<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 2000
COMMISSION FILE NUMBER 0-15066
VERTEX INTERACTIVE, INC. (FORMERLY VERTEX INDUSTRIES, INC.)
-----------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-2050350
------------------------- ------------------------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
23 CAROL STREET CLIFTON, NEW JERSEY 07014
----------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (973) 777-3500
--------------
INDICATED 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 PRECEDING 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: 22,524,317 SHARES OUTSTANDING AS OF
AUGUST 18, 2000.
1
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VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2000
I N D E X
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I. Financial Information
Item 1 Consolidated Financial Statements
Balance Sheets-
June 30, 2000 and September 30, 1999 ........................... 3
Statements of Operations-
Nine and three months ended June 30, 2000 and 1999 ............. 5
Statements of Changes in Stockholders' Equity-
For the year ended September 30, 1999, and the nine months
ended June 30, 2000 ............................................ 6
Statements of Cash Flows - nine months ended
June 30, 2000 and 1999 ......................................... 7
Notes to Consolidated Financial Statements ..................... 8
Item 2. Management's Discussion and Analysis Of
Consolidated Financial Condition and Results of Operations ..... 16
Part II -Other Information
Item 1. Legal Proceedings ...................................... 21
Item 4. Submission of Matters to Vote of Security Holders ...... 21
Item 6. Exhibits and Reports on Form 8-K ....................... 21
Signatures ..................................................... 22
</TABLE>
2
<PAGE>
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
------------- --------------
(See Note 1)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,198,688 $ 1,998,759
Accounts receivable, less allowance for doubtful accounts
of $110,360 and $125,166 at June 30, 2000 and
September 30, 1999, respectively 9,085,257 5,807,404
Inventories, net 5,808,044 3,102,094
Marketable securities 22,625 42,309
Prepaid expenses and other current assets 1,133,344 662,706
------------ ------------
Total current assets 23,247,958 11,613,272
------------ ------------
PROPERTY, EQUIPMENT, AND CAPITAL LEASES
Property and Equipment 4,914,678 4,158,814
Capital Leases 398,104 505,792
------------ ------------
Total property, equipment and capital leases 5,312,782 4,664,606
Less: Accumulated depreciation and amortization (2,010,244) (1,849,610)
------------ ------------
Net property, equipment and capital leases 3,302,538 2,814,996
------------ ------------
OTHER ASSETS:
Intangible Assets, net of amortization of $724,036 at
June 30, 2000 and $0 at September 30, 1999 30,472,765 15,822,576
Capitalized software, net of amortization of $32,183 567,536 --
Other assets 757,289 274,083
------------ ------------
Total other assets 31,797,590 16,096,659
------------ ------------
Total assets $ 58,348,086 $ 30,524,927
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
--------------- --------------
(See Note 1)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of obligations under capital leases $ 225,644 $ 165,239
Bank credit lines 2,213,580 996,745
Notes payable 2,078,671 3,205,318
Current portion of Mortgage notes payable 76,546 103,237
Accounts payable 4,713,406 2,359,377
Loan payable to former shareholder 340,732 381,220
Accrued expenses and other liabilities 5,349,773 4,465,190
Advances from customers 1,078,358 1,272,393
Deferred revenue 2,775,850 2,202,321
------------ ------------
Total current liabilities 18,852,560 15,151,040
------------ ------------
LONG-TERM LIABILITIES:
Obligations under capital leases 326,169 217,084
Mortgage notes payable 1,527,921 1,118,153
Other long term liabilities 132,844 148,925
------------ ------------
Total long-term liabilities 1,986,934 1,484,162
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; 2,000,000 shares
authorized, none issued and outstanding -- --
Common stock, par value $.005 per share; 32,000,000 shares
authorized; 22,442,317 and 18,526,746 shares issued at
June 30, 2000 and September 30, 1999, respectively 112,211 92,633
Additional paid-in capital 42,704,653 17,202,093
Accumulated deficit (4,209,418) (3,378,700)
Accumulated other comprehensive income (1,053,685) 18,868
------------ ------------
37,553,761 13,934,894
Less: Treasury stock, 10,000 shares at cost (45,169) (45,169)
------------ ------------
Total stockholders' equity 37,508,592 13,889,725
------------ ------------
Total liabilities and stockholders' equity $ 58,348,086 $ 30,524,927
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 NINE MONTHS ENDED JUNE 30
------------------------------- ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
(See Note 1) (See Note 1)
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 12,256,621 $ 1,937,304 $ 32,834,445 $ 8,379,689
COST OF SALES 7,984,358 1,183,094 22,642,626 5,075,529
------------ ------------ ------------ ------------
GROSS PROFIT 4,272,263 754,210 10,191,819 3,304,160
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling and administrative 3,683,372 785,739 8,966,431 2,074,975
Research and development 322,305 214,772 901,292 544,851
Amortization of intangibles 309,599 -- 724,036 --
------------ ------------ ------------ ------------
Total operating expenses 4,315,276 1,000,511 10,591,759 2,619,826
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (43,013) (246,301) (399,940) 684,334
------------ ------------ ------------ ------------
OTHER INCOME AND (EXPENSES):
Interest income 141,730 13,324 210,186 44,320
Interest expense (69,550) (610) (364,517) (6,889)
------------ ------------ ------------ ------------
Net other income 72,180 12,714 (154,331) 37,431
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 29,167 (233,587) (554,271) 721,765
------------ ------------ ------------ ------------
Income tax provision (benefit) 121,996 (77,581) 276,447 275,588
------------ ------------ ------------ ------------
NET INCOME (LOSS) ($ 92,829) ($ 156,006) ($ 830,718) $ 446,177
