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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Year Ended:
September 30, 2000
Commission file number 0-15066
Vertex Interactive, Inc.
(Exact name of Company as specified in its charter)
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<S> <C>
New Jersey 22-2050350
(State of incorporation) (I.R.S. Employer Identification No.)
23 Carol Street 07014
(Address of principal executive offices) (Zip Code)
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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. [X]
As of December 15, 2000 the aggregate market value of the voting stock held by
non-affiliates of the Company was $126,316,756 based upon the closing price of
the common stock as reported on the NASDAQ National Market as of December 15,
2000.
As of December 15, 2000 the Company had 26,486,693 shares of Common Stock
outstanding.
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
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effective June 2, 1986, Current Reports filed on Form 8-K dated
October 2, 2000, April 12, 2000 and October 7, 1999, Quarterly Report on
Form 10-Q filed on February 18, 2000, Transition Report on Form 10K filed on
January 13, 2000, and the Company's Schedule 14A Information Proxy Statement to
be filed on or before January 29, 2001.
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PART I
ITEM 1. BUSINESS
GENERAL
Vertex Interactive, Inc. ("Vertex" or "the Company") is a leading provider of
supply chain management software and systems. Vertex products focus on the
execution part of supply chain management, which is the automation of business
processes designed to manage orders, manage the procurement and selection of
products so ordered, and manage the delivery of such products through the chain
of supply to end customers. 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 fulfillment, warehousing and distribution software described above is
applicable to both traditional distribution channels and e-business fulfillment
channels, or e-fulfillment channels. E-fulfillment is the process of ordering,
picking, configuring, packing, shipping and the delivering of products ordered
by customers over the Internet. Vertex software and systems allow companies to
use the Internet and traditional communication methods to efficiently manage and
control the flow of inventory throughout the supply chain. Companies use Vertex
software and systems to increase visibility to all participants in the chain of
supply of a particular product or products to a particular end user or group of
end users, to reduce distribution costs and to increase customer loyalty and
satisfaction. This is achieved through improved supply chain efficiency and
greater responsiveness to customer needs, which are inherent in the deployment
of Vertex supply chain software and systems. Vertex provides global service and
support for all of its software and systems from established facilities in both
North America and Europe.
The Company's principal executive 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.
SUPPLY CHAIN MANAGEMENT BACKGROUND - THE EMERGING OPPORTUNITY
The rapid emergence of the Internet as a medium for commerce has shifted the
focus of logistics systems from warehouse management and distribution to
fulfillment and, in particular, e-fulfillment. Many traditional economy
companies, who have historically relied on warehouse management and inventory
management systems to replenish inventory, are becoming e-commerce aware and are
seeking the ability to transact business directly with customers worldwide over
the Internet. Many traditional manufacturers, who may have historically relied
on distributors and retailers to transact business with their customers, are now
using or considering using the Internet to sell their products directly to
end-customers. In addition, many e-commerce companies, which generally have no
internal fulfillment capabilities of their own, are relying on third parties to
satisfy their fulfillment needs. Vertex believes that traditional warehouse
management and distribution
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software, which have been designed to store and distribute products, are not
flexible enough to meet the dynamic and fast changing needs of Internet based
supply chain management. Thus, the Company believes that companies must rapidly
deploy e-fulfillment systems to respond to the specific Internet based trading
needs of customers on a worldwide basis. Hence, the enormous and exploding
demand in particular for internet supply chain management solutions worldwide.
RECENT EVENTS
Effective September 30, 2000 the Company acquired Renaissance Software, Inc.
("Renaissance") through the merger of a new subsidiary of the Company, Rensoft
Acquisition Corp., into Renaissance, with Renaissance surviving as a
wholly-owned subsidiary of the Company. The value of the transaction was
approximately $55 million. The Company acquired all of the outstanding shares of
Renaissance for approximately 3.6 million shares of Vertex common stock and
assumed all outstanding Renaissance stock options and warrants in exchange for
options to purchase approximately 530,000 shares of Vertex common stock.
On December 11, 2000, the Company announced that it had entered into a
definitive agreement to acquire Applied Tactical Systems ("ATS") in a
transaction valued at approximately $26 million, to be paid for through the
issuance of 3.0 million shares of Vertex common stock. The transaction is
expected to close before the end of December 2000.
