<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report September 22, 1999
VERTEX INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
New Jersey 0-15066 22-2050350
- ---------------------------- ------------------------ --------------------------
(State or Other Jurisdiction (Commission File Number) (I.R.S. Identification No.)
of Incorporation)
23 Carol Street
PO Box 996
Clifton, New Jersey 07014
- ------------------------------------------ --------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (973) 777-3500
</TABLE>
<PAGE>
Vertex Industries, Inc. (the "Company"), hereby files this Amendment No. 1
to its Current Report on Form 8-K, filed with the Commission on October 1, 1999,
and supplies financial information on Portable Software Solutions Limited, a
company organized under the laws of England ("PSS"), and ICS International
Aktiengesellschaft Identcode-Systeme, a company organized under the laws of
Germany ("ICS"), and pro forma information regarding the Company's acquisition
of PSS and ICS on September 27, 1999 and September 22, 1999, respectively.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits
(a) Financial statements of business acquired
1. ICS International AG Identcode Systeme
Independent Auditors' Report
German Consolidated Balance Sheets as of
September 30, 1999 and 1998
German Consolidated Statements of
Income (Loss) for the years ended
September 30, 1999 and 1998
Notes to German Consolidated Financial
Statements
2. Portable Software Solutions
Report of Independent Auditors
Combined Balance Sheets as of September
30, 1999 and 1998
Combined Statements of Operations for the
years ended September 30, 1999 and 1998
Combined Statements of Stockholders' Equity
for the years ended September 30, 1999 and 1998
Combined Statements of Cash Flow for the
years ended September 30, 1999 and 1998
Notes to the Combined Financial Statements
(b) Pro Forma Financial Information
The following pro forma financial information is filed as part of this
report:
Pro forma Consolidated Financial Statements of Vertex
Industries, Inc,.
Pro forma Consolidated Balance Sheet - July 31, 1999 (unaudited)
Pro forma Consolidated Statement of Operations for the year ended
July 31, 1999 (unaudited)
Notes to Pro forma Consolidated Financial Statements
(c) Exhibits
23.1 Consent of ATM Consult
23.2 Consent of Ernst & Young
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
ICS International AG Identcode-Systeme, Neu-Anspach/Germany and its Subsidiaries
We have audited the German consolidated financial statements of ICS
International AG Identcode-Systeme, Neu-Anspach/Germany and its subsidiaries as
of September 30, 1999 and 1998, including the related statements of income for
the periods then ended and the notes. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the Federal Republic of Germany and in the United States of America. Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of ICS
International AG Identcode-Systeme, Neu-Anspach/Germany and its subsidiaries as
of September 30, 1999 and 1998, and the net income for periods then ended, in
conformity with accounting principles generally accepted in the Federal Republic
of Germany.
For the convenience of the reader of the financial statements only, possible
US-GAAP differences and its effect on consolidated net income and consolidated
shareholders' equity is indicated in the notes to the financial statements.
Eschborn/Taunus/Germany, at December 2, 1999
/s/ ATM Consult GmbH
Wirtschaftsprufungsgesellschaft
Pokoj
Wirtschaftsprufer
<PAGE>
Appendix 1
Page 1
ICS INTERNATIONAL AG IDENTCODE-SYSTEME
GERMAN CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
------
Sept. 30, 1999 Sept. 30, 1998
-------------- --------------
DM DM
<S> <C> <C>
A. FIXED ASSETS
I. Intangible Assets 175,301.00 127,791.72
II. Tangible Assets 429,593.79 523,140.69
III. Financial Assets 25,800.00 25,800.00
-------------- --------------
630,694.79 676,732.41
-------------- --------------
B. CURRENT ASSETS
I. Inventories
1. Work in process 537,554.84 120,358.00
2. Merchandise 4,127,057.53 4,338,930.75
3. Payments on account 44,466.64 12,800.00
-------------- --------------
4,709,079.01 4,472,088.75
-------------- --------------
II. Receivables and Other Assets
1. Trade accounts receivable 4,775,182.15 6,375,208.01
2. Receivables due from
unconsolidated affiliates 1.00 10,185.00
3. Other assets 485,981.24 622,930.61
-------------- --------------
5,261,164.39 7,008,323.62
-------------- --------------
III. Cash on hand, Bank Accounts 367,081.26 316,190.95
-------------- --------------
10,337,324.66 11,796,603.32
-------------- --------------
C. PREPAID EXPENSES AND
DEFERRED CHARGES 156,630.48 79,530.43
-------------- --------------
D. ACCUMULATED LOSS NOT
COVERED BY EQUITY 568,365.31 0.00
-------------- --------------
11,693,015.24 12,552,866.16
============== ==============
</TABLE>
<PAGE>
Appendix 1
Page 2
ICS INTERNATIONAL AG IDENTCODE-SYSTEME
GERMAN CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
Sept. 30, 1999 Sept. 30, 1998
-------------- --------------
DM DM
<S> <C> <C>
A. EQUITY
I. Subscribed capital 3,000,700.00 3,000,700.00
II. Additional paid-in capital 5,000,000.00 5,000,000.00
III. Accumulated losses -8,564,125.19 -7,187,777.90
IV. Translation adjustment -4,940.12 -4,502.93
V. Accumulated loss not covered by equity 568,365.31 0.00
-------------- --------------
0.00 808,419.17
-------------- --------------
B. ACCRUALS
Other accruals 1,616,720.43 1,276,616.34
-------------- --------------
C. LIABILITIES
1. Liabilities due to banks 4,755,531.80 3,706,645.39
2. Trade accounts payable 2,256,260.22 4,333,886.15
3. Advances from customers 839,057.04 676,105.66
4. Loan from former shareholder 700,000.00 550,000.00
5. Other liabilities 1,249,947.70 1,069,194.43
-------------- --------------
9,800,796.76 10,335,831.63
-------------- --------------
D. DEFERRED INCOME 275,498.05 131,999.02
-------------- --------------
11,693,015.24 12,552,866.16
============== ==============
</TABLE>
<PAGE>
Appendix 2
ICS INTERNATIONAL AG IDENTCODE-SYSTEME, NEU-ANSPACH/GERMANY
GERMAN CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
Oct. 1, 1998 Oct. 1, 1997
to Sept. 30, 1999 to Sept. 30, 1998
----------------- -----------------
DM DM
<S> <C> <C>
1. SALES REVENUE 33,491,492.22 34,056,064.52
2. Increase in work in process 417,196.84 4,416.92
3. Other operating income 759,413.06 803,186.73
--------------- ---------------
34,668,102.12 34,863,668.17
--------------- ---------------
4. Cost of materials and purchased goods 22,146,489.97 20,901,610.66
5. Personnel expenses 7,552,439.35 8,223,773.17
6. Amortization and depreciation of intangible
and tangible fixed assets 294,871.32 310,050.29
7. Other operating expenses 5,616,332.19 5,433,721.20
--------------- ---------------
35,610,132.83 34,869,155.32
--------------- ---------------
-942,030.71 -5,487.15
--------------- ---------------
8. Other interest and similar income 2,079.60 29,151.95
9. Write-down of financial assets 0.00 -472,642.54
10. Interest and similar expenses -333,200.24 -270,133.79
--------------- ---------------
-331,120.64 -713,624.38
--------------- ---------------
11. RESULTS FROM ORDINARY OPERATIONS -1,273,151.35 -719,111.53
12. Income Taxes 7,932.17 45,699.13
13. Other taxes 95,263.77 3,442.52
--------------- ---------------
14. NET LOSS -1,376,347.29 -768,253.18
15. Accumulated losses beginning of year -7,187,777.90 -6,419,524.72
--------------- ---------------
16. ACCUMULATED LOSSES AT END OF YEAR -8,564,125.19 -7,187,777.90
=============== ===============
</TABLE>
<PAGE>
Appendix 3
ICS INTERNATIONAL AG IDENTCODE-SYSTEME
NEU-ANSPACH/GERMANY
NOTES TO THE GERMAN CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
The German consolidated statements for ICS International AG Identcode-Systeme,
Neu-Anspach/Germany (in the following referred to as "ICS AG") and its
subsidiaries (referred thereafter as the "ICS Group") were prepared according to
the regulations of the German Commercial Code as well as the relevant
regulations specified in the German Stock Corporation Law.