============ ============ ============ ============
Net Income (Loss) per share of
Common Stock:
Basic ($.00) ($.02) ($.04) $ .06
Diluted ($.00) ($.02) ($.04) $ .06
Weighted Average Number of
Shares Outstanding:
Basic 22,310,414 6,942,769 19,924,440 6,911,575
Diluted 22,310,414 6,942,769 19,924,440 7,606,602
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
VERTEX INTERACTIVE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------- Paid-In Accumulated Comprehensive
Shares Amount Capital Deficit Income
------------ ------------ ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balance September 30, 1998, as restated (See Note 1) 6,762,604 $ 33,813 $ 5,248,409 ($3,301,924)
Exercise of stock options 107,000 535 96,169
Issuance of stock in connection with
new investors and acquisitions 11,657,142 58,285 11,796,217
Stock grants to employees and consultants 61,298
Other comprehensive income, net of tax:
Net loss (76,776) ($ 76,776)
Change in unrealized gain/(loss) on
investment (197,970)
------------
Comprehensive income ($ 274,746)
------------ ------------ ------------ ------------ ============
Balance September 30, 1999 18,526,746 92,633 17,202,093 (3,378,700)
Exercise of stock options 409,799 2,049 505,465
Issuance of private placement stock,
net of expenses 3,293,750 16,469 21,220,100
Stock options issued to non-employees 3,156,745
Issuance of stock in connection with acquisitions 100,000 500 599,500
Stock grants to employees and consultants 112,022 560 20,750
Other comprehensive income, net of tax:
Net loss (830,718) ($ 830,718)
Change in unrealized gain/(loss) on investment (19,683)
Change in unrealized foreign exchange translation
gains/losses (1,052,870)
------------
Comprehensive income ($ 1,903,271)
------------ ------------ ------------ ------------ ============
Balance June 30, 2000 22,442,317 $112,211 $42,704,653 ($4,209,418)
============ ============ ============ ============
<CAPTION>
Accumulated
Other
Comprehensive Treasury
Income Stock Total
------------- -------------- -------------
<S> <C> <C> <C>
Balance September 30, 1998, as restated $ 216,838 ($45,169) $ 2,151,967
Exercise of stock options 96,704
Issuance of stock in connection with
new investors and acquisitions 11,854,502
Stock grants to employees 61,298
Other comprehensive income, net of tax:
Net loss (76,776)
Change in unrealized gain/(loss) on
investment (197,970) (197,970)
------------ ------------ ------------
Comprehensive income
Balance September 30, 1999 18,868 (45,169) 13,889,725
Exercise of stock options 507,514
Issuance of private placement stock,
net of expenses 21,236,569
Stock options issued to non-employees 3,156,745
Issuance of stock in connection with acquisitions 600,000
Stock grants to employees 21,310
Other comprehensive income, net of tax:
Net loss (830,718)
Change in unrealized gain/(loss) on investment (19,683) (19,683)
Change in unrealized foreign exchange translation
gains/losses (1,052,870) (1,052,870)
Comprehensive income
------------ ------------ ------------
Balance June 30, 2000 ($1,053,685) ($45,169) $37,508,592
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
(See Note 1)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (loss) ($ 830,718) $ 446,177
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,443,533 99,849
Net loss on disposal of assets 18,778 --
Imputed interest expense 100,000 --
Stock and options issued in consideration
for services 95,640 39,988
Deferred taxes (267,460) 167,232
Changes in assets and liabilities:
Accounts receivable, net 468,271 82,036
Inventories, net 985,434 306,647
Prepaid expenses and other
current assets (365,178) 52,894
Other assets (833,345) (13,056)
Accounts payable 1,156,277 (772,112)
Accrued expenses and other
liabilities (704,899) 297,366
Advances from customers (2,780,183) --
Deferred revenue (676,038) 86,340
------------ ------------
Net cash (used for) provided by
operating activities (2,189,888) 793,361
------------ ------------
Cash Flows from Investing Activities:
Additions to property
and equipment (902,347) (105,123)
Proceeds from sale of assets 272,899 --
Acquisition of businesses, net of cash acquired (15,826,755) --
------------ ------------
Net cash used for investing activities (16,456,203) (105,123)
------------ ------------
Cash Flows from Financing Activities:
Loans payable bank, net (11,321) --
Payment of notes payable (958,201) (97,959)
Payment of mortgages (90,604) --
Payment of capitalized lease obligations (113,996) (4,247)
Proceeds from long term borrowings 572,600 --
Proceeds from private placement, net of cash
expenses 24,012,569 --
Proceeds from exercise of stock options 507,514 67,955
------------ ------------
Net cash provided by (used for)
financing activities 23,918,561 (34,251)
------------ ------------
Effect of exchange rate changes on cash (72,541) --
------------ ------------
Net Increase (decrease) in Cash 5,199,929 653,987
Cash and Cash Equivalents at Beginning of Period 1,998,759 686,330
------------ ------------
Cash and Cash Equivalents at End of Period $ 7,198,688 $ 1,340,317
============ ============
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Vertex Interactive, Inc. (formerly Vertex Industries, Inc.) (the "Company")
produces and sells systems that automate the order fulfillment process of
business-to-business transactions. Such functions are generally performed by
mobile workers and, include the automation of sales order entry, inventory and
warehouse operations, and transportation management and route accounting related
to business-to-business deliveries. These systems include both proprietary and
third party software and third party hardware which are resold by the Company as
part of an integrated solution. The systems may be wired directly to the host
computer or transmit the data via wireless technology. The Company also designs,
manufactures and sells software for the integration of disparate computing
systems and applications. These middleware products can be integrated into the
Company's fulfillment technologies and are also generally sold in the banking,
financial services and manufacturing industries. Increasingly, such systems are
being provided with internet enabling technologies.