During fiscal year 2000, the Company also disposed of its mechanical precision
weighing equipment business in the United States, and its hardware reseller
business in Germany, to focus the Company on its core supply chain software,
systems and services.
PRODUCTS
The nature of Vertex's business and product offerings was transformed during
fiscal 2000 to the selling of supply chain execution software solutions and
systems.
The Company's products began as Warehouse Management Systems (WMS) products and
have expanded to Supply Chain Management (SCM) products. WMS fulfill the
requirements of material storage and retrieval operations within today's Supply
Chain management. The traditional warehouse is the buffer between one business
and another business or between the manufacturer and/or importer and the end
customer.
Software Products
The Company's latest generation product suite named e-Supply Chain Management
(e-SCM)(acquired through the Renaissance acquisition) provides a complete web
based suite of supply chain execution products from order through warehouse
management to the acknowledgement of the actual delivery to a customer. Among
other things, the e-SCM product set provides internet based information sharing
amongst employees, customers, vendors and visibility into the entire
distribution network. Thus e-SCM controls true distribution cost of inventory,
as an intelligent and a proactive problem-solving system.
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The e-SCM suite of products consists of the e-WMS - the first client and server
designed, JAVA engineered warehouse management system. e-WMS contains unique
features that allow its users to `break through' and extend capabilities,
visibility and service levels beyond the four walls of their warehouse.
e-Order is a web based system, that allows companies to link their internal
employees, outside sales force, customers, and distributors into an integrated
order management system, either through their own network or the Internet.
e-Distribution is a web based software product designed to plan, manage and
optimize the actual transportation and delivery from a company's shipping dock
to a customer's receiving dock, and contains within it demand management, order
management, purchase management and inventory management.
Vertex traditional WMS solutions ran on A/S 400, Windows 9x, NT and 2000, as
well as various forms of UNIX operating systems. Vertex software also supports
all of the popular RF terminals.
The Company's iWMS product, built to run on the A/S 400 platform, is a well
established top tier WMS system for fortune 1000 companies, and contain a
feature rich functionality including receiving, cross-docking, put away, cycle
counting , picking, packing, shipping, slip verification and manifesting.
In October 2000, the Company announced the introduction of Release 4.2 of its
Stradivari packaged warehouse management system L(WMS) available for middle
market distribution and warehouse facilities. Stradivari is a complete solution
for warehouse facilities that enables streamlined management of receiving,
put-away, inventory, cycle-counting, picking, shipping and other areas of
warehouse operations, intended to have return on investment within as little as
six months.
Stradivari is completely configurable without programming and is also an Open
Systems Interconnect (OSI) solution, ensuring connectivity to a broad range of
host systems and applications. In addition to its seamless performance and
extensive warehouse functionality, Stradivari provides the audit trails and
accountability required to minimize costly on-hand inventory, reduce labor, and
provide real-time visibility into warehouse operations. Another key benefit to
using Stradivari is that users can be up and running in approximately 10 days
from installation
WareRite'r' is a real time warehouse inventory and order management system that
controls and records all product movements from receipt through order picking
and shipping.
PicRite'r' is a pick to light system designed for all types of flow rack,
shelving, and pallet flow order picking applications. PicRite guides each picker
by illuminating light panels at particular locations, to the specified products
for each carton and specifies the quantities required. PicRite allows the picker
to indicate pick Complete or
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Shortages directly at the pick location. The system supports lot and serial
number control as required.
PutRite'r' is used in a variety of carton-specific applications. When products
delivered in full cases are distributed to individual cartons typically
representing store orders, PutRite guides distribution of product to the
appropriate put location for each store carton by illumination of light panels
at particular locations.
TurnRite'r' is used in all types of carousel batch order processing
applications. TurnRite controls all industry standard horizontal and vertical
carousels. TurnRite supports multiple workstation operations. TurnRite combines
carousel pick and batch put operations, as well as carousel restocking and cycle
counting functions.
