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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from:
August 1, 1999 to September 30, 1999
Commission file number 0-15066
Vertex Industries,Inc. and Subsidiaries
(Exact name of Company as specified in its charter)
New Jersey 22-2050350
(State of incorporation) (I.R.S. Employer Identification No.)
23 Carol Street 07014
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (973) 777 - 3500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.005 per share
Indicate by check mark whether the Company (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 Company was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO _______
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the Company's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K.
As of January 12, 2000 the aggregate market value of the voting
stock held by non-affiliates of the Company was $ $37,301,727 based
upon the closing price of the common stock as reported on the
over-the-counter market as of January 12, 2000).
As of January 12, 2000 the Company had 16,982,921 shares of
Common Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE:
Exhibits to Company's Registration Statement on Form S-18 (No.
33-897-NY) filed under the Securities Act of 1933, as amended and
effective June 2, 1986, its Registration Statement on Form 8-A
filed under the Securities Act of 1934 as amended, its Annual
Reports on Form 10-K filed on or about October 31, 1986 through
October 29, 1999 and Current Reports filed on Form 8-K dated
December 3, 1999, October 7, 1999, October 1, 1999, September
22,1999, March 6, 1998, April 11, 1996, July 22, 1987, and
January 14, 1987, Form 8-Ka filed December 6, 1999 and
Registration Statements on Form S-8 filed on November 2, 1992,
March 1, 1993, March 24, 1993, April 27, 1993, October 2, 1993,
October 22, 1993, February 25, 1994, September 23, 1994, March
20, 1996, April 10, 1996, January 23, 1997, July 8, 1997, July
10, 1998 and November 10, 1998. S-4 filed on July 20, 1994, 10KA
filed on June 14, 1996, Form 14(f) Information Statement dated
July 1, 1999 and Amendment thereto dated August 24, 1999. Forms
3, Statement of Beneficial Ownership of Securities, filed on
September 27, 1999 and Schedule 13D filed on September 27, 1999.
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PART I
Item 1. Business
General
Vertex Industries, Inc. ("Vertex" or "the Company") produces
and sells systems that automate business functions performed by
mobile workers, including sales force automation, the collection
and processing of data, the identification of goods, services and
individuals and solutions for the automation of warehouse
operations and route accounting. 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 wireless technology. The Company also designs,
manufactures and sells software for the integration of disparate
computing systems and applications. These middleware products are
generally sold in the banking, financial services and
manufacturing industries. Increasingly, such systems are being
provided with internet enabling technologies. The Company also
manufactures and markets precision weighing equipment and
weights.
The Company's systems and devices are used for the automatic
sorting and tracking of inventory, routing and instructions for
personnel as well as the collection of data in factories,
warehouses, hospitals and other commercial establishments and the
automation of field sales and customer service operations on a
real time basis. Many of Vertex's solutions for its current
warehouse customers involve the picking and packing of orders for
customers with specific label compliance and EDI requirements and
the receiving, put-away of goods being received from outside
suppliers.
The Company's business focus has undergone a 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 Company's offices are located at 23 Carol Street,
Clifton, New Jersey 07014-0996 and its telephone number is (973)
777-3500. The Company was organized in the State of New Jersey in
November 1974.
Recent Events
On September 16, 1999, pursuant to a Subscription Agreement
by and among the Company, Edwardstone & Company, Incorporated, a
Delaware corporation ("Edwardstone") and MidMark Capital, L.P., a
Delaware limited partnership ("MidMark", and together with
Edwardstone, the "Buyers"), dated as of June 21, 1999, as amended
on August 23, 1999 and September 13, 1999, Edwardstone purchased
five million four hundred forty nine thousand six hundred forty
two (5,449,642) shares of the Company's common stock and MidMark
purchased five million (5,000,000) shares of the Company's common
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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
16,921,121 common shares outstanding.
As part of these transactions: (i) three of the Company's
five directors, James Maloy, Wilbur Highleyman and Irwin Dorros,
resigned from office; (effective September 27, 1999) (ii) the
number of directors constituting the full Board of Directors was
increased to eight (8) members; and, (iii) Edwardstone appointed
three of its designees, Hugo H. Biermann, Gregory N. Thomas and
Nicholas R. H. Toms, and MidMark appointed three of its
designees, Wayne L. Clevenger, Denis Newman and Joseph R.
Robinson to serve as directors of the Company to fill the
vacancies on the Company's Board of Directors created by such
resignations. Ronald C. Byer and George Powch continue to serve
in that capacity.
In addition, on September 27, 1999, James Q. Maloy resigned
as Chairman of the Board and Ronald C. Byer resigned as Chief
Executive Officer of the Company. Hugo H. Biermann and Nicholas
R. H. Toms have been appointed to serve as Joint Chairmen of the
Board and Joint Chief Executive Officers of the Company to fill
the vacancies created by the resignations of Messrs. Maloy and
Byer. Mr. Byer continues to serve as President of the Company.
On September 22, 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") pursuant to a
Share Purchase Agreement, dated as of June 21, 1999, by and among
the Company, St Georges Trustees Limited, a company organized
under the laws of Jersey, Channel Island, as trustee on behalf of
The John Kenny Settlement and The Godfrey Smith Settlement, John
Kenny, Bryan J. Maguire and Godfrey Smith (the "Share Purchase
Agreement). The PSS Group is the largest 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 will make two additional payments 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. The Company used a portion of the
cash consideration received from Edwardstone and MidMark when
Edwardstone and MidMark purchased 60% of the Company's common
shares on September 16, 1999.
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On September 27, 1999, the Company acquired all of the
outstanding capital stock of ICS International AG ("ICS"), the
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, pursuant to a
Share Purchase and Transfer Agreement, dated as of September 22,
1999, between Gregor von Opel and the Company (the "Share
Purchase and Transfer Agreement").
The total consideration paid to ICS was DM 9,000,000 of
which DM 6,000,000 was paid in cash at the closing and the
balance of DM 3,000,000 was in the form of a note redeemable in
amounts of DM 1,000,000 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. Further interest in the
amount of DM 726,000 was paid at the closing on the original
aggregate purchase price. The Company also assumed DM 4,000,000
of bank debt of which DM 3,000,000 was paid off at the closing.
With the acquisition of PSS and ICS, the Company has
positioned itself as the provider of interactive systems to
automate mobile workers in the areas of sales force automation,
in the sales order entry, key account management and
merchandising, marketing and customer research; and in the area
of supply chain management from logistics management in the
warehouse to route accounting and transportation of the goods to
the customer. The Company's web enabling technologies are being
attached to these interactive transaction processing systems, to
improve productivity and quality while controlling costs.
Mobile Computing Industry Background
Mobile Computing involves the utilization of handheld
computing devices that range in size from small palm sized to
larger tablet sized or laptop sized devices that are used to
collect data in the field. This data may be read by use of a
number of technologies. These include, among others, magnetic
stripe, laser and smart cards, bar code, optical character and
pattern recognition. The data also may be manually entered into
the terminal through the device's keyboard.
In some cases, the data is manipulated by an application
program within the device and in other cases it is only collected
and transmitted to another computing device for processing.
Transmission of the data can be done by connecting the handheld
device to a telephone line and sending it to the host computer
utilizing programs in both the device and the host. The
transmission can also be done via wireless means utilizing Radio
Frequency technology.
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The data can be collected and transmitted at a later time or
can be transmitted as it is collected. The former method is
called batch transmission while the latter is called real time
transmission. In many cases, the collected data is processed
during the overnight hours and therefore the results are not
required until the following day and the batch transmission
method is sufficient. But, in some cases, such as sale of
inventory, the decision to replenish stock levels must be made
immediately and therefore real time is required.
As currently applied, the Company's mobile computing
technologies function in several ways. They serve to automate
such mobile workers as: the persons collecting money from
payphones, parking meters and vending machines; the insurance
salesman selling insurance door to door and collecting premiums;
milkmen delivering to a preplanned route and having the ability
to sell additional product as required to the customer; the
warehouseman picking an order for shipment.
Increasingly, these systems are being designed to process
transactions interactively utilizing wireless and web enabling
technologies to automate mobile workers.
Middleware Industry Background
The term "middleware" is a fairly new term and as yet
remains unfamiliar to many in the computing industry. Products
performing a middleware function were introduced in the late
1980s and were described by different terms. Some were touted as
client/server products, but that marketplace has come to mean
point-and-click rapid application development tools. Others
called themselves message buses or distributed database products.
Today, middleware refers to those products which sit between
applications and the network. They form a network operating
system which lets incompatible programs communicate with each
other over the network and lets programs access and update
foreign legacy or SQL data distributed across the network.
Middleware allows a company to integrate the data and
business rules which to date have been isolated on its disparate,
incompatible legacy systems into a common, enterprise-wide
knowledge base and then to open this information to today's
modern technologies of workstations, LANs, and SQL databases and
the internet.
The Company has chosen to specialize in that middleware
marketplace segment which addresses the needs of mission-critical
distributed applications which refers to enterprise dependence.
Distributed implies heterogeneity - any number of incompatible
systems may be involved in the business process that must appear
seamless to the user.
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For a middleware product to satisfy mission-critical,
distributed application needs, it must possess fast response time
with minimum stress on system computing, networking, and database
resources; it must be scaleable which means it must handle growth
both in term of functional growth and volume growth; it must be
able to continue in the presence of, or recover gracefully from,
any fault in the system and no system fault will compromise the
information maintained by the system.
NetWeave is designed specifically to support the high
performance, scalability, reliability, data integrity, and
heterogeneous needs of mission-critical distributed applications
Products
Bar Code Products
Vertex distributes bar code scanners, printers and data
collection terminals, both portable and fixed as part of their
total system solution concept. These devices are manufactured by
various companies with whom the Company has distribution or VAR
agreements. Offered in many different models, these devices are
used mainly in factories, warehouses and hospitals.
The nature of Vertex's product offering is changing from
that of selling hardware devices to that of selling solutions to
customer's needs which is accomplished mainly through software
offerings. The hardware requirements of these solutions can be
supplied by offering products which best fill the need from a
variety of manufacturers under terms of resellers agreements.
Software Products
The Company's software product, BridgeNet, performs data
collection and transactional processing functions. It is a
complete Data Collection Management System for real time data
collection providing connectivity of dissimilar equipment and
compatibility with most major networks. It includes a development
system which allows the creation of application programs by
persons not highly skilled as programmers.
While originally conceived and implemented for personal
computers running on DOS operating system, BridgeNet has been
expanded to run on UNIX-based machines such as Sun Sparc, Hewlett
Packard's HP/9000, AT&T 3B2, DEC VAX and IBM RS 6000 platforms
plus the IBM AS/400. BridgeNet also runs on most of the popular
portable data terminals on the market and has been implemented on
Windows 95/98 and Windows NT.
BridgeNet also has communication network support that allows
different types and brands of computers to communicate with one
another and to transfer information between them. It connects
different software operating systems as well as different
hardware platforms that were otherwise incompatible. While other
networking systems allow simple communication links between
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different computer platforms, unlike BridgeNet, they generally do
not permit the development and writing of application software on
one operating system for use on other operating systems. Once a
BridgeNet application program has been written, it can run on any
computer hardware platform on which BridgeNet is resident.
Due to its open architecture, corresponding flexibility and
scope, BridgeNet enlarges the number and type of individuals who
can write and implement applications software for specific data
collection and processing functions. This expansion of use gives
the user quicker and less expensive means of resolving certain
data collection and processing tasks along with ease of software
maintenance in the future.
Recent releases of BridgeNet have included direct access to
all major SQL databases and support for radio frequency ("RF")
terminals. Remote terminals (direct connection or radio
frequency) running on a Vertex data collection system can have
direct access to host databases such as Oracle, Informix, Access,
Sybase and others. Powerful new RF terminals are being
manufactured by such companies as Symbol Technologies, Intermec,
Norand and Telxon. These terminals allow applications to be
developed where an operator can be in direct contact with a host
computer database from a remote location in a factory or
warehouse while he is picking and packing an order, checking
inventory status or a similar function. In these instances,
BridgeNet would be resident on both the RF terminal and the host.
It would handle the application on the RF portable,
communications with the host and the access to the host database.
BridgeNet serves as the necessary software component in
several of Vertex's hardware systems, including its school
attendance/access control and its public telephone, coin-
collection systems.
On February 17, 1997, the Company entered into a license
agreement with Netweave Corporation to develop, market, and
support the NetWeave product worldwide. Vertex pays NetWeave
Corporation a royalty on the initial licenses sold and on the
annual license fees paid by the customer for maintenance and
support of the NetWeave product. Vertex assumed the
responsibility of the existing customer base for ongoing support
and new license sales. On December 28, 1998 the Company entered
into a Limited Enterprise License agreement with NetWeave to
support the Company's new product "evolve" in connection with
sales under the NetWeave product line.
The NetWeave product lets companies integrate their
otherwise incompatible IBM, Digital, Unisys, Tandem, UNIX, and PC
systems into a seamless whole. The NetWeave product has been used
as a means of managing information by customers such as The New
York Stock Exchange, Amtrak, Credit Agricole(France), Generale
Bank(Belgium) and The Hungarian National Railway. Since the
signing of this license agreement, Vertex has added new customers
such as Rabo Bank(Belgium), Computer Sciences Corporation and the
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U. S. Navy.
The synergy that exists between the NetWeave product and
BridgeNet, provides Vertex with access to new customers with
legacy systems and the need for direct data collection solutions
without having to change computer platforms or databases. The
NetWeave product has been the primary offering in the Company's
Middleware Technologies group.
Thus, during Fiscal Year 1999, the Company recognized that
the Internet was producing a new requirement for a middleware
product which would provide an efficient and simple method for
providing software developers with the ability to connect data on
the World Wide Web to existing or legacy computer systems. A
popular example of this need is the case where shoppers on a Web
Site are given the ability to interact with data on the
suppliers' host computer system. The shopper makes a product
selection, enters an order and checks on product delivery status
directly from his or her home computer which is connected to the
Internet.
During Fiscal 1999, the Company began the development of a
product called, evolve, which provides the tools necessary for
the software developer to produce the messages necessary to allow
the Web site to interact with the various host computers in the
marketplace. It is anticipated that evolve will be demonstrated
in the second quarter of Fiscal year 2000.
The Company, utilizing its experience in installing systems
based upon BridgeNet, began development of a system to automate
all phases of distribution center operations during Fiscal Year
1999. First implementations of this new system are scheduled for
Second Quarter Fiscal Year 2000.
These products are generally referred to as Warehouse
Management Systems Products(WMS). Warehouse Management Systems
fulfill the requirements of material storage and retrieval
operations in today's Supply Chain management. The warehouse of
today is the buffer between the manufacturer and/or importer and
the retail outlet. In some cases, the operator of the warehouse
is independent and operates what is known as a third party
facility. In that case, companies contract out their warehouse
operations to a single consolidation facility. The operator
performs the warehouse functions of multiple companies on a
contract basis under, all under one roof.
Received goods are verified against purchase orders, bar
coded put-away labels are printed, allocated to specific storage
locations and reported back to the host system. Items can be
tracked by date, lot and serial number and selected for
inspection by many different criteria. Hand Held batch and Radio
Frequency terminals are utilized to direct picking of customer
orders, replenishment of goods and cycle counting.
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Customer orders to be shipped, are picked by portable
terminal, printed or bar coded shipping documents are prepared,
routing determined by customer requirements, and packed to pre-
defined container sizes. The customer is then notified of the
shipment by electronic Advanced Shipping Notice(ASN).
The new Vertex product is a Windows-based Client/Server real
time warehouse management system which offers a complete solution
for all areas of warehouse and distribution center operations. It
is a cost competitive, scaleable solution that accommodates a
variety of industries.
As part of the acquisition described in Recent Events, the
Company acquired significant additional software products to
enhance its position in the area of software for mobile
computing, to wit, from PSS, LifePro(a product developed to
automate field insurance agents), SalesPro(for the automation of
field sales workers generally) and VanPro(for route accounting
functions) and from ICS, its Stradivarius Warehouse Management
Systems (WMS) products.