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with the instructions for Form 10-Q, and therefore, do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. Reference should be made to the two month and
annual financial statements including the footnotes thereto, included in the
Company's Transition Report on Form 10-K for the two months ended September 30,
1999 (the "Transition Report"). In the opinion of management, the accompanying
unaudited interim financial statements contain all material adjustments,
consisting of normal recurring accruals, necessary to present fairly the
financial condition, the results of operations and cash flows of the Company for
the interim periods. Operating results for interim periods are not necessarily
indicative of the results that may be expected for the entire year.
ACQUISITIONS
Pooling of Interests Method
In June 2000, the Company completed a merger with Positive Developments, Inc.
("PDI"), a designer of software solutions for supply chain applications, by
exchanging 400,000 shares of its common stock (40,000 of which are held in
escrow) for all of the common stock of PDI. Each share of PDI was exchanged
for approximately 57.6 shares of Vertex common stock.
Also in June 2000, the Company completed a merger with Communication Services
International, Incorporated ("CSI"), a designer and installer of wireless
communications and cabling networks, by exchanging 1,317,647 shares of its
common stock (50,000 of which are held in escrow) for all of the common stock
of CSI. Each share of CSI was exchanged for approximately 941.2 shares of
Vertex common stock.
Prior to these mergers, PDI's fiscal year ended on December 31, and CSI's fiscal
year ended on February 28. In recording the business combinations, PDI's and
8
<PAGE>
CSI's prior period financial statements have been restated to a year ended
September 30, to conform with Vertex's fiscal year end. These mergers
constituted tax-free reorganizations and have been accounted for as poolings of
interests under Accounting Principles Board Opinion No. 16. The Company's
financial statements have been restated to include the results of PDI and CSI
for all periods presented.
There were no transactions between Vertex and PDI or CSI prior to the respective
combinations.
The results of the operations for the separate companies and the combined
amounts presented in the consolidated financial statements follow:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Revenues
Vertex $ 28,214,342 $ 5,549,570
Pooled Entities 4,620,103 2,830,119
------------ -----------
Combined $ 32,834,445 $ 8,379,689
============ ===========
Net Income (loss)
Vertex ($ 993,661) $ 253,954
Pooled Entities 162,943 192,223
------------ -----------
Combined ($ 830,718) $ 446,177
============= ===========
</TABLE>
Purchase Method
On September 27, 1999, the Company acquired all of the stock of Portable
Software Solutions Limited ("PSS"), Portable Software Solutions (Maintenance)
Limited ("Maintenance") and Trend Investments Limited ("Trend", and together
with PSS and Maintenance, the "PSS Group"). The PSS Group is a leading provider
of handheld terminal solutions to mobile workers in the U.K., primarily in the
door-to-door insurance and dairy industries. The total purchase price was
approximately $10.1 million, including approximately $5.9 million in cash, two
notes payable of approximately $800,000 each and 1,591,984 unregistered common
shares. The shareholders of the PSS Group may be entitled to additional
incentive payments based upon target average annual pre tax profits of the PSS
Group for the two years ending December 31, 1999 and 2000. No incentive payments
were earned based on the PSS Group profits for the year ended December 31, 1999.
On September 22, 1999, the Company acquired all of the outstanding capital stock
of ICS International AG ("ICS"), a leading provider in Germany of integrated
high-end wireless data capture solutions to industrial users and one of the only
multi-national European providers of such solutions. The total consideration
paid to ICS was $5,161,700 of which $3,570,000 was paid in cash at the closing
and the balance was in the form of three notes payable of $531,000 each. In
addition, the Company purchased ICS's headquarters located in Neu Anspach near
Frankfurt, Germany for $1,593,000 of which $372,000 was paid in cash and the
remainder was financed through mortgages, the principal amounts of which were
$1,221,000.
Effective March 1, 2000, the Company acquired all of the outstanding capital
stock of Data Control Systems ("DCS"), a provider of pick to light warehouse
management systems located in New Jersey. The Company paid the shareholders
9
<PAGE>
$14,250,000 in cash (10% of which is held in escrow). The purchase price is
subject to a working capital adjustment.
Effective April 1, 2000, the Company acquired all of the outstanding common
stock of Auto-ID, Inc. ("Auto-ID"), a reseller of bar coding equipment. As
consideration, the Company issued 100,000 shares of its common stock, which at
the date of the transaction, had a fair market value of $6 per share.