CartRite'r' is used in applications with large numbers of medium-to-slow moving
SKUs. CartRite offers low cost, accurate, high-speed picking for areas not
equipped with a pick-to-light system. CartRite handles the 80% of products that
constitute 20% of a company's volume with ease.
GTL'r' is an easy-to-use development tool that is used primarily to create and
run applications for portable data collection systems. GTL provides all the
functionality to read and write to ODBC/SQL databases and to communicate over
TCP/IP networks. GTL has been responsible for successful custom projects in
asset management, warehouse management, work in progress, order fulfillment, UCC
128 compliance labeling, picking and packing, labor tracking, inventory shipping
and receiving, route accounting, EDI/ASN, and time and attendance.
Middleware
In 1997, the Company entered into a license agreement with Netweave Corporation
(NWC) to develop, market, and support the NetWeave product worldwide. Pursuant
to this agreement, Vertex has paid NWC 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 August 31, 2000, the Company purchased outright all rights to the Netweave
product from NWC, in a transaction valued at appropriately $1 million, paid for
by the issuance of approximately 80,000 shares of Vertex common stock.
The NetWeave product lets companies integrate their otherwise incompatible IBM,
Digital, Unisys, Tandem, UNIX, and PC systems into a seamless whole.
The synergy that exists between the NetWeave product and the Company's supply
chain execution software, provides Vertex with access to new customers with
legacy systems and the need for supply chain management solutions without having
to change computer platforms or databases. The NetWeave product has been the
primary offering in the Company's Middleware Technologies group.
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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. As anticipated the first releases of eVolve were
completed during fiscal 2000.
The Company also maintains and supports significant additional software products
to enhance its position in the area of software for mobile computing, namely
LifePro(a product developed to automate field insurance agents), SalesPro (for
the automation of field sales workers generally) and VanPro (for route
accounting functions).
PRODUCT PRICES AND REVENUES
The Company's product prices and revenues vary according to the scale of a
particular customer implementation and the nature of the products and services
offered. Therefore, in this context individual product or service prices and
revenues are not meaningful.
MAINTENANCE AND SERVICE
Depending on the product concerned, the Company offers a ninety day to one-year
warranty which includes parts and labor. 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 facilities. 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.
SALES AND MARKETING
Vertex sells its software and systems through a direct sales force of
approximately 90 employees worldwide and through strategic alliances with
complementary software vendors and consulting organizations, including, among
others, i2 Technologies, IBM Global Services, and
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Scansource. The Company promotes the sales of some or all of its products
through national advertising, direct mailings, distributors' catalogs, trade
shows and product literature.
CUSTOMERS
Vertex targets companies in the vertical markets of Pharmaceuticals, Information
Technology, Consumer Packaged Goods, Automotive Products, Third Party Logistics
Providers, Bulk Food Distributors and Financial Services. These are generally
industries characterized by large product selections, high transaction volumes
and increasing demands for customer-specific order processing. A representative
sample of our largest customers in these industries includes IBM, Dell, Merck,
Pfizer, Novartis, Warner Lambert, The Wiz, Estee Lauder, Rite Aid, Office Max,
Daimler Chrysler, BMW and ConAgra, among others. The Company had one customer
that accounted for approximately 11% of revenue for the fiscal year ended
September 30, 2000. For the fiscal years ended September 30, 1999 and 1998, two
other customers accounted for 48% and 33% of revenue, respectively.
RESEARCH AND DEVELOPMENT
During fiscal 2000, the Company expended approximately $2.4 million on Research
and Development (including capitalized software of $1.1 million), compared to
approximately $900,000 and $500,000 in fiscal 1999 and 1998, respectively.
EMPLOYEES
The Company now employs approximately 400 employees. Approximately 150 are
technical personnel involved in Research and Development or product deployment,
approximately 100 in sales and marketing and customer support, approximately 100
are involved in post sale services and maintenance, and the balance of 50 being
in administration and finance.
Designing and implementing the Company's software solutions 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 companies, 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
Vertex faces competition from numerous foreign and domestic companies of various
sizes. In the Company's opinion, dominant companies with which it competes are,
among others, Manhattan Associates, EXE Technologies, JDA Software, McHugh
Software and Robocom Systems, as well as a variety of smaller software
providers. Less often the Company will compete with companies such as i2
Technologies and IBM, who are
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also business partners, as well as ERP vendors such as SAP, Baan and JD Edwards,
some of whom are also partners in middleware technologies. 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 share due to technological innovation, changes in product emphasis and
applications and new entrants with greater capabilities or better prospects.