Telephone Coin Collection System
In conjunction with several other companies, Vertex has
developed a route accounting system to automate the collection of
coin boxes from public pay telephones (the "Telephone System").
The Telephone System is designed to reduce manual record keeping,
improve the efficiency of coin collections and telephone repairs,
and enhance data collection and processing, generally. The
Telephone System operates with computer hardware and software
components and bar code technology.
In 1991, the Company sold the Telephone Systems to Bell
Atlantic for installation in the states of New Jersey,
Pennsylvania, Delaware, Maryland, West Virginia and Virginia and
to Ameritech for use in the states of Ohio, Michigan, Illinois,
Wisconsin and Indiana.
In Fiscal Year 1998, Vertex was successful in a competitive
bid to replace the hardware, upgrade the system software and add
new features to the system previously sold to Bell Atlantic. The
total contract value was at $4,100,000. Bell Atlantic has
acquired NYNEX and now covers the states from Virginia to Maine.
Add-on orders are expected from Bell Atlantic for this system in
Fiscal Year 2000. Vertex is discussing the sale of its Telephone
System to other telephone companies.
In Fiscal Year 1999, Vertex was successful in completing its
contract with Bell Atlantic, which generated revenue in excess of
$3,800,000. This contract was to replace the hardware, upgrade
the system software and add new features to the system previously
sold to Bell Atlantic.
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Precision Weighing Equipment and Weights
The Company manufactures and/or sells mechanical precision
weighing equipment, weight sets and accessories under the trade
name of "Torbal". Operating on the torsion principle, these
devices are utilized to weigh small amounts of materials from a
minute fraction of a gram to 4,500 grams. The items weighed by
this equipment include prescription drugs, medicine, powders,
grain, dairy products, inks, gemstones, ball bearings and other
materials.
The Company produces and sells mainly pharmaceutical
balances and weight sets. Vertex enjoys a good reputation in the
pharmacy market. There have been no significant R&D or marketing
expenditures for these products for the two-month period ending
September 30, 1999 and the fiscal year ending July 31, 1999.
Product Prices and Revenues
The prices of the Company's products range as follows: (a)
Bar code products from $110 to $6000; (b) Card products from $40
to $200(repairs and parts); (c) weighing equipment and weights
from $50 to $1,200; (d) Label Generating Systems from $100 to
$1200(repairs and parts) and (e) Software Products where pricing
varies with the individual application.
The following table sets forth the contribution to revenues
of each of the Company's principal product lines during the
periods indicated:
<TABLE>
<CAPTION>
Two-Months
Ended
Sept. 30, July 31,
--------- -----------------------------------
Product Lines (1) 1999 1999 1998 1997
- - ------------------ --------- ------------------------------------
<S> <C> <C> <C> <C>
Barcode Equipment $112,937 $4,168,462 $412,883 $488,827
Card Devices $675 $28,171 $66,472 $49,806
Weighing Equipment
and weights $171,880 $1,520,489 $1,231,481 $1,291,054
Label Generating
Systems $8,650 $51,112 $130,004 $688,195
Software and PCS $39,806 $484,144 $753,202 $606,183
Middleware and PCS $175,034 $769,695 $735,316 $104,533
<FN>
(1) All of the above product lines include revenues from repair
services.
</TABLE>
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Manufacturing and Supply
Vertex's manufacturing operation for the precision balances
runs on a batch basis in which a group of products move from
station to station for processing and testing at irregular
intervals. Manufacturing is not accomplished on a continuous
flow or conventional production line basis. Generally, the
Company manufactures its products pursuant to specific customer
orders. It usually purchases a major portion of its related
inventory upon receiving such orders.
The Company also designs and develops its own software
utilizing an in house development staff and outside contractors.
The outside software developers are utilized on an as needed
basis and are experts in their particular field.
As the nature of the Company's business continues to change
to that of a system solutions provider, the manufacturing portion
of the business continues to decrease in size. Presently, the
major item manufactured is the pharmaceutical balance. This
business has remained constant over the past ten years.
Maintenance and Service
Depending on the product concerned, the Company offers a
ninety day to one-year warranty which includes parts and labor
regarding hardware. To date, warranty costs have been
immaterial. All other repair work is performed at standard quoted
rates, which are adjusted from time to time, and which is
generally accomplished in the Company's factory. Products sold
by the Company but manufactured by others are covered by the
manufacturers' standard warranty and service agreements.
Vertex encourages its customers to purchase annual
maintenance contracts on software purchased from the Company. The
normal fee for the maintenance contract is 10-20% of the original
purchase price of the software package depending upon the nature
of the support required. For this fee, the customer is entitled
to "bug" fixes and updates to the software, which are released
by the company during the period of the contract. The contract
does not include major revisions.
Marketing and Sales
The Company sells its BridgeNet and WMS products through a
direct sales force, distributors and value added resellers in the
United States. In recent years, the Company has placed more
emphasis on direct sales of systems utilizing its software to end
users.
The NetWeave product is sold through distributors
internationally and through direct channels in the United States.
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Sales of Vertex's weighing equipment and weights are made
through approximately 60 laboratory supply distributors and
wholesale drug suppliers in the United States and Canada. The
Company has no written contracts other than purchase orders with
any of these distributors or suppliers of this line and thus such
distribution arrangements are non-exclusive and cancelable at
will. The Company usually grants discounts ranging from 10% to
35%, depending on the product and quantity sold to such
distributors and suppliers.
The Company promotes the sales of some or all of its
products through national advertising, direct mailings,
distributors' catalogs, trade shows and product literature. Its
marketing effort has been designed to support and promote the
sales of its bar code products, software and systems solutions.
Customers
The Company sells its products, directly or indirectly, to
numerous customers, ranging in size from small companies to
Fortune 1000 corporations. Its customers are end users, original
equipment manufacturers as well as distributors. Many of its
customers are repeat purchasers. Vertex's business is generally
not seasonal.
Backlog
As of September 30, 1999 the Company's backlog was
approximately $9,600,000 as compared with the backlog at July 31,
1999 of approximately $581,000 as compared with a backlog of
approximately $4,496,000 as of July 31, 1998. The Company
currently anticipates manufacturing and delivering substantially
all of such total backlog during the current fiscal year, which
ends September 30, 2000. Backlog figures generally include those
orders that are in writing and executed by the customer and are
for both products and services. On most orders, payment is due
within 30 days of shipment.
Research and Development
The Company intends to continue its research and development
activities mainly in the area of its BridgeNet, evolve and
NetWeave software products and considers these efforts vital to
its future business and prospect. It anticipates the
continuation and expansion of such efforts primarily directed
toward the improvement of existing products and the development
of new products and applications in the Automatic Identification
area and Electronic Commerce. For the two-months ended September
30, 1999 and for the fiscal years ended July 31, 1999 and 1998
the Company spent $192,268, $777,263 and $460,781 respectively,
for research and development.
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Patents
The Company holds approximately 7 active patents all of
which relate to its card reader product line in the United States
and abroad. Approximately 3 products of Vertex are covered by
these patents. Vertex is currently de-emphasizing this product
line. The Company believes, however, that it is possible that a
number its competitors and potential competitors could develop,
produce and market products similar to the Company's if they so
chose.
Employees
With the acquisition of Portable Software Solutions Limited
and ICS International AG the Company now employs 164 employees.
Vertex Industries, Inc. located in Clifton, New Jersey employs 25
employees. There are 7 production and maintenance employees
covered by a collective bargaining agreement between the Company
and Local 262 of the New Jersey AFLCIO which runs through
November 5, 2002. Other employees are not covered by such an
agreement. Portable Software Solution Limited employs 52
employees of which 27 are located in London, England and 25 are
located in Dublin, Ireland. ICS International AG employees 87
employees of which 62 are located in Germany, 16 are located in
Italy, 4 are located in France, and 5 in the Netherlands. As of
July 31, 1999 and July 31, 1998 Vertex employed a total of 27 and
25 employees, respectively.
Designing and manufacturing the Company's equipment requires
substantial technical capabilities in many disparate disciplines,
from mechanics and computer science to electronics and
mathematics. While the Company believes that the capability and
experience of its technical employees compare favorably with
other similar manufacturers, there is no guarantee that it can
retain existing employees or attract and hire capable technical
employees it may need in the future, or, if it is successful,
that such personnel can be secured on terms deemed favorable to
the Company.
Competition
In all its product lines, Vertex faces competition from
numerous foreign and domestic manufacturers of various sizes. In
the Company's opinion, dominant companies with which it competes
are among others Manhattan Associates, Kronos and Epic Data in
data collection software, a large number of companies including
McHugh Freeman and Robocom Systems in Warehouse Management
Systems, and Microsoft and IBM in middleware technologies, as
well as a variety of smaller software providers. Many of its
competitors have greater financial, technical and marketing
resources than the Company. Competition in these areas is
further complicated by possible shifts in market shares due to
technological innovation, changes in product emphasis and
applications and new entrants with greater capabilities or better
prospects.
13
<PAGE>
In the Company's opinion, its weighing equipment and weights
business is part of a maturing industry that offers little or no
prospects for long-term growth and no significant competition.
As a consequence, Vertex is placing greater emphasis and more of
its resources on the development of its bar code and software
products. For all its products, the Company generally competes
on the basis of price, product performance and features.
Item 2. Properties
The Company leases from an unrelated third party a 40,000
square foot building in Clifton, New Jersey for its manufacturing
facilities and executive offices. This lease runs from June 1,
1998 to May 31, 2003 at an annual rental of $164,340 for the
first 3 years and $170,280 for the next two years.
On May 4, 1998 the Company entered into a five year
sublease with Thea and Shoen, Inc. Under the terms of the
sublease the tenant is required to pay annual rent of $53,010 for
the first three years and $54,720 for the last two years, plus a
proportionate share of utilities. The tenant occupies
approximately 17,000 square feet.
In addition, the Company purchased ICS's headquarters
located in Neu Anspach near Frankfurt, Germany for DM 3,000,000,
of which DM 700,000 was paid in cash and the remainder was
financed through a mortgage the principal amount of which is DM
2,300,000. The Company used a portion of the cash consideration
received from Edwardstone and MidMark to acquire ICS.
The Company's subsidiary, Portable Software Solutions,
leases a 3,000 square foot facility in Dublin, Ireland at an
annual rental of $43,000. The lease has twenty-one more years to
run and expires on September 30, 2020. In addition, PSS leases a
3,000 square foot facility, in London, England at the annual
rental of $117,000. This lease will expire in March 2006.
The Company's facilities are considered adequate for present
and expansion purposes.
Item 3: Legal Proceedings
None
The Company is aware of the potential for claims against it
and other companies for damages arising from products and
services provided by the Company that were not Year 2000 ready.
The Company continues to believe that any such claim against it
would be without merit. See Management Discussion and Analysis,
Year 2000.
14
<PAGE>
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.
PART II
Item 5: Market for Company's Common Equity and Related
Stockholder Matters
The principal market for the Company's shares of Common
Stock, par value $.005 per share is the over-the-counter bulletin
board market under the symbol VETX.
The following table sets forth, for the periods shown, the
high and low sale prices concerning such shares of Common Stock:
<TABLE>
<CAPTION>
High Low
1998
<S> <C> <C>
First Quarter 1 1/16 11/16
Second Quarter 1 3/8
Third Quarter 15/16 1/2
Fourth Quarter 1 1/2 5/8
Two-months ended
September 30, 1 5/8 15/16
1999
First Quarter 1 7/16 3/4
Second Quarter 2 1/4 15/16
Third Quarter 2 9/16 1
Fourth Quarter 3 1 7/16
Two-Months Ended
September 30, 3 5/16 1 15/16
</TABLE>
The approximate number of holders of record of the Company's
shares of Common Stock, par value $.005 per share as of September
30, 1999 was 252. This number includes numerous brokerage firms
that hold such shares in street name. The Company estimates that
there are more than 3,000 beneficial shareholders as of January
12, 2000. There were no holders of record of the
Company's shares of Preferred Stock, par value $.01 per share.
The Company has not paid any cash dividends on its Common
Stock and does not intend to do so in the foreseeable future.
15
<PAGE>
Item 6. Selected Financial Data
The following selected financial data of the Company should be read in
conjection with the Company's financial statements and notes thereto
appearing on pages beginning on F-1. Such financial data for July 31,
1999 and 1998 was restated as described in Notes 1 and 3 to the Consolidated
Financial Statements.
<TABLE>
<CAPTION>
A SUMMARY OF SELECTED FINANCIAL DATA
For the For the
Two-Months Two-Months
Ended Ended
September 30, For the Years Ended July 31, September 30,
1999 1999 1998 1997 1996 1998
(as restated) (as restated) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues $508,982 $7,022,073 $3,329,358 $3,228,598 $3,784,480 $1,094,003
Net Income (Loss) $(683,711) $512,984 ($94,139) $ (473,060) $ 237,748 $ 72,621
Average Number of
Shares Outstanding
Basic 8,683,136 5,191,579 5,133,674 5,102,003 5,090,719 5,146,979
Diluted 9,512,671 5,910,688 5,239,920 5,102,003 5,360,763 5,584,981
Net Income or
(Loss) Per Share
Basic $(.08) $.10 $(.02) $(.09) $.04 $.01
Diluted $(.08) $.09 $(.02) $(.09) $.05 $.01
Working Capital
(Deficit) $(3,828,041) $1,699,826 $1,356,686 $1,184,762 $1,489,689 $1,257,060
Current Ratio (.74:1) 2.37:1 2.21:1 3.03:1 4.81:1 1.68:1
Property,
Equipment and
Capital Leases $4,558,308 $2,055,227 $1,941,283 $1,895,152 $1,867,259 $1,961,990
Less: Accumulated
Depreciation &
Amortization $1,778,494 $1,764,863 $1,653,962 $1,545,071 $1,393,102 $1,668,170
Property, Equipment
Capital Leases
and Leased
Equipment -Net $2,779,814 $290,364 $287,321 $ 350,081 $ 474,157 $ 293,820
Total Assets $29,545,878 $3,851,193 $3,323,066 $2,433,455 $2,715,856 $3,904,148
Long-Term Debt $1,484,162 $5,155 $11,424 $ 17,065 $ 32,875 $ 10,424
Stockholder's
Equity $13,564,270 $2,605,234 $2,193,984 $1,831,412 $2,285,377 $2,054,382
</TABLE>
16
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
On September 27, 1999, the Company elected to change the
date of its fiscal year-end to September 30. The Company has adjusted
its accounting for revenue recognition of certain software license fees and
related postcontract customer support revenue because the Company determined
that information with respect to separate pricing for each of the multiple
elements is not available. Accordingly, the July 31, 1999 and 1998 financial
information, presented herein, has been restated as described in Notes 1 and 3
to the Consolidated Financial Statements. The management discussion and
analysis that follows compares the results of the two-month period ending
September 30, 1999, transition period, with the results for the two-month
period ending September 30, 1998, not previously reported. In addition, it
compares the results for the year ended July 31, 1999 to the results for the
year ended July 31, 1998, and July 31, 1998 to the year ended July 31, 1997.
Two months ended September 30, 1999 compared with the two months
ended September 30, 1998.
Operating Revenues
Operating revenues decreased $585,021 or 53% to $508,982
for the two-month period ended September 30, 1999 as compared to
$1,094,003 for the same period in 1998. Revenue for the weighing
equipment product line increased 10% or $15,209 to $171,880 for
the two-month period ended September 30, 1999 as compared to
$156,671 for the same period in 1998. Revenue for the bar code
product line decreased $615,155 or 84% to $112,937 for 1999 as
compared with $728,092 in 1998. The decrease is due primarily to
the Company not replacing the revenue provided by the 1998 Bell
Atlantic contract to provide 1,000 data collection devices.
Revenue for the software product line which includes the
Company's BridgeNet software product and warehouse management
systems decreased $13,932 or 26% to $39,806 for the two-month
period ended September 30, 1999 as compared to $53,738 in 1998.
The decrease is primarily due to the Bell Atlantic software
order, which was delivered in 1998. Revenue from the NetWeave
licensing agreement increased to $175,034 for the two-month
period ended September 30, 1999 as compared to $145,938 for the
same period in 1998 due to the Company's emphasis on higher
margin products.