The consolidated financial statements of ICS AG include the financial statements
of the following companies:
<TABLE>
<CAPTION>
Ownership
---------
%
<S> <C>
- - ICS International AG Identcode-Systeme,
Neu-Anspach/Germany (parent company),
- - PSD PrintScan Distributions GmbH,
Neu-Anspach/Germany, 100
- - ICS France Identcode Systems S.A.,
Guermantes/France, 100
- - ICS Identcode Systems Italia S.R.L.,
Milano/Italy, 51
- - Identcode Systems Nederland B.V.,
Ijsselstein/The Netherlands. 100
</TABLE>
SIGNIFICANT CORPORATE TRANSACTION
On September 22, 1999, Vertex Industries, Inc., Clifton, New Jersey, acquired
all of the shares of ICS AG from Mr. Gregor von Opel, Kronberg/Germany through
VTX GmbH (an inactive company, formerly named "FMS Goethit Asset Management
GmbH"), Dusseldorf/Germany,at a purchase price of DM 9.000.000,00. In connection
with the acquisition, Vertex also repaid bank debt in the amount of DM
3.000.000,00. The accompanying financial statements assume the acquisition
transaction was completed effective with close of business on September 30,
1999, and reflect the ICS AG historical cost basis of accounting with no
adjustment for purchase accounting.
In connection with the purchase of all of the shares of ICS AG, Vertex
Industries, Inc. also purchased the previously leased land and the office
building of the head office in Neu-Anspach/Germany from Mr. Gregor von Opel
through VTX GmbH at a purchase price of DM 3.000.000,00. The land and buildings
are not included in the accompanying financial statements because the lease has
been accounted for as an operating lease.
<PAGE>
Appendix 3
Page 2
ICS INTERNATIONAL AG IDENTCODE-SYSTEME
NEU-ANSPACH/GERMANY
NOTES TO THE GERMAN CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL COMMENTS
The financial statements as of September 30, 1998 and 1999, were compiled in
accordance with accounting standards generally accepted in the Federal Republic
of Germany. Consistent with the previous year, the cost-type format was used for
the statement of income (loss).
For the reader's convenience, the disclosures required for specific balance
sheet and income statements positions are included in these notes to the
financial statements accompanied by additional information.
The financial statements have been prepared on a going-concern basis which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The ICS Group prepares its financial statements
on the accrual basis of accounting. Under this method of accounting revenue, is
recognized when earned, e.g. when products are shipped and projects are
completed, and expenses are recognized when incurred.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
<PAGE>
Appendix 3
Page 3
ICS INTERNATIONAL AG IDENTCODE-SYSTEME
NEU-ANSPACH/GERMANY
NOTES TO THE GERMAN CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
ACCOUNTING AND VALUATION METHODS
A summary of significant accounting and valuation methods follows:
Intangible Assets (Software and Licenses) are stated at cost less amortization
on a straight-line basis.
Fixed assets are valued at purchase cost, less accumulated depreciation.
Depreciation is determined on a straight-line basis taking into account the
expected useful life of the related asset. Low-value goods costing up to DM
800,00 (or DM 1.000,00 for the Italian subsidiary) are fully depreciated and
treated as disposed in the year when purchased, whereas low-value goods of the
German head office purchased up to September 30, 1997 were capitalized and
depreciated over their useful lives. Maintenance, repairs and minor renewals are
expensed as incurred. When property is disposed of, the related cost and
accumulated depreciation is removed from the respective accounts, and any gain
or loss is included in income.
Investments are valued at acquisition cost. In the case of an expected
diminution of value, extraordinary depreciation to the lower fair value is
recognized.
Inventories, EDP-components and merchandise are valued at lower of cost or
market, including freight, duty, etc. Cost is determined on the basis of an
average or FIFO method. Work in process is valued at direct cost including
neccessary overhead and excluding interest and selling expense.
Receivables are valued at nominal value less adequate write-downs. An allowance
for doubtful accounts has been set-up which is determined by individually
expected loss of receivables, combined with the expected loss of interest.
Accrued expenses were determined on the basis of reasonable business judgment
under an appropriate estimation of all prevailing risks at the balance sheet
date.
Liabilities are recorded at the amounts to be repaid.
<PAGE>
Appendix 3
Page 4
ICS INTERNATIONAL AG IDENTCODE-SYSTEME
NEU-ANSPACH/GERMANY
NOTES TO THE GERMAN CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
CONSOLIDATION POLICIES
A summary of significant consolidation policies follows:
The financial statements of the companies included in the consolidated financial
statements were fully consolidated. The investment in consolidated subsidiaries
and their share capital is eliminated. Any investment amount in excess of the
related share capital of the respective consolidated subsidiary is recorded as
an expense, due to the loss history of the subsidiaries, by applying the book
value method.
Minority interest receivables are fully provisioned.
The accounts due from or due to consolidated companies are eliminated.
Differences arising from that were recorded as expense or income.
The effects of significant intercompany transactions, e.g. sales, purchases and
interest, have been eliminated. Unrealized intercompany profits are immaterial.
The Italian subsidiary's statutory year end is December 31. The consolidated
balance sheet at September 30, 1999 and 1998 includes the Italian subsidiary's
balance sheet as of September 30, 1999 and December 31, 1998, respectively. The
consolidated income statement for the years ended September 30, 1999 and 1998
includes the Italian subsidiary's results of operations adjusted to conform to
such periods.
Assets and liabilities of the consolidated companies are valued uniformly in
accordance with valuation methods in the financial statements of ICS AG.
Assets and liabilities denominated in foreign currencies are translated into
Deutsche Marks at the balance sheet date rate, whereas equity positions are
translated at historical rates. Differences in amounts arising from the
difference in rates are included in a separate component of equity "Translation
adjustment". Income statement positions were translated at the approximate
yearly average rate.
<PAGE>
Appendix 3
Page 5
ICS INTERNATIONAL AG IDENTCODE-SYSTEME
NEU-ANSPACH/GERMANY
NOTES TO THE GERMAN CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
EXPLANATORY COMMENTS WITH RESPECT TO THE BALANCE SHEET
FIXED ASSETS
The development of the specific fixed asset positions is revealed in the
analysis of fixed assets, which includes intangible and tangible fixed assets as
well as financial assets. See Appendix 3, page 16, development of fixed assets.
Intangible assets include mainly EDP-software for internal operating purposes,
such as warehousing, billing, customer ordering, bookkeeping, etc.
EDP-software located in operating departments is amortized over the expected
useful life of 3 years, whereas EDP-software for internal bookkeeping purposes
is amortized over the expected useful life of 5 years.
For financial reporting purposes, depreciation on tangible assets is computed
using the straight-line method. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Office furniture and fixtures, warehouse equipment 3 to 10 years
Transportation equipment 5 years
Low-value equipment
- purchased since October 1, 1997 (ICS AG only) 0 years
- purchased up to September 30, 1997 (ICS AG only) 5 years
- other 0 years
</TABLE>
In the year of acquisition, depreciation is determined with a full annual
depreciation if acquired in the first half of the fiscal year. One half of the
annual depreciation is recorded if the asset is acquired in the second half of
the business year.
<PAGE>
Appendix 3
Page 6
ICS INTERNATIONAL AG IDENTCODE-SYSTEME
NEU-ANSPACH/GERMANY
NOTES TO THE GERMAN CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
FINANCIAL ASSETS - INVESTMENTS
ICS AG is shareholder of the following foreign companies which are engaged in a
business similar to the Company:
<TABLE>
<CAPTION>
Currency Common stock Ownership %
------------------------------------------------------
<S> <C> <C> <C> <C>
STD Identcode Systems
Limited, North Cheam-
Sutton, Surrey/UK GBP 240.000 60.100 25,04
ICS Identifikacni-
Systemy A.S., Prag/
Czech Republic Czech crowns 1.000.000 430.000 43,00
(KCS)
</TABLE>
Because STD Identcode Systems Limited was not able to pay its current
liabilities, it went into bankruptcy in 1998. ICS AG has no control over this
subsidiary. Therefore, the subsidiary is fully written off in these financial
statements under the equity-method. The total cost of the investment in this
subsidiary (DM 696.265,41), which includes DM 260.697,60 investment in capital,
DM 315.413,74 short-term loan and DM 120.154,07 trade receivables is
written-down to zero in 1997/98. ICS AG has guaranteed no liabilities of ICS
Identcode-Systems GB Limited other than a guarantee of Merck Finck & Co. to
Barclays Bank, UK in favour of ICS UK amounting to GBP 42.000, which was fully
charged to ICS AG in 1997/98. There is no net income to disclose for the English
company.