Effective June 30, 2000, the Company acquired all of the outstanding common
stock of Societe Italiana Servizi Italservice S.r.l. ("SIS"), a provider of
after-market computer maintenance and software support services. Total
consideration paid was $1,800,000 and is subject to an additional incentive
payment based upon targeted profits for the fiscal year ended December 31, 2000,
up to a maximum of $270,000.
The accompanying consolidated financial statements assume the PSS and ICS
acquisitions closed effective September 30, 1999, the DCS acquisition closed
effective March 1, 2000, the Auto-ID acquisition closed effective April 1, 2000,
and the SIS acquisition closed effective June 30, 2000. The Company has
accounted for these acquisitions using the purchase method of accounting in
accordance with APB No. 16 and accordingly, the financial statements include the
results of operations from October 1, 1999 for PSS and ICS, March 1, 2000 for
DCS, and April 1, 2000 for Auto-ID. The consolidated balance sheet at
September 30, 1999 reflects the purchase prices of PSS and ICS allocated on a
preliminary basis to the assets and liabilities acquired based on their
estimated fair market values. A preliminary allocation of the purchase price for
DCS, Auto-ID, and SIS has been made to the assets and liabilities acquired as of
March 1, April 1, and June 30, 2000, respectively, based on their estimated fair
market values:
<TABLE>
<CAPTION>
Fair value of net assets acquired:
<S> <C>
Cash $ 706,925
Accounts Receivable 4,144,845
Inventories 4,211,560
Other assets 409,699
Intangible assets 16,421,768
Bank lines of credit (1,396,124)
Advances from customers (3,439,977)
Other liabilities (4,408,696)
------------
Consideration paid $ 16,650,000
============
</TABLE>
The following table presents unaudited pro forma results of operations of the
Company as if the above described purchase method acquisitions had occurred at
October 1, 1998:
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Revenues $ 41,022,019 $ 39,279,899
Income before taxes 136,730 (34,947)
Net income (loss) (598,955) (339,215)
Basic and diluted loss per share ($0.03) ($0.04)
</TABLE>
10
<PAGE>
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 1998, nor do they purport to be
indicative of the future results of operations of the Company. The proforma
revenues and gross margin for the nine months ended June 30, 1999 were favorably
impacted as a result of the substantial completion of two large contracts (one
in Vertex and one in PSS). The revenue (approximately $4,700,000) and gross
margin (approximately $2,000,000) were recognized in each case in the 1999
period.
The pro forma amounts reflect the estimated amortization of the excess of the
purchase price over the fair value of net assets acquired, net interest expense,
the net effect of the purchase of real estate compared to lease cost, the
estimated federal tax benefit of a consolidated U.S. tax return, and the
approximate number of shares issued to complete the acquisitions.
The estimated purchase price for each acquisition may be subject to certain
purchase price adjustments.
DISPOSAL OF WEIGHING PRODUCT LINE
On June 30, 2000, the Company sold all of its tangible and intangible assets
related to its weighing product line. As consideration, the Company received
$255,000 in cash, and the right to earn a percentage of the buyer's gross sales
of the weighing product line over the next three years. Included in the sale
were inventory, furniture and equipment, a customer base, trade names, and
patents. The book value of the assets sold was approximately $230,000, and
accordingly, the Company recorded a gain on the sale of $25,000. The percentage
of the buyer's sales that can be earned by the Company will range from 0% to 18%
based on the buyer's annual sales volumes of weighing products. For the nine
months ended June 30, 2000, the revenue from weighing products represents less
than 2.5% of total revenues.
CHANGE IN FISCAL YEAR END
The Company changed its year end from July 31 to September 30, effective October
1, 1999. The two-month transition period is included in the Transition Report.
The accompanying financial statements for the three and nine months ended June
30, 1999 have been compiled from the records of the Company and do not include
the results of the companies acquired using the purchase method of accounting
for the period.
RESTATEMENT
In the Transition Report the Company adjusted its accounting for revenue
recognition of certain software license fees and related post contract customer
support revenue for the years ended July 31, 1999 and 1998. The accompanying
consolidated financial statements for the three and nine months ended June 30,
1999 reflect this restatement. Accordingly, the restated consolidated financial
statements presented herein are the Company's primary historical financial
statements for the periods presented.
THE FOLLOWING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OF THE COMPANY IS
PRESENTED TO ASSIST IN UNDERSTANDING THE COMPANY'S FINANCIAL STATEMENTS:
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
11
<PAGE>
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue related to sales of equipment is recognized when the products are
shipped. Revenue related to software license sales is recorded at the time of
shipment provided that (i.) no significant vendor obligations remain outstanding
at the time of sale; (ii.) the collection of the related receivable is deemed
probable of collection by management; and (iii.) effective with the adoption of
SOP 97-2, "Software Revenue Recognition" as amended by SOP 98-9, Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions",
that vendor specific objective evidence (V.S.O.E.) of fair value exists for all
significant elements, including postcontract customer support (PCS) in multiple
element arrangements; prior to adopting SOP 97-2 in fiscal 1999, the Company
followed the provisions of SOP 91-1 which allowed for unbundling of components
of multiple element arrangements when subsequent PCS arrangements were
equivalent to the PCS offered in the initial period. The Company accounts for
revenue related to post-contract customer support over the life of the
arrangements, usually twelve months, pursuant to the licensing agreement between
the customers and the Company.
