<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 DECEMBER 31, 1999
-----------------
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: 17,036,921 SHARES OUTSTANDING AS OF
FEBRUARY 16, 2000.
<PAGE>
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 1999
I N D E X
---------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I. Financial Information
Item 1. Consolidated Financial Statements
Balance Sheets-
December 31, 1999 and September 30, 1999.......... 3
Statements of Operations-
three months ended December 31, 1999 and 1998 .... 5
Statements of Changes in
Stockholders' Equity - for the year ended
July 31, 1999, the two months ended September 30,
1999, and the three months ended December 31, 1999 6
Statements of Cash Flows - three months ended
December 31, 1999 and 1998........................ 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 18
Item 4. Submission of Matters to Vote of
Security Holders ................................. 18
Item 6. Exhibits and Reports on Form 8-K ......... 18
Signatures ....................................... 19
</TABLE>
2
<PAGE>
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
----- -----
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,569,954 $ 1,769,422
Accounts receivable, less allowance for doubtful accounts
of $112,640 and $125,166 at December 31, 1999 and
September 30, 1999, repectively 4,320,340 5,163,266
Inventories, net 2,925,842 3,042,994
Marketable securities 113,126 42,309
Prepaid expenses and other current assets 657,038 651,414
------------ -----------
Total current assets 9,586,300 10,669,405
------------ -----------
PROPERTY, EQUIPMENT, AND CAPITAL LEASES
Property and Equipment 3,944,226 4,052,516
Capital Leases 505,442 505,792
------------ -----------
Total property, equipment and capital leases 4,449,668 4,558,308
Less: Accumulated depreciation and amortization (1,744,587) (1,778,494)
------------ -----------
Net property, equipment and capital leases 2,705,081 2,779,814
------------ -----------
OTHER ASSETS:
Intangible Assets, net of amortization of $186,976 at
December 31, 1999 and $0 at September 30, 1999 15,635,600 15,822,576
Licensing Cost, net of amortization of $33,120 at
December 31, 1999 and $24,840 at September 30, 1999 104,880 113,160
Other assets 254,438 160,923
------------ -----------
Total other assets 15,994,918 16,096,659
------------ -----------
Total assets $ 28,286,299 $ 29,545,878
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 1999
----------------- ------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of obligations under capital leases $ 149,415 $ 165,239
Loan payable bank 1,516,546 996,745
Notes payable 3,205,318 3,205,318
Mortgage notes payable current portion 104,295 103,237
Accounts payable 2,577,087 2,011,177
Loan payable former shareholder 359,620 381,220
Accrued expenses and other liabilities 2,989,483 4,159,796
Advances from customers 792,353 1,272,393
Deferred revenue 1,699,515 2,202,321
----------- ----------
Total current liabilities 13,393,632 14,497,446
----------- ----------
LONG-TERM LIABILITIES:
Obligations under capital leases 175,732 217,084
Mortgage notes payable 1,091,564 1,118,153
Other long term liabilities 140,438 148,925
----------- ----------
Total long-term liabilities 1,407,734 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; 20,000,000 shares
authorized; 16,982,921 and 16,921,121 shares issued at
December 31, 1999 and September 30, 1999, respectively 84,914 84,605
Additional paid-in capital 17,173,770 17,115,679
Accumulated deficit (3,767,119) (3,609,713)
Accumulated other comprehensive income 38,537 18,868
----------- ----------
13,530,102 13,609,439
Less: Treasury stock, 10,000 shares at cost (45,169) (45,169)
----------- ----------
Total stockholders' equity 13,484,933 13,564,270
----------- ----------
Total liabilities and stockholders' equity $28,286,299 $29,545,878
----------- ----------
----------- ----------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31
-------------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING REVENUES $8,790,935 $3,469,829
COST OF SALES 6,105,110 2,153,335
---------- ----------
GROSS PROFIT 2,685,825 1,316,494
---------- ----------
OPERATING EXPENSES:
Selling and administrative 2,269,876 425,041
Research and development 265,005 157,214
Amortization of intangibles 186,976 --
---------- ----------
Total operating expenses 2,721,857 582,255
---------- ----------
OPERATING INCOME (LOSS) (36,032) 734,239
---------- ----------
OTHER INCOME AND (EXPENSES):
Interest income 15,185 13,490
Interest expense (89,904) (1,741)
---------- ----------
Net other income (74,719) 11,749