ICS AG holds 43 % of the shares of ICS Identifikacni-Systemy A.S. The investment
in this subsidiary is DM 35.985,30, which includes the investment in capital of
DM 25.800,00 and trade receivables of DM 10.185,30, and which is recorded at
cost less provision for doubtful accounts due to immateriality. The net income
of the Czech company is approximately DM 60.000 for the business year 1998.
ACCOUNTS RECEIVABLE
All accounts receivable are due within one year.
<PAGE>
Appendix 3
Page 7
ICS INTERNATIONAL AG IDENTCODE-SYSTEME
NEU-ANSPACH/GERMANY
NOTES TO THE GERMAN CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
TRADE ACCOUNTS RECEIVABLES
There is a so-called global silent cession (which is similar to a pledge of
assets) of all trade receivables of ICS AG with customer names beginning with
letters A through K to Dresdner Bank AG, Bad Homburg v.d.H./Germany. There is
another global silent cession of all trade receivables with customer names
beginning with letters L through Z to Nassauische Sparkasse, Niederlassung
Hochtaunus, Bad Homburg v.d.H./Germany. A further cession of trade receivables
was granted to Banco Ambrosiano and Credito Carugate amounting to DM 138.000 at
September 30, 1999.
SUBSCRIBED CAPITAL
The authorized, issued, outstanding and fully paid-in share capital (common
stock) of ICS AG consists of the following shares:
<TABLE>
<CAPTION>
Number
of Total amount
shares Par value at par value
-------- ----------- ---------------
DM DM
<S> <C> <C>
24.340 5,00 121.700,00
2.879 1.000,00 2.879.000,00
------ ------------
27.219 3.000.700,00
====== ============
</TABLE>
Sole shareholder is Vertex Industries, Inc., Clifton, New Jersey, who acquired
all ICS AG shares through VTX GmbH, Dusseldorf/Germany, from Mr. Gregor von
Opel, Kronberg/Germany, effective September 22, 1999. As previously noted, the
accompanying financial statements assume the transaction closed on September 30,
1999 and reflects ICS AG historical cost basis of accounting with no adjustments
for purchase business accounting.
ADDITIONAL PAID-IN CAPITAL
To strengthen the financial basis of ICS AG, Mr. Gregor von Opel paid DM
5.000.000 to the Company during previous years. At the end of business year
1998/99 Vertex Industries, Inc. paid to ICS AG DM 3.000.000 used to paydown
certain bank debt which will be recorded as additional paid-in capital after
September 30, 1999, since this transaction is considered post-acquisition event.
<PAGE>
Appendix 3
Page 8
ICS INTERNATIONAL AG IDENTCODE-SYSTEME
NEU-ANSPACH/GERMANY
NOTES TO THE GERMAN CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
MINORITY INTEREST
ICS AG holds 51 % of the shares of ICS Identcode Systems Italia S.R.L.,
Milan/Italy. The remaining 49 % are held by Mr. Vieider, an Italian citizen. Due
to the negative shareholders` equity of ICS Identcode Systems Italia S.R.L.,
there is a minority interest receivable due from Mr. Vieider. This minority
interest receivable amounts to DM 500.771 at September 30, 1999 (DM 53.902 at
September 30, 1998) and is fully provisioned.
OTHER ACCRUALS
Other accruals were primarily made for Christmas bonuses, vacation claims and
bonuses, warranties, outstanding supplier invoices, commissions and additional
payroll taxes and social security contributions.
LIABILITIES
All liabilities are due within one year.
BANK LIABILITIES
The bank balance at Banco Ambrosiano and Credito Carugate is secured by a
guarantee of LIT 3.000.000 from the minority shareholder and by silent cession
of Italy trade receivables (LIT 136.000.000).
During 1998 and up to a few days before September 30, 1999, Dresdner Bank AG had
a guarantee of DM 500.000 and a declaration from the sole former shareholder,
Mr. Gregor von Opel, to keep the shareholders' equity at a defined level
together with a global silent cession (similar to a pledge of assets) of all
trade receivables due from customers with the names beginning with letters A
through K as security. Nassauische Sparkasse had similar securities, the
guarantee being limited to DM 1.500.000 and the global silent cession of all
trade receivables being limited to customer names beginning with letters L
through Z.
At about September 22/23, 1999, the new shareholder, Vertex Industries, Inc.,
paid DM 1.500.000,00 to each of the two banks in order to have the banks release
the previous shareholder out of the guarantees. These respective payments of DM
1.500.000,00 each will be recorded as additional paid-in capital within equity
after September 30, 1999, since this transaction is considered post-acquisition
event.
<PAGE>
Appendix 3
Page 9
ICS INTERNATIONAL AG IDENTCODE-SYSTEME
NEU-ANSPACH/GERMANY
NOTES TO THE GERMAN CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
COMMITMENTS AND CONTINGENT LIABILITIES
ICS Group leases its office and warehouse locations for the head office, the
German branches and the foreign subsidiaries under short- and medium-term lease
agreements. The rental contracts of the foreign consolidated subsidiaries and
most of the German branches can be terminated within one year. The rental
contract for the head office has a lease term until the year 2004. There is an
automatic extension of the lease term of up to five years, if no cancellation
notice is given by ICS AG.
At September 30, 1999 and 1998, the future minimum lease payments for office and
warehouse locations are as follows:
<TABLE>
<CAPTION>
9-30-1999 9-30-1998
----------- -----------
DM DM
<S> <C> <C>
Year ending September 30,
- 1999 - - 373.364
- 2000 420.396 373.364
- 2001 327.617 307.961
- 2002 303.276 300.000
- 2003 300.000 300.000
- 2004 300.000 300.000
- 2005 75.000 75.000
------------ ------------
1,726,289 2,029,689
============ ============
</TABLE>
The lease contract for the main office building in Neu-Anspach/Germany has been
recently negotiated with the new owner VTX GmbH. From October 1, 1999, the
monthly rent has been set at DM 15.000 for a lease term of five years.
<PAGE>
Appendix 3
Page 10
ICS INTERNATIONAL AG IDENTCODE-SYSTEME
NEU-ANSPACH/GERMANY
NOTES TO THE GERMAN CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
There are also non-cancelable lease agreements related to office equipment and
cars. The future minimum payments during the non-cancelable lease terms are as
follows:
<TABLE>
<CAPTION>
9-30-1999 9-30-1998
----------- -----------
DM DM
<S> <C> <C>
Cars, office and other equipment:
Year ending September 30,
- 1999 - 224.547
- 2000 291.779 144.675
- 2001 170.829 55.566
- 2002 50.176 15.701
- 2003 9.278 831
- 2004 3.496 -
and thereafter 5.650 -
--------- ---------
531,208 441,320
========= =========
</TABLE>
<PAGE>
Appendix 3
Page 11
ICS INTERNATIONAL AG IDENTCODE-SYSTEME
NEU-ANSPACH/GERMANY
NOTES TO THE GERMAN CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
EXPLANATORY COMMENTS WITH RESPECT TO THE
STATEMENT OF INCOME (LOSS)
SALES REVENUES
Sales revenues are analyzed according to the sales statistics of ICS AG as
follows:
<TABLE>
<CAPTION>
9-30-1999 9-30-1998
----------- -----------
DM DM
<S> <C> <C>
ICS-Germany
Hardware revenue 7.830.097,25 8.221.032,67
Stationary supply 6.963.817,03 7.544.347,71
Software packages 658.489,33 1.054.165,69
Software development projects 1.330.090,20 2.612.088,00
Maintenance and repairs, support 2.303.696,37 2.709.365,00
Other sales revenue 729.734,10 33.655,00
Sales discounts -197.247,44 - 226.450,95
-------------- --------------
19.618.676,84 21.948.203,12
The Netherlands
Sales revenue 2.401.876,97 2.646.770,01
France
Sales revenue 2.588.430,04 2.272.931,23
Italy
Sales revenue 3.521.591,08 3.805.383,95
PSD-Germany
Sales revenue 5.360.917,29 3.382.776,21
-------------- --------------
33.491.492,22 34.056.064,52
============== ==============
</TABLE>
<PAGE>
Appendix 3
Page 12
ICS INTERNATIONAL AG IDENTCODE-SYSTEME
NEU-ANSPACH/GERMANY
NOTES TO THE GERMAN CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
OTHER OPERATING INCOME
Other operating income consists primarily of the following items:
<TABLE>
<CAPTION>
9-30-1999 9-30-1998
----------- -----------
DM DM
<S> <C> <C>
ICS Germany
Foreign currency gains 290.654,24 425.579,27
Receipts on written-down receivables 57.861,54 14.375,64
Income from reversal of accruals 60.645,63 2.118,00
France
Primarily foreign currency gains 19.246,90 10.056,84
Italy
Primarily foreign currency gains 20.506,07 23.914,84
PSD-Germany
Primarily foreign currency gains 17.709,89 28.997,00
</TABLE>
<PAGE>
Appendix 3
Page 13
ICS INTERNATIONAL AG IDENTCODE-SYSTEME
NEU-ANSPACH/GERMANY
NOTES TO THE GERMAN CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
OTHER OPERATING EXPENSES
Other operating expenses consist of rental and leasing expenses for office
buildings and warehouses, maintenance and repairs, general and administrative
expenses, selling expenses and other.
