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 MARCH 31, 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: 20,575,671 shares outstanding as of
May 10, 2000.
1
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VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 2000
I N D E X
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Part I. Financial Information
Item 1. Consolidated Financial Statements
Balance Sheets -- March 31, 2000 and September 30, 1999................. 3
Statements of Operations -- six and three months ended
March 31, 2000 and 1999 ................................................ 5
Statements of Changes in Stockholders' Equity -- for the year ended
July 31, 1999, the two months ended September 30,
1999, and the six months ended March 31, 2000 .......................... 6
Statements of Cash Flows -- six months ended
March 31, 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 .................................................. 15
Part II. Other Information
Item 1. Legal Proceedings ........................................... 20
Item 2. Changes in Securities and Use of Proceeds ................... 20
Item 4. Submission of Matters to Vote of
Security Holders ............................................ 20
Item 6. Exhibits and Reports on Form 8-K ............................ 21
Signatures ............................................................. 22
</TABLE>
2
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VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31, September 30,
2000 1999
----------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ...................................... $24,319,775 $1,769,422
Accounts receivable, less allowance for doubtful accounts
of $91,112 and $125,166 at March 31, 2000 and
September 30, 1999, respectively ............................ 7,039,046 5,163,266
Inventories, net ............................................... 4,201,518 3,042,994
Marketable securities .......................................... 141,407 42,309
Prepaid expenses and other current assets ...................... 837,935 651,414
---------- ----------
Total current assets ................................... 36,539,681 10,669,405
---------- ----------
PROPERTY, EQUIPMENT, AND CAPITAL LEASES
Property and Equipment ......................................... 3,994,849 4,052,516
Capital Leases ................................................. 527,978 505,792
---------- ----------
Total property, equipment and capital leases ................ 4,522,827 4,558,308
Less: Accumulated depreciation and amortization ............ (1,987,147) (1,778,494)
---------- ----------
Net property, equipment and capital leases ..................... 2,535,680 2,779,814
---------- ----------
OTHER ASSETS:
Intangible Assets, net of amortization of $414,437 at
March 31, 2000 and $0 at September 30, 1999 ............... 27,895,592 15,822,576
Licensing Cost, net of amortization of $41,400 at
March 31, 2000 and $24,840 at September 30, 1999 .......... 96,600 113,160
Capitalized software, net of amortization of $15,700 ........... 258,505 --
Other assets ................................................... 265,018 160,923
---------- ----------
Total other assets .......................................... 28,515,715 16,096,659
---------- ----------
Total assets ................................................ $67,591,076 $29,545,878
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
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VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, 2000 September 30, 1999
-------------- ------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of obligations under capital leases ................. $ 150,997 $ 165,239
Loans payable bank .................................................. 1,584,338 996,745
Notes payable ....................................................... 2,626,944 3,205,318
Mortgage notes payable current portion .............................. 101,834 103,237
Accounts payable .................................................... 3,285,365 2,011,177
Loan payable former shareholder ..................................... 344,099 381,220
Accrued expenses and other liabilities .............................. 3,888,097 4,159,796
Due to Data Control Systems shareholders ............................ 14,250,000 --
Accrued financing costs ............................................. 1,950,000 --
Advances from customers ............................................. 2,202,490 1,272,393
Deferred revenue .................................................... 2,026,009 2,202,321
---------- ----------
Total current liabilities ....................................... 32,410,173 14,497,446
---------- ----------
LONG-TERM LIABILITIES:
Obligations under capital leases .................................... 151,022 217,084
Mortgage notes payable .............................................. 963,353 1,118,153
Other long term liabilities ......................................... 134,258 148,925