Operating Expenses
Cost of sales decreased to 43% of revenues for the two-
month period ended September 30, 1999 as compared to 56% in 1998.
Cost of Sales for the two-months ended September 30, 1999 decreased by
$392,875 to $218,208 as compared with $611,083 in 1998.
The decrease is primarily attributable to the absence of the Bell
Atlantic contract, which was mostly hardware at lower gross
margins. As the Company moves to a higher margin, more service
oriented company, the cost of sales should continue to decrease
as a percentage of revenue.
17
<PAGE>
Selling and administrative expenses increased $133,353 or
52% to $390,721 for the two-month period ended September 30, 1999
as compared to $257,368 in 1998. The Company increased its reserve for bad
debts by $29,000 and incurred $61,416 in severance expense to a former
employee. Research and development expenses increased $83,543 or 77% to
$192,268 for the two-month period ended September 30, 1999, as compared to
$108,725 for the same period in 1998. The increase is due to the hiring of
additional personnel and consultants to complete software development projects
and to expedite future sales.
The Company recorded an operating loss of $279,711 for
the two-month period ending September 30, 1999 and compared to an
operating profit of $120,621 in 1998 for the reasons stated above.
Other income
Interest income increased $8,610 to $12,701 for the two-
month period ended September 30, 1999. The increase is due to
additional funds being available to invest in the Company's money
market account and generate interest income. Interest expense
decreased $100 from $297 to $197.
Income Tax Provision (Benefit)
The Company recorded a income tax provision of $404,000 for the two-month
period ended September 30, 1999 as compared to an income tax provision of
$48,000 for the same period in 1998.
The tax provision for the two months ended September 30, 1999 is directly
related to an increase in the deferred tax asset valuation reserve. The
Company believes that as of September 30, 1999, an ownership change under
Section 382 of the Internal Revenue Code ocurred. The effect of the ownership
change would be the imposition of annual limitation on the use of the NOL
carryforwards attributable to the periods before the change which Management
has not yet quantified. Management presently believes it is no longer more
likely than not that the deferred tax asset will be realized.
Net Income (Loss)
The company recorded a net loss of $683,711 for the
two-months ended September 30, 1999 as compared to a net income
of $72,621 for the two-months ended September 30, 1998 for the
reasons stated above.
Year ended July 31, 1999 (as restated) compared with Year Ended July 31, 1998
(as restated).
Operating Revenues
Operating revenues increased $3,692,715 or 111% to $7,022,073 for the year
ended July 31, 1999 as compared to $3,329,358 for the same period in 1998.
Revenue for the weighing equipment product line increased 23% or $289,008
to $1,520,489 for the year ended July 31, 1999 as compared to $1,231,481 in
18
<PAGE>
1998. The increase is due to an increase in product demand.
Revenue for the bar code product line increased $3,755,579 or
910% to $4,168,462 for 1999 as compared to $412,883 for 1998.
The increase is due primarily from the Bell Atlantic contract for
1,000 data collection devices. Revenue for the Card Reader product
line decreased to $28,171 in 1999 from $66,472 for the same period in 1998.
Management does not expect revenue from this product line to increase and
currently the company is supporting its existing customer base.
Revenue for the software product line which includes the
Company's BridgeNet software product and warehouse management
systems decreased $269,058 or 36% to $484,144 in 1999 as
compared to $753,202 for the same period in 1998. The decrease
is primarily due to the Bell Atlantic software order, which was
delivered, in the fiscal 1998. The Company has added additional
software products in addition to BridgeNet to its current list of
products, such as warehouse management systems and its new e-
commerce product, "evolve". Management expects revenue from
these products to increase in future years. Revenue from the
Label Generating Systems product line decreased $78,892 or 61% to
$51,112 for the year ended July 31, 1999 as compared to $130,004
for the same period in 1998. The decrease is due to a decrease
in demand for the Model 2400 Label Generating System. The Company
is currently supporting existing customers and does not expect
any future revenue from this product line. Revenue from the
NetWeave licensing agreement increased to $769,695 for
1999 as compared to $735,316 for the same period in 1998.
Operating Expenses
Cost of Sales increased to 57% of revenues in 1999 as compared to 52% in
1998. Cost of Sales for the year ended July 31, 1999 increased by $2,254,845
to $3,987,997 as compared to $1,733,152 in 1998. The increase is primarily
attributable to the Bell Atlantic contract, which was mostly hardware at lower
gross margins. As the Company moves to a more service oriented company, the
cost of sales should continue to decrease as a percentage of revenue.
Selling and administrative expenses increased $150,979 or
10% to $1,700,705 as compared to $1,549,726. The increase is
partially due to increased costs relating to the Bell Atlantic
contract.
Research and development expenses increased 64% or $316,482
to $777,263 for the year ended July 31, 1999 as compared to
$460,781 for the same period in 1998. The increase is due to the
hiring of additional personnel in addition to the reduction in
software related jobs in which personnel within the R&D
department would be working on and would be allocated to cost of
sales.
The Company recorded an operating profit of $556,108 for the year ended
July 31, 1999 as compared to an operating loss of $414,301 in
1998. The operating profit in 1999 is primarily attributed to the increase
in operating revenues generated from the Bell Atlantic contract.
19
<PAGE>
Other income
Interest income increased $30,247 to $53,171 for the year ended July 31,
1999 as compared to $22,924 in 1998. The increase is due to funds being
available to invest in the Company's money market account and
generate interest income. Interest expense increased $2,533 for the year
ended July 31, 1999 to $5,295 as compared to $2,762 in 1998. The
increase is due to the Company's working capital line of credit.
Income Tax Provision (Benefit)
The Company recorded an income tax provision of $91,000
for the year ended July 31, 1999 as compared to an income tax benefit
of 300,000 for 1998.
Net Income (Loss)
The Company recorded net income of $512,984 for the year ended July 31, 1999 as
compared to a net loss of $94,139 in 1998.
The Company has shifted its focus to warehouse management
systems, its e-commerce products, including "evolve" and as
well as its mobile computing systems. The Company continues its
efforts on the BridgeNet Data Collection management systems and
the Netweave middleware product.
The Company continues to expand its customer base which
includes: AT&T, Bell Atlantic, Credit Lyonnais, Dell Computers,
Tenneco Packaging, MCI, Lucent Technologies, Gemini Industries,
P.C. Richards and Tommy Hilfiger.
Year ended July 31, 1998 (as restated) compared with Year Ended July 31, 1997.
Operating Revenues
Operating revenues increased $100,760 or 3% to $3,329,358 for the year ended
July 31, 1998 as compared to $3,228,598 for the same period in 1997. Revenue
for the weighing equipment product line decreased 5% or $59,573 to $1,231,481
for the year ended July 31, 1998 as compared to $1,291,054 in 1997. The
decrease is due to a decrease in product demand. Revenue for the
bar code product line decreased $75,944 or 16% to $412,883 for
1998 as compared to $488,827 for 1997. The decrease is
due to a lack of orders for bar code hardware products. For
1999 the Company expects revenues of approximately $3.3
million of bar code hardware primarily from the Bell Atlantic
contract for 1,000 data collection devices. Revenue for the
Card Reader product line increased to $66,472 in 1998 from
$49,806 for the same period in 1997. Management does not expect
revenue from this product line to increase and currently the
company is supporting its existing customer base.
Revenue for the software product line which includes the
Company's BridgeNet software product and warehouse management
systems increased $147,019 or 24% to $753,202 for the year ended July 31, 1998
20
<PAGE>
as compared to $606,183 for the same period in 1997. The increase is
primarily due to the Bell Atlantic software order, which was previously
announced by the Company. The Company has added additional software products
in addition to BridgeNet to its current list of products, such as warehouse
management systems and its new e-commerce product, "evolve". Management expects
revenue from these products to increase in future years. Revenue
from the Label Generating Systems product line decreased $558,191
or 81% to $130,004 for the year ended July 31, 1998 as compared
to $688,195 for the same period in 1997. The decrease is due to
a decrease in demand for the Model 2400 Label Generating System.
The Company is currently supporting existing customers and does
not expect any future revenue from this product line. Revenue
from the Netweave licensing agreement increased to $735,316 for the year
ended July 31, 1998 as compared to $104,533 for the same period in 1997.
The Company entered into the Netweave licensing agreement in
February 1997 therefore only had five months of revenues in
fiscal 1997.
Operating Expenses
Cost of Sales decreased to 52% of revenues 1998 as compared
to 55% in 1997. Cost of Sales decreased $67,124 in 1998 to $1,733,152
as compared to $1,800,276 in 1997. The decrease is partially attributed
to reduced costs in operating the Netweave licensing agreement, in addition
to a change in the sale mix for fiscal 1998 as compared to 1997. As
the Company moves to a more service oriented company, the cost of sales
should continue to decrease as a percentage of revenues.
Selling and administrative expenses increased $37,777 or 3%
to $1,549,726 for the year ended July 31, 1999 as compared to $1,511,949 for
same period in 1997. The increase is partially due to having twelve months of
operating expenses for the Netweave licensing agreement in 1998 as
compared to only five months of operating expenses in 1997.
Research and development expenses decreased 7% or $36,081 to
$460,781 for the year ended July 31, 1998 as compared to $496,862
for the same period in 1997. The decrease is due to a decrease
in the staff of the R&D department in addition to a decrease in
R&D expenses for the Netweave licensing agreement.
Operating Income (Loss)
The Company recorded an operating loss of $414,301 for the year ended
July 31, 1998 as compared to an operating loss of $580,489 in
1997. The operating loss in 1998 is primarily attributed
to the Company's sales mix and operating revenues not increasing
sufficiently to cover the operating expenses of the Company's
operations. Management expects to increase revenues and keep
operating expenses constant in 1999.
Other Income
Interest income decreased $15,877 to $22,924 in 1998 as
compared to $38,801 in 1997. The decrease is due to funds not
21
<PAGE>
available to invest in the Company's money market account and
generate interest income. Interest expense decreased $3,610 in
1998 to $2,762 as compared to $6,372 in 1997. The decrease is due
to the Company's reduction in capital leases.
In 1997 the Company recorded $75,000 in other income. The
$75,000 pertains to the termination of Time-Med's contract to
purchase label generating systems from the Company. The Company
received $75,000 in cash and all of the previously purchased LGS
from Time-Med in settlement on the contract. In 1998 the Company
did not record any other income.
Income Tax Provision (Benefit)
The Company recorded an income tax benefit of $300,000 for the year ended
July 31, 1998 as compared to no income tax provision or benefit for
fiscal 1997.
The income tax benefit for 1998 represents the Company's
ability to utilize the net operating loss carryforwards which
were generated in past years in fiscal 1999 and beyond.
Net Income (Loss)
The Company recorded net loss of $94,139 in 1998 as compared to a net loss
of $473,060 in 1997. The reduction in the net loss in 1998 is primarily
attributed to an income tax benefit of $300,000, which was recorded in the
1998.
The Company has shifted its focus to warehouse management
systems and its e-commerce product, "evolve". The Company
continues its efforts on the BridgeNet Data Collection management
systems and the Netweave middleware product.
Management expects to remain profitable for fiscal 1999
partially due to the Bell Atlantic contract, warehouse management
systems, evolve, Netweave middleware and BridgeNet systems.
The Company continues to expand its customer base which
includes: AT&T, Bell Atlantic, Credit Lyonnais, Dell Computers,
Tenneco Packaging, MCI, Lucent Technologies, Gemini Industries,
P.C. Richards and Tommy Hilfiger.
Capital Resources and Liquidity:
Amounts available under lines of credit secured by the
Company and its subsidiaries and funds generated from operations
are the primary source of liquidity. In June 1999 the Company
secured a $600,000 working capital line of credit with a New
Jersey lending institution, all of which is available at September 30,
1999. This line of credit expires on January 31, 2000, and the Company
presently is in discussions with the bank to renew and increase the
amount available. The Company has obtained a waiver relating to certain
22
<PAGE>
financial covenants stated in the agreements under the line of credit as of
September 30, 1999. Portable Software Solutions, Ltd, one of the Company's
European subsidiaries has a line of credit of $180,000, all of which was
available of September 30, 1999, and which is secured by the subsidiaries
accounts receivable. In addition, ICS International-AG has approximately
$36,000 of unused credit available with two banks in Germany.
For the period ended September 30, 1999, the Company funded
certain acquisitions with the combination of cash, common stock
and debt.
Capital expenditures for the two-month period ended
September 30, 1999 and the fiscal years ended July 31, 1999 and 1998
were approximately $26,000, $114,000 and $46,000, respectively.
Capital expenditures are primarily computer equipment used for
Research and Development and internal office use.
The Company believes that as of September 30, 1999, an ownership change
under Section 382 of the Internal Revenue Code occurred. The effect of
the ownership change would be the imposition of annual limitation on the
use of the NOL carryforwards attributable to the periods before the change
which Management has not yet quantified. Management presently believes it
is no longer more likely than not that the deferred tax asset will be
realized. At September 30, 1999, the Company's federal net operating loss
was approximately $4 million expiring in various amounts through 2019 and the
Company's state net operating loss was approximately $3.4 million expiring
in various amounts through 2006.
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 placement and public equity
markets are also available to it for purpose of funding working
capital needs or other corporate purposes.
The Company's results of operations have not been
materially affected by inflation.
Year 2000
The Year 2000 issue arises because many computer hardware
and software systems use only two digits to represent the year.
As a result, these systems and programs may not process dates
beyond 1999, which may cause errors in information or systems
failures. Assessments of the potential effects of Year 2000
issues vary markedly among different companies, governments,
consultants, economists and commentators, and it is not possible
to predict what the actual impact may be. The Company recognizes
the need to remain vigilant and is continuing its analysis,
assessment and planning for the various Year 2000 issues.
In early 1998, the Company developed a program to determine
Year 2000 compliance of its computer systems, products and
23
<PAGE>
services, as well as computer hardware which it has sold, but
which it did not manufacture. The Company's current products and
service offerings have been designed to be Year 2000 compliant. A
Year 2000 committee was formed and several meetings have taken
place to address the Company's Year 2000 issues. The Company has
identified three areas of inquiry with respect to Year 2000
compliance - (1) the Company's internal finance and informational
systems, (2) software and hardware sold or licensed to customers,
and (3) third-party relationships, including vendors, suppliers
and customers.
The Company has conducted a review of the above areas to
determine exposure to year 2000 issues. In the financial and
information areas, a number of applications have been identified
as being Year 2000 compliant due to their recent implementation.
The Company has deemed its core financial and reporting systems
Year 2000 compliant by obtaining a certificate of compliance from
the software vendor and by performing its own tests to verify
that the systems are Year 2000 compliant.
In the software and hardware area, the Company has
identified areas of exposure. The Company has determined from
internal testing that all versions of NetWeave are Year 2000
compliant, provided they are operating on a Year 2000 compliant
operating system. All customers have been notified of the
necessity of ascertaining the Year 2000 compliance of their
operating system from their respective vendors. If the customers
need to upgrade their operating systems for Year 2000 compliance,
they then may need to upgrade their versions of NetWeave to
accommodate the new operating system. The Company has prepared
such upgrades of NetWeave, which will operate on the Year 2000
compliant operating systems, and has shipped them to customers
who requested such upgrades.
The Company has determined through internal testing that the
core versions of BridgeNet are Year 2000 compliant. It has been
determined that some of the BridgeNet application code written by
Vertex for certain customers is not Year 2000 compliant.
Application code for BridgeNet may be written or modified by the
customer or Vertex. The customers for whom the non-compliant code
was written have been notified and provided with new code, which
will make their application Year 2000 compliant. In addition, the
customers were given the choice of implementing the code with
their own personnel or contracting with Vertex to implement the
change.
In the third-party area, the Company has assessed the Year
2000 readiness of its key suppliers, subcontractors and business
partners. This process has been undertaken with a view toward
assuring that the Company has adequate resources for required
supplies and components, and to enable the Company to identify
potential Year 2000 non-compliance problems with hardware which
it has sold but did not manufacture. Where deemed necessary, the
Company has requested and received statements of compliance from
24
<PAGE>
certain vendors. The Company has completed this process in fiscal
year 1999 and is satisfied that it can obtain an adequate supply
of supplies and components from alternative suppliers and
vendors.