Within general and administrative expenses the following items are of a
non-operating nature:
<TABLE>
<CAPTION>
9-30-1999 9-30-1998
----------- -----------
DM DM
<S> <C> <C>
ICS Germany
Foreign exchange losses 275.730,91 312.167,64
France
Primarily foreign exchange losses 15.435,92 8.460,45
Italy
Primarily foreign exchange losses 5.914,24 9.020,83
PSD-Germany
Primarily foreign exchange losses 82.652,80 0,00
</TABLE>
<PAGE>
Appendix 3
Page 14
ICS INTERNATIONAL AG IDENTCODE-SYSTEME
NEU-ANSPACH/GERMANY
NOTES TO THE GERMAN CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
ADDITIONAL INFORMATION
SUPERVISORY BOARD
The following individuals were assigned as supervisory board member during
1998/99:
Mr. Gregor von Opel, Kronberg/Taunus
Mr. Albert Keck (chairman), Eschborn/Taunus
Mr. Otto Leistner, Schmitten/Taunus
MANAGEMENT BOARD
The following individuals were assigned as members of the management board
during 1998/99:
Mr. Adrian Scott Thomas, Usingen (dismissed at March 10, 1999)
Mr. Ludger Lappenkueper, Roedermark (dismissed at September 30, 1998)
Mr. Siegfried Lemke, Buettelborn (assigned at March 10, 1999)
Mr. Joerg Killer, Offenbach/Main (assigned at March 10, dismissed at
July 16, 1999)
TOTAL REMUNERATION FOR THE MANAGEMENT
For the fiscal year 1998/99, management remuneration amounted to DM 117.931,00
(1997/98: DM 736.900,00).
EMPLOYEES
The average number of employees working for ICS Group during 1998/99 was 83
(1997/98: 74).
GROUP POSITION
These consolidated financial statements will be included in the consolidated
financial statements of Vertex Industries, Inc., Clifton/New Jersey, at the
highest group level, which are available there.
<PAGE>
Appendix 3
Page 15
ICS INTERNATIONAL AG IDENTCODE-SYSTEME
NEU-ANSPACH/GERMANY
NOTES TO THE GERMAN CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
US-GAAP CONSIDERATIONS
US-GAAP DIFFERENCES
The ICS Group consolidated financial statements comply with General Accepted
Accounting Principles in the Federal Republic of Germany, which differ in
certain respects from US-GAAP. Possible differences that may affect the
consolidated net income and stockholders` equity are considered to be
immaterial, except for the item stated below:
Under German GAAP the future tax benefit from application of income tax loss
carry forward is not allowed to be recorded, whereas US GAAP requires such
recognition. The tax benefit from the loss carry forward was determined by ICS
Group management to amount to DM 2.879.400 (gross) based on a corporate income
tax rate of 30 % (in case of full distribution of future earnings) and based on
a trade tax on income rate of 15 %. Due to the past loss history , which does
not allow reasonable estimates for future earnings, a valuation allowance of
100 % was taken into account, because significant portions of the tax benefit
may result from the application of tax losses in very far future years. The
valuation allowance also takes into account effects which may arise from
downward adjustments to future expected profits and from the expected change in
tax rates and the German tax system in the future (Unternehmenssteuerreform).
Therefore, for US-GAAP purposes, ICS AG management decided not to record the tax
benefit from the application of tax loss carry forwards to future earnings.
Neu-Anspach/Germany, at December 1, 1999
ICS International AG Identcode-Systeme
/s/ Siegfried Lemke
- ----------------------------------
Siegfried Lemke
<PAGE>
Appendix 3
Page 16
ANALYSIS OF FIXED ASSETS
FOR THE YEAR ENDING SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
ACQUISITION COST
Balance as of Additions Disposals Balance as of
Oct. 1, 1998 Sept. 30, 1999
------------------------------------------------------
DM DM DM DM
<S> <C> <C> <C> <C>
I. Intangible Assets
EDP-Software 483,693.63 104,393.82 256,510.94 331,576.51
------------------------------------------------------
II. Tangible Assets
Other Equipment, operational
and office equipment
a) Other Equipment, operational
and office equipment 1,231,912.84 123,925.71 119,066.55 1,236,772.00
b) Automobiles and transportation 125,036.79 0.00 0.00 125,036.79
c) Low value goods 188,170.94 39,394.89 39,394.89 188,170.94
------------------------------------------------------
1,545,120.57 163,320.60 158,461.44 1,549,979.73
------------------------------------------------------
III. Financial Assets
Investments in unconsolidated
affiliates
a) ICS Identcode Systems Limited
North Cheam-Sutton,
Surrey/England 260,697.60 0.00 0.00 260,697.60
b) ICS Identifikacni-Systemy AS
Prag/Czech Republic 25,800.00 0.00 0.00 25,800.00
------------------------------------------------------
286,497.60 0.00 0.00 286,497.60
------------------------------------------------------
2,315,311.80 267,714.42 414,972.38 2,168,053.84
======================================================
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED DEPRECIATION NET BOOK VALUE
Balance as of Depreciation Disposals Balance as of
Oct. 1, 1998 Sept. 30, 1999 Sept. 30 1999, Sept. 30, 1998
----------------------------------------------------------- -------------- ---------------
DM DM DM DM DM DM
<S> <C> <C> <C> <C> <C> <C>
I. Intangible Assets
EDP-Software 355,901.91 46,846.42 246,472.82 156,275.51 175,301.00 127,791.72
-------------------------------------------------------- -------------- ---------------
II. Tangible Assets
Other Equipment, operational
and office equipment
a) Other Equipment, operational
and office equipment 808,889.73 162,940.13 110,223.96 861,605.90 375,166.10 423,023.11
b) Automobiles and transportation 61,905.21 20,782.67 0.00 82,687.88 42,348.91 63,131.58
c) Low value goods 151,184.94 64,302.11 39,394.89 176,092.16 12,078.78 36,986.00
-------------------------------------------------------- -------------- ---------------
1,021,979.88 248,024.91 149,618.85 1,120,385.94 429,593.79 523,140.69
-------------------------------------------------------- -------------- ---------------
III. Financial Assets
Investments in unconsolidated
affiliates
a) ICS Identcode Systems Limited
North Cheam-Sutton,
Surrey/England 260,697.60 0.00 0.00 260,697.60 0.00 0.00
b) ICS Identifikacni-Systemy AS
Prag/Czech Republic 0.00 0.00 0.00 0.00 25,800.00 25,800.00
-------------------------------------------------------- -------------- ---------------
260,697.60 0.00 0.00 260,697.60 25,800.00 25,800.00
-------------------------------------------------------- -------------- ---------------
1,638,579.39 294,871.33 396,091.67 1,537,359.05 630,694.79 676,732.41
======================================================== ============== ===============
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
PORTABLE SOFTWARE SOLUTIONS - COMBINED
We have audited the accompanying combined balance sheets of Portable Software
Solutions Limited, its subsidiaries and associates as of September 30, 1998
and 1999 and the related combined statements of income and changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of company's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Portable
Software Solutions Limited, its subsidiaries and associates at September 30,
1998 and 1999 and the combined results of their operations and their cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Ernst & Young
Reading, England
December 2, 1999
- 1-
<PAGE>
PORTABLE SOFTWARE SOLUTIONS - COMBINED
- --------------------------------------------------------------------------------
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1998 1999
---- ----
<S> <C> <C>
ASSETS Stg'L' Stg'L'
Current assets
Cash 986,301 1,709,008
Accounts receivable 551,154 1,219,808
Inventories (note 2) 91,627 77,066