Deferred income taxes ............................................... 20,000 --
---------- ----------
Total long-term liabilities ...................................... 1,268,633 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; 20,158,421 and 16,921,121 shares issued at
March 31, 2000 and September 30, 1999, respectively .............. 100,792 84,605
Additional paid-in capital .......................................... 38,762,662 17,115,679
Accumulated deficit ................................................. (4,396,769) (3,609,713)
Accumulated other comprehensive income .............................. (509,246) 18,868
---------- ----------
33,957,439 13,609,439
Less: Treasury stock, 10,000 shares at cost ......................... (45,169) (45,169)
---------- ----------
Total stockholders' equity ....................................... 33,912,270 13,564,270
---------- ----------
Total liabilities and stockholders' equity ....................... $67,591,076 $29,545,878
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
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VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31 Six Months Ended March 31
--------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES ........................................ $9,008,112 $1,195,570 $ 17,799,047 $ 4,650,690
COST OF SALES ............................................. 6,661,312 624,708 12,766,422 2,778,043
---------- ---------- ------------ -----------
GROSS PROFIT .............................................. 2,346,800 570,862 5,032,625 1,872,647
---------- ---------- ------------ -----------
OPERATING EXPENSES:
Selling and administrative ...................... 2,220,209 444,742 4,490,085 869,784
Research and development ........................ 313,982 172,865 578,987 330,079
Amortization of intangibles ..................... 227,461 -- 414,437 --
---------- ---------- ------------ -----------
Total operating expenses ............................. 2,761,652 617,607 5,483,509 1,199,863
---------- ---------- ------------ -----------
OPERATING INCOME (LOSS) ................................... (414,852) (46,745) (450,884) 672,784
---------- ---------- ------------ -----------
OTHER INCOME AND (EXPENSES):
Interest income ................................. 51,696 17,506 66,881 30,996
Interest expense ................................ (183,258) (2,810) (273,162) (4,551)
---------- ---------- ------------ -----------
Net other income (expense) ...................... (131,562) 14,696 (206,281) 26,445
---------- ---------- ------------ -----------
Income (Loss) Before Income Taxes .................... (546,414) (32,049) (657,165) 699,229
---------- ---------- ------------ -----------
Income Tax Provision ................................. 83,236 13,000 129,891 278,000
---------- ---------- ------------ -----------
Net Income (loss) ......................................... ($629,650) ($45,049) ($787,056) $421,229
========== ========== ============ ===========
Net Income (loss) per share of Common Stock:
Basic ($.04) ($.01) ($.05) $.08
Diluted ($.04) ($.01) ($.05) $.07
Weighted Average Number of
Shares Outstanding:
Basic 17,103,251 5,195,146 17,019,702 5,177,831
Diluted 17,103,251 5,195,146 17,019,702 5,851,542
</TABLE>
See notes to consolidated financial statements.
5
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VERTEX INTERACTIVE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-In Accumulated
Shares Amount Capital Deficit
------------ --------- ----------- -------------
<S> <C> <C> <C> <C>
Balance July 31, 1998 ............................... 5,156,979 $25,785 $5,223,293 ($3,438,986)
Exercise of stock options ........................... 82,000 410 67,544
Other comprehensive income, net of tax:
512,984
Net income .....................................
Change in unrealized gain/(loss) on
investment ................................
Comprehensive income ................................ ---------- ------ ---------- ----------
Balance July 31, 1999 ............................... 5,238,979 26,195 5,290,837 (2,926,002)
Exercise of stock options ........................... 25,000 125 28,625
Issuance of stock in connection with
new investors and acquisitions ...................... 11,657,142 58,285 11,796,217
Other comprehensive income, net of tax:
Net loss ....................................... (683,711)
Change in unrealized gain/(loss) on
investment ...............................
Comprehensive income (loss) .........................
---------- ------ ---------- ----------
Balance September 30, 1999 .......................... 16,921,121 84,605 17,115,679 (3,609,713)
Exercise of stock options ........................... 349,800 1,749 395,765
Issuance of stock, net of costs of financing ........ 2,887,500 14,438 21,134,818
Stock options issued to non-employees ............... 116,400
Other comprehensive income, net of tax:
Net loss ........................................ (787,056)
Change in unrealized gain/(loss) on investment ..
Change in unrealized foreign exchange translation
gains/losses ..............................