The Year 2000 readiness of the Company's customers varies
and the Company is actively encouraging its customers to prepare
their own systems for the Year 2000. The Company's major
customer, Bell Atlantic, has tested the Company supplied
software, BridgeNet, in conjunction with their internal systems
and found BridgeNet to be Year 2000 compliant. Efforts by
customers to address Year 2000 issues may absorb a substantial
part of their information technology budgets in the near term and
customers may either delay or accelerate the deployment and
implementation of new applications and systems. This could
potentially decrease demand for the Company's products and
services and thereby effect the Company's operating revenues.
Although the Company believes its costs in steps addressing
any Year 2000 issues (for testing, third party inquiries, and
remedies) shall be minimal and will not have a material adverse
impact on the Company's financial position, any failure or delay
in addressing the issues could result in the disruption of
business in the Year 2000. In addition, the Company is aware of
the potential for claims against it and other companies for
damages arising from products and services provided by the
Company that were not Year 2000 ready. The Company continues to
believe that any such claims against it would be without merit.
The Company has reviewed all internal equipment which may
have embedded systems, which could be date sensitive and
determined that there would be no adverse affect on Company
operations if these systems were determined not to be Year 2000
compliant.
The Company has developed a contingency plan appointing a
trouble shooting team of employees to evaluate and remedy a Year
2000 problem if one may occur upon reaching that year.
Finally, the Year 2000 represents a number of other risks
and uncertainties that could effect the Company, including
utility failures, competition for its personnel skilled in the
resolution of Year 2000 issues, building systems failures,
environmental systems failures, office equipment failures, and
the nature of government responses to Year 2000 issues, among
others. While the Company continues to believe that the Year 2000
matters discussed above will not have a material impact on its
business, financial condition or results of operations, it
remains uncertain whether or to what extent the company may be
affected.
25
<PAGE>
Item 8. Financial Statements and Supplementary Data
The information called for by this "Item 8" is included
following the "Index to Financial Statements and Schedules"
appearing at the end of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
(a) On November 30, 1999 the registrant and Sax, Macy, Fromm &
Co., P.C.("Sax, Macy") mutually agreed to cease the client auditor
relationship. Sax, Macy's report upon registrant's financial
statements for its fiscal years ended July 31, 1999 and 1998 did
not contain an adverse opinion or a disclaimer of opinion, nor
was such report qualified or modified as to uncertainty, audit
scope or accounting principles. During registrant's fiscal years
ended July 31, 1999 and July 31, 1998, and the interim period
from August 1, 1999 to November 30, 1999 (the "Interim Period"):
(i) there were no disagreements (of the nature contemplated by
Item 304 (a) (1) (iv) of Regulation S-K) between registrant and
Sax, Macy and (ii) there were no reportable events of the nature
contemplated by Item 304 (a)(1) (v)(A)-(D) of Regulation S-K.
(b) On November 30, 1999, registrant engaged Ernst & Young, LLP
as its independent auditors for registrant's new fiscal year ending
September 30, 1999 (See Item 8 below). The registrant's Audit
Committee approved the appointment of Ernst & Young LLP as the
registrant's auditors through the distribution of the Ernst &
Young LLP engagement letter to the members of the Committee.
During registrant's two fiscal years ended July 31, 1999 and July
31, 1998 and the Interim Period, registrant did not consult Ernst
& Young LLP with respect to any of the matters contemplated by
Item 304 (a)(2)(i)-(ii) of Regulation S-K.
26
<PAGE>
PART III
Item 10. Directors and Executives Officers of the Company
Certain information about directors and officers of the
Company is contained in the following table:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Hugo H. Biermann 50 Joint Chairman/Joint CEO
and Director
Nicholas R. H. Toms 50 Joint Chairman/Joint CEO
and Director
Ronald C. Byer(1) 66 President, Treasurer and
Director
Barbara H. Martorano 42 Secretary
George Powch(2)(3) 51 Director
Gregory N. Thomas(2)(3) 52 Director
Wayne L. Clevenger(3) 56 Director
Denis Newman 69 Director
Joseph R. Robinson(2) 57 Director
(1) Trustee under the 401(K)Plan
(2) Members of Audit Committee.
(3) Members of Stock Option and Compensation
All directors hold office until the next annual meeting
of shareholders of the Company or until their successors have
been elected and qualified. Officers serve at the discretion
of the Board of Directors. Directors who are not officers
receive $1,000 annual compensation, paid quarterly, for
attending director's meetings and are reimbursed for all
related expenses.
Hugo H. Biermann, 50, has been a principal in
Edwardstone, an investment management company, since 1986
and has served as President of Edwardstone since 1989.
From 1988 to 1995 Mr. Biermann served as Director and Vice
Chairman of Peak Technologies Group, Incorporated ("Peak
Technologies"), a company involved in automated data capture
technologies.
27
<PAGE>
Nicholas R. H. Toms, 50, has been a principal of
Edwardstone since 1986 and Chairman and Chief Executive
Officer of Edwardstone since 1989. From 1985 to 1996 he
served as a Director of Lynton Group, Inc., a corporation
involved in general aviation. From 1988 to 1997, Mr. Toms
served as Chairman, President and Chief Executive Officer of
Peak Technologies.
Ronald C. Byer, 66, joined the Company in 1975 and has
served as Vice President of Marketing and Sales since 1979,
Treasurer since 1983, Executive Vice President since 1985 and
a Director since 1976. From 1963 to 1975, Mr. Byer held
various positions at Datascan, Inc. After its acquisition by
Dymo Industries, Inc., he became manager of its newspaper
computer systems group. From 1958 to 1972 Mr. Byer was
employed by Bendix Aviation Corp. Mr. Byer has a bachelor's
degree in electrical engineering from Rensselaer Polytechnic
Institute ("RPI"). Mr. Byer was promoted to President of the
Company on July 31, 1995 and to Chief Executive Officer on
January 17, 1996.
Barbara H. Martorano, 42, joined the Company in June,
1990 and has served in a variety of positions, including Sales
Coordinator, Office Administrator, Assistant to the Secretary,
President and Chairman of the Board, as well as, Corporate
Secretary as of January 17, 1996. Mrs. Martorano is a
graduate of Berkeley, Garret Mountain Campus.
George Powch, 51, has served as a Director of the Company
since 1987. He is President & Chief Executive Officer of
Huber + Suhner (North America) Inc., responsible for the North
American units of Huber + Suhner AG of Switzerland. These
include Champlain Cable Corporation, a manufacturer of
specialty wire and cable, Huber + Suhner, Inc. a manufacturer
and reseller of RF and microwave components for
telecommunications, Huber + Suhner Integration, Inc. and Huber
+ Suhner (Canada) Ltd. He was previously Vice President &
General Manager of Cinch Connectors, a division of Labinal
Components & Systems, Inc. From 1987 to 1993, Mr. Powch was
President of BFI-IBEXSA International Inc., a distributor of
electronic components. Prior to that, he held a variety of
positions including President of Diffracto Ltd.(1984-1986) and
Vice President & General Manager of Bendix's Robotics Division
(1981-1983). Mr. Powch has an MBA degree from Harvard
Business School, an M.S. degree from Stanford University and a
B.S. from MIT, both in Electrical Engineering.
Gregory N. Thomas, 52, has been managing director of
Treacy Ventures LLC, a private venture capital company,
since February 1999. Mr. Thomas also sits on the board of
directors of a number of private companies. From December
1997 to February 1999, Mr. Thomas served as Vice
Chairman and a Director of Freedom securities, Inc., an
investment bank. Mr. Thomas was a director of Peak
28
<PAGE>
Technologies from September 1992 to June 1997. Prior to his
retirement in December 1992, Mr. Thomas had, for more than
five years, been a partner with William Blair & Company, an
investment-banking firm.
Wayne L. Clevenger, 56, has been a managing director of
MidMark Advisors, Inc., the general partner of MidMark Equity
Partners, L.P., since 1994 and a managing director of MidMark
Associates, Inc., the general partner of MidMark, since
1994. MidMark is an investment limited partnership holding
equity securities in 12 private portfolio companies. Mr.
Clevenger is on the board of directors several privately owned
companies.
Denis Newman, 69, has been a managing director of
MidMark Advisors, Inc., the general partner of MidMark
Equity Partners, L.P., since 1994 and a managing director
of MidMark Associates, Inc., the general partner of MidMark,
since 1994. Mr. Newman is on the board of directors of several
privately owned companies.
Joseph R. Robinson, 57, has been a managing director of
MidMark Advisors, Inc., the general partner of MidMark Equity
Partners, L.P., since 1994 and a managing director of
MidMark Associates, Inc., the general partner of MidMark,
since 1994. Mr. Robinson is on the board of directors of
several privately owned companies.
Item 11. Executive Compensation
The following table sets forth information concerning the
annual and long-term compensation for services in all
capacities to the Company for the two-months ended September
30, 1999 for the fiscal years ended July 31, 1999, 1998 and
1997 of those persons who were, at July 31, 1999, executive
officers of the Company earning annually $100,000 or more:
</TABLE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Long-Term Compensation All Other
Compensation Compensation
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted All
Name and Annual Stock LTIP Other
Principal Salary Bonus Compensation Award(s) Options/ Payout Compensation
Position Year ($) ($) ($) ($) SARs (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ronald C. *** $ 27,500 $988 - - - -
Byer 1999 $115,000 - $5,910 - - - -
President 1998 $115,000 - $5,553 - - - -
1997 $115,000 - $6,150 - - - -
<FN>
***Two-Months ended September 30, 1999
</TABLE>
29
<PAGE>
All Officers and non-union employees of Vertex are covered by a
pension plan that is financed by voluntary employee and Company
contributions. See "401(k) Savings and Retirement Plan" and Note
9 of Notes to Financial Statements.
Mr. Byer is provided with an automobile by the Company; a
portion of which may represent the personal use thereof
estimated at $2,500 per year and is excluded.
On November 13, 1995 Mr. McLaughlin, former CFO and
Treasurer, was granted 50,000 stock options at an exercise price
of $.75 which vest over five years and expire on November 13,
2005. On November 13, 1997 Mr. McLaughlin was granted 25,000
stock options at an exercise price of $.81 which vest over five
years and expire on November 13, 2007. On January 20, 1999 Mr.
McLaughlin resigned his post as Chief Financial Officer and
Treasurer, the positions which he held since joining the Company
in November, 1995. On December 29, 1997 Mrs. Barbara Martorano,
Corporate Secretary, was granted 5,000 stock options at an
exercise price of $.56 which vest over five years and expire on
December 29, 2007. These shares were granted under the Company's
Incentive Stock Option Plan. Stock appreciation rights are not
granted under the Incentive Stock Option Plan. The Company does
not currently have in effect a Long-Term Incentive Plan ("LTIP")
and, consequently, no such awards were granted to Vertex's
executive officers in fiscal years covered above.
There were no unexercised options, under the incentive stock
option plan to purchase the Company's common stock for the two-
month period ended September 30, 1999 by the above named
officers.
The Company had no other executive officers other than Mr. Maloy,
Mr. Byer, and Mrs. Martorano.
On May 28, 1999 the Company entered into a one-year
employment contract with its President. The contract provides
for an annual salary of $150,000 per year and a Company paid
automobile. The term commences on August 1, 1999.
The Company entered into a three (3) year employment
contract with Robert Morsch commencing on May 1, 1998 to serve as
its Vice President of Sales and Marketing. Under this contract,
Mr. Morsch is to receive as compensation: (a) an annual salary of
$95,000 per annum plus a cost of living increase each year; (b)
1% commission on the company's operating revenue; (c) grant of
70,000 stock options at an exercise price of $.68 (35,000 options
immediately vest, with the remaining 35,000 options vesting on
January 1, 1999); (d) use of a leased automobile costing up to
$750 per month and a right of first refusal to purchase such
vehicle at the end of the lease term;(e) reimbursement of
business expenses incurred and (f) the same group benefits
received by other Company executives. The above stock options
are in addition to the 200,000 options previously granted at an
exercise price of $.75 pursuant to the Company's Incentive Stock
30
<PAGE>
Option Plan. On May 25, 1999 Mr. Robert Morsch was granted
100,000 stock options at an exercise price of $1.625 which vest
over five years and expire on May 25, 2004.
On September 10, 1998 the Company entered into a two (2)
year employment contract with Ronald Byer, Jr. to serve as its
Director of Middleware Technologies. Under this contract, Mr.
Byer, Jr. is to receive as compensation: (a) an annual salary of
$104,500 per annum for the first year and $109,725 per annum for
the second year; (b) a grant of a five year stock option to
purchase up to 25,000 shares of the Company's common stock under
its Incentive Stock Option Plan at an exercise price of $.94; (c)
reimbursement of business expenses and (d) the same group
benefits received by other company executives. The above stock
options are in addition to the 50,000 options previously granted
at an exercise price of $1.06 pursuant to the Company's Incentive
Stock Option Plan. On May 25, 1999 Mr. Ron Byer Jr. was granted
175,000 stock options at an exercise price of $1.625 which vest
over five years and expire on May 25, 2004.
On February 12, 1999 the Company entered into a two (2) year
employment contract with Ronald Hopson to serve as the Company's
Middleware Technologies Technical Director. Under this contract
Mr. Hopson is to receive as compensation: (a) an annual salary of
$101,000 per annum for the first year and $106,050 per annum for
the second year; (b) a grant of a five year stock option to
purchase up to 10,000 shares of the Company's common stock under
its Incentive Stock Option Plan at an exercise price of $1.375;
(c) reimbursement of business expenses and (d) the same group
benefits received by other company executives. The above stock
options are in addition to the 40,000 options previously granted
at an exercise price of $1.06 pursuant to the Company's Incentive
Stock Option Plan.
Under the Company's Incentive Stock Option Plan ("The
Plan"), options to purchase a maximum of 2,000,000 shares of its
Common Stock may be granted to officers and other key employees
of the Company. Options granted under the Plan are intended to
qualify as incentive stock options under the Economic Recovery
Tax Act of 1981 (the "1981" Act) as amended.
The Plan is administered by the Board of Directors and a
committee presently consisting of three members of the Board
which determines which persons are to receive options, the number
of shares that may be purchased under each option and the
exercise prices. In the event an optionee voluntarily terminates
his employment with the Company, he has the right to exercise his
accrued options within 30 days of such termination. However, the
Company may redeem any accrued options held by each optionee by
paying him the difference between the option price and the then
fair market value. If an optionee's employment is involuntarily
terminated, other than because of death, he also has the right to
exercise his accrued options within 30 days of such termination.
31
<PAGE>
Upon death, his estate or heirs have one year to exercise his
accrued options. The maximum term of any option is ten years and
the option price per share may not be less than the fair market
value of the Company's shares on the date the option is granted.
However, options granted to persons owning more than 10% of the
voting shares of the Company may not have a term in excess of
five years and the option price per share may not be less than
110% of the fair market value on the date the option is granted.
If the aggregate fair market value of the shares of Common
Stock (determined at the time the option is granted) with respect
to which incentive stock options are exercisable for the first
time by such optionee during any calendar year (under all such
plans) exceeds $100,000, then only the first $100,000 of such
shares so purchased will be treated as exercised under the Plan
and any excess over $100,000 so purchased shall be treated as
options which are not incentive stock options. This rule shall
be applied by taking options into account in the order or
sequence in which they are granted. Options must be granted
within ten years from the effective date of the Plan.
Options granted under the Plan are not transferable other
than by will or by the laws of descent and distribution. Options
granted under the Plan are protected by anti-dilution provisions
increasing the numbers of shares issuable thereunder and reducing
the exercise price of such options, under certain conditions.
The Plan expires on October 9, 2005. Any option outstanding at
the termination date will remain outstanding until it expires or
is exercised in full, whichever occurs first. At the Company's
annual meeting in the second quarter of fiscal 1998 the Company's
shareholders approved an additional 500,000 shares of common
stock to be issued under the incentive stock option plan for a
total of 2,000,000 shares of common stock in the plan.