Prepaid expenses and other current assets 121,416 127,087
--------- ---------
Total current assets 1,750,498 3,132,969
Property and equipment, net (note 3) 475,856 395,001
--------- ---------
Total assets 2,226,354 3,527,970
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable 219,460 384,187
Accrued payables (note 6) 337,999 329,116
Deferred income 550,685 1,307,062
Capital lease obligations 71,900 96,524
--------- ---------
1,180,044 2,116,889
--------- ---------
Long-term liabilities
Capital lease obligations 158,872 129,445
Government grants and related loans (note 9) 49,876 90,488
--------- ---------
208,748 219,933
--------- ---------
Stockholders' equity
Common stock:
Issued and outstanding:
At September 30, 1998 and 1999 (note 7) 25,340 25,340
Retained earnings 606,232 1,149,204
Capital reserve 164,822 164,822
Cumulative translation adjustment 41,168 (148,218)
--------- ---------
Total stockholders' equity 837,562 1,191,148
--------- ---------
Total liabilities and shareholders' equity 2,226,354 3,527,970
========= =========
</TABLE>
See notes to combined financial statements
<PAGE>
PORTABLE SOFTWARE SOLUTIONS - COMBINED
- --------------------------------------------------------------------------------
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1998 1999
---- ----
Stg'L' Stg'L'
<S> <C> <C>
Net revenue - continuing activities 2,414,281 6,069,981
Cost of revenue 664,264 2,261,319
--------- ---------
Gross margin 1,750,017 3,808,662
--------- ---------
Operating expenses:
Distribution costs 220,348 226,346
Administrative expenses 1,044,803 943,560
Staff costs 1,397,383 1,965,813
--------- ---------
Total operating expenses 2,662,534 3,135,719
--------- ---------
(Loss) income from operations (912,517) 672,943
Interest receivable and similar income 50,370 36,620
Interest payable (15,358) (22,392)
--------- ---------
(Loss) income before provision for income taxes (877,505) 687,171
Provision for income taxes (note 5) (32,776) (104,914)
--------- ---------
Net (loss) income (910,281) 582,257
========= =========
</TABLE>
See notes to combined financial statements
<PAGE>
PORTABLE SOFTWARE SOLUTIONS - COMBINED
- --------------------------------------------------------------------------------
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
---------------------------------------------------------
Cumulative Total stock-
Common Retained translation Capital holders'
stock earnings adjustment reserve equity
----- -------- ---------- ------- ------
Stg'L' Stg'L' Stg'L' Stg'L' Stg'L'
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1997 25,340 1,534,161 (33,541) 162,359 1,688,319
Net loss - (910,281) - - (910,281)
Exchange gain - - 74,709 - 74,709
Dividends paid - (15,185) - - (15,185)
Transfer to capital reserve - (2,463) - 2,463 -
------ --------- -------- ------- ---------
Balance at September 30,
1998 25,340 606,232 41,168 164,822 837,562
====== ========= ======== ======= =========
Balance at October 1, 1998 25,340 606,232 41,168 164,822 837,562
Net income - 582,257 - - 582,257
Exchange loss - - (189,386) - (189,386)
Dividends paid - (39,285) - - (39,285)
------ --------- -------- ------- ---------
Balance at September 30,
1999 25,340 1,149,204 (148,218) 164,822 1,191,148
====== ========= ======== ======= =========
</TABLE>
See notes to combined financial statements
<PAGE>
PORTABLE SOFTWARE SOLUTIONS - COMBINED
- --------------------------------------------------------------------------------
COMBINED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1998 1999
---- ----
Stg'L' Stg'L'
<S> <C> <C>
Operating activities
Net (loss) income (910,281) 582,257
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortisation 93,244 109,591
Effect of changes in foreign currency exchange rates (32,960) (84,196)
Loss on disposal of tangible fixed assets 5,059 18,387
Changes in operating assets and liabilities:
Trade receivables 728,366 (668,654)
Inventories (3,513) 14,561
Prepaid expenses and other current assets (21,879) (5,671)
Trade payables and accrued payables (199,827) 155,844
Deferred revenues 59,602 756,377
--------- -------
Net cash provided by (used in) operating activities (282,189) 878,496
--------- -------
Investing activities
Acquisition of tangible fixed assets (8,062) (38,371)
Capital funding received 49,876 40,612
--------- --------
Net cash provided by investing activities 41,814 2,241
--------- --------
Financing activities
Dividends paid (15,185) (39,285)
Principal payments on capital leases (76,776) (89,880)
--------- ---------
Net cash used in financing activities (91,961) (129,165)
--------- ---------
Net increase (decrease) in cash (332,336) 751,572
Effect of exchange rate on cash (6,974) (28,865)
Cash at beginning of period 1,325,611 986,301
--------- ---------
Cash at end of period 986,301 1,709,008
========= =========
Supplemental disclosure of cash flow information
Interest paid 1,412 1,207
========= =======
Taxes paid 62,235 95,946
========= =======
</TABLE>
<PAGE>
PORTABLE SOFTWARE SOLUTIONS - COMBINED
- --------------------------------------------------------------------------------
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. ORGANISATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organisation
The combined group is made up of the following companies:
<TABLE>
<CAPTION>
Country of
Company incorporation
<S> <C>
Portable Software Solutions Limited United Kingdom
Portable Software Solutions Maintenance Limited United Kingdom
Portable Software Solutions (Ireland) Limited Ireland
Portable Software Solutions (Manufacturing) Limited Ireland
Trend Investments Limited Ireland
Portable Software Solutions Inc. United States of America
</TABLE>
Portable Software Solutions (Ireland) Limited, Portable Software Solutions
(Manufacturing) Limited and Portable Software Solutions Inc. are 100%
subsidiaries of Portable Software Solutions Limited. Portable Software
Solutions Maintenance Limited, Portable Software Solutions Limited and
Trend Investments Limited are under common ownership.
The group is a systems solutions provider in the hand-held computer market
place.
The company supplies total systems using hand-held, notebook, palm-top and
pen and display computers linked to sophisticated PC-networked
communication controllers and/or integration with clients' existing
mini-computer and main-frame database systems. The company also provides
related development and professional services, including support, project
management, implementation and training services.
(b) Use of estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from
those estimates.
(c) Basis of presentation and principles of combination
The accompanying combined financial statements are prepared in accordance
with generally accepted accounting principles in the United States of
America and include the company, its wholly-owned subsidiaries and its
related subsidiaries.
(d) Foreign currency translation
Sterling (Stg'L') is the functional currency of the companies
incorporated in the United Kingdom. The Irish pound (IR'L') is the
functional currency of the companies incorporated in Ireland and the US
dollar (US$) is the functional currency of the company incorporated in the
United States of America.
Transaction gains or losses arising on changes in the exchange rates
between functional currencies and foreign currencies are included in net
income (loss) for the year.
The results, assets and liabilities of all the group companies are
translated into sterling, the reporting currency, at the exchange rate
ruling at the balance sheet date. Translation adjustments arising are
reported as a component of shareholders' equity.