Comprehensive income (loss) ......................... ---------- -------- ---------- ----------
Balance March 31, 2000 .............................. 20,158,421 $ 100,792 $ 38,762,662 $ (4,396,769)
========== ======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Comprehensive Treasury
Income (loss) Income (loss) Stock Total
------------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
Balance July 31, 1998 ............................... $ 429,061 ($45,169) $2,193,984
Exercise of stock options ........................... 67,954
Other comprehensive income, net of tax:
Net income ..................................... $ 512,984 512,984
Change in unrealized gain/(loss) on
investment ................................ (169,688) (169,688) (169,688)
----------
Comprehensive income ................................ $ 343,296
========== -------- ---------- --------
Balance July 31, 1999 ............................... 259,373 (45,169) 2,605,234
Exercise of stock options ........................... 28,750
Issuance of stock in connection with
new investors and acquisitions ...................... 11,854,502
Other comprehensive income, net of tax:
Net loss ....................................... ($ 683,711) (683,711)
Change in unrealized gain/(loss) on
investment ............................... (240,505) (240,505) (240,505)
---------
Comprehensive income (loss) ......................... ($ 924,216)
========= -------- ---------- ----------
Balance September 30, 1999 .......................... 18,868 (45,169) 13,564,270
Exercise of stock options ........................... 397,514
Issuance of stock, net of costs of financing ........ 21,149,256
Stock options issued to non-employees ............... 116,400
Other comprehensive income, net of tax:
Net loss ........................................ ($ 787,056) (787,056)
Change in unrealized gain/(loss) on investment .. 99,098 99,098 99,098
Change in unrealized foreign exchange translation
gains/losses .............................. (627,212) (627,212) (627,212)
---------- -------- ---------- ---------
Comprehensive income (loss) ......................... ($1,315,170)
========== -------- ---------- ---------
Balance March 31, 2000 .............................. $ (509,246) $ (45,169) $ 33,912,270
======== ========== ==========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
----------------
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (loss) .................................... ($787,056) $421,229
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .................. 716,247 52,462
Loss on disposal of fixed assets ............... 25,613 --
Stock options issued in consideration
for services .............................. 74,330 --
Deferred taxes ................................. (300,000) 256,195
Changes in assets and liabilities:
Accounts receivable, net .................. 483,352 453,137
Inventories, net .......................... 1,349,030 388,658
Prepaid expenses and other
current assets ........................ (140,799) 57,993
Other assets .............................. (439,406) (1,776)
Accounts payable .......................... 1,059,678 (822,001)
Accrued expenses and other
liabilities ........................... (1,003,849) 61,983
Advances from customers ................... (1,707,531) --
Deferred revenue .......................... (747,691) (351,463)
---------- ---------
Net cash (used for) provided by
operating activities ................................. (1,418,082) 516,417
---------- ---------
Cash Flows from Investing Activities:
Additions to property
and equipment ....................................... (140,330) (75,564)
Proceeds from sale of fixed assets .................... 18,195 --
Acquisition of business, net of cash acquired ......... 645,130 --
---------- ---------
Net cash provided by (used for)
investing activities ................................. 522,995 (75,564)
---------- ---------
Cash Flows from Financing Activities:
Loans payable bank, net .............................. 727,796 --
Payment of notes payable ............................. (475,210)
Payment of mortgages ................................. (68,886) --
Payment of capitalized lease obligations ............. (81,041) (2,794)
Proceeds from private placement ...................... 23,100,000 --
Proceeds from exercise of stock options .............. 397,514 47,300
---------- ---------
Net cash provided by
financing activities ................................. 23,600,173 44,506
---------- ---------
Effect of exchange rate changes on cash .................. (154,733) --
---------- ---------
Net Increase in Cash ..................................... 22,550,353 485,359
Cash and Cash Equivalents at Beginning of Period ......... 1,769,422 564,240
---------- ---------
Cash and Cash Equivalents at End of Period ............... $24,319,775 $1,049,599
========== =========
</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.
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 six months ended March
31, 1999 have been compiled from the records of the Company and do not include
the results of the acquired companies (See Note 2) 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 six months ended March 31,
1999 reflect this restatement. Accordingly, the restated consolidated financial
statements presented herein are the Company's primary historical financial
statements for the periods presented.