---------- ----------
Income (Loss) Before Income Taxes (110,751) 745,988
---------- ----------
Income Tax Provision 46,655 299,000
---------- ----------
NET INCOME (LOSS) ($157,406) $446,988
========== ==========
Net Income (loss) per share of
Common Stock:
Basic $ (0.01) $.09
Diluted $ (0.01) $.08
Weighted Average Number of
Shares Outstanding:
Basic 16,937,062 5,160,892
Diluted 17,841,227 5,638,931
</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
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:
Net income 512,984
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 61,800 309 58,091
Other comprehensive income, net of tax:
Net loss (157,406)
Change in unrealized gain/(loss) on investment
Change in unrealized foreign exchange
translation gains/losses
Comprehensive income (loss)
---------- -------- ----------- -----------
Balance December 31, 1999 16,982,921 $84,914 $17,173,770 ($3,767,119)
========== ======== =========== ===========
<CAPTION>
Accumulated
Other
Comprehensive Comprehensive Treasury
Income Income 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 58,400
Other comprehensive income, net of tax:
Net loss ($157,406) (157,406)
Change in unrealized gain/(loss) on investment 70,817 70,817 70,817
Change in unrealized foreign exchange
translation gains/losses (51,148) (51,148) (51,148)
----------
Comprehensive income (loss) ($137,737)
========== ----------- ---------- -----------
Balance December 31, 1999 $38,537 ($45,169) $13,484,933
=========== ========== ============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (loss) ($157,406) $446,988
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 134,778 24,701
Loss on disposal of fixed assets 43,127 --
Deferred taxes -- 278,000
Amortization of intangibles 186,976 --
Changes in assets and liabilities:
Accounts receivable, net 842,926 (329,916)
Inventories, net 117,152 230,367
Prepaid expenses and other
current assets (5,624) 5,408
Other assets (93,515) 5,534
Accounts payable 565,910 514,617
Accrued expenses and other
liabilities (1,170,313) 64,596
Advances from customers (480,040) --
Loan payable former shareholder (21,600) --
Deferred revenue (502,806) (293,107)
-------------------- -----------------
Net cash (used for) provided by
operating activities (540,435) 947,188
-------------------- -----------------
Cash Flows from Investing Activities:
Additions to property
and equipment (106,578) (53,209)
-------------------- -----------------
Net cash used for investing activities (106,578) (53,209)
-------------------- -----------------
Cash Flows from Financing Activities:
Loans payable bank, net 519,801 --
Payment of mortgages (25,531) --
Payment of long term debt (8,487) --
Payment of capitalized lease obligations (57,176) (1,379)
Proceeds from exercise of stock options 58,400 11,250
-------------------- -----------------
Net cash provided by
financing activities 487,007 9,871
-------------------- -----------------
Effect of exchange rate changes on cash (39,462) --
-------------------- -----------------
Net Increase (decrease) in Cash (199,468) 903,850
Cash and Cash Equivalents at Beginning of Period 1,769,422 564,240
-------------------- -----------------
Cash and Cash Equivalents at End of Period $1,569,954 $1,468,090
==================== =================
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) RECENT DEVELOPMENTS AND 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
Vertex Interactive, Inc. (formerly Vertex Industries, Inc.) (the "Company")
Transition Report on Form 10-K for the two months ended September 30, 1999. 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.
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 purchased
5,449,642 shares of the Company's common stock and MidMark purchased 5,000,000
shares of the Company's common stock. The consideration paid by Edwardstone and
its affiliates for such shares was $5,000,000 and the consideration paid by
MidMark for such shares was $5,000,000. As a result of such transactions, the
Buyers beneficially own 60% of the Company's 16,982,921 common shares
outstanding. 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.
On September 27, 1999, the Company acquired all of the stock of Portable
Software Solutions Limited, a company organized under the laws of England
("PSS"), Portable Software Solutions (Maintenance) Limited, a company organized
under the laws of England ("Maintenance") and Trend Investments Limited, a
company organized under the laws of the Republic of Ireland ("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. and leads
the door-to-door insurance and dairy industries in the U.K.