However, management believes that no other company possesses the broad base and
depth of supply chain fulfillment products from the web based JAVA platform of
its eSCM suite of products to the software solutions such as Stradivari which
provide it with a significant competitive advantage.
ITEM 2. PROPERTIES
Vertex's corporate headquarters occupy approximately 20,000 square feet of
office space in Clifton, New Jersey under a lease expiring on May 31, 2003.
The Company owns an 8,000 square foot building in Anaheim, California which
houses primarily technical and sales personnel, and a 10,000 square foot
building in Neu Anspach, Germany, near Frankfurt, which serves as the
headquarters for its ICS International AG subsidiary. In addition, the Company
leases many sites domestically and in Europe for sales, research and
development, and administrative purposes. The Company believes that its
current facilities and office space is sufficient to meet its present needs
and does not anticipate any difficulty securing additional space, as needed,
on terms acceptable to the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to routine litigation matters in connection with its
business. The Company is currently not involved in any legal proceeding that it
believes could have a material adverse effect upon its financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS
The Company did not submit any matters to a vote of security holders during the
most recent fiscal quarter.
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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 NASDAQ National Market System under the symbol VETX. Prior to
April 26, 2000 the Company's shares of common stock traded on the OTC Bulletin
Board under the same symbol.
The following table sets forth, for the periods shown, the high and low sale
prices concerning such shares of Common Stock:
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<CAPTION>
High Low
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1999
First Quarter 1.9375 0.6562
Second Quarter 2.2500 1.1875
Third Quarter 4.5000 1.0000
Fourth Quarter 3.3125 1.9062
2000
First Quarter 4.4375 2.1875
Second Quarter 14.7500 3.2500
Third Quarter 14.1250 5.5000
Fourth Quarter 18.5000 9.6875
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The approximate number of holders of record of the Company's shares of Common
Stock as of December 4, 2000 was 407. This number includes numerous brokerage
firms that hold such shares in street name. The Company estimates that there are
more than 2,900 beneficial shareholders as of December 4, 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.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company should be read in
conjunction with the Company's Financial Statements and notes thereto appearing
on pages beginning on F-1. Such financial data for periods prior to September
30, 1999 were restated to reflect the change in year end from July 31 to
September 30 as described in Note 1 to the Consolidated Financial Statements.
Also, as discussed in Item 7 and Note 1 to the financial statements, the
Company has completed acquisitions in both fiscal 2000 and 1999 so the
amounts shown in selected financial data are not directly comparable.
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SUMMARY OF SELECTED FINANCIAL DATA
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2000 1999 1998 1997 1996
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OPERATIONS FOR THE YEAR:
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Revenues $47,769,311 $10,106,332 $6,754,864 $4,078,127 $3,784,480
Operating income (loss) before
goodwill amortization and
in-process research and
development write-off (1) (198,157) 333,542 (20,500) (289,628) 392,566
Goodwill amortization 1,063,775 - - - -
In-process research and
development write-off 7,500,000 - - - -
Net income (9,412,424) (160,413) 287,011 (597,500) 237,748
Basic Net Income (Loss)
Per Share (0.46) (0.02) 0.04 (0.09) 0.04
Cash earnings (2) 857,314 498,191 139,683 (391,111) 547,595
Basic cash earnings
per Share 0.04 0.07 0.02 (0.06) 0.10
FINANCIAL POSITION AT END OF YEAR:
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Total Assets $110,219,476 $30,348,130 $5,399,704 $2,600,420 $2,715,856
Long-Term Debt 1,927,943 1,495,337 115,530 271,412 32,875
Stockholders' Equity 84,407,725 13,725,628 2,071,507 1,534,550 2,285,377
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(1) In-process research and development write off associated with the
acquisition of Renaissance Software Inc., effective September 30, 2000.