<PAGE>
PORTABLE SOFTWARE SOLUTIONS - COMBINED
- --------------------------------------------------------------------------------
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (CONTINUED)
1. ORGANISATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
(e) Revenue recognition
The group's revenue is derived from the sale of hand-held computer systems,
maintenance, training and related services. For 1999, the group followed
the revenue recognition criteria of Statement of Position 97-2 ("SOP 97-2")
issued by the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants.
The group recognised professional service revenue when earned and
recognised technical support revenue rateably over the term of the
maintenance agreement, generally twelve months.
Where the professional services relate to arrangements requiring
significant production, modification or customisation of software, and the
service element does not meet the criteria for separate accounting, the
entire arrangement, including the software element, is accounted for in
conformity with the percentage-of-completion contract accounting method.
Percentage-of-completion is generally measured using input measures,
primarily labour costs where such costs indicated progress to completion.
(f) Cost of revenue
Cost of revenue includes the costs of products, the hardware costs
associated with the contract and also materials (such as diskettes,
packaging and documentation).
(g) Research and development
Research and development expenditures are generally charged to operations
as incurred. Statement of Financial Accounting Standard Number 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed", requires capitalisation of certain software
development costs subsequent to the establishment of technological
feasibility. Based on the group's product development process,
technological feasibility is established upon completion of a working
model. Development costs incurred by the group between completion of the
working model and the point at which the product is ready for general
release have been insignificant. Through September 30, 1999, all research
and development costs have been expensed.
(h) Property and equipment
Property and equipment is stated at cost. Depreciation and amortisation are
computed using the straight line method over the estimated useful lives of
the assets as follows:
<TABLE>
<S> <C>
Office equipment 7 years
Fixtures and fittings (owned and leased) 7 years
Computer accessories 4 years
Motor vehicles (owned and leased) 4 years
Leased computer equipment 7 years
</TABLE>
(i) Inventories
Inventories are stated at the lower of cost and net realisable value.
<PAGE>
PORTABLE SOFTWARE SOLUTIONS - COMBINED
- --------------------------------------------------------------------------------
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (CONTINUED)
1. ORGANISATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
(j) Deferred taxation
The group uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws which
will be in effect when the differences are expected to reverse.
(k) Grants
Capital grants received and receivable are treated as deferred credits and
are released to income over the lives of the fixed assets to which they
relate.
Other grants are credited to income in the year in which the related
expenditure is incurred.
(l) Leased assets
Assets held under leasing arrangements that transfer substantially all the
risks and rewards of ownership to the company are capitalised. The capital
element of the related rental obligations is included in creditors. Leasing
charges under capital leases are charged to revenue so as to produce a
constant periodic rate of charge on the net obligation outstanding in each
year.
Rentals in respect of all other leases are charged against income on a
straight line basis over the lease term.
(m) Recent accounting pronouncements
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-9, "Modification of SOP 97-2 Software Revenue
Recognition, With Respect to Certain Transactions". The SOP requires
recognition of revenue using the residual method, if vendor-specific
objective evidence of fair value is not available. SOP 98-9 is effective on
December 15, 1998 and amends SOP 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition", to extend the
deferral of the application of certain requirements of SOP 97-2 provided by
SOP 98-4 through fiscal years beginning on or before March 15, 1999. The
company believes that the adoption of this amended accounting standard will
not have a material impact on the company's financial statements. All other
provisions of this SOP are effective for transactions entered into in
fiscal years beginning on or after March 15, 1999.
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for Computer Software Developed for
or Obtained for Internal Use". SOP 98-1 applies to all non-governmental
entities and provides revised guidance for the accounting treatment for
software which is internally developed, acquired or modified solely to meet
the entity's internal needs. The company has not yet adopted SOP 98-1. The
company believes that SOP 98-1 will not have a material effect on the
company's financial statements or operating results.
<PAGE>
PORTABLE SOFTWARE SOLUTIONS - COMBINED
- --------------------------------------------------------------------------------
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (CONTINUED)
2. INVENTORIES
<TABLE>
<CAPTION>
1998 1999
Stg'L' Stg'L'
<S> <C> <C>
Finished goods and goods for resale 91,627 77,066
====== ======
</TABLE>
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1998 1999
Stg'L' Stg'L'
<S> <C> <C>
Property and equipment consist of the following:
Property and equipment
Office equipment 312,290 228,920
Fixtures and fittings 140,395 140,583
Computer accessories 8,159 32,639
Motor vehicles 43,594 34,467
------- -------
Total 504,438 436,609
Less: Accumulated depreciation and amortisation 263,660 262,798
------- -------
Net property and equipment 240,778 173,811
------- -------
Property and equipment held under capital leases
Fixtures and fittings 63,011 60,982
Motor vehicles 159,134 196,752
Computer accessories 24,708 28,122
Office equipment 86,616 114,874
------- -------
Total 333,469 400,730
Less: Accumulated depreciation and amortisation 98,391 179,540
------- -------
Net property and equipment held under capital leases 235,078 221,190
------- -------
Net property, equipment and capital leases 475,856 395,001
======= =======
</TABLE>
<PAGE>
PORTABLE SOFTWARE SOLUTIONS - COMBINED
- --------------------------------------------------------------------------------
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (CONTINUED)
4. CAPITAL LEASES
The following is a schedule by year of future minimum lease payments under
capital leases, together with the present value of the net minimum lease
payments as of September 30, 1999:
<TABLE>
<CAPTION>
Stg'L'
<S> <C>
Year ending September 30, 2000 117,954
Year ending September 30, 2001 92,098
Year ending September 30, 2002 51,690
Year ending September 30, 2003 11,178
-------
Total minimum lease payments 272,919
Less: Amount representing interest (46,950)
-------
Present value of net minimum lease payments 225,969
=======
</TABLE>
The current portion and non-current portion of present value of net minimum
lease payments as of September 30, 1999 was Stg'L'96,524 and Stg'L'129,445,
respectively.
5. INCOME TAXES
<TABLE>
<CAPTION>
1998 1999
Stg'L' Stg'L'
<S> <C> <C>
The provision for income taxes consists of the following:
Current
United Kingdom 32,776 35,347
Ireland - 69,567
------- -------
Total provision for income taxes 32,776 104,914
======= =======
</TABLE>
The are no material differences in the provision for income taxes from the
amount computed by applying the statutory income tax rate to income before
taxes.
<PAGE>
PORTABLE SOFTWARE SOLUTIONS - COMBINED
- --------------------------------------------------------------------------------
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (CONTINUED)
6. ACCRUED PAYABLES
<TABLE>
<CAPTION>
1998 1999
Stg'L' Stg'L'
<S> <C> <C>
Accrued expenses and other liabilities consist of
the following:
Professional fees 64,280 39,231
Salary 11,506 23,904
Expense accruals 92,955 67,470
Corporation tax 30,828 62,135
Sales taxes 138,430 83,507
Income tax - 52,869
------- -------
337,999 329,116
======= =======
</TABLE>
7. STOCKHOLDER'S EQUITY
The authorised and issued common stock of the group companies, as disclosed
in the combined balance sheets, are as follows:
<TABLE>
<CAPTION>
Number Number
Authorised Issued
<S> <C> <C>
Portable Software Solutions Limited
- Common stock of Stg'L'0.10 each 300,000 251,000
======= =======
Portable Software Solutions Maintenance Limited
- Common stock of Stg'L'1 each 100,000 200
======= ====
Trend Investments Limited
- A Ordinary shares of Stg'L'0.20 each 200,000 85
- B Ordinary shares of Stg'L'0.20 each 200,000 85
- C Ordinary shares of Stg'L'0.20 each 100,000 30
======= ====
</TABLE>
8. SEGMENTAL INFORMATION
The company has adopted Statement of Financial Accounting Standards Number
131, "Disclosures About Segments of an Enterprise and Related Information",
("FAS 131") in the fiscal year ended September 30, 1999. FAS 131 supersedes
Statement of Financial Accounting Standards Number 14, "Financial Reporting
for Segments of a Business Enterprise" ("FAS 14"). FAS 131 changes current
practice under FAS 14 by establishing a new framework for reporting
information regarding operating segments in annual financial statements and
requires selected information for these segments in interim financial
statements. FAS 131 also establishes standards for related disclosures
about products and services and geographic areas.