To fund its acquisition, the Company transferred 1,207,500 unregistered common
shares to the PSS Group and Edwardstone transferred 384,484 of its Vertex shares
to PSS. In addition, the Company paid the PSS Group approximately $5.9 million
in cash and issued two notes payable of approximately $800,000 each, payable at
the end of the six month period and the twelve month period, respectively,
following the closing of the transaction. 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.
8
<PAGE>
The shares of the Company's Common Stock issued in connection with the
consummation of the transactions set forth above 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 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 of $1,593,000 was in the form of a note
payable in amounts of $531,000 each on December 31, 1999, March 31, 2000 and
June 30, 2000, respectively, together with the interest thereon at a rate of 8%
per annum. The Company also assumed $2,124,000 of bank debt of which $1,593,000
was paid off at the closing. 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 a
mortgage, the principal amount of which is $1,221,000.
The accompanying consolidated financial statements assume the PSS and ICS
acquisitions closed effective September 30, 1999. The Company has accounted for
the acquisitions of ICS and PSS using the purchase method of accounting in
accordance with APB No. 16. Accordingly, the consolidated balance sheet at
September 30, 1999 reflects the purchase prices of PSS and ICS allocated to the
assets and liabilities acquired based on their estimated fair market values as
follows:
<TABLE>
<S> <C>
Fair Value of Assets acquired:
Current assets excluding cash $7,776,650
Fixed assets 2,477,168
Intangible assets 15,822,576
Other assets 79,202
Less: liabilities assumed
Current liabilities (9,146,557)
Other liabilities (361,965)
Notes payable to sellers (3,205,318)
Mortgage payable (1,221,390)
Common stock issued to sellers (2,415,000)
-----------
Net cash paid $9,805,366
-----------
</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:
<TABLE>
<CAPTION>
(In thousands, except per Three Months Ended
share data) December 31, 1998
------------------
<S> <C>
Revenues $12,672,314
Income before income taxes 1,684,937
Net income 1,277,343
Basic earnings per share $.08
Diluted earnings per share $.07
</TABLE>
9
<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 net income for the three months ended December 31, 1998 were
approximately $4,000,000 and $1,500,000, respectively, higher than the
corresponding period ended December 31, 1999. This was primarily the result of
the substantial completion of two large contracts (one in Vertex and one in
PSS), the revenue and income for which were recognized in each case in the 1998
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
and the net effect of the purchase of real estate compared to lease cost.
The estimated purchase price for each acquisition may be subject to certain
purchase price adjustments.
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 on
Form 10K. The accompanying financial statements for the three months ended
December 31, 1998 have been compiled from the records of the Company and do not
include the results of the acquired companies (PSS and ICS) for the period.
Restatement
In the Transition Report on Form 10K the Company adjusted its accounting for
revenue recognition of certain software license fees and related postcontract
customer support revenue for the years ended July 31, 1999 and 1998. The
accompanying consolidated financial statements for the three months ended
December 31, 1998 reflect this restatement. Accordingly, the restated
consolidated financial statements presented herein are the Company's primary
historical financial statements for the periods presented.
(2) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
This summary of significant accounting policies of the Company is presented to
assist in understanding the Company's financial statements.
Nature of Business-
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 sales force automation, the collection
and processing of data, the identification of goods, services and individuals
and solutions for the automation of inventory and warehouse operations and route
accounting or business-to-business deliveries. These systems include both
proprietary and third party software and third party hardware which are resold
by Vertex as part of an integrated solution. The systems may be wired directly
to the host computer or transmit the data via
10
<PAGE>
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 Vertex'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.
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.
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.
11
<PAGE>
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 (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.
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.
(3) BANK CREDIT LINES
The Company maintains lines of credit worldwide with several banks. In the
United States, the Company has a $600,000 working capital line of credit from a
New Jersey bank. The interest rate is prime plus 1%. The Company must maintain
certain financial covenants to stay in compliance with the bank. The line of
credit expires on March 15, 2000, which the Company is negotiating to extend. As
of December 31, 1999 the Company had a $525,000 outstanding balance due on the
line.
