and obligations for less than their book value.
The current income tax provision in both years was negligible due primarily to
the net operating loss carryforwards.
We realized a tax credit of approximately $457,000 by selling NJ State net
operating loss carryforwards during the six months ended March 31, 2005.
The net loss for the period increased by approximately $1,433,000 to
approximately $2,278,000 from a loss of $845,000 in 2004, mainly due to the
factors mentioned above.
Liquidity and Capital Resources
Based upon our substantial working capital deficiency ($21,445,000) and
stockholders' deficiency ($23,367,000) at March 31, 2005, our recurring losses,
our historic rate of cash consumption, the uncertainty arising from our default
on one of our notes payable, the uncertainty of our 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) continuing
operations, (ii) further development of our enterprise software technologies,
(iii) settlement of existing liabilities including past due payroll obligations
to its employees, officers and directors, and our obligations under existing or
possible litigation settlements, (iv) possible selective acquisitions to achieve
the scale we believe will be necessary to remain competitive in the global SCM
industry and (v) the integration of the recently completed acquisition of Cape
Systems. There can be no assurance that we will be successful in raising the
necessary funds or integrate the recently completed acquisition.
Fiscal 2005 Outlook:
We had current obligations at March 31, 2005 accumulated during the past several
years that substantially exceeded our current assets and, to the extent we
cannot settle existing obligations in stock or defer payment of our obligations
until we generate sufficient operating cash, we will require significant
additional funds to meet accrued non-operating obligations, to fund operating
losses, if required, short-term debt and related interest, capital expenditures
and expenses related to cost-reduction initiatives, and to pay liabilities that
could arise from litigation claims and judgments.
26
Our sources of ongoing liquidity include the cash flows from our operations,
potential new credit facilities and potential additional equity investments.
Consequently, we continue to aggressively pursue obtaining additional debt and
equity financing, the restructuring of certain existing debt obligations, and
the reduction of our operating expenses. In addition, we have structured our
overall operations and resources around high margin enterprise products and
services. However, in order to remain in business, we must raise additional cash
in a timely fashion.
Initiatives Completed or in Process:
The following initiatives related to raising required funds, settling
liabilities and/or reducing expenses have been completed or are in process:
(i) We completed the sale of certain entities and assets during fiscal 2002.
After being unsuccessful in attempting to sell our five remaining European
operations (Vertex UK, Vertex Service and Maintenance Italy, Vertex Italy,
Euronet and Vertex France), and based on the continuing cash drain from these
operations, during fiscal 2002 the respective boards of directors determined
that in the best interest of their shareholders that they would seek the
protection of the respective courts in each country, which have agreed to an
orderly liquidation of these companies for the benefit of their respective
creditors. During the year ended September 30, 2004, we recognized a noncash
gain of $321,000 from the approval by creditors of the liquidation of the net
liabilities of the Company's U.K. subsidiary. Upon legal resolution of the
approximately $8,054,000 of net liabilities of these remaining European entities
as of March 31, 2005, we expect to recognize a non-cash gain (and no significant
cash outlay), however the amount and timing of such gain and cash outlay, if
any, is totally dependent upon the decisions to be issued by the respective
court appointed liquidators.
(ii) The Company is negotiating with vendors to settle balances at substantial
discounts. In addition, the Company is negotiating to settle certain notes
payable and approximately $3,700,000 of litigation accruals at a discount or
with the issuance of shares of Cape.
(iii) During the six months ended March 31, 2005, we realized net gains of
$167,257 from settlements of liabilities totaling $517,257 through the payments
of approximately $350,000 in cash.
iv) During the six months ended March 31, 2005 convertible notes payable to
unrelated parties in the principal amount of $313,098 were converted into
11,245,615 shares of common stock.
(v) On January 11, 2005, we entered into a Securities Purchase Agreement and
sold (i) $1,850,000 in secured convertible notes and (ii) warrants to purchase
1,850,000 shares of our common stock to accredited investors through a private
placement. 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 $0.09 per share or 40% of the average of the
three lowest intraday trading prices for the common stock on the NASDAQ 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 which includes the common
stock underlying the secured convertible notes and the warrants. If the
registration statement is not filed and 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 3%
of the outstanding principal amount of the secured convertible notes per month
plus accrued and unpaid interest.
27
The warrants are exercisable until January 2010 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.
(vi) 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. pursuant to which we
purchased on that date all of the issued and outstanding shares of common stock
of Cape Systems and Consulting Services Ltd. (collectively "Cape Systems") 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. The acquisition was accounted for pursuant to the purchase method
in accordance with Statement of Financial Accounting Standards No. 141,
"Business Combinations" effective as of January 12, 2005. In connection with the
Stock Purchase Agreement, we entered into an employment agreement with Brad L.
Leonard and a consulting agreement with IMC Development Group.