8
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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
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 postcontract 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. At the time a
determination is made that capitalized amounts are not recoverable based on the
estimated cash flows to be generated from the applicable software, any remaining
capitalized amounts are written off.
9
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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.
NET INCOME (LOSS) PER SHARE OF COMMON STOCK
Basic net income (loss) per common share is calculated by dividing net income,
by the weighted average common shares outstanding during the period.
Diluted net income per common share is computed similar to that of basic net
income per common share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if all
potentially dilutive common shares, principally stock options, were issued
during the reporting period.
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 year. Translation adjustments are reported as a
component of comprehensive income in stockholders' equity.
RECLASSIFICATION
Certain reclassifications have been made to the balance sheet at September 30,
1999 to conform with the current period's presentation.
(2) ACQUISITIONS
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.
10
<PAGE>
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
$14,250,000 in cash (10% of which is held in escrow). The purchase price is
subject to a working capital adjustment payable approximately 60 days after
closing.
The accompanying consolidated financial statements assume the PSS and ICS
acquisitions closed effective September 30, 1999 and the DCS acquisition closed
effective March 1, 2000. The Company has accounted for each of the 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 and March 1, 2000 for DCS. 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 has been made to the assets and liabilities acquired as of March
1, 2000 based on their estimated fair market values:
Fair value of net assets acquired:
<TABLE>
<S> <C>
Cash .............................. $ 645,130
Accounts Receivable ............... 2,649,891
Inventories ....................... 2,741,426
Other assets ...................... 69,679
Intangible assets ................. 13,057,200
Advances from customers ........... (2,690,384)
Other liabilities ................. (2,222,942)
-----------
Cash to be paid ................... $14,250,000
===========
</TABLE>
The following table presents unaudited pro forma results of operations of the
Company as if the above described acquisitions had occurred at October 1, 1998
and reflect in the 1999 period, the bulk of the revenues associated with two
significant contracts as more fully described below:
<TABLE>
<CAPTION>
(In thousands, except per Six Months Ended Six Months Ended
share data) March 31, 1999 March 31, 2000
- ------------------------- ---------------- ----------------
<S> <C> <C>
Revenues ..................... $24,463,645 $23,123,378
Income before income taxes ... 617,908 263,795
Net income ................... 309,129 6,255
Basic and diluted earnings
per share................... $ .02 $ .00
</TABLE>
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 six months ended March 31, 1999 were
11
<PAGE>
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. These two contracts represent the largest contracts ever recorded
by each of the two companies.
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 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.
(3) 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 own approximately 52% of the Company's common shares outstanding as
of March 31, 2000. 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. On February 11, 2000 a preliminary
Registration Statement on Form S-3 was filed with the Securities and Exchange
Commission to register such shares.
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
net proceeds (after deducting issuance costs of $260,000) of an additional
$2,990,000. 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 connection with the private placement offering,
the Company granted options to an advisor to purchase 800,000 common shares at
$4.00 per share. These options were contingent upon raising at least $25,000,000
and thus became fully earned and exercisable in April 2000.
During the six months ended March 31, 2000, the Company granted 2,465,000 stock
options to employees and directors, at prices ranging from $2.50 to $10.94 per
share. Options for 46,000 shares were granted to non-employees for services
rendered and were accounted for under SFAS #123, using the Black-Scholes formula
to determine the fair market value of the options on the measurement date. This
accounting resulted in a non-cash expense charge of approximately $74,000. Also
during the six month period ended March 31, 2000, options for 349,800 common
shares were exercised resulting in cash proceeds of $397,514.
12
<PAGE>
(4) 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. The interest rate was prime plus 1%. The line of credit expired
on April 30, 2000. As of March 31, 2000 the Company had a $600,000 outstanding
balance due on the line, which amount was paid in full on April 14, 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 $1,500,000 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 March 31, 2000 the Company had
outstanding balances of approximately $984,000 on these foreign lines of credit.