Where the professional services relate to arrangements requiring significant
production, modification or customization of software, and the service element
does not meet the criteria for separate accounting, the entire arrangement,
including the software element, is accounted for in conformity with the
percentage-of-completion contract accounting method. Percentage-of-completion is
generally measured using input measures, primarily labor costs where such costs
indicate progress to completion.
Deferred revenue represents the unearned portion of revenue related to PCS
arrangements not yet completed and revenue related to multiple element
arrangements which could not be unbundled pursuant to either SOP 97-2 or 91-1.
SOFTWARE DEVELOPMENT COSTS
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as incurred
until technological feasibility has been established. After technological
feasibility is established, any additional development costs are capitalized in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed." Such costs are amortized over the lesser of three years or the
economic life of the related product. The Company performs an annual review of
the recoverability of such capitalized software costs. If a determination is
made that capitalized amounts are not recoverable based on the estimated cash
flows to be generated from the applicable software, then any remaining
capitalized amounts are written off.
INTANGIBLE ASSETS
Intangible assets consist primarily of the excess of cost over the value of
identifiable net assets of businesses acquired and are amortized on a
straight-line basis over their estimated useful lives of 25 years.
12
<PAGE>
NET INCOME (LOSS) PER SHARE OF COMMON STOCK
Basic net income (loss) per common share is calculated by dividing net income
(loss), by the weighted average common shares outstanding during the period.
Diluted net income (loss) per common share is computed similar to that of basic
net income per common share except that the denominator is increased to include
the number of additional common shares that would have been outstanding if all
potentially dilutive common shares, principally stock options, were issued
during the reporting period. For periods in which a net loss occurs, such
additional shares would not be included, as their effect would be anti-dilutive.
COMPREHENSIVE INCOME
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners and is reported
in the Statement of Changes in Stockholders' Equity.
MARKETABLE SECURITIES
The Company has classified its marketable securities as available for sale. Such
securities are measured at fair value in the financial statements based on
quoted market prices with unrealized gains and losses included in comprehensive
income in stockholders' equity.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign affiliates are translated at
current exchange rates, while revenue and expenses are translated at average
rates prevailing during the respective period. Translation adjustments are
reported as a component of comprehensive income in stockholders' equity.
(2) STOCKHOLDERS EQUITY
On September 16, 1999, the Company entered into a Subscription agreement with
Edwardstone & Company, Incorporated, ("Edwardstone") and Midmark Capital, L.P.
("Midmark", and together with Edwardstone, the "Buyers"). Edwardstone and
Midmark purchased 5,449,642 shares and 5,000,000 shares, respectively, of the
Company's common stock. The total consideration paid by Edwardstone and Midmark
for such shares was $10,000,000. As a result of such transactions, the Buyers
beneficially owned approximately 60% of the Company's common shares outstanding
at the time of the transaction. As a condition to the Buyers' purchase of the
shares, the Buyers and the Company entered into a Stockholders Agreement, dated
September 16, 1999 (the "Stockholders Agreement") containing certain terms and
conditions concerning the acquisition and disposition of such shares of the
Company and the corporate governance of the Company.
The shares of the Company's Common Stock issued in connection with the
consummation of the transactions set forth above and the purchase of the PSS
Group carried certain registration rights. A Registration Statement on Form S-3
was filed with the Securities and Exchange Commission to register such shares
and was effective on May 24, 2000.
On March 30, 2000, the Company closed on the sale of 2,887,500 unregistered
common shares through a private placement offering, resulting in net proceeds
(after deducting estimated accrued issuance costs of $1,950,000) of
approximately $21,150,000. During the month of April 2000, the Company closed on
the sale of an additional 406,250 unregistered common shares, resulting in
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net proceeds (after deducting issuance costs of $387,000) of an additional
$2,863,000. All of the common shares issued in these private placement offerings
carry registration rights requiring the Company to register such shares within
six months of the closing. In January 2000, the Company granted options to an
advisor to purchase 800,000 common shares at $4.00 per share contingent upon
raising at least $25,000,000 which became fully earned and exercisable in
April 2000 on completion of the private placement offerings discussed above.
The fair market value of these options is $2,776,000, and was determined in
accordance with SFAS #123 using the Black-Scholes formula. This amount was
recorded as additional paid in capital, as well as a direct charge against
equity as a cost of the private placement offerings.
During the nine months ended June 30, 2000, the Company granted 3,720,000 stock
options to employees and directors, at prices ranging from $2.50 to $12.69 per
share. In addition, the Company granted 246,691 stock options to non-employees
in consideration for services rendered, as well as for services to be rendered.
Options issued for services rendered were accounted for under SFAS #123 and
EITF Issue 96-18, using the Black-Scholes formula to determine their fair
market value, and resulted in additional paid in capital of approximately
$381,000 and non-cash expenses of approximately $74,000. Options issued for
services to be rendered are contingent upon specific performance by the grantee,
and will be valued when performance is completed.