While we are continuing our efforts to reduce costs, increase revenues, resolve
lawsuits on favorable terms and settle certain liabilities on a non-cash basis
there is no assurance that we will achieve these objectives. In addition, we
will continue to pursue strategic business combinations and opportunities to
raise both debt and equity financing. However, there can be no assurance that we
will be able to raise additional financing in the timeframe necessary to meet
our immediate cash needs, or if such financing is available, whether the terms
or conditions would be acceptable to us.
28
CAPE SYSTEMS GROUP, INC.
ITEM 3. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. As of March 31, 2005,
the Company's management carried out an evaluation, under the supervision
of the Company's Chief Executive Officer and the Chief Financial Officer
of the effectiveness of the design and operation of the Company's system
of disclosure controls and procedures pursuant to the Securities and
Exchange Act, Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based
upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures
were effective, as of the date of their evaluation, for the purposes of
recording, processing, summarizing and timely reporting material
information required to be disclosed in reports filed by the Company under
the Securities Exchange Act of 1934.
Based on the evaluation, which disclosed no significant deficiencies or
material weaknesses that are not being addressed in the actions
currently being taken to improve its disclosure controls and
procedures, the Company has identified certain deficiencies and issues
with its internal controls that occurred in the quarter ended March 31,
2005. These deficiencies and issues include, but are not limited to:
o During the second quarter of fiscal 2005, the Company determined
that it had not timely considered the beneficial conversation
charges resulting from modification of the terms of its convertible
debt instruments in January 2005. Management has put in place
appropriate controls to mitigate this type of events from occurring
in future periods.
b) Changes in internal controls. There were no changes in internal controls
over financial reporting, known to the Chief Executive Officer or Chief
Financial Officer that occurred during the quarter ended March 31, 2005
that has materially affected, or is likely to materially effect, the
Company's internal control over financial reporting.
29
CAPE SYSTEMS GROUP, INC.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal
proceedings, which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. Except as
disclosed below, we are currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating results.
Pending Litigation
We are party to a number of claims, which have been previously disclosed by the
Company, and claims by vendors, landlords and other service providers seeking
payment of balances owed. Since such amounts have already been recorded in
accounts payable or accrued liabilities, these claims are not expected to have a
material affect on the stockholders' deficiency of the Company. However, they
could lead to involuntary bankruptcy proceedings.
a) On or about March 22, 2004, an action against the Company and its subsidiary
Renaissance Software, Inc. was commenced in New York State Supreme Court, Nassau
County, captioned Great Oak LLC vs. Vertex Interactive, Inc. et. al., Index no.
03-7270 The action, which demands $327,666, alleges two months rent totaling
$23,737 and an early termination fee of $303,929 to be due Great Oak LLC, the
landlord of premises leased to Renaissance Software Inc. The Company is
vigorously defending the action.
b) On April 16, 2003, an action was commenced in the Supreme Court of the State
of New York, County of Suffolk, entitled Bautista v. Vertex Interactive, Inc and
Renaissance Software, Inc. The action, which demands $394,000, was brought by a
former employee claiming breach of his employment agreement. On March 29, 2004,
a judgment was granted against the Company in the amount of $350,482. As of the
date of this filing, the judgment has not been paid.
c) 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 the Company, and the Company,
alleged the default by Renaissance Software, Inc. in payment of certain
promissory notes in the principal aggregate sum of $1,227,500. The Company
guaranteed the notes. The noteholders demanded $1,227,500, together with
interest accruing at the rate of 8% per annum from June 30, 2001. On March 12,
2002, the noteholders were successful in obtaining a judgment against
Renaissance Software, Inc. in the aggregate amount of $1,271,407 including
interest, late charges and attorneys' fees. However given the Company's current
cash position, we have been unable to pay the judgment. As of the date of this
filing, the judgment has not been paid.
d) As part of the settlement entered into between the Company and three former
principals of a company acquired by the Company in 2000, consent judgments in
the amount of approximately $1,000,000 each were entered against the Company on
July 19, 2002. The incremental liability has been included in other expense
(provision for litigation) for the year ended September 30, 2003. The Company is
currently negotiating with the former owners to accept forms of payment other
than cash. However, there can be no assurance that a non-cash settlement will be
concluded. In July 2002, the former owners obtained a court levy upon several of
the Company's bank accounts, placing a hold on approximately $70,000 of the
Company's funds. The Company, together with its secured lenders, objected to the
turnover of these funds, however a turnover order was granted by the court in
October 2002. As of the date of this filing, the judgments have not been paid.
30
CAPE SYSTEMS GROUP, INC.
PART II - OTHER INFORMATION
e) On February 9, 2003, in the matter captioned Scansource, Inc. vs. Vertex
Interactive, Inc., Superior Court of New Jersey, Essex County, a judgment was
granted against the Company in the amount of $142,155. The action alleged
non-payment by the Company for computer hardware. As of the date of this filing,
the judgment has not been paid.
PAYROLL OBLIGATIONS
As a result of its severe cash constraints (see Note 1 - Going Concern section),
the Company had fallen as much as two to three months behind in meeting its
payroll obligations to its employees subsequent to September 30, 2002. The
Company has been meeting its current payroll obligations, and has attempted to
pay overdue employee payroll obligations as cash resources become available.