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 $1,250,000
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 December 31, 1999, the Company had outstanding
balances of approximately $992,000 on these foreign lines of credit. These loans
bear interest at rates ranging from 9% to 9.25%.
At December 31, 1999 the Company had a total of approximately $350,000 available
under all of its lines of credit.
12
<PAGE>
(4) NOTES PAYABLE
Notes payable to sellers consists of three equal payments of $531,106 payable
December 30, 1999, March 30, 2000 and June 30, 2000 bearing interest at 8% for
the acquisition of ICS. The payment due December 31 was paid in January. In
addition there are notes payable in two equal installments of $806,000 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.
(5) LONG-TERM DEBT:
Long-term debt consists of the following-
Capital lease obligations
<TABLE>
<CAPTION>
December 31, Sept. 30,
1999 1999
----------- ----------
<S> <C> <C>
Obligations under capital leases, due in
varying quarterly monthly principal
installments and interest at varying
interest rates not exceeding 11.5% $325,147 $382,323
Less- Current portion of long-term debt 149,415 165,239
--------- ---------
Capitalized leases $175,732 $217,084
========= =========
Mortgage notes payable
</TABLE>
<TABLE>
<CAPTION>
December 31, Sept. 30,
1999 1999
------------- -----------
<S> <C> <C>
Mortgage notes payable bearing interest
at rates from 6% to 7% $1,195,859 $1,221,390
Less- Current portion of mortgage notes
payable 104,295 103,237
---------- ----------
Long term mortgage notes payable $1,091,564 $1,118,153
========== ==========
</TABLE>
Other Long Term Liabilities
Other long-term liabilities of $140,438 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 December 31, 1999.
13
<PAGE>
(6) INCOME TAXES:
The income tax provision in 1999 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 1998, the tax provision was based on pre-tax
operating income at an expected annual effective rate of 40%.
(7) SUBSEQUENT EVENTS
Effective February 14, 2000 the Company has changed its name from Vertex
Industries, Inc. to Vertex Interactive, Inc. In addition, the Board of Directors
approved an increase of the authorized Common shares from 20 million to 32
million. The maximum number of shares reserved for issuance under the Company's
Incentive Stock Option Plan was also increased from 2 million to 4 million
shares.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations
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 Vertex
resells as part of the solution for the customer.
The accompanying consolidated financial statements assume the PSS and ICS
acquisitions closed effective September 30, 1999. The Company has accounted for
the acquisitions of ICS and PSS using the purchase method of accounting in
accordance with APB No. 16. Accordingly, the consolidated balance sheet at
September 30, 1999 reflects the purchase prices of PSS and ICS allocated to the
assets and liabilities acquired based on their estimated fair market values. The
operating results of PSS and ICS have been included in the consolidated
statement of operations from October 1, 1999.
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
months ended December 31, 1998 have been compiled from the records of the
Company and do not include the results of the acquired companies (PSS and ICS)
for the period.
The management discussion and analysis that follows compares the results of the
three month period ended December 31, 1999 ("1999"), with the results for the
three month period ended December 31, 1998 ("1998"), which had not previously
been reported.
Operating Revenues:
Operating revenues increased by approximately $5,321,000 (or 153%) to $8,790,935
in 1999. All of the increase was the result of the two acquisitions, with PSS
contributing approximately $2.6 million and ICS contributing approximately $5.2
million in 1999. The operating revenues for Vertex, excluding the acquired
companies, decreased approximately $2.5 million, primarily as a result of the
Bell Atlantic contract, which was recognized in 1998. 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 $1,370,000 (or 104%) to $2,685,825 in
1999. As a percent of operating revenues, gross profit was 30.6% in 1999 as
compared to 37.9% in 1998. The acquired companies contributed approximately
$2,230,000 of gross profit in 1999, which is approximately 29% of their
operating revenue. This 1999 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. The gross profit for Vertex,
excluding the acquired companies, was substantially lower in 1999 as a result of
the Bell Atlantic contract in 1998; however, gross profit as a percentage
15
<PAGE>
of operating revenues was lower in 1998, because of the significant hardware
component of the Bell Atlantic contract.