In January 2000, one of the pooled entities issued 112,022 shares of common
stock to certain employees and consultants, the fair value of which had been
expensed over the respective service periods; this resulted in additional paid
in capital and non-cash expenses of $20,750 and $61,298 in fiscal year 2000
and 1999, respectively.
During the nine-month period ended June 30, 2000, options for 409,799 common
shares were exercised resulting in cash proceeds of $507,514.
(3) BANK CREDIT LINES
The Company maintains lines of credit worldwide with several banks. In the
United States, the Company had a $600,000 working capital line of credit from a
New Jersey bank, with an interest rate of prime plus 1%. The line of credit was
paid in full and terminated in April 2000.
In addition, the Company has several foreign lines of credit which allow it to
borrow in the applicable local currency. These lines of credit total
approximately $2,900,000 and are concentrated in Germany, Italy and the United
Kingdom. The Company's lines of credit generally are secured by the accounts
receivable of the respective subsidiary. As of June 30, 2000 the Company had
outstanding balances of approximately $2,214,000 on these foreign lines of
credit. These loans bear interest at rates ranging from 6.4% to 9.75%.
At June 30, 2000 the Company had a total of approximately $686,000 available
under all of its lines of credit.
(4) NOTES PAYABLE
The Company has a note payable with a remaining balance of $534,000 bearing
interest at 8% for the acquisition of ICS. In addition there is a note payable
in two equal installments of approximately $750,000 to the sellers of the PSS
Group. This note is subject to deferral or offset in connection with the
completion of certain pre-acquisition customer obligations of PSS. Vertex and
the sellers are currently negotiating the settlement of these notes payable.
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(5) LONG-TERM DEBT:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Capital lease obligations
Obligations under capital leases, due in varying quarterly or monthly principal
installments and interest at rates ranging from 7% to 11.5% $ 551,813 $ 382,323
Less Current portion of obligations under capital leases 225,644 165,239
---------- ----------
Long term Obligations under capital leases $ 326,169 $ 217,084
========== ==========
Mortgage Notes Payable
Mortgage notes payable bearing interest at rates from 6% to 9.75% $1,604,467 $1,221,390
Less Current portion of Mortgage notes payable 76,546 103,237
---------- ----------
Long term Mortgage notes payable $1,527,921 $1,118,153
========== ==========
</TABLE>
Other Long Term Liabilities
Other long term liabilities of $132,844 consist of Irish government non-interest
bearing loans that are repayable at rates linked to future revenues earned.
Under the terms of the agreement, the loan is repaid at a rate of 4.2% of
project sales made in the United States by PSS in the period from July 1998 to
June 2001 and is due for repayment commencing in July 1999 and ending in July
2002. If the repayments calculated as a percentage of sales are not sufficient
to repay the loans in full, the Irish government may write-off the balance. PSS
has not made any sales in the United States to date and thus no payments have
been made against these borrowings at June 30, 2000.
(6) INCOME TAXES:
The income tax provision in 2000 includes U.S. state and foreign taxes provided
on the profit of certain subsidiaries for which no net operating losses are
available or where the utilization of the pre-acquisition net operating losses
will be an adjustment of goodwill. In 1999, the tax provision was based on
pre-tax operating income at an expected annual effective rate, adjusted
for certain permanent differences.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As discussed in Note 1 to the Consolidated Financial Statements, in September
1999, the Company acquired all of the stock of three commonly owned companies in
the United Kingdom and Ireland (together "PSS") and all of the stock of ICS
International ("ICS"), based principally in Germany. These two significant
acquisitions further enable the Company to continue its transformation from
primarily producing hardware devices to developing sophisticated, software
products and systems designed for data collection and computer networking and
communication along with software resold from third parties. These systems may
also contain hardware devices manufactured by third parties, which the Company
resells as part of the solution for the customer.
Effective March 1, 2000, the Company acquired all of the outstanding capital
stock of Data Control Systems ("DCS"), a provider of pick to light warehouse
management systems located in New Jersey.
Effective April 1, the Company acquired all of the outstanding capital stock of
Auto-ID, Inc. ("Auto-ID"), a reseller of bar coding equipment.
Effective June 30, 2000, the Company acquired all of the outstanding common
stock of Societe Italiana Servizi Italservice S.r.l. ("SIS"), a provider of
after-market computer maintenance and software support services. Results of
operations for SIS will be included in the Company's consolidated financial
statements beginning July 1, 2000.
The accompanying consolidated financial statements assume the PSS and ICS
acquisitions closed effective September 30, 1999, the DCS acquisition closed
effective March 1, 2000, and the Auto-ID acquisition closed effective April 1,
2000. The Company has accounted for each of these acquisitions using the
purchase method of accounting in accordance with APB No. 16. Accordingly, the
financial statements include the results of operations from October 1, 1999 for
PSS and ICS, from March 1, 2000 for DCS, and from April 1, 2000 for Auto-ID.
In June 2000, the Company completed mergers with Positive Developments, Inc.
("PDI") and Communication Services International, Incorporated ("CSI"). These
mergers were accounted for using the pooling of interests method in accordance
with APB No. 16. Accordingly, the accompanying consolidated financial statements
have been restated to include the results of PDI and CSI for all periods
presented.