As of September 30, 1999 options to acquire 1,392,000 shares
of the Company's Common Stock at exercise prices of $.50 to $8.12
per share have been granted under the Plan to 14 employees and
one director of the Company. As of September 30, 1999, 375,400
options have been exercised and 1,016,600 options are
outstanding, with 428,400 options presently exercisable.
During 1999, the Company granted 25,000 options to the
Company's legal counsel for legal services. The options are
exercisable at $.94 and expire on September 23, 2001. These
options are currently exercisable. The underlying shares have
been registered under the Securities Act of 1933 on Form S-8.
Vertex maintains a 401(k) savings plan (the "401(k) Plan")
for the benefit of all employees age 18 or over who have worked
for at least six months and who are not covered by a collective
bargaining agreement. The 401(k) Plan is qualified under Section
401(a) of the Code and is intended to qualify under Section
401(k) of the Code.
32
<PAGE>
Under the current terms of the 401(k) Plan, employees may
elect to defer from Federal income tax from 1% to 17% of their
annual compensation, not to exceed Internal Revenue Code limits
and have it contributed to the 401(k) Plan on their behalf. In
addition, Vertex may make a contribution of up to 3% of a
contributing employee's salary. The salary deferrals are fully
vested, while the Company's contributions vest 20% upon the
completion of the second year of service with the Company or its
subsidiaries, 20% upon completion of the third year of service,
20% upon the completion of the fourth year of service, 20% upon
the completion of the fifth year of service and the remaining 20%
upon the completion of the sixth year of service or, if earlier,
upon the death, disability or retirement of the participant.
Benefits under the 401(k) Plan are generally distributed in a
lump sum following the participant's retirement, death,
disability or termination of employment, or in a case of
hardship, prior to the termination of the participant's
employment.
The assets accumulated by the 401(k) Plan are held in a
trust, the trustees of which are Messrs. Maloy and Byer, who are
officers and directors of the Company. Under the terms of the
401(k) Plan, Vertex has agreed to indemnify the trustees to the
fullest extent permitted by law against any liability whatsoever
for any action taken or omitted by them in good faith in
connection with the 401(k) Plan unless it results from their own
willful misconduct.
There was no matching contribution for the two-month period
ended September 30, 1999. The charge against income for matching
contributions for fiscal 1999, 1998 and 1997 were $18,386,
$3,255, and $5,787, respectively.
The following former directors of Vertex were granted
qualified stock options in the amounts specified opposite their
names, at the exercise prices so indicated and on the dates
specified:
<TABLE>
<CAPTION>
Initial Exercise
Name of Date of Number of Price Options Options
Director Grant Option Shares(1)(3) Per Option Exercised Exercisable
<S> <C> <C> <C> <C> <C>
Wilbur Highleyman 6/11/97 10,000 1.00 -- --
1/20/93 40,000 4.25 8,000 32,000
Irwin Dorros 6/11/97 10,000 1.00 -- --
1/20/93 40,000 4.25 8,000 32,000
George Powch 6/11/97 10,000 1.00 -- --
1/20/93 40,000 4.25 16,000 24,000
<FN>
(1) Adjusted for 2 for 1 stock split effective April 19, 1993.
(2) No options were granted to Directors in Fiscal 1999.
33
<PAGE>
(3) The above options were granted under the incentive stock option
plan as discussed on page 32.
</TABLE>
On September 27, 1999 Dr. Highleyman and Dr. Dorros
resigned their position as members of the Board of Directors.
Both Dr. Highleyman and Dr. Dorros have one year from that date
to exercise their options. At that time their options will be
cancelled.
Item 12: Security Ownership of Certain Beneficial Owners and
Management
The following information table sets forth certain
information regarding the Company's Common Stock owned on
September 30, 1999 by (i) each who is known by the Company to own
beneficially more than 5% of its outstanding Common Stock, (ii)
each director and officer, and (iii) all officers and directors as
a group:
<TABLE>
<S> <C> <C>
Names and Address of
Directors, Officers and Shares Owned(4)(7) (1)(2)(4)(5)
5% Shareholders Number Percent
MidMark Capital L.P. 5,000,000 29.5
466 Southern Blvd.
Chatham, NJ 07928
Bacchus International 1,217,718 7.2
2321 "C"
North Geneva Terrace
Chicago, IL 60614
James Q. Maloy 1,202,208 7.1
23 Carol Street
Clifton, New Jersey
Nicholas R. H. Toms 1,151,120 6.8
23 Carol Street
Clifton, New Jersey
Ronald C. Byer 448,422 2.7
23 Carol Street
Clifton, New Jersey
Bunter, B.V.I., Ltd 413,010 2.4
C/O Ansbacher, B.V.I. Ltd.
Roadtown, Tortola, B.V.I.
Gregory Thomas 294,117 1.7
4 Acorn Street
Boston, MA
All officers and directors 7,356,669 43.4
as a group (8 persons)(3)(5)(6)
34
<PAGE>
<FN>
(1) Does not give effect to the issuance of up to 2,000,000
shares of Common Stock reserved for issuance under the
Company's incentive stock option plan and 445,000 shares
under non-qualified stock options.
(2) Gives effect to a 2 for 1 stock split effective April 19,
1993
(3) Includes 50,000 shares of common stock owned by Mr. George
Powch.
(4) On September 27, 1999 control of the Company changed. See
"Item 1, Business, Recent Events" section in Part I of this
filing.
(5) Includes 413,010 shares held in the name of Bunter, B.V.I.,
Ltd. of which Mr. Hugo Biermann may be deemed a beneficiary.
Mr. Biermann disclaims such beneficial ownership.
(6) Includes the 5,000,000 shares held in the name of MidMark
Capital L.P. of which Mr. Joseph R. Robinson, Mr. Denis
Newman and Mr. Wayne L. Clevenger are managing directors,
but disclaim beneficial ownership.
(7) Mr. Joseph R. Robinson, Mr. Denis Newman and Mr. Wayne L.
Clevenger are managing directors of MidMark Capital L.P. but
disclaim beneficial ownership of the shares.
</TABLE>
Item 13. Certain Relationships and Related Transactions
On February 17, 1997 the Company entered into a License
Agreement with NetWeave Corporation to develop, market, sell and
support the NetWeave product worldwide. The Company will pay
NetWeave a royalty on the initial licenses sold and on annual
license fees paid by the customer for maintenance and support of
the NetWeave product. Under terms of the License Agreement,
NetWeave Corporation assigned its existing customer base to the
Company along with the existing sales representative agreements
in the U.S. and the master distributor agreement with SX
Consultancy for Europe and Asia. SX Consultancy is a European
software distributor and developer of custom software based in
the UK with ties to distributors in Asia. Dr. Wilbur H.
Highleyman, Chairman of Netweave Corp., had been a director of
Vertex from 1985 through September 27, 1999 and presently owns
25.5% of Netweave Corp. Ronald C. Byer, Jr. is the son of Ronald
C. Byer, the President of the Company. Ronald C. Byer, Jr.,
presently owns 2.1% of Netweave Corp.
35
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K
(a) The following documents are filed as a part of this report:
1. and 2. Financial Statements:
1. Financial Statements and Supplementary Data:
Index to Financial Statements
Reports of Independent Auditors
Balance Sheets as of September 30, 1999 and July 31,
1999
Statements of Operations for two-months ended September
30, 1999 and the Years Ended July 31, 1999, 1998 and
1997
Statements of Changes in Stockholders' Equity for the
two-months ended September 30, 1999 and for the Years
Ended July 31, 1999, 1998 and 1997
Statements of Cash Flows for the two-months ended
September 30, 1999 and for the Years Ended July 31,
1999, 1998 and 1997.
Notes to Financial Statements
2. Financial Statement Schedules:
Schedules for the two-months ended September 30, 1999
and for the Years Ended July 31, 1999, 1998 and 1997.
Schedule II - Valuation Qualifying Accounts
Schedules other than those listed above have been
omitted because they are not applicable or the required
information is shown in the financial statements or
notes thereto.
3. Exhibits:
The following is a list of exhibits incorporated by
reference from the Company's Registration Statement
filed under the Securities Act of 1933, as amended
(File No. 33-897-NY), those filed pursuant to
Registration Statement on Form 8-A under the Securities
36
<PAGE>
Exchange Act of 1934, as amended, and those material
contracts of the Company previously filed pursuant to
the Securities Act of 1934 as amended, and those filed
herewith.
1.1 Form of Underwriter's Warrant Agreement and
Warrant.
2.1 Form of Common Stock Certificate.
3.1 Articles of Incorporation and Amendment.
3.2 Amended By-laws (See also Registration Statement
on Form 8A referred to above).
5.1 Opinion of Cascone & Rapaport, including its
consent.
10.5 Incentive Stock Option Plan dated October 10, 1985
and Form of Agreement.
10.16 401(k) Retirement and Savings Plan.
10.30 Loan Agreement and Promissory Note between Company
and NetWeave Corporation dated May 30, 1996.
10.33 Master Distribution Agreement between Company and
NetWeave (Europe) dated July 1, 1996.
10.34 Factoring Agreement between Company and NetWeave
Corporation dated July 18, 1996.
10.35 Assignments and Amendment to Factoring Agreement
Dated October 8, 1996.
10.37 Amendment to Assignment and Amendment to Factoring
Agreement dated November 6, 1996.
10.40 License Agreement between NetWeave Corporation and
Vertex Industries, Inc. dated February 19, 1997.
10.42 Real Estate Lease between the Company and Ninth
Avenue Equities; October 15, 1997.
10.45 Employment Contract between the Company and Robert
Morsch; dated May 1, 1998.
10.46 Sub-lease between the Company and Thea and Schoen,
Inc.; May 4, 1998.
10.48 Employment Contract between the Company and Ronald
Byer, Jr.; dated September 10, 1998.
37
<PAGE>
10.49 Legal Services agreement between the Company and
Jeffrey D. Marks, Esq.,P.C. dated January 11,1999
and Amendment thereto dated January 15, 1999).
10.50 Employment Agreement between the Company and
Ronald Hopson; dated February 12, 1999.
10.51 Employment Agreement between the Company and
Ronald C. Byer; dated May 28, 1999 .
10.52 Consulting Agreement between the Company and
Ronald C. Byer; dated May 28, 1999 .
10.53 Consulting Agreement between the Company and James
Q. Maloy; dated May 28, 1999 .
10.54 Management agreement between the Company and
Edwardstone & Company, Incorporated dated
September 27, 1999 (filed herewith).
10.55 Union Contract between the Company and Local 262
of New Jersey dated November 6, 1999 (to be filed)
23.1 Consent of Ernst & Young (filed herewith)
23.2 Consent of Sax, Macy, Fromm (filed herewith)
23.3 Consent of Arthur Andersen (filed herewith)
(b) Reports on Form 8-K
Form 8-K dated September 22, 1999
Item 2. Acquisition or Disposition of Assets-
Acquisition of Portable Software Solutions Limited and ICS
International AG
Form 8-K dated December 3, 1999
Item 4. Change in certifying accountants
Item 8. Change in fiscal year
Form 8-KA dated December 6, 1999
Item 7. Financial Statement and Exhibits-
a) Financial Statements of businesses acquired
b) Pro Forma Financial Information
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of
the Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: January 12, 2000 VERTEX INDUSTRIES, INC.
s/Ronald C. Byer
Ronald C. Byer
President and Treasurer
Pursuant to the requirements by the Securities Exchange
Act of 1934, this report has been signed by the following persons
on behalf of the Company and in the capacities and on the dates
indicated:
January 12, 2000 s/Nicholas Toms
Nicholas R. H. Toms
Joint Chairman of the Board,
Joint Chief Executive Officer
and Director
January 12, 2000 s/Hugo H. Biermann
Hugo H. Biermann
Joint Chairman of the Board
Joint Chief Executive Officer
and Director
January 12, 2000 s/Ronald C. Byer
Ronald C. Byer
President, Treasurer and
Director
January 12, 2000 s/George Powch
George Powch
Director
January 12, 2000 s/Gregory N. Thomas
Gregory N. Thomas
Director
January 12, 2000 s/Wayne L. Clevenger
Wayne L. Clevenger
Director
January 12, 2000 s/Denis Newman
Denis Newman
Director
January 12, 2000 s/Joseph R. Robinson
Joseph R. Robinson
Director
39
<PAGE>
VERTEX INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS:
Reports of Independent Auditors F-2, F-3, F-4
Balance Sheets as of September 30, 1999 and July
31, 1999 and 1998 F-5, F-6
Statements of Operations for the two-months ended
September 30, 1999 and for the Years Ended
July 31, 1999, 1998 and 1997 F-7
Statements of Changes in Stockholders' Equity
for the two-months ended September 30, 1999 and for
the Years Ended July 31, 1999, 1998 and 1997 F-8
Statements of Cash Flows for the two-months ended
September 30, 1999 and for the Years Ended
July 31, 1999, 1998 and 1997 F-9
Notes to Financial Statements F-10
SUPPLEMENTAL SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts
for the two-months ended September 30, 1999 and for
the Years Ended July 31, 1999, 1998 and 1997
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders of
Vertex Industries Inc. and subsidiaries
We have audited the accompanying consolidated balance sheet of Vertex
Industries, Inc. and subsidiaries as of September 30, 1999, and the related
consolidated statements of operations, changes in stockholders' equity,
and cash flows for the two months then ended. Our audit also included the
financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Vertex
Industries, Inc. and subsidiaries at September 30, 1999, and the consolidated
results of their operations and their cash flows for the two months then ended
in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/Ernst & Young LLP
MetroPark, New Jersey
January 10, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Vertex Industries, Inc.
We have audited the accompanying balance sheets of Vertex Industries, Inc.
as of July 31, 1999 and 1998 and the related statements of operations,
changes in stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
<PAGE>
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vertex Industries, Inc.
as of July 31, 1999 and 1998 and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
As described in Note 3 to the financial statements, the July 31, 1999 and
1998 financial statements have been restated to reflect an adjustment in the
accounting for revenue recognition of certain software license fees and
related postcontract customer support revenue.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
/s/Sax Macy Fromm & Co., PC
Sax Macy Fromm & Co., PC
Certified Public Accountants
Clifton, New Jersey
September 16, 1999
except for Note 1 as to which the
date is September 27, 1999 and for
Note 10 as to which the date is
January 10, 2000
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vertex Industries, Inc. and subsidiary:
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity and cash flows of Vertex Industries, Inc.