Operating Expenses:
Selling and administrative expenses increased from $425,041 in 1998 to
$2,269,876 in 1999, primarily as a result of the inclusion of the acquired
companies expenses in 1999. 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 has increased from $157,214 to $265,005, or a
69% 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 1999 by outside consultants.
The amortization of intangibles of $186,976 in 1999 is a direct result of the
acquisitions of PSS and ICS. 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 $88,000 as a result of acquisition
related debt, including the assumption of outstanding bank lines of credit and
building mortgages.
The income tax provision in 1999 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 1998, the tax provision was based on pre-tax
operating income at an expected annual effective rate of 40%.
Net Income (loss):
Net income in 1998 reflected the operations of Vertex, before the acquisition of
PSS and ICS. In addition, 1998 included the recognition of the Company's most
significant contract ever, resulting in virtually all of the Company's net
income for the fiscal year ended July 31, 1999 included in the quarter ended
December 31, 1998. The 1999 net income 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. 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 quarter ended December 31, 1999, the Company borrowed $525,000 on its
domestic line of credit, and used approximately $540,000 for operating
activities, $107,000 for capital expenditures, and $90,000 for debt repayments.
This cash flow activity resulted in a decrease of approximately $200,000 in the
Company's cash balance to $1,569,954 at December 31, 1999.
At December 31, 1999 the Company had approximately $350,000 available under
various credit lines, most of which are with European banks and are secured
16
<PAGE>
by the respective local subsidiary's accounts receivable. The $600,000 domestic
credit line, of which $75,000 was available, expires on March 15, 2000. The
Company is currently pursuing an extension of that borrowing arrangement with
the bank. In addition, the Company is in preliminary discussion with several
international money-center banks regarding a multi-currency, multi-national
credit facility.
The Company anticipates that working capital, together with funds generated from
operations and amounts available under lines of credit will be sufficient to
meet the cash needs of the Company during the coming year. Should it choose to
do so, the Company believes that the private and public equity and debt markets
are also available to it for purposes of funding working capital needs or other
corporate purposes.
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.
17
<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 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:
(2) 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
18
<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/ Ronald C. Byer
Ronald C. Byer
President and Treasurer
February 17, 2000
19
<PAGE>
Exhibit 1
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION OF
VERTEX INDUSTRIES, INC.
To: The Secretary of State
State of New Jersey
Pursuant to the provisions of Section 14A:9-2(4) and Section 14A:9-4(3),
Corporations, General, of the New Jersey Statutes, the undersigned corporation
executes the following Certificate of Amendment to its Certificate of
Incorporation:
1. The name of the corporation is Vertex Industries, Inc.
2. The following amendments to the Certificate of Incorporation
were approved by the directors on the 15th day of December, 1999 and
thereafter duly adopted by the shareholders of the corporation on the
20th day of December, 1999.
Article One of the Certificate of Incorporation, as amended, be amended
to read as follows:
"The name of the Corporation is Vertex Interactive, Inc."
Article Third of the Certificate of Incorporation as amended, be amended to
read as follows:
"The aggregate number of Shares that this corporation shall have authority
to issue is Thirty Four Million (34,000,000) consisting of Thirty Two Million
(32,000,000) Shares of Common Stock, par value $.005 per share, and Two Million
(2,000,000) shares of Preferred Stock, par value $.01 per share. The board of
directors of this corporation is expressly authorized to set by its own
resolutions preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, terms and conditions
of redemption and liquidation pertaining to the corporation's Preferred Stock."
3. In lieu of a meeting and vote of the shareholders and in accordance with
the provisions of Section 14A:5-6, the amendments were adopted by the
shareholders without a meeting pursuant to the written consents of the
shareholders representing at least the minimum number
<PAGE>
of shares necessary to authorize such action, and the number of shares
represented by such consents is 9,019,466 shares.
4. The effective date of this Amendment to the Certificate of Incorporation
shall be February 14, 2000.
Dated this 14th day of February, 2000
VERTEX INDUSTRIES, INC.
By: /s/ Nicholas R. H. Toms
Nicholas R. H. Toms
Chief Executive Officer
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<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
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