In addition, the Company changed its year-end from July 31 to September 30,
effective October 1, 1999. The accompanying financial statements for the three
and nine months ended June 30, 1999 have been compiled from the records of the
Company and do not include the results of the purchase method acquired companies
(PSS, ICS, DCS, and Auto-ID) for those periods.
The management discussion and analysis that follows compares the results of the
three and nine month periods ended June 30, 2000 ("2000"), with the restated
results for the three and nine month periods ended June 30, 1999 ("1999"),
which had not previously been reported.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999.
Operating Revenues:
Operating revenues increased by approximately $10.3 million (or 533%) to $12.3
million in 2000. $9.5 million of the increase was the result of the
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acquisitions of PSS, ICS, DCS and Auto-ID (the "Purchase Acquisitions"), which
contributed approximately $1.4 million, $4.7 million, $3.1 and $0.3 million,
respectively. $0.8 million of the increase is attributable to the mergers with
CSI and PDI (the "Mergers"). The operating revenues for Vertex, excluding all
acquired companies, remained approximately the same from 1999 to 2000.
Gross Profit:
Gross profit increased by approximately $3.5 million (or 466%) to $4.3 million
in 2000. As a percent of operating revenues, gross profit was 34.8% in 2000 as
compared to 38.9% in 1999. The Purchase Acquisitions contributed approximately
$3.1 million of gross profit in 2000, which is approximately 33.4% of their
operating revenue. The Mergers accounted for approximately $0.3 million of the
increase, and improved slightly as a percentage of operating revenues going from
33.9% in 1999 to 36.4% in 2000. The gross profit for Vertex, excluding all
acquired companies, remained approximately the same from 1999 to 2000.
Operating Expenses:
Selling and administrative expenses increased approximately $2.9 million (or
369%) to $3.7 million in 2000. $2.5 million of the increase is attributable to
the Purchase Acquisitions. $0.3 million of the increase is attributable to
Vertex, excluding all acquired companies, as a result of centralizing certain
corporate functions. In this regard, the Company has commenced the process of
integrating the selling and administrative functions of the subsidiaries, with
the goal of increasing efficiency and leveraging its wider geographic coverage.
In addition, the Company has been developing and refining its marketing and
business strategies with the assistance of outside consultants.
Research and development expenses have increased $0.1 million (or 50%) from $0.2
million in 1999 to $0.3 million in 2000. This increase reflects the Company's
transformation from primarily producing and reselling hardware devices to
developing sophisticated order fulfillment software solutions, with an
increasing emphasis on providing Internet enabling technologies. The research
and development is being performed by employees, including some recently hired
technicians, and to a greater extent in 2000, by outside consultants. Research
and development expenses are exclusive of $0.3 million of net software
development costs that have been capitalized related to certain key projects
that first met the capitalization criteria in the second quarter.
The amortization of intangibles of $309,599 in 2000 is a direct result of the
acquisitions of the Purchase Acquisitions. Goodwill is being amortized over its
estimated life of 25 years, while covenants not to compete are being amortized
over their two to three year terms.
Interest income increased approximately $130,000 (or 964%) in 1999 to $143,000
in 2000. $30,000 is attributable to interest-earning cash balances obtained with
the Purchase Acquisitions, and $100,000 was earned on the proceeds from the
stock issuances (approximately $24.0 million) in March and April 2000. Interest
expense increased by approximately $69,000 from the prior year, of which $52,000
is attributable to bank borrowings associated with the Purchase Acquisitions and
$14,000 is attributable to bank borrowings associated with the Mergers.
The income tax provision in 2000 includes U.S state and foreign taxes provided
on the profit of certain subsidiaries for which no net operating losses are
available or where the utilization of the pre-acquisition net operating losses
will be an adjustment of goodwill. In 1999, the tax provision for Vertex,
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<PAGE>
including the Mergers, was based on pre-tax operating income at an expected
annual effective rate, adjusted for certain permanent differences.
Net Loss:
Net loss in 1999 reflected the operations of Vertex, including the Mergers, but
excluding the Purchase Acquisitions. The 2000 net loss includes the operations
of the Purchase Acquisitions, as well as the impact of the amortization of
intangibles and interest expense related to the acquisitions described above. In
addition, the Company has incurred substantial research and development and
marketing strategy costs in the process of positioning itself as an integrated
provider of business-to-business, web enabled fulfillment solutions.
NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO NINE MONTHS ENDED JUNE 30, 1999
Operating Revenues:
Operating revenues increased by approximately $24.5 million (or 292%) to $32.8
million in 2000. The Purchase Acquisitions provided $25.4 million of operating
revenues in 2000 while the Mergers accounted for $1.8 million of the net
increase. The operating revenues for Vertex, excluding the acquired companies,
decreased approximately $2.7 million, primarily as a result of the Bell Atlantic
contract, which was recognized in the first two quarters of fiscal 1999. This
contract, to provide 1,000 data collection devices and related software, was the
largest contract ever recorded in Vertex's history.