and subsidiary (a New Jersey Corporation) as of July 31, 1997 and for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Vertex
Industries, Inc. and subsidiary as of July 31, 1997, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in
the index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not
part of the basic consolidated financial statements. This schedule has
been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Roseland, New Jersey
October 7, 1997
<PAGE>
<TABLE>
VERTEX INDUSTRIES, INC.AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
September 30, July 31,
1999 1999
(as restated)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,769,422 $1,353,650
Accounts receivable, less allowance for doubtful accounts
of $125,166 at September 30, 1999 and $30,666 at July 31,1999 5,163,266 914,717
Notes and other receivables, net 329,339 64,044
Inventories, net 3,042,994 295,457
Investment securities 42,309 282,814
Prepaid expenses and other current assets 322,075 29,948
---------- ----------
Total current assets 10,669,405 2,940,630
---------- ----------
PROPERTY, EQUIPMENT, AND CAPITAL LEASES
Property and Equipment 4,052,516 1,913,470
Capital Leases 505,792 141,757
--------- ---------
Total property, equipment and capital leases 4,558,308 2,055,227
Less: Accumulated depreciation and amortization (1,778,494) (1,764,863)
---------- ----------
Net property, equipment and capital leases 2,779,814 290,364
---------- ----------
OTHER ASSETS:
Intangible Assets 15,822,576 --
Investment in partner companies 14,050 --
Deferred tax asset -- 404,000
Licensing Cost, net of amortization of $24,840 at September 30,
1999 and $19,320 at July 31, 1999 113,160 118,680
Other assets 146,873 97,519
---------- ----------
Total other assets 16,096,659 620,199
---------- ----------
Total assets $29,545,878 $3,851,193
=========== ==========
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
VERTEX INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Sept. 30, 1999 July 31, 1999
(as restated)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of obligations under capital leases $165,239 $6,269
Loan payable bank 996,745 --
Notes payable 3,205,318 --
Mortgage notes payable current portion 103,237 --
Accounts payable 2,011,177 226,251
Loan payable former shareholder 381,220 --
Accrued expenses and other liabilities 4,159,796 272,567
Advances from customers 456,950 --
Deferred revenue 3,017,764 735,717
----------- ---------
Total current liabilities 14,497,446 1,240,804
----------- ---------
LONG-TERM LIABILITIES:
Obligations Under Capital Leases, net of current portion
and other long term liabilities 217,084 5,155
Mortgage notes payable 1,118,153 --
Other long term liabilities 148,925 --
--------- ---------
Total long-term liabilities 1,484,162 5,155
--------- ---------
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; 16,921,121 and 5,238,979 shares issued at
September 30, 1999 and July 31, 1999, respectively 84,605 26,195
Additional paid-in capital 17,115,679 5,290,837
Accumulated deficit (3,609,713) (2,926,002)
Accumulated other comprehensive income 18,868 259,373
---------- ---------
13,609,439 2,650,403
Less: Treasury stock, 10,000 shares at cost at September 30, 1999 (45,169) (45,169)
---------- ---------
Total stockholders' equity 13,564,270 2,605,234
---------- ---------
Total liabilities and stockholders' equity $29,545,878 $3,851,193
========== =========
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
VERTEX INDUSTRIES, INC.AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
For The Two
Months Ended
September 30 For the Years Ended July 31,
1999 1999 1998 1997
(as restated)(as restated)
<S> <C> <C> <C> <C>
OPERATING REVENUES $508,982 $7,022,073 $3,329,358 $3,228,598
--------- ---------- ---------- ----------
OPERATING EXPENSES:
Cost of sales 218,208 3,987,997 1,733,152 1,800,276
Selling and administrative 390,721 1,700,705 1,549,726 1,511,949
Research and development 192,268 777,263 460,781 496,862
---------- ---------- ---------- ----------
Total operating expenses 801,197 6,465,965 3,743,659 3,809,087
---------- ---------- ---------- ----------
Operating income (loss) (292,215) 556,108 (414,301) (580,489)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income 12,701 53,171 22,924 38,801
Interest expense (197) (5,295) (2,762) (6,372)
Other -- -- -- 75,000
-------- --------- --------- ---------
Net other income 12,504 47,876 20,162 107,429
Income (loss) before -------- --------- --------- ---------
income taxes (279,711) 603,984 (394,139) (473,060)
INCOME TAX PROVISION (BENEFIT): 404,000 91,000 (300,000) --
---------- -------- --------- ----------
Net income (loss) ($683,711) $512,984 ($94,139) ($473,060)
========== ======== ========= ==========
NET INCOME(LOSS)PER SHARE OF COMMON STOCK:
Basic $ (0.08) $ 0.10 $ (0.02) $ (0.09)
Diluted $ (0.08) $ 0.09 $ (0.02) $ (0.09)
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
VERTEX INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE TWO MONTHS ENDED SEPTEMBER 30, 1999 AND
FOR THE YEARS ENDED JULY 31, 1999 (as restated), 1998 (as restated) AND 1997
<CAPTION> Accumulated
Additional Other
Common Stock Paid-In Accumulated Comprehensive Comprehensive Treasury
Shares Amount Capital Deficit Income Income Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE July 31, 1996 5,108,979 $25,545 $5,182,188 ($2,871,787) ($50,569) $2,285,377
Exercise of stock options 24,000 120 14,600 14,720
Issuance of stock in consideration
for services 5,000 25 4,350 4,375
Net loss (473,060) (473,060)
BALANCE July 31, 1997 5,137,979 25,690 5,201,138 (3,344,847) (50,569) 1,831,412
--------- ------ --------- ----------- ----------- ----------- --------- ---------
Issuance of stock in consideration of
services 19,000 95 22,155 22,250
Other comprehensive income, net of tax
Net income (as restated) (94,139) $ (94,139) (94,139)
Unrealized gain on investment security 429,061 $429,061 429,061
-------
Comprehensive income $334,922
-------
Decrease in treasury stock 5,400 5,400
---------- ------- --------- ------------ ---------- -------- ---------
Balance July 31, 1998, as restated 5,156,979 25,785 5,223,293 (3,438,986) 429,061 (45,169) 2,193,984
Exercise of stock options 82,000 410 67,544 67,954
Other comprehensive income, net of tax
Net income (as restated) 512,984 $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, as restated 5,238,979 26,195 5,290,837 (2,926,002) 259,373 (45,169) 2,605,234
Exercise of stock options 25,000 125 28,625 $28,750
Issuance of stock in connection
with new inventories and
acquisitions 11,657,142 58,285 11,796,217 11,854,502
Net loss (683,711) $(683,711) (683,711)
Change in unrealized gain/(loss) on
investment (240,505) (240,505) (240,505)
---------
$(924,216)
---------- ------- ----------- ----------- ========= -------- -------- ------------
Balance September 30, 1999 16,921,121 $84,605 $17,115,679 ($3,609,713) $18,868 ($45,169) $13,564,270
<FN>
See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
VERTEX INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<CAPTION>
Two Months Ended Year Ending
September 30, 1999 1999 1998 1997
--------------- --------------------------------------
(as restated)(as restated)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ($683,711) $512,984 ($94,139) ($473,060)
---------- -------- --------- ----------
Adjustments to reconcile net income (loss) to net cash
Provided by operating activities
Depreciation and amortization 19,151 130,221 141,811 194,382
Stock issued in consideration for services -- -- 22,250 4,375
Deferred taxes 404,000 91,000 (300,000) --
(Increase) or decrease, net of acquisitions
Accounts receivable 294,075 (122,637) (387,133) 157,898
Allowance for doubtful Accounts -- 45,319 -- --
Inventories, net (72,637) 168,932 118,220 110,570
Notes and other receivables (630) (134,700) 28,107 75,304
Prepaid expenses and other current assets 2,334 (8,600) 11,513 (18,976)
Other Assets 46,115 (31,118) -- --
Increase or (decrease) in operating liabilities:
Current portion of long term debt 111 -- -- --
Accounts payable (76,128) (47,475) 144,104 (40,010)
Accrued expenses and other liabilities 882,883 15,473 86,451 71,406
Deferred revenue (35,651) 154,520 313,567 181,510
---------- -------- ------- --------
Net adjustments 1,463,623 260,935 178,890 736,459
---------- -------- -------- --------
Net cash provided by
operating activities 779,912 773,919 84,751 263,399
---------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (25,913) (113,944) (46,131) (27,892)
Acquisition of business, net of cash acquired (9,805,366) -- -- --
Other -- -- 1,272 (1,642)
------------ -------- ------- -------
Net cash used for
investing activities (9,831,279) (113,944) (44,859) (29,534)
------------ -------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long term debt -- -- (2,567) (2,800)
Repayment of capitalized lease obligations (1,111) (5,641) (14,516) (31,576)
Proceeds from short term borrowing -- 100,000 -- --
Repayments of short term borrowing -- (100,000) -- --
Net Proceeds from issuance of stock 9,439,500 -- -- --
Net Proceeds from exercise of stock options 28,750 67,954 -- 14,720
----------- --------- --------- --------
Net cash provided by
(used for) financing activities 9,467,139 62,313 (17,083) (19,656)
----------- --------- --------- --------
Net increase in Cash 415,772 722,288 22,809 214,209
CASH AND CASH EQUIVALENTS AT BEGINNING OF
OF PERIOD 1,353,650 631,362 608,553 394,344
----------- --------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,769,422 $1,353,650 $631,362 $608,553
=========== =========== ======== ========
<PAGE>
<FN>
See notes to financial statements.
</TABLE>
<PAGE>
VERTEX INDUSTRIES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) RECENT DEVELOPMENTS AND BASIS OF PRESENTATION
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 five million four hundred forty nine
thousand six hundred forty two (5, 449,642) shares of the Company's
common stock and MidMark purchased five million (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
16,921,121 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 the largest 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. The Company used a portion of the cash consideration received
from Edwardstone and MidMark when Edwardstone and MidMark purchased 60%
of the Company's common shares on September 16, 1999.
On September 22, 1999, the Company acquired all of the outstanding
capital stock of ICS International AG ("ICS"), the 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.
<PAGE>
The total consideration paid to ICS was DM 9,720,000 of which DM
6,720,000 was paid in cash at the closing and the balance of DM
3,000,000 was in the form of a note payable in amounts of DM 1,000,000
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 DM 4,000,000 of bank debt of which DM
3,000,000 was paid off at the closing. In addition, the Company
purchased ICS's headquarters located in Neu Anspach near Frankfurt,
Germany for DM 3,000,000, of which DM 700,000 was paid in cash and the
remainder was financed through a mortgage the principal amount of which
is DM 2,300,000. The Company used a portion of the cash consideration
received from Edwardstone and MidMark to acquire ICS. The exchange rate
on September 27, 1999 was 1.8961 German Marks to the US dollar.
The following table presents unaudited pro forma results of operations
of the Company as if the above described acquisitions had occurred at
August 1, 1998:
<TABLE>
<S> <C>
(In thousands, except per Year Ended
share data) July 31, 1999
Revenues $36,386,715
Loss before income taxes (320,322)
Net loss (665,665)
Basic and diluted loss per
share: (.04)
</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 1999, nor do they purport to be indicative of the future results
of operations of the Company.
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.
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:
<PAGE>
<TABLE>
<CAPTION>
Fair Value of Assets acquired:
<S> <C>
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 to seller (1,221,390)
Common stock issued to sellers (2,415,000)
=============
Net cash paid $ 9,805,366
=============
<FN>
No operating activities has been included in the statement
of operations for the two months ended September 30, 1999
for either PSS or ICS.
</TABLE>
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 accompanying financial statements.
Comparative condensed income statement information is shown as follows:
<TABLE>
<CAPTION>
Two-months ended
September 30,
1998
(Unaudited)
<S> <C>
Sales $1,094,003
=============
Net Income $72,621
=============
</TABLE>
Restatement
The Company has 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, and has restated the accompanying
consolidated financial statements to reflect this adjustment. Accordingly,
the restated consolidated financial statements presented herein are the
Company's primary historical financial statements for the periods presented.
See Note 3 for a reconciliation of the Company's financial position and results
of operations from the financial statements previously issued to the restated
financial statements, presented herein.
<PAGE>
(2) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
This summary of significant accounting policies of Vertex Industries,
Inc. and subsidiaries (the Company) is presented to assist in
understanding the Company's financial statements.
Nature of Business-
Until the acquisitions of ICS and PSS on September 22, 1999 and
September 27, 1999, respectively the Company sold and distributed bar code
printers, data collection terminals, software, automated card devices
and precision weighing equipment to customers primarily within the
United States. The Company has also provided systems integration for
turnkey automated data collection solutions in real-time systems and
warehouse management systems. In addition, through the Netweave license
agreement, the Company has sold the Netweave middleware product.
Through the acquisition of ICS and PSS, the Company is now also a
provider of integrated high-end wireless data capture solutions to
industrial users and handheld terminal solutions to mobile workers,
substantially in Germany, the United Kingdom and Ireland.
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 bar code hardware and other 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 to 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 intial 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.
<PAGE>
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.
Inventories-
Inventories are valued at the lower of cost (first-in, first-out basis)
or market.
Property and Equipment-
All items of property and equipment, including amounts recorded under
capital leases, are stated at cost. It is the general policy of the
Company to depreciate property and equipment under the straight-line
method over their estimated useful lives. Leasehold improvements are
amortized over the lesser of the useful life of the improvements or the
remaining term of the lease.
<TABLE>
<CAPTION>
The estimated useful lives of depreciable assets are as follows-
<S> <C>
Building 35 years
Leasehold improvements 10 years
Machinery and equipment 12 years
Tools, dies and patterns 12 years
Office furniture and equipment 3-10 years
Computer equipment 3-7 years
Exhibit equipment 3 years
Capital leases 5 years
</TABLE>
Intangible Assets-
Intangible assets consist 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.
Net Income (Loss) Per Share of Common Stock-
The Company adopted SFAS No. 128, "Earnings per Share", on July 31,
1998. SFAS No. 128 establishes the new standard for computation and
presentation of net income per common share. Under the new
requirements both basic and diluted net income per common share are
presented. All prior period net income (loss) per common share data
has been restated.
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
<PAGE>
have been outstanding if all potentially dilutive common shares,
principally stock options, were issued during the reporting period.
Cash Equivalents-
The Company considers all investments with an original maturity period
within three months to be cash equivalents.
Long-Lived Assets-
During 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets" (SFAS 121). SFAS 121 requires, among other
things, that an entity review its long-lived assets and certain
related intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully
recoverable. As a result of its review, the Company does not believe
that any impairment currently exists related to the long-lived assets.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130. "Reporting Comprehensive Income", which
establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income
is defined to include all changes in equity except those resulting
from investments by owners and distribution to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to
be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
Stock Based Compensation-
The Financial Accounting Standards Board issued a standard,
"Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123
requires that an entity account for employee stock compensation under
a fair value based method. However, SFAS 123 also allows an entity to
continue to measure compensation cost for employee stock-based
compensation arrangements using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees" (Opinion 25). Entities electing to remain with
the accounting under Opinion 25 are required to make pro forma
disclosures of net income and earnings per share as if the fair value
based method of accounting under SFAS 123 has been applied. The
Company has elected to continue to account for employee stock-based
compensation under Opinion 25 and has made the required disclosures
under SFAS 123 (see Note 14).
Investment Securities-
The Company has classified its investment securities as available for
sale. Such securities are measured at fair value in the financial
<PAGE>
statements based on quoted market prices with unrealized gains and
losses included in stockholders' equity.
(3) RESTATEMENT
The Company has 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 because the Company determined that
information with respect to separate pricing for each of the multiple elements
is not available.
The following information pertaining to the statements of operations and
balance sheets reconcile previously reported and restated financial information
for the years ended July 31, 1999 and 1998.
<TABLE>
<CAPTION>
July 31,
1999 1998
<S> <C> <C>
Statement of Operations
Income (loss) before income taxes:
as previously reported $801,342 $(156,554)
as restated 603,984 (394,139)
Income tax provision (benefit):
as previously reported 170,000 (205,000)
as restated 91,000 (300,000)
Net income (loss):
as previously reported 631,342 48,446
as restated 512,984 (94,139)
Net income (loss) per common share
Basic
as previously reported .12 .01
as restated .10 (.02)
Diluted
as previously reported .11 .01
as restated .09 (.02)
Deferred revenue
as previously reported 300,774 343,612
as restated 735,717 581,197
Accumulated deficit
as previously reported (2,665,059) (3,296,401)
as restated (2,926,002) (3,438,986)
</TABLE>
<PAGE>
(4) SALE OF SUBSIDIARY AND INVESTMENT SECURITIES:
On March 4, 1998 the Company entered into an agreement with MPEL
Holdings Corp., parent company of Mortgage Plus Equity and Loan Corp.,
a mortgage banking company whereby MPEL Holdings Corp. merged with
Vertex's inactive subsidiary, Computer Transceiver Systems, Inc.
(OTCBB:CPTT). The agreement provided pre-merger CPTT shareholders
with 4% of the merged company, of which Vertex owns approximately
2.7%. The merged company is traded Over the Counter Bulletin Board
under the symbol MPEH. The Company currently owns 226,251 shares of
MPEH. The Company has recognized an unrealized gain of $259,373 as of
July 31, 1999 based on the then current stock price of $2 per share.
As of September 30, 1999 the company has recorded market fluctuation
of the investment in MPEH, based on the current stock price of $.187
per share.