(2) Cash earnings represent net income exclusive of depreciation, amortization,
the in-process research and development write-off, issuance of stock and/or
stock options for services, and other non-cash expenses. Management considers
cash earnings to be an important indication of the operational strength of our
business, including our ability to fund future development. Cash earnings,
however, should be considered in addition to operating or net loss as an
indicator of our performance, and in addition to cash flows from operations
as a measure of liquidity, in each case determined in accordance with
generally accepted accounting principles. In addition, this definition of
cash earnings may not be comparable to similarly titled measures reported
by other companies.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Annual Report on Form 10K contains, in addition to historical information,
certain forward-looking statements that involve significant risks and
uncertainties. Such forward-looking statements are based on management's belief,
as well as assumptions made by and information currently available to,
management pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. The Company's actual results could differ
materially from those expressed in or implied by the forward-looking statements
contained herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed herein and in Item 1:
"Business", and elsewhere in this Annual Report on Form 10-K. The Company
undertakes no obligation to release publicly the result of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date of this Annual Report or to reflect the occurrence
of other unanticipated events.
This discussion and analysis should be read in conjunction with the Selected
Financial Data and the audited consolidated financial statements and related
notes of the Company contained elsewhere in this report. In this discussion, the
years "2000", "1999" and "1998" refer to fiscal years ended September 30, 2000,
1999 and 1998, respectively.
OVERVIEW
As discussed in Note 1 to the Consolidated Financial Statements, in September
1999, the Company acquired all of the stock of three commonly owned companies in
the United Kingdom and Ireland (together "PSS") and all of the stock of ICS
International ("ICS"), based principally in Germany. These two significant
acquisitions continued the Company's transformation from primarily producing
hardware devices to developing sophisticated, software products and systems
designed for the automation of business processes to manage orders, manage the
procurement and selection of products so ordered, and manage the delivery of
such products through the supply chain to end customers. These systems may also
contain hardware devices manufactured by third parties, which the Company
resells as part of the solution for the customer.
Effective March 1, 2000, the Company acquired all of the outstanding capital
stock of Data Control Systems ("DCS"), a provider of pick to light warehouse
management systems located in New Jersey.
Effective April 1, 2000 the Company acquired all of the outstanding capital
stock of Auto-ID, Inc. ("Auto-ID"), a reseller of bar coding equipment.
Effective June 30, 2000, the Company acquired all of the outstanding common
stock of Societe Italiana Servizi Italservice S.r.l. ("SIS"), a provider of
after-market computer maintenance and software support services.
Effective September 30, 2000, the Company acquired all of the outstanding common
stock of Renaissance Software Inc. ("RSI"), a developer of supply chain and
warehouse management systems. Results of
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operations for RSI will be included in the Company's consolidated financial
statements beginning October 1, 2000.
The accompanying consolidated financial statements assume the PSS and ICS
acquisitions closed effective September 30, 1999, the DCS acquisition closed
effective March 1, 2000, and the Auto-ID acquisition closed effective April 1,
2000. The Company has accounted for each of these acquisitions using the
purchase method of accounting in accordance with APB No. 16. Accordingly, the
financial statements include the results of operations from October 1, 1999 for
PSS and ICS, from March 1, 2000 for DCS, from April 1, 2000 for Auto-ID, and
from July 1, 2000 for SIS.
In June 2000, the Company completed mergers with Positive Developments, Inc.
("PDI") and Communication Services International, Incorporated ("CSI"). These
mergers were accounted for using the pooling of interests method in accordance
with APB No. 16. Accordingly, the accompanying consolidated financial statements
have been restated to include the results of PDI and CSI for all periods
presented.
The Company changed its year-end from July 31 to September 30, effective October
1, 1999. In the Company's Form 10K Transition Report filed in January 2000, the
Company included a two-month transition period (August 1, 1999 to September 30,
1999). The accompanying financial statements for the years ended September 30,
1999 and 1998 have been compiled from the records of the Company and restated to
reflect the results of operations and cash flows of the Company on the basis of
a September 30 fiscal year.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO YEAR ENDED SEPTEMBER 30, 1999.