These loans bear interest at rates ranging from 6.4% to 9.75%.
At March 31, 2000 the Company had a total of approximately $515,000 available
under all of its lines of credit.
(5) NOTES PAYABLE
Notes payable to sellers consists of two equal payments of $515,000 payable
March 30, 2000 and June 30, 2000 bearing interest at 8% for the acquisition of
ICS. The payment due March 30th was paid in April. In addition there are notes
payable in two equal installments of approximately $800,000 to the sellers of
the PSS Group payable on March 27, 2000 and September 27, 2000, subject to
deferral or offset in connection with the completion of certain pre-acquisition
customer obligations of PSS. The sellers agreed in April to accept Vertex stock
in payment of the installment due March 27, 2000.
(6) LONG-TERM DEBT:
Long-term debt consists of the following-
<TABLE>
<CAPTION>
Capital lease obligations
-------------------------
March 31, Sept. 30,
2000 1999
--------- ---------
<S> <C> <C>
Obligations under capital leases, due in
varying quarterly or monthly principal
installments and interest at rates
ranging from 7% to 11.5% ................. $302,019 $382,323
Less--Current portion of long-term debt .. 150,997 165,239
--------- --------
Capitalized leases .............. $151,022 $217,084
========= =========
Mortgage notes payable
----------------------
Mortgage notes payable bearing interest
at rates from 6% to 7% ................... $1,065,187 $1,221,390
Less--Current portion of mortgage notes
payable .................................. 101,834 103,237
---------- ----------
Long term mortgage notes payable .. $ 963,353 $1,118,153
========== ==========
</TABLE>
13
<PAGE>
Other Long Term Liabilities
Other long-term liabilities of $134,258 consist of Irish government non-interest
bearing loans which 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 March 31, 2000.
(7) INCOME TAXES:
The income tax provision in 2000 includes taxes provided on the profit of
certain foreign 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 of 40%.
(8) SUBSEQUENT EVENTS
On May 5, 2000 the Company entered into a definitive agreement to acquire
Societe Italiana Servizi Italservice S.r.l. (S.I.S.), a provider of after-market
computer maintenance and software support services. S.I.S. is headquartered in
Milan, Italy and has customers throughout Italy, France and Spain. The purchase
price is approximately $1.8 million, with an additional payment of $260,000,
contingent on achieving certain performance-related milestones. The acquisition
is expected to be completed within the next 30 days.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
As discussed in Note 2 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.
The accompanying consolidated financial statements assume the PSS and ICS
acquisitions closed effective September 30, 1999 and the DCS acquisition closed
effective March 1, 2000. The Company has accounted for each of the 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 and March 1, 2000 for DCS.
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 six months ended March 31, 1999 have been compiled from the records of the
Company and do not include the results of the acquired companies (PSS,ICS and
DCS) for those periods.
The management discussion and analysis that follows compares the results of the
three and six month periods ended March 31, 2000 ("2000"), with the results for
the three and six month periods ended March 31, 1999 ("1999"), which had not
previously been reported.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999.
Operating Revenues:
Operating revenues increased by approximately $7,813,000 (or 650%) to $9,008,112
in 2000. All of the increase was the result of the three acquisitions, with PSS,
ICS and DCS contributing approximately $2.0 million, $5.0 million and
$1.1 million respectively in 2000. The operating revenues for Vertex, excluding
the acquired companies, decreased approximately $250,000 primarily as a result
of lower hardware sales in 2000.
Gross Profit:
Gross profit increased by approximately $1,780,000 (or 311%) to $2,346,800 in
2000, notwithstanding the fact that the Company was precluded from recognizing
approximately $350,000 of gross margin as a result of acquisition accounting
relating to one acquired contract, as discussed below. As a percent of
operating revenues, gross profit was 26.1% in 2000 as compared to 47.7% in 1999.
The acquired companies contributed approximately $1,900,000 of gross profit in
2000, which is approximately 23.5% of their
15
<PAGE>
operating revenue. This 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 the acquired companies, was slightly lower in
2000; however, gross profit as a percentage of operating revenues was consistent
at 47%.