(5) INVENTORIES:
<TABLE>
Inventories consist of the following-
<CAPTION>
Sept.30, July 31,
1999 1999
<S> <C> <C>
Raw materials $7,183 $8,836
Work in process 338,599 $36,004
Finished goods and parts, net of
obsolescence reserves of $225,290 at
September 30, 1999 and $201,208 at
July 31, 1999, respectively 2,697,212 250,617
--------- -------
$3,042,994 $295,457
========== ========
</TABLE>
<PAGE>
(6) PROPERTY, EQUIPMENT
AND CAPITAL LEASES:
Details of property, equipment and capital leases are as follows-
<TABLE>
<CAPTION>
Sept. 30, July 31,
1999 1999
--------- --------
<S> <C> <C>
Property and equipment-
Land $206,468 --
Building 1,386,650 --
Leasehold improvements 299,956 $299,956
Machinery and equipment 223,911 223,911
Tools, dies and patterns 454,067 454,067
Office furniture and equipment 1,093,780 611,491
Computer equipment 242,923 203,868
Automobiles 24,584 --
Exhibit equipment 120,177 120,177
----------- ----------
Total 4,052,516 1,913,470
Less- Accumulated depreciation and
amortization (1,645,533) (1,632,828)
------------ -----------
Net property and equipment 2,406,983 280,642
Capital leases-
Office equipment 253,736 86,448
Computer equipment 27,564 --
Automobiles 224,492 55,309
----------- -----------
Total 505,792 141,757
Less- Accumulated amortization (132,961) (132,035)
----------- -----------
Net capital leases 372,831 9,722
----------- -----------
Net property, equipment and
capital leases $2,779,814 $290,364
=========== ===========
</TABLE>
Depreciation and amortization of property, equipment and capital leases
for two-months ended September 30, 1999 and the fiscal years ended July
31, 1999, 1998 and 1997 was $13,635, $110,901, $108,891, and $151,969,
respectively.
<PAGE>
(7) LOANS PAYABLE BANK
Loans payable bank consists of loans from two banks in Germany with an
outstanding balance of $663,127 and a loan from a bank in Italy with an
outstanding balance of $333,618 at September 30, 1999. These loans
bear interest at rates ranging from 5.685% to 8.75%. The above loans
from the German banks are secured by accounts receivable from
subsidiary companies located in Germany. The loan from the Italian bank
is secured by accounts receivable of an Italian subsidiary. At
September 30, 1999 the unused line of credit with respect to these
banks is approximately $36,000.
In June 1999, the Company obtained 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 January 31, 2000,
the Company presently is in discussions with the bank to renew and increase
the amount available under the line of credit. As of September 30, 1999 and
July 31, 1999 there was no balance due on the loan. The Company has obtained
a waiver relating to certain financial covenants stated in the agreement
as of September 30, 1999.
One of the Company's European subsidiaries has a line of credit of
$180,000, all of which was available of September 30, 1999, and which
is secured by the subsidiaries accounts receivable.
(8) 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 International AG. In addition
there are notes payable in two equal installments of $806,000 to the
sellers of Portable Software Solutions Limited payable on March 27,
2000 and September 27, 2000.
(9) LONG-TERM DEBT:
Long-term debt consists of the following-
Capital lease obligations
<TABLE>
<CAPTION>
Sept. 30, July 31,
1999 1999
<S> <C> <C>
Obligations under capital leases, due in
varying quarterly monthly principal
installments and interest at varying
interest rates not exceeding 10 9/16% $382,323 $11,424
Less- Current portion of long-term debt 165,239 6,269
--------- --------
Capitalized leases $217,084 $5,155
========= =========
<PAGE>
Mortgage notes payable
Sept. 30, July 31,
1999 1999
Mortgage notes payable bearing interest
at rates from 6% to 8% $1,221,390 --
Less- Current portion of mortgage notes
payable 103,237 --
---------- ---------
Long term mortgage notes payable $1,118,153 --
=========== ==========
</TABLE>
Other Long Term Liabilities
Other long-term liabilities of $148,925 consist of government grants
and loans. Under the terms of the employment grant agreements
between Portable Software Solutions Limited, a wholly owned
subsidiary of Vertex Industries, Inc. and the Irish Industrial
Development Authority, Forbairt (the IDA), the company offsets
related payroll expense amount against these grants. These
grants may be repaid to the IDA in certain circumstances,
principally the failure to maintain the related jobs for a
period of five years from the payment of the first installment
of the related employment grant. The Company has complied
with the terms of the grant agreements through September 30,
1999.
(10) ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued expenses and other liabilities consist of the following-
<TABLE>
<CAPTION>
Sept. 30, July 31,
1999 1999
<S> <C> <C>
Professional fees $ 362,755 $50,502
Acquisition related accruals 978,557 --
Vacation salaries, bonus
and severance 798,075 --
Sales tax 142,753 1,484
Commissions 66,859 17,641
Payroll and deductions 126,851 57,962
Royalty Expense 90,143 82,497
Pension Expense -- 5,870
Taxes other 246,641 --
Payroll taxes 389,675 --
Other 957,487 56,611
--------- ---------
$4,159,796 $272,567
</TABLE>
<PAGE>
(11) PENSION PLANS:
The Company maintains a 401(k) plan, which is a defined contribution
plan covering substantially all of the nonunion employees. Eligible
employees can contribute up to 17% of their compensation not to exceed
Internal Revenue Code limits. The Company may match 50% of the
amount contributed by employees, up to 3% of compensation as defined.
Company contributions for the years ended July 31, 1999, 1998 and 1997
were $18,386, $3,255, and $5,787, respectively. There was no company
accrual or contribution for the two-months ended September
30, 1999 since there was a loss in that period.
(12) INCOME TAXES:
Deferred income taxes are recognized for tax consequences of temporary
differences by applying enacted statutory tax rates to differences
between the financial reporting and the tax basis of existing assets
and liabilities.
The net deferred tax assets in the accompanying balance sheets consist
of the following-
<TABLE>
<CAPTION>
Sept. 30, July 31,
1999 1999
<S> <C> <C>
Deferred tax assets-
Allowance for accounts, note and other
receivables $44,000 $32,000
Inventory 82,000 80,000
Deferred revenue -- --
Net operating loss carryforwards 1,714,605 1,602,000
--------- ---------
Total deferred tax assets 1,840,000 1,714,000
Deferred tax liabilities -
Depreciation (19,000) (19,000)
---------- ----------
Total deferred tax liabilities (19,000) (19,000)
Valuation allowance (1,821,000) (1,291,000)
----------- -----------
Net deferred tax asset -- 404,000
=========== ===========
</TABLE>
Deferred tax assets arise from the tax benefit of net operating loss
carryforwards which are expected to be utilized to offset taxable
income and from timing differences between the recognition in
financial statement and tax returns of certain inventory costs, bad
debt reserve allowances on receivables, depreciation on fixed assets
and amortization of certain intangible assets.
<PAGE>
A valuation allowance on the deferred tax assets has been provided
based on the Company's assessment of ability to realize such assets in
the future. For the two-months ended September 30, 1999 the valuation
allowance for net deferred tax assets increased by $530,000. The increase was
the result of net changes in temporary differences and the reversal of
the deferred tax asset.
The components of the income tax provision (benefit) included in the
statements of operations for two-months ended September 30, 1999 and
the fiscal years ended July 31, 1999, 1998 and 1997 consist of the
following-
<TABLE>
<CAPTION>
Sept.30, July 31,
1999 1999 1998 1997
<S> <C> <C> <C> <C>
Current-
Federal -- -- -- --
State -- -- -- --
Deferred $404,000 $91,000 ($205,000) --
---------- ---------- ---------- ---------
Total income
tax provision (benefit) $404,000 $91,000 ($205,000) --
========== ========== ========== =========
</TABLE>
At September 30, 1999, the net operating loss carryforwards available
to offset future taxable income consist of approximately $4,042,000 in
Federal net operating losses which will expire in various amounts
through 2019, and state net operating losses of approximately
$3,433,000 which will expire in various amounts through 2006.
The tax provision for the two months ended September 30, 1999 is
directly related to an increase in the deferred tax asset valuation
reserve. The Company believes that as of September 30, 1999, an
ownership change under Section 382 of the Internal Revenue Code occurred.
The effect of the ownership change would be the impostion of annual limitation
on the use of the NOL carryforwards attributable to the periods before the
change which Manaagement has not yet quantified. Management presently
believes it is no longer more likely than not tht the deferred tax asset will
be realized.
<PAGE>
A reconciliation of income tax at the statutory rate to the Company's
effective rate is as follows-
<TABLE>
<CAPTION>
Sept.30, July 31,
1999 1999 1998 1997
<S> <C> <C> <C> <C>
Statutory rate (34.0%) 34.0% (34.0%) (34.0%)
Effect of-
Valuation allowance 188.0 (28.1) (31.1) 34.0
Permanent differences 0.0 6.4 (12.0) 0.0
State income taxes, net
of Federal tax effect (9.0) 2.8 0.9 0.0
-------- -------- -------- --------
Effective income
tax rate 145.0% 15.1% (76.1) 0.0%
======== ======== ========= ========
</TABLE>
(13) COMMITMENTS AND
CONTINGENT LIABILITIES:
Leases-
The Company leases phone equipment under a capital lease with an
expiration date of April 2001. The Company leases its plant and office
facilities located in Clifton, New Jersey. The lease expires on May
31, 2003. Annual rental is $164,340 for the first three years of the
lease. For the last two years of the lease the annual rent is
$170,280. In addition, the Company is obligated to pay applicable
real estate taxes, repairs and insurance.
The Company's subsidiary, Portable Software Solutions, Limited leases a
3,000 square foot facility in Dublin, Ireland at an annual rental of
$43,000. The lease has twenty-one more years to run and expires on
September 30, 2020. In addition, PSS leases a 3,000 square foot
facility in London, England at the annual rental of $117,000. This
lease will expire in March 2006.
The Company subleases under a 60-month lease a portion of its plant in
Clifton, New Jersey, which expires on May 31, 2003. Under the terms
of the sublease, the tenant is required to pay annual rent of $53,010
for the first three years of the sublease and annual rent of $54, 720
for the last two years of the sublease, plus a proportionate share of
utilities.
Rent expense for the two-months ended September 30, 1999 and years
ended July 31, 1999, 1998 and 1997 was $27,390, $164,340, $158,920,
and $154,660, respectively.
<PAGE>
Minimum lease payments and sublease rental income are as follows-
<TABLE>
<CAPTION>
Equipment Sublease
Capital Operating Rental
Year Ended September 30, Leases Leases Income
<S> <C> <C> <C>
2000 $201,308 $705,280 $53,010
2001 155,762 527,367 53,580
2002 85,071 433,656 54,720
2003 18,397 347,754 36,480
Thereafter -- 628,019 --
-------- -------- --------
Total 460,538 $2,642,076 $197,790
======== ========
Less- Amount representing
interest 78,215
---------
Present value of net
minimum lease payments 382,323
Less- Current portion of
obligations under capital
leases 165,239
--------
Long-term portion of
obligations under capital leases $217,084
========
</TABLE>
Employment Agreements and Other Commitments
On May 28, 1999 the Company entered into a one-year employment
contract with its President. The contract provides for an annual
salary of $150,000 per year and a Company paid automobile. The term
commenced on August 1, 1999.
On September 27, 1999 the Company entered into a five year management
agreement with Edwardstone & Company, Incorporated. The contract
provides for a shareholder, Edwardstone, to provide the Company the
services of Hugo Biermann and Nicholas Toms to act as Joint Chairmen
and Joint Chief Executive Officers of the Company during the term of
the agreement. In addition, Hugo Biermann and Nicholas Toms shall
serve as members of the Board of Directors of the Company. In exchange
for the services rendered by Hugo Biermann and Nicholas Toms the
Company will pay Edwardstone & Company, Incorporated $600,000 per
annum.
On September 27, 1999 the Company entered into a five year investment
banking agreement with another shareholder, MidMark Associates, Inc.,
for $250,000 per annum payable quarterly at the rate of $62,500.
<PAGE>
(14) STOCKHOLDERS' EQUITY:
Incentive Stock Options-
The Company has an Incentive Stock Option Plan which provides for the
granting of options to officers and other key employees to purchase
shares of the Company's common stock. The maximum number of shares to
be issued as part of the plan is 2,000,000. The maximum term of any
option is ten years and the option price per share may not be less
than the fair market value of the stock on the date the option is
granted. Options granted to persons owning more than 10% of the
voting shares of the Company may not have a term of more than five
years and may not be less than 110% of fair market value.
<TABLE>
<CAPTION>
September 30 July 31
1999 1999 1998
<S> <C> <C> <C>
Options outstanding, beginning of year 1,056,600 821,600 667,600
Granted -- 375,000 170,000
Exercised (10,000) (82,000) --
Canceled (30,000) (58,000) (16,000)
---------- --------- ----------
Options outstanding, end of year 1,016,600 1,056,600 821,600
========== ========== ==========
Options price range $.50-$8.12 $.475-$8.12 $.475-$8.12
Options exercisable 428,400 430,400 373,800
Options available for grant 608,000 578,000 1,050,000
</TABLE>
The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation. In accordance with the provisions the Company accounts
for its stock option plans under Opinion 25 and, accordingly, does not
recognize compensation cost. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at
grant date as prescribed by SFAS 123, net income (loss) and earnings
(loss) per share would have been reduced to the pro forma amounts
indicated in the table below-
<TABLE>
<CAPTION>
Sept.30 July 31,
1999 1999 1998 1997
<S> <C> <C> <C> <C>
Net income (loss)-as reported $(683,711) $512,984 ($94,139) ($473,060)
Net income (loss)-pro forma $(711,711) $279,484 $(237,055) ($499,529)
Earnings (loss) per share-as restated $(.08) $.10 $(.02) ($.09)
Earnings (loss) per share-proforma $(.08) $.05 $(.05) ($.10)
</TABLE>
<PAGE>
The weighted average fair value at date of grant for options granted
in 1999, 1998 and 1997 was $1.55, $.50 and $.46, respectively. The
fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model based on the weighted
average market price of $1.38 in 1999, $.81 in 1998 and $.85 in 1997
using the following assumptions-
Expected stock price volatility 92%
Risk-free interest rate 6.67%
Weighted average expected life of options 3 years
Expected dividends 0
The effects of applying SFAS 123 and the results obtained through the
use of the Black-Scholes option-pricing model are not necessarily
indicative of future values.
Other Stock Options-
In connection with an employment agreement, the Company granted an
employee an option to purchase up to 300,000 shares of common stock,
at an option price of $7.875 per share, expiring the earlier of June
29, 2003, one year after death, or 30 days after termination. The
agreement allowed the employee to retire these options at their
original grant price, should the market price of the Company's
common stock drop below the exercise price of the options, and have
the options granted again at the then market price. During 1996,
the employee retired all 300,000 options exercisable at $7.875 and
was subsequently granted 300,000 at an exercise price of $.50 per
option the then market value of the common stock. During 1997, the
employee left the Company and the Company agreed to waive the
termination clause in the agreement. In 1998, in connection with an
employment agreement, the Company granted an employee an option to
purchase 70,000 shares of common stock, at an option price of $.68.
All 70,000 options are currently exercisable.
During 1999, the Company granted 25,000 options to the Company's
legal counsel for legal services. The options are exercisable at
$.94 and expire on September 23, 2001. These options are currently
exercisable. During 1998, the Company granted 20,000 options to the
Company's legal counsel for legal services. The options are
exercisable at $.38 and expire on December 23, 2000. These options
are currently exercisable. During 1997, the Company granted 20,000
and 120,000 options to two service firms as partial payment for
legal, financial and consulting services. The 20,000 options were
exercised at $1.00 in December 1999. The 120,000 options expired on
July 7, 1998. No options were granted in the two-month period ended
September 30, 1999.
<PAGE>
(15) NET INCOME (LOSS) PER COMMON SHARE:
The following table summarizes the computation of basic and diluted net
income per common share for the period ended September 30, 1999 and each of
the three years ended July 31, (as restated):
<TABLE>
<CAPTION>
Sept. 30, July 31,
1999 1999 1998 1997
<S> <C> <C> <C> <C>
Net income (loss) available to common
shareholders ($683,711) $512,984 $94,139 $(473,060)
========= ======== ======= ==========
Weighted-average common
shares outstanding 8,683,136 5,191,579 5,133,674 5,102,003
Plus: Common stock
equivalents 829,535 719,109 106,246 --
Diluted weighted-average
common shares outstanding 9,512,671 5,910,688 5,239,920 5,102,003
========= ========= ========= =========
Net income (loss) per
common share:
Basic $(.08) $.10 $(.02) $(.09)
Diluted $(.08) $.09 (.02) $(.09)
</TABLE>
The Company did not pay dividends for the period ended September 30, 1999
and each of the three years ending July 31, 1999, 1998 and 1997.