Gross Profit:
Gross profit increased by approximately $6.9 million (or 208%) to $10.2 million
in 2000. As a percent of operating revenues, gross profit was 31.0% in 2000 as
compared to 39.4% in 1999. The Purchase Acquisitions contributed approximately
$7.3 million of gross profit in 2000, which is approximately 28.8% of their
operating revenues. The Mergers accounted for $0.5 million of the increase in
gross profit. The 2000 gross profit percentage reflects a higher than average
hardware sales component in operating revenues, which carries a lower gross
profit than software and system sales. In addition, the DCS gross margin for the
month of March 2000 was substantially lower than its normal gross margins, due
to a large contract ($700,000 of revenues) recognized in March with minimal
gross margin. Purchase accounting requires that the gross margin attributed to
the pre-acquisition effort on the contract be capitalized as part of the fair
market value of assets acquired and only the gross margin on post acquisition
effort is included in the March 2000 results of operations. The gross profit for
Vertex, excluding all acquired companies, was substantially lower in 2000 as a
result of the Bell Atlantic contract in 1999; however, gross profit as a
percentage of operating revenues increased from 41.0% in 1999 to 46.1% in 2000,
resulting from a higher percentage of system sales in 2000.
Operating Expenses:
Selling and administrative expenses increased $6.9 million (or 332%) to $9.0 in
2000. The Purchase Acquisitions accounted for $5.6 million of the increase, the
Mergers accounted for $0.5 million, and Vertex, exclusive of all acquired
companies, accounted for $0.8 million. The Company has commenced the process of
integrating the selling and administrative functions of the subsidiaries, with
the goal of increasing efficiency and leveraging its wider geographic coverage.
Research and development expenses have increased 65.4% from $544,851 in 1999 to
$901,292 in 2000. This increase reflects the Company's transformation from
primarily producing and reselling hardware devices to developing sophisticated
order
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fulfillment solutions, with an increasing emphasis on providing Internet
enabling technologies. The research and development is being performed by
employees and to a greater extent in 2000 by outside consultants. Research and
development expenses are exclusive of $0.6 million of software development costs
that have been capitalized related to certain key projects that first met the
capitalization criteria in the second quarter.
The amortization of intangibles of $0.7 million in 2000 is a direct result of
the Purchase Acquisitions. Goodwill is being amortized over its estimated life
of 25 years, while covenants not to compete are being amortized over their two
to three year terms.
Interest income increased approximately $166,000 (or 374%) to $210,000 in 2000.
$74,000 is attributable to interest earning cash balances obtained with the
Purchase Acquisitions, and $100,000 was earned on the proceeds from the stock
issuances (approximately $24.0 million) in March and April 2000. Interest
expense increased by approximately $358,000 to $365,000 in 2000. A non cash
imputed interest charge of approximately $100,000 resulted from the closing of
the DCS purchase 30 days later than its effective date. The remainder of
interest expense was from working capital borrowings and acquisition related
debt, including the assumption of outstanding bank lines of credit and building
mortgages.
The income tax provision in 2000 includes U.S state and foreign taxes provided
on the profit of certain subsidiaries for which no net operating losses are
available or where the utilization of the pre-acquisition net operating losses
will be an adjustment of goodwill. In 1999, the tax provision for Vertex,
including the Mergers, was based on pre-tax operating income at an expected
annual effective rate adjusted for certain permanent differences.
Net Income (loss):
Net income in 1999 reflected the operations of Vertex, including the Mergers,
but excluding the Purchase Acquisitions. In addition, 1999 included the
recognition of the Company's most significant contract ever. The 2000 net loss
includes the operations of Purchase Acquisitions, as well as the impact of the
amortization of intangibles and interest expense related to these acquisitions.
As previously discussed, the Company is in the process of positioning itself
as an integrated provider of business-to-business, web enabled fulfillment
solutions.
LIQUIDITY AND CAPITAL RESOURCES
In March and April of 2000, the Company executed private placement sales of
common shares resulting in approximately $24.0 million of proceeds (net of cash
transaction costs totaling $2.3 million). The exercise of stock options for the
nine months ended June 30, 2000, totaled $0.5 million. Additionally, the Company
obtained a mortgage of $0.6 million for new facilities of its California
operations. Approximately $16 million of these proceeds were used to acquire DCS
and SIS, $2.2 million was used to fund operating activities, $0.9 million was
used for capital expenditures (including the mortgaged property mentioned
above), $1.2 was used to pay debt obligations, including capital leases. The
above activity resulted in an increase of approximately $5.2 million in the
Company's cash balance to $7.2 million at June 30, 2000.
At June 30, 2000 the Company had approximately $0.7 million available under
various credit lines, most of which are with European banks and are secured by
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the respective local subsidiary's accounts receivable. The Company had a
$600,000 domestic credit line that was paid in full and terminated in April
2000. The Company is in preliminary discussions with several international
money-center banks regarding a multi-currency, multi-national credit facility.
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VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to routine litigation matters in connection with its
business. The Company is currently not involved in any legal proceeding that it
believes could have a material adverse effect upon its financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the
period covered by this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(27) Financial Data Schedule
(b) Form 8-K dated March 31, 2000, filed April 12, 2000
Acquisition of Data Control Systems
Completion of private placement sale of common shares
Form 8-Ka dated March 31, 2000, filed June 14, 2000
Re: Acquisition of Data Control Systems
Audited financial statements
Pro-forma financial information
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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 INTERACTIVE, INC.
------------------------
Registrant
By:/s/ Raymond J. Broek
Raymond J. Broek
Chief Financial Officer
August 21, 2000
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