<PAGE>
PORTABLE SOFTWARE SOLUTIONS - COMBINED
- --------------------------------------------------------------------------------
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (CONTINUED)
8. SEGMENTAL INFORMATION (Continued)
Operating segments are identified as components of an enterprise about
which separate discrete financial information is available that is
evaluated by the chief operating decision maker or decision making group to
make decisions about how to allocate resources and assess performance. The
group's chief operating decision maker is the Chief Executive Officer. To
date, the group has viewed its operations as principally two segments:
<TABLE>
<CAPTION>
Revenue Gross margin
Stg'L' Stg'L'
<S> <C> <C>
Year ended September 30, 1999
Systems 4,850,849 2,661,268
Services 1,219,132 1,147,394
--------- ---------
Segments total 6,069,981 3,808,662
========= =========
Year ended September 30, 1998
Systems 1,338,223 721,129
Services 1,076,058 1,028,888
--------- ---------
Segments total 2,414,281 1,750,017
========= =========
</TABLE>
The group does not report staff costs, indirect operating expenses,
depreciation and amortisation, interest income (expenses), income taxes,
capital expenditures or identifiable assets by industry segment. In the
future, the group plans to identify all costs relating to each product line
to further ascertain the profitability of each segment.
9. GOVERNMENT GRANTS AND RELATED LOANS
Under employment grant agreements between Portable Software Solutions
(Manufacturing) Limited (the "company") and the Irish Development
Authority (the "IDA"), the company has offset against related payroll
expense amounts of Stg'L'9,864 and Stg'L'9,864 in the years ended September
30, 1998 and 1999, respectively. Under the terms of the agreements between
the company and the IDA, these grants may be repaid to the IDA in certain
circumstances, principally the failure to maintain the related jobs for a
period of five years from the payment of the first instalment of the
related employment grant. The company has complied with the terms of the
grant agreements through September 30, 1999.
<PAGE>
PORTABLE SOFTWARE SOLUTIONS - COMBINED
- --------------------------------------------------------------------------------
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (CONTINUED)
9. GOVERNMENT GRANTS AND RELATED LOANS (Continued)
Under an agreement between Portable Software Solutions (Manufacturing)
Limited (the "company") and Enterprise Ireland in the years ended
September 30, 1998 and 1999, the company received Stg'L'49,876 and
Stg'L'40,612, respectively, in the form of non-interest bearing loans
which are repayable at rates linked to future revenues earned in the
related markets. Under the terms of the agreement, the loan is repaid at a
rate of 4.2% of project sales made in the United States of America by
Portable Software Solutions Inc. in the period from July 1998 to June 2001
and is due for repayment commencing in July 1999 and ending in July 2002.
If the repayments calculated as a percentage of sales are not sufficient to
repay the loans in full, Enterprise Ireland may write-off the balance. The
company has credited all such loan amounts to the balance sheet liability
account "Government grants repayable and related loans" as the company
believes such loans will be repaid in full.
10. IMPACT OF THE YEAR 2000 (unaudited)
The year 2000 issue is a result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
company's computer programs that have time-sensitive software may recognise
a date using "00" as the year 1900 rather than the year 2000. This
situation could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar
normal business activities.
Based on preliminary assessment, the company believes that it will not be
required to modify or replace significant portions of its software to
function properly with respect to dates in the year 2000 or thereafter. The
company presently believes that any potential modifications to existing
software and conversions to new software will not pose significant
operational problems for its computer systems. However, if such
modifications and conversions are not made or are not completed on a timely
basis, the year 2000 issue could have a material impact on the operations
of the company.
The company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the
company's interfaces are vulnerable to those third parties' failure to
remediate their own year 2000 issues. There can be no guarantee that the
systems of other companies on which the company's systems rely will be
converted on a timely basis and would not have an adverse effect on the
company's systems. The company has preliminarily determined it has no
exposure to contingencies related to the year 2000 issue for the products
and services it has sold.
<PAGE>
VERTEX INDUSTRIES, INC.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENT
(UNAUDITED)
The accompanying unaudited pro forma consolidated balance sheet of the Company
as of July 31, 1999, gives effect to the acquisitions of International
Aktiengesellschaft Identcode-Systeme ("ICS") and Portable Software Solutions
Limited, Portable Software Solutions (Maintenance) Limited and Trend Investments
Limited, collectively Portable Software Solutions Group ("PSS") and the
financing of such acquisitions, as if all such transactions had occurred on July
31, 1999.
The accompanying unaudited pro forma consolidated statement of operations of the
Company for the year ended July 31, 1999 gives effect to the acquisitions of ICS
and PSS and the financing thereof, as if all such transactions had occurred at
the beginning of the fiscal year.
The pro forma consolidated financial statements are based upon certain
assumptions and estimates, which are subject to change. These statements are not
necessarily indicative of the actual results of operations that might have
occurred, nor are they necessarily indicative of the expected results in the
future. The pro forma consolidated financial statements should be read in
conjunction with the Company's historical consolidated financial statements and
the related notes.
<PAGE>
VERTEX INDUSTRIES, INC.
PROFORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
Vertex Proforma
Industries, Inc. PSS ICS Combined
July 31, September 30, September 30, Proforma Vertex
1999 1999 1999 Adjustments Industries, Inc.
-------------- ------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,353,650 $ 2,812,685 $ 199,912 $ 9,933,138 A
(9,628,683) B
(902,734) C
(1,593,118) D
(371,727) F $ 1,803,123
Accounts receivable, less allowance for doubtful
accounts 914,717 2,007,560 2,600,564 5,522,841
Notes and other receivables, net 64,044 - 264,665 328,709
Inventories, net 295,457 126,835 2,564,565 2,986,857
Investment securities 282,814 - - 282,814
Prepaid expenses and other current assets 29,948 209,160 85,301 324,409
---------------------------------------------------------------------------
Total current assets 2,940,630 5,156,240 5,715,007 (2,563,124) 11,248,753
---------------------------------------------------------------------------
PROPERTY, EQUIPMENT, AND CAPITAL LEASES
Property and Equipment 1,913,470 718,572 844,119 1,593,118 F
(1,042,675) H 4,026,604
Capital Leases 141,757 659,521 - (295,487) H 505,791
---------------------------------------------------------------------------
Total property, equipment and capital leases 2,055,227 1,378,093 844,119 254,956 4,532,395
---------------------------------------------------------------------------
Less: Accumulated depreciation and amortization (1,764,863) (728,000) (610,162) 1,338,162 H (1,764,863)
---------------------------------------------------------------------------
Net property, equipment and capital leases 290,364 650,093 233,957 1,593,118 2,767,532
---------------------------------------------------------------------------
OTHER ASSETS:
Goodwill - - - 14,822,574 E 14,822,574
Investment in partner companies - - 14,050 14,050
Deferred tax asset 230,000 - - 230,000
Licensing cost, net of amoritzation 118,680 - - 118,680
Other assets 97,519 - 95,469 192,988
---------------------------------------------------------------------------
Total other assets 446,199 - 109,519 14,822,574 15,378,292
---------------------------------------------------------------------------
Total assets $ 3,677,193 $ 5,806,333 $ 6,058,483 $13,852,568 $29,394,577
===========================================================================
</TABLE>
(See notes to proforma consolidated financial statements)
<PAGE>
VERTEX INDUSTRIES, INC.
PROFORMA CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Vertex Proforma
Industries, Inc. PSS ICS Combined
July 31, September 30, September 30, Proforma Vertex
1999 1999 1999 Adjustments Industries, Inc.