(16) MAJOR CUSTOMERS:
For the two-months ended September 30, 1999 the Company had three
customers that accounted for approximately 22% of revenue.
The Company had one customer which accounted for approximately 57% of
revenue for the fiscal year ended July 31, 1999. As of July 31, 1999,
approximately $230,519 of accounts receivable were due from this
customer. For the fiscal year ended July 31, 1998 the same customer
accounted for 17% of revenue. The Company had no customer which
accounted for more than 10% of revenue for the fiscal year ended July
31, 1997.
(17) SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Sept. 30, July 31,
1999 1999 1998 1997
<S> <C> <C> <C> <C>
Interest paid $197 $5,295 $2,762 $6,372
Stock issued in
consideration for services -- -- 22,050 4,735
</TABLE>
<PAGE>
(18) LICENSE AGREEMENT WITH
NETWEAVE CORPORATION:
On February 17, 1997 the Company entered into a license agreement (the
"Agreement") with NetWeave Corporation ("NetWeave") to develop,
market, sell and support the NetWeave product worldwide. The Company
will pay NetWeave a royalty on the initial licenses sold and on annual
license fees paid by the customer for maintenance and support of the
NetWeave product. Under terms of the Agreement, the NetWeave
Corporation assigns its existing customer base to the Company along
with the existing sales representative agreements in the U. S. and the
master distributor with SX Consultancy for Europe and Asia. SX
Consultancy is a European software distributor and developer of custom
software based in the UK. For the two-months ended September 30, 1999
and the years ended July 31, 1999, 1998 and 1997 the NetWeave Licensing
agreement generated revenues of approximately $175,034, $769,695,
$735,316 and $104,533, respectively, and the company incurred royalty
expenses related to the revenues in the amount of $14,460, $185,444,
$137,909 and $15,759, respectively.
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of the Company's financial instruments approximates the
carrying amounts.
(20) CONCENTRATION OF CREDIT RISKS:
From time to time the Company maintains cash balances that are in excess
of Federally insured limits.
(21) OPERATING SEGMENTS:
In June 1997, SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information," was issued effective for fiscal
years beginning after December 15, 1997. The statement allows, and
the Company has chosen to present information for operating segments
for the two-months ended September 30, 1999 and the years ended July
31, 1999, 1998 and 1997, respectively.
The Company has six distinct product lines that offer different
products and services.
<PAGE>
The following tables list the operating revenues and gross margins of
each segment:
<TABLE>
<CAPTION>
Two-Months Ended
September 30, July 31
Operating Revenues 1999 1999 1998 1997
(as restated) (as restated)
<S> <C> <C> <C> <C>
Barcode Equipment $112,937 $4,168,462 $412,883 $488,827
Card Devices 675 28,171 66,472 49,806
Weighing Equipment and
weights 171,880 1,520,489 1,231,481 1,291,054
Label Generating Systems 8,650 51,112 130,004 688,195
Software and Services 39,806 484,144 753,202 606,183
Middleware and Services 175,034 769,695 735,316 104,533
--------- ---------- ---------- ----------
$508,982 $7,022,073 $3,329,358 $3,228,598
========= =========== =========== ===========
Gross Margins 1999 1999 1998 1997
(as restated) (as restated)
Barcode Equipment $45,723 $1,305,281 $147,657 $175,431
Card Devices 374 16,623 23,905 22,208
Weighting Equipment
and weights 77,754 724,282 449,471 463,038
Label Generating
Systems 6,777 31,326 53,668 299,919
Software and Services 36,003 411,962 521,060 418,128
Middleware and Services 124,143 544,602 400,445 49,598
--------- ------------ --------- ----------
$290,774 $3,034,076 $1,596,206 $1,428,322
========== ============ =========== ============
</TABLE>
For the two-months ended September 30, 1999 all of the Company's
business is conducted from it facility in Clifton, New Jersey and
substantially all sales have been made domestically. The Company does
not allocate their assets and liabilties to business seqments.
management decisions regarding sales, purchases, pricing and shipping
are performed by the Company's management team. At present, Selling,
Research and Development and General and Administrative Expenses are not
specifically allocated to each product segment. In the future the
Company plans to identify all costs relating to each product line to
further ascertain the profitability of each segment.
<PAGE>
<TABLE>
VERTEX INDUSTRIES, INC.AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE TWO-MONTHS ENDED SEPTEMBER 30, 1999 AND
FOR THE YEARS ENDED JULY 31, 1999, 1998 AND 1997
<CAPTION>
Balance at Additions Deductions Balance at
Beginning Charged to From End of
of Period Expense Allowances Period
<S> <C> <C> <C> <C>
Two-months ended September 30, 1999-
Deducted from accounts receivable for
doubtful accounts $30,666 $94,500 $-- $125,166
Deducted from inventory as valuation
allowance $201,208 $38,406 $14,324 $225,290
Year Ended July 31, 1999-
Deducted from accounts receivable for
doubtful accounts $75,985 $-- $45,319 $30,666
Deducted from inventory as valuation
allowance $235,419 $165,393 $199,604 $201,208
Year Ended July 31, 1998-
Deducted from accounts receivable for
doubtful accounts $75,985 $-- $-- $75,985
Deducted from inventory as valuation
allowance $139,419 $96,000 $-- $235,419
Year Ended July 31, 1997-
Deducted from accounts receivable for
doubtful accounts $75,985 $-- $-- $75,985
Deducted from inventory as valuation
allowance $34,619 $204,000 $99,200 $139,419
</TABLE>
<PAGE>
MANAGEMENT AGREEMENT
THIS AGREEMENT is made as of September 27, 1999,
between Vertex Industries, Inc., a New Jersey corporation (the
"Company") and Edwardstone & Company, Incorporated, a Delaware
corporation ("EW").
WHEREAS, EW has initiated a series of transactions on
behalf of the Company including procuring adequate financing for
it to purchase certain assets; and
WHEREAS, the Company is engaged in the business of
producing and selling systems utilized in the collection and
processing of data, middleware, the identification of goods,
services and individuals, solutions for the automation of
warehouse operations and the integration of disparate computing
systems and applications, and EW is experienced in business and
organizational strategy, and financial and operational
management; and
WHEREAS, the Company desires to retain EW to procure the
ongoing services of Messrs. Hugo Biermann and Nicholas Toms to
provide investment banking, business and organizational strategy,
and financial and management services to the Company, upon the
terms and conditions hereinafter set forth, and EW is willing to
undertake such obligations;
NOW, THEREFORE, in consideration of the mutual
covenants hereinafter set forth, the parties hereto agree as
follows:
1. Appointment.
The Company hereby engages EW and EW hereby agrees
under the terms and conditions set forth herein to procure
certain services of Hugo Biermann and Nicholas Toms to the
Company as described in Section 2 hereof.
2. Duties of HHB and NT; Other Services.
(a) EW shall procure on behalf of the Company the
services of Hugo Biermann and Nicholas Toms to act as Co-Chairmen
and Chief Executive Officers of the Company during the term of
this agreement to provide the Company with business and
organizational strategy, and financial and investment management
and leadership services. HHB and NT shall perform such management
and other duties as reasonably requested from time to time by the
Board of Directors of the Company ("the Board of Directors"),
provided, however, that Hugo Biermann and Nicholas Toms each
agrees to devote no less than 90%of his professional time,
attention, skills, benefits and best efforts to the performance
of his duties hereunder and to the promotion of the business and
interests of the Company, and HHB agrees to take responsibilities
for the Company's operations in Europe.
<PAGE>
(b) In addition, Hugo Biermann and Nicholas Toms shall
serve as members of the Board of Directors of the Company upon
nomination by EW and election pursuant to the terms of that
certain Shareholders Agreement dated as of the date hereof by and
among the Company and certain of its shareholders, and the
Management Fee provided for herein shall serve as full
compensation for such services, in lieu of any separate or
additional directors' fees.
3. Compensation of EW
(a) In exchange for the services rendered by HHB and
NT, during the term of this Agreement, the Company
agrees to pay EW a management fee (the "Management
Fee"), in cash, in the amount of $600,000 per year,
payable in approximately 24 equal bi-monthly
installments.
The Company shall reimburse each of HHB and NT for all
reasonable and necessary out-of-pocket travel and other expenses
incurred by either of them in rendering services required under
the terms of this Agreement, promptly and in no event more than
thirty (30) business days after submission, on a monthly basis,
of a detailed statement of such expenses and reasonable
documentation.
4. Benefits
During the term of this Agreement, HHB and NT shall be
entitled to participate in all of the benefit plans available to
senior executives of the Company including, but not limited to,
medical, dental and life insurance, and disability and other
benefits available to such senior executives from time to time.
5. Term and Termination of Agreement.
This Agreement shall be for an initial term of five
years commencing on the date hereof, and shall be automatically
renewed thereafter for successive one-year terms unless
terminated by either party upon written notice to the other party
given not less than thirty days prior to the end of either the
initial term or any subsequent one-year renewal term, as the case
may be.
6. Liability.
EW is not and never shall be liable to any creditor of
the Company and the Company agrees to indemnify and hold EW
harmless from and against any and all such claims of alleged
creditors and against all costs, charges and expenses (including
reasonable attorneys' fees and expenses) incurred or sustained by
it or the other party in connection with any action, suit or
proceeding to which it may be made a party by any alleged
creditor. The Company also agrees to indemnify and hold EW
harmless from and against any and all liabilities, losses or
damages suffered, paid or incurred by EW arising out of, or in
any way connected with, or as a result of, the execution and
delivery of this Agreement, or the performance by HHB and NT of
the Services hereunder, except for claims arising out of or
related to the gross negligence or willful misconduct of EW, HHB or NT.
<PAGE>
7. Assignment.
This Agreement shall be binding upon and inure to the
benefit of the parties' successors and permitted assigns.
However, neither this Agreement nor any of the rights of the
parties hereunder may be transferred or assigned by either party
hereto without the express written consent of the other party.
Any attempted transfer or assignment in violation of this Section
6 shall be void.
8. Relationship of the Parties.
Nothing contained in this Agreement is intended or is
to be construed to constitute EW and the Company as partners or
joint venturers or either party as an employee of the other
party. Neither party hereto shall have any express or implied
right or authority to assume or create any obligations on behalf
of or in the name of the other party or to bind the other party
to any contract, agreement or undertaking with any third party.
9. Miscellaneous.
(a) Amendments and Waivers. This Agreement may
be amended, modified, superseded, canceled, renewed or extended,
and the terms and conditions hereof may be waived, only by a
written instrument signed by the parties hereto or, in the case
of waiver, by the party waiving compliance.
(b) Notices. Any notice or other communication
required or which may be given hereunder shall be in writing and
shall be delivered personally, telecopied, or sent by certified,
registered, or express mail, postage prepaid, to the parties at
the following addresses or at such other addresses as shall be
specified by the parties by like notice, and shall be deemed
given when so delivered personally or telecopies, or if mailed,
two days after the date of mailing, as follows:
(i) if to the Company, to:
Vertex Industries, Inc.
23 Carol Street
Clifton, New Jersey 07014
Attention: Ronald C. Byer
Tel: 973-777-3500
Fax: 973-472-0814
(ii) if to EW, to:
Edwardstone & Company, Incorporated
600 Madison Avenue
26th Floor
New York, NY 10022
Attention: Nicholas R. Toms, Esq.
Tel: 212-832-2700
Fax: 212-832-3151
<PAGE>
(c) Entire Agreement. This Agreement contains
the entire agreement between the parties hereto with respect to
the subject matter hereof and supersedes all prior contracts and
other agreements.
(d) Headings. The headings in this Agreement are
for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement.
(e) Counterparts. This Agreement may be executed
in two or more counterparts, each of which shall be deemed an
original but all of which together shall constitute one and the
same instrument.
(f) Governing Law; Consent to Jurisdiction. This
Agreement shall be governed by, and construed and enforced in
accordance with and subject to, the laws of the State of New
Jersey applicable to agreements made and to be performed entirely
within such State. Each of the parties hereto consents and
agrees to the jurisdiction of any State or Federal court sitting
in the County of Morris, State of New Jersey, and waives any
objection based on venue or forum non conveniens with respect to
any action instituted therein, and agrees that any dispute
concerning the conduct of any part in connection with this
Agreement or otherwise shall be heard only in the courts
described above.
(g) Severability. If any term, provision,
covenant or restriction of this Agreement, or any part thereof,
is held by a court of competent jurisdiction or any foreign,
federal, state, county or local government or any other
governmental, regulatory or administrative agency or authority to
be invalid, void, unenforceable or against public policy for any
reason, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and
shall in no way be affected, impaired or invalidated.
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement on the date first above written.
VERTEX INDUSTRIES, INC.
By: s/Ronald C. Byer
Name: Ronald C. Byer
Title: President
EDWARDSTONE & COMPANY, INCORPORATED
By: s/Nicholas R. Toms
Name: Nicholas R. Toms
Title: Chairman
Accepted and agreed to:
s/Hugo H. Biermann
Hugo H. Biermann
s/Nicholas R. Toms
Nicholas R. Toms
<PAGE>
Consent of Independent Auditors
We consent to the incorporation by reference in the
Registration Statements (Form S-8 No. 333-58841; Form S-8
No. 333-02391; Form S-8 No. 333-00032; Form S-8 No. 333-
67055; Form S-8 No. 333-20229; and Form S-8 No. 333-58843)
of Vertex Industries, Inc. of our report dated January 10,
2000, with respect to the consolidated financial statements
and schedule of Vertex Industries, Inc. as of September 30,
1999 and for the two months then ended, included in this
Transition Report (Form 10-K) for the period ended September
30, 1999.
/s/ Ernst & Young LLP
MetroPark, New Jersey
January 10, 2000
<PAGE>
Consent of Independent Auditors
We consent to the incorporation by reference in the
Registration Statements of Vertex Industries, Inc. (Form S-8 No.
333-58841; Form S-8 No. 333-02391; Form S-8 No. 333-00032; Form
S-8 No. 67055; Form S-8 No. 333-20229; and Form S-8 No. 333-
58843) of our report dated September 16, 1999, except for Note 1
as to which the date is September 27, 1999 and Note 3 as to which
the date is January 10, 2000, on our audits of the financial
statements and financial statement schedule of Vertex Industries,
Inc. as of July 31, 1999 and 1998 and for the years then ended,
which report is included in this Annual Report on Form 10K.
/s/Sax, Macy, Fromm & Co., PC
Sax, Macy, Fromm & Co., PC
Certified Public Accountants
Clifton, New Jersey
January 10, 2000
<PAGE>
EXHIBIT 23.3
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the
incorporation of our report, dated October 7, 1997, included in
this Form 10-K, into the Company's previously filed Registration
Statements (Form S-8 No. 333-58841; Form S-8 No. 333-02391; Form
S-8 No. 333-00032; Form S-8 No. 67055; Form S-8 No. 333-20229;
and Form S-8 No. 333-58843)
/s/Arthur Andersen LLP
Arthur Andersen LLP
Roseland, New Jersey
January 10, 2000
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<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,769,422
<SECURITIES> 42,309
<RECEIVABLES> 5,163,266
<ALLOWANCES> 125,166
<INVENTORY> 3,042,994
<CURRENT-ASSETS> 10,669,405
<PP&E> 4,558,308
<DEPRECIATION> 1,778,494,
<TOTAL-ASSETS> 29,545,878
<CURRENT-LIABILITIES> 14,497,446
<BONDS> 1,484,162
0
0
<COMMON> 84,605
<OTHER-SE> 13,479,665
<TOTAL-LIABILITY-AND-EQUITY> 29,545,878
<SALES> 508,982
<TOTAL-REVENUES> 508,982
<CGS> 218,208
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<INCOME-PRETAX> 279,711
<INCOME-TAX> 404,000
<INCOME-CONTINUING> (683,711)
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<CHANGES> 0
<NET-INCOME> (683,711)
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