Operating Expenses:
Selling and administrative expenses increased from $444,742 in 1999 to
$2,220,209 in 2000, primarily as a result of the inclusion of the acquired
companies expenses in 2000. 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 from $172,865 to $313,982, or
an 82% increase. This increase reflects the Company's transformation from
primarily producing 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 $258,500 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 $227,461 in 2000 is a direct result of the
acquisitions of PSS, ICS and DCS. Goodwill is being amortized over its estimated
life of 25 years, while covenants not to compete are being amortized over their
two year terms.
Interest expense increased by approximately $180,000 from the prior year. 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 taxes provided on the profit of
certain foreign 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 of 40%.
Net Income (loss):
Net loss in 1999 reflected the operations of Vertex, before the acquisition of
PSS, ICS and DCS. The 2000 net loss includes the operations of PSS and ICS for
the first time, as well as the impact of the amortization of intangibles and
interest expense related to the acquisitions described above. It also reflects
16
<PAGE>
the operations of DCS for one month in 2000. As previously discussed,
acquisition accounting rules precluded the recognition of approximately
$350,000 of gross margin, and the imputation of a $100,000 non cash interest
charge related to the DCS acquisition on March 1, 2000. 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.
SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO SIX MONTHS ENDED MARCH 31, 1999
Operating Revenues:
Operating revenues increased by approximately $13,150,000 (or 280%) to
$17,799,047 in 2000. The increase was the result of the three acquisitions, with
PSS, ICS and DCS contributing approximately $4.6 million, $10.1 million and $1.1
million, respectively, in 2000. 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 1999. This contract, to
provide 1,000 data collection devices and the related software, was the largest
contract ever recorded in Vertex's history.
Gross Profit:
Gross profit increased by approximately $3,160,000 (or 169%) to $5,032,625 in
2000. As a percent of operating revenues, gross profit was 28.3% in 2000 as
compared to 40.2% in 1999. The acquired companies contributed approximately
$4,130,000 of gross profit in 2000, which is approximately 24.6% of their
operating revenue. This 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 the 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 was approximately the same in 2000
and 1999.
Operating Expenses:
Selling and administrative expenses increased from $869,784 in 1999 to
$4,490,085 in 2000, primarily as a result of the inclusion of the acquired
companies expenses in 2000. 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 from $330,079 to $578,987, or a
75% increase. This increase reflects the Company's transformation from primarily
producing hardware devices to developing sophisticated order fulfillment
solutions, with an increasing emphasis on providing Internet enabling
technologies. The research and development is being performed by employees and
to a greater extent in 2000 by outside consultants. Research and development
expenses are exclusive of $258,500 of software development costs that have been
capitalized related to certain key projects that first met the capitalization
criteria in the second quarter.
17
<PAGE>
The amortization of intangibles of $414,437 in 2000 is a direct result of the
acquisitions of PSS, ICS and DCS. Goodwill is being amortized over its estimated
life of 25 years, while covenants not to compete are being amortized over their
two year terms.
Interest expense increased by approximately $270,000 from the prior year. 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 taxes provided on the profit of
certain foreign 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 of 40%.
Net Income (loss):
Net income in 1999 reflected the operations of Vertex, before the acquisition of
PSS, ICS and DCS. In addition, 1999 included the recognition of the Company's
most significant contract ever, resulting in virtually all of the Company's net
income for the six months ended March 31, 1999. The 2000 net loss includes the
operations of PSS and ICS for the first time, and one month of DCS operations,
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
During the six months ended March 31, 2000, the Company borrowed $725,000 on its
lines of credit, and used approximately $1,420,000 for operating activities,
$140,000 for capital expenditures, and $625,000 for debt repayments. This cash
flow activity, together with the private placement sale of common shares on
March 30, 2000 of $23,100,000 and the exercise of stock options amounting to
$397,500, resulted in an increase of approximately $22,500,000 in the Company's
cash balance to $24,319,775 at March 31, 2000.