However, in a letter dated April 3, 2003, the New Jersey Department of Labor
(N.J.D.O.L.) has assessed the Company a penalty of $154,000 for failure to pay
payroll on a timely basis. The Company entered into Consent Order and Agreement
with the N.J.D.O.L. to pay down this obligation, starting with an initial
payment on April 30, 2004 of $18,000, which the Company has made, and then
monthly payments of $30,000 starting on June 1, 2004, which the Company has
made, until the balance of the payroll obligations including the penalty are
paid.
In addition, a number of former employees of a California based division of the
Company had filed claims with the California Department of Labor for non payment
of wages for the second half of July 2002; the final payroll prior to the
closing of the division. The Company had disputed the claims, primarily on the
basis of the lack of documentation for hours worked during the period. However
in July 2003, these claims were heard by the California DOL and the amounts
claimed, together with interest and penalties aggregating approximately $100,000
which remain unpaid as of March 31, 2005, were granted to these former
employees.
The Company believes, although there can be no assurances, that the payroll
obligations including penalties as of March 31, 2005 totaling approximately
$428,000 to both the N.J.D.O.L and the California DOL will be satisfied by the
fiscal quarter ending September 30, 2006.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended March 31, 2005, we issued 4,175,530 shares of our
common stock to three consultants for services provided. This issuance is
considered exempt under Regulation D of the Securities Act of 1933 and Rule 506
promulgated thereunder.
31
CAPE SYSTEMS GROUP, INC.
PART II - OTHER INFORMATION
During the quarter ended March 31, 2005, we issued 697,059 shares to two
former employees in settlement of outstanding payroll obligations. This issuance
is considered exempt under Regulation D of the Securities Act of 1933 and Rule
506 promulgated thereunder.
The following table provides information about purchases by us and our
affiliated purchasers during the quarter ended December 31, 2004 of equity
securities that are registered by us pursuant to Section 12 of the
Securities Exchange Act of 1934:
ISSUER PURCHASES OF EQUITY SECURITIES
Period (a) (b) (c) (d)
Total Number of Average Price Total Number of Shares (or Maximum Number (or Approximate
Shares (or Units) Paid per Units) Purchased as Part of Dollar Value) of Shares (or Units)
Purchased) Share (or Publicly Announced Plans or that May Yet Be Purchased Under
Unit) Programs (1) the Plans or Programs (1)
10/01/04-10/31/04 0 $0 0 0
11/01/04-11/30/04 0 $0 0 0
12/01/04-12/31/04 0 $0 0 0
(1) We have not entered into any plans or programs under which we may repurchase
its common stock.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
We are currently in default pursuant to secured convertible notes issued
pursuant to a securities purchase agreement dated April 28, 2004 (the "SPA").
Pursuant to the SPA, we are obligated to have two times the number of shares
that the secured convertible notes are convertible into registered pursuant to
an effective registration statement. We filed a registration statement on Form
S-1, as amended, that was declared effective by the Securities and Exchange
Commission on August 9, 2004. All of the shares of common stock underlying the
secured convertible notes that were registered on the S-1 have been issued. On
April 26, 2005, we filed a registration statement on Form SB-2 registering
additional shares to be issued upon conversion of the secured convertible notes
pursuant to the SPA, however, the SB-2 registration statement is currently being
review and has not been declared effective.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to a written consent of a majority of stockholders dated February 24,
2005 in lieu of a special meeting of the stockholders, the majority of
stockholders approved the following actions:
1. To Amend the Company's Articles of Incorporation, as amended, to:
(a) Change the Company's name from Vertex Interactive, Inc. to Cape
Systems Group, Inc.; and
(b) increase the number of authorized shares of common stock, par
value $.005 per share (the "Common Stock"), of the Company from
400,000,000 shares to 1,000,000,000 shares;
32
CAPE SYSTEMS GROUP, INC.
PART II - OTHER INFORMATION
2. To ratify the selection of J.H. Cohn LLP as Independent Registered
Public Accounting Firm of the Company for the year ending September 30, 2005;
and
3. To elect three directors to the Company's Board of Directors, to hold
office until their successors are elected and qualified or until their earlier
resignation or removal.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS
31.1 - Certification of Chief Executive Officer pursuant to Rule
13a-14 and Rule 15d-14(a), promulgated under the Securities and
Exchange Act of 1934, as amended
31.2 - Certification of Chief Financial Officer pursuant to Rule
13a-14 and Rule 15d 14(a), promulgated under the Securities and
Exchange Act of 1934, as amended
32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
Executive Officer)
32.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
Financial Officer)
33
CAPE SYSTEMS GROUP, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAPE SYSTEMS GROUP, INC.
Date: May 23, 2005 By: /s/ NICHOLAS R. TOMS
----------------------------------------
Nicholas R. Toms
Chief Executive Officer (Principal
Executive Officer) and Chief Financial
Officer (Principal Financial Officer and
Principal Accounting Officer)
34