-------------- ------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Current portion of obligations under capital leases $ 6,269 $ 158,859 $ - $ 165,128
Loan payable bank - - 2,589,863 $(1,593,118) D 996,745
Advances from customers - - 456,950 456,950
Accounts payable 226,251 632,295 1,228,759 2,087,305
Notes payable - - - 3,205,318 B 3,205,318
Liabilities due to shareholder - - 381,220 381,220
Accrued expenses and other liabilities 272,567 541,659 1,561,187 493,636 A
321,700 C 3,190,749
Deferred revenue 300,774 2,151,163 150,036 2,601,973
---------------------------------------------------------------------------
Total current liabilities 805,861 3,483,976 6,368,015 2,427,536 13,085,388
---------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Obligations Under Capital Leases, net of current
portion and other long term liabilities 5,155 213,040 - 218,195
Mortgage note payable - - - 1,221,390 F 1,221,390
Other long term liabilities - 148,925 - 148,925
---------------------------------------------------------------------------
Total long-term liabilities 5,155 361,965 - 1,221,390 1,588,510
---------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock - - - -
Common Stock 26,195 41,705 1,634,181 (1,675,886) G
52,248 A
6,035 B 84,478
Additional paid-in capital 5,290,837 271,264 2,723,000 (2,994,264) G
9,387,254 A
2,408,965 B 17,087,056
Accumulated deficit (2,665,059) 1,881,425 (4,689,249) 2,807,824 G (2,665,059)
Accumulated other comprehensive income 259,373 (234,002) 22,536 211,466 G 259,373
---------------------------------------------------------------------------
2,911,346 1,960,392 (309,532) 10,203,642 14,765,848
---------------------------------------------------------------------------
Less: Treasury Stock (45,169) - - (45,169)
---------------------------------------------------------------------------
Total stockholders' equity 2,866,177 1,960,392 (309,532) 10,203,642 14,720,679
---------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 3,677,193 $ 5,806,333 $ 6,058,483 $13,852,568 $29,394,577
===========================================================================
</TABLE>
(See notes to proforma consolidated financial statements)
<PAGE>
VERTEX INDUSTRIES, INC. AND SUBSIDIARIES
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Vertex Proforma
Industries, Inc. PSS ICS Combined
July 31, September 30, September 30, Proforma Vertex
1999 1999 1999 Adjustments Industries, Inc.
-------------- ------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $ 7,219,431 $ 9,886,421 $ 19,280,863 $ 36,386,715
OPERATING EXPENSES:
Cost of sales 3,987,997 3,683,101 12,232,071 19,903,169
Selling and administrative 1,700,705 5,107,271 7,632,715 (105,154) C 14,335,537
Amortization of goodwill 1,482,257 A 1,482,257
Research and development 777,263 - - 777,263
-----------------------------------------------------------------------------
Total operating expenses 6,465,965 8,790,372 19,864,786 1,377,103 36,498,226
-----------------------------------------------------------------------------
Operating income 753,466 1,096,049 (583,923) (1,377,103) (111,511)
OTHER INCOME (EXPENSE):
Interest income 53,171 59,644 1,171 113,986
Interest expense (5,295) (36,471) (187,568) (93,463) B (322,797)
Other - - - -
-----------------------------------------------------------------------------
47,876 23,173 (186,397) (93,463) (208,811)
-----------------------------------------------------------------------------
Income before taxes 801,342 1,119,222 (770,320) (1,470,566) (320,322)
-----------------------------------------------------------------------------
Income tax provision 170,000 170,878 4,465 345,343
-----------------------------------------------------------------------------
Net income $ 631,342 $ 948,344 $ (774,785) $(1,470,566) $ (665,665)
=============================================================================
INCOME PER SHARE OF COMMON STOCK:
Basic $ 0.12 $ (0.04)
Fully Diluted $ 0.11 $ (0.04)
</TABLE>
(See notes to proforma consolidated financial statements)
<PAGE>
VERTEX INDUSTRIES, INC.
NOTES TO PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
1. Background
Until the acquisitions of ICS and PSS on September 22, 1999 and September
27, 1999, the Company sold and distributed bar code scanners, printers,
data collection terminals, software, automated card devices and precision
weighing equipment to customers primarily within the United States. The
Company has also provided systems integration for turnkey automated data
collection solutions in real-time systems and warehouse management systems.
In addition, through the Netweave license agreement, the Company has sold
the Netweave middleware product. Through the acquisition of ICS and PSS,
the Company is now also a provider of integrated high-end wireless data
capture solutions to industrial users and handheld terminal solutions to
mobile workers, substantially in Germany, the United Kingdom and Ireland.
2. Historical financial statements
The historical data in these pro forma consolidated financial statements
are derived from the financial statements of the Company, ICS and PSS.
The historical financial data presented in the proforma consolidated
balance sheet represent the financial position of the Company as of July
31, 1999 and ICS and PSS as of September 30, 1999. The historical financial
data presented for the year ended July 31, 1999 in the pro forma
consolidated statement of operations represent the results of operations of
(i) the Company for the year ended July 31, 1999 and for each of ICS and
PSS for the year ended September 30, 1999.
3. The acquisitions
The aggregate consideration paid by the Company for ICS and PSS, including
transactions costs, was approximately $16.5 million. Based on management's
preliminary analysis, it is estimated that the carrying value of the assets
and liabilities of ICS and PSS approximate their fair values.
<TABLE>
<S> <C>
ICS purchase price (DM 9,000,000) $5,161,700
PSS purchase price (Stg'L'6,250,000) 10,087,300
Transaction costs 1,224,434
-----------
16,473,434
ICS net liabilities acquired (309,532)
PSS net assets acquired 1,960,392
-----------
Purchase price in excess of net tangible assets acquired $14,822,574
===========
</TABLE>
4. Pro forma adjustments
Balance sheet adjustments:
A) Record the investment by Edwardstone & Company and MidMark Capital,
L.P., net of expenses, which was used to fund the
acquisition of PSS and ICS.
B) Record the acquisition consideration.
C) Record acquisition expenses.
D) Record debt repayment.
E) Record the excess of the purchase price over the estimated fair value
of the net assets acquired.
<PAGE>
F) Record the acquisition of land and building from ICS' sole
shareholder.
G) Record the elimination of the stockholder's equity of ICS and PSS.
H) Eliminate accumulated depreciation and amortization relating to
acquired property, equipment and capital leases.
Statement of operations:
A) Record the amortization of the excess of cost over the fair value of
net assets acquired using an estimated useful life of 10 years.
B) Record interest related to mortgage on building acquired and notes
payable to former ICS shareholder net of interest savings on
repayment of debt.
C) Record reversal of operating lease expense for the building net of
depreciation expense on the building acquired.
5. Earnings per share
Earnings per share is calculated by dividing the net income by the weighted
average outstanding shares during the period. The weighted average shares
outstanding during the period are calculated as follows:
<TABLE>
<CAPTION>
Basic Fully diluted
<S> <C> <C>
Average shares outstanding per Company's
July 31, 1999 financial statements 5,191,579 5,910,688
Issued in connection with acquisitions 1,207,500 1,207,500
Issued to Edwardstone and MidMark Capital 10,449,642 10,449,642
--------------------------------
Pro forma average shares outstanding 16,848,721 17,567,830
================================
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERTEX INDUSTRIES, INC.
Registrant
/s/ Nicholas R.H. Toms
------------------------------
Name: Nicholas R.H. Toms
Title: Chief Executive Officer
December 6, 1999
STATEMENT OF DIFFERENCES
------------------------
The British pound sterling sign shall be expressed as ................ 'L'
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-58841; Form S-8 No. 333-02391; Form S-8 No. 333-00032;
Form S-8 No. 333-67055; Form S-8 No. 333-20229; and Form S-8 No. 333-58843) of
Vertex Industries, Inc. of our report dated December 2, 1999, with respect to
the consolidated financial statements of ICS International AG Identcode-Systeme
as of September 30, 1999 and 1998 and for the years then ended, included in the
Current Report (Form 8-K/A) dated September 22, 1999, filed with the Securities
and Exchange Commission on December 6, 1999.
/s/ ATM Consult GMBH
Wirtschaftsprufungsgesellschaft
Eschborn/Taunus/Germany
December 2, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-58841; Form S-8 No. 333-02391; Form S-8 No. 333-00032;
Form S-8 No. 333-67055; Form S-8 No. 333-20229; and Form S-8 No. 333-58843) of
Vertex Industries, Inc. of our report dated December 2, 1999, with respect to
the combined financial statements of Portable Software Solutions as of
September 30, 1999 and 1998 and for the years then ended, included in the
Current Report (Form 8-K/A) dated September 22, 1999, filed with the Securities
and Exchange Commission on December 6, 1999.
/s/ Ernst & Young
Reading, England
December 2, 1999