At March 31, 2000 the Company had approximately $515,000 available under various
credit lines, most of which are with European banks and are secured by the
respective local subsidiary's accounts receivable. The $600,000 domestic credit
line expired on April 30, 2000. The Company is in preliminary discussion with
several international money-center banks regarding a multi-currency,
multi-national credit facility.
In April 2000, the Company closed on additional private placement sales of
406,250 unregistered common shares, resulting in proceeds of an additional
$3,250,000. Cash payments for the DCS acquisition ($14,250,000), equity
transaction costs ($2,200,000) and debt repayments ($600,000) were made in
April. The remaining cash balance is available to meet working capital and
potential acquisition needs and will be invested in short term, relatively
liquid investments.
18
<PAGE>
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. During 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company has not
incurred any significant expense in connection with remediating its systems.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
19
<PAGE>
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
a) On March 30, 2000, the Company completed the first phase of a private
placement by issuing 2,887,500 restricted common shares, par value of .005
per share, to various investors for $23,100,000. From April 3 through April
17, 2000, the Company sold an additional 406,250 restricted common shares
to various investors for $3,250,000. Pursuant to Registration Agreements,
dated as of March 30, 2000 and several dates in April, among the Company
and the various investors named therein, the Company is obligated to file a
registration statement registering such shares for sale under applicable
federal securities laws no later than 180 days after closing.
b) Class of persons to whom sold: Accredited investors consisting of corporate
entities, partnerships and individuals, and less than 35 purchasers.
c) Exemption: The registration exemption for this private placement offering
is Rule 5.06 of Regulation D under the Securities Act of 1933, as amended.
d) Use of proceeds: The planned private placement offering is for $30
million. The expected use of proceeds is as follows:
<TABLE>
<S> <C>
Acquisition of Data Control Systems ...... $14,500,000
Italian company acquisition .............. 3,000,000
Repayment of outstanding debt ............ 4,500,000
Costs of financing ....................... 2,000,000
Corporate expenses, working capital,
additional acquisitions ......... 6,000,000
-----------
$30,000,000
===========
</TABLE>
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.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(3) Certificate of Amendment to the Certificate of Incorporation,
filed with the Secretary of State, State of New Jersey on
February 14, 2000.
Changing the name of the registrant to Vertex Interactive
Inc.
Increasing the number of outstanding shares to 34,000,000,
consisting of 32,000,000 shares of Common Stock, par value
$.005 per share, and 2,000,000 shares of Preferred Stock,
par value $.01 per share.
(27) Financial Data Schedule
(b) Form 8-K dated October 1, 1999
Change in control of interest to MidMark and Edwardstone
Form 8-K dated October 7, 1999
Acquisition of Portable Software
Solutions Limited and ICS International AG
Form 8-K dated December 3, 1999
Change in certifying accountants
Change in fiscal year
Form 8-Ka dated December 6, 1999
Financial Statements of businesses acquired Pro Forma Financial
Information
Form 8-K dated March 31, 2000
Acquisition of Data Control Systems
Completion of private
placement sale of common shares
21
<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 INTERACTIVE, INC.
------------------------
Registrant
By:/s/ Raymond J. Broek
Raymond J. Broek
Chief Financial Officer
May 12, 2000
22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 24,319,775
<SECURITIES> 141,407
<RECEIVABLES> 7,130,158
<ALLOWANCES> 91,112
<INVENTORY> 4,201,518
<CURRENT-ASSETS> 36,539,681
<PP&E> 4,522,827
<DEPRECIATION> 1,987,147
<TOTAL-ASSETS> 67,591,076
<CURRENT-LIABILITIES> 32,410,173
<BONDS> 0
0
0
<COMMON> 100,792
<OTHER-SE> 33,811,478
<TOTAL-LIABILITY-AND-EQUITY> 67,591,076
<SALES> 0
<TOTAL-REVENUES> 17,799,047
<CGS> 12,766,422
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,483,509
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 273,162
<INCOME-PRETAX> (657,165)
<INCOME-TAX> 129,891
<INCOME-CONTINUING> (787,056)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (787,056)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