Operating Revenues:
Operating revenues increased by approximately $37.7 million (or 373%) to $47.8
million in 2000. The acquisitions of PSS, ICS, DCS, Auto-ID, and SIS (the
"Purchase Acquisitions") contributed approximately $9.2 million, $19.4 million,
$7.4 million, $0.6 million and $0.7 million, respectively for an aggregate
increase of $37.3 million. The mergers with CSI and PDI (the "Mergers")
contributed to $3.5 million of the increase. The operating revenues for Vertex,
excluding all acquired companies, decreased approximately $3.1 million from 1999
to 2000 due to the completion of a large contract during 1999.
Gross Profit:
Gross profit increased by approximately $10.8 million (or 245%) to $15.2 million
in 2000. As a percent of operating revenues, gross profit was 31.8% in 2000 as
compared to 43.6% in 1999. The Purchase Acquisitions contributed approximately
$11.4 million of gross profit in 2000, which is approximately 30.1% of their
operating revenues. The Mergers accounted for $0.7 million of the increase in
gross profit, while the gross profit for Vertex, excluding all acquired
companies, decreased $1.2 million as a result of the completion of a large
contract in 1999. The 2000 gross profit percentage reflects a higher
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than average hardware sales component in operating revenues, which carries a
lower gross profit than software and system sales, and the 1999 gross profit was
favorably impacted as a result of the large contract noted above.
Operating Expenses:
Selling and administrative expenses increased $10.7 million (or 335%) to $13.9
million in 2000. The Purchase Acquisitions accounted for $8.4 million of the
increase, the Mergers accounted for $0.5 million, and Vertex, exclusive of all
acquired companies, accounted for $1.8 million. Included in the Vertex increase
are the costs of establishing a corporate infrastructure, which are offset by
reduced administrative costs at certain of the acquired entities. As a
percentage of revenue, selling and administrative expenses decreased from
31.7% to 29.2% from 1999 to 2000.
Research and development expenses have increased approximately $370,000 (or
43.0%) from $0.9 million in 1999, to $1.3 million in 2000. In addition, $1.1
million of software development expenses incurred in 2000 were capitalized.
Thus, total research and development expenditures in 2000 were approximately
$2.4 million. This increase reflects the Company's transformation from primarily
producing and reselling hardware devices to developing sophisticated order
fulfillment solutions, with an increasing emphasis on providing Internet
enabling technologies. The research and development is being performed by
employees, and to a greater extent in 2000, by outside consultants.
The amortization of intangibles of $1.1 million in 2000 is a direct result of
the Purchase Acquisitions. These intangibles are being amortized over their
estimated lives ranging from 2 to 25 years.
As a result of the September, 2000 acquisition of Renaissance Software, Inc.,
$7.5 million of the excess purchase price was charged directly to expense as a
write-off of in-process research and development costs. The allocation of $7.5
million of the excess purchase price to in-process research and development
costs was based on a valuation made by an independent valuation firm, as more
fully described in Note 1 to the financial statements. In addition during 2000,
the Company incurred approximately $237,000 of expenses related to the Mergers.
Interest income increased approximately $248,000 (or 394%) in 2000. Interest
earning cash balances obtained with the Purchase Acquisitions accounted for
$103,000 of the increase, and approximately $145,000 is due to increased
earnings at Vertex as a result of the proceeds from the stock issuances
(approximately $24.0 million) in March and April 2000. Interest expense
increased by approximately $464,000 to $471,000 in 2000. A non cash imputed
interest charge of approximately $100,000 resulted from the closing of the DCS
purchase 30 days later than its effective date. The remainder of interest
expense was from working capital borrowings and acquisition related debt,
including the assumption of outstanding bank lines of credit and building
mortgages.
The income tax provision in 2000 includes U.S state and foreign taxes provided
on the profit of certain subsidiaries for which no net operating losses are
available or where the utilization of the pre-acquisition net operating losses
are an adjustment of goodwill. In
14
<PAGE>
1999, the tax provision for Vertex, including the Mergers, was based on pre-tax
operating income at an expected annual effective rate, adjusted for certain
permanent differences and the valuation of deferred tax assets which had not
previously been reserved (see Note 11 to the financial statements).
Net Income (loss):
Net loss in 1999 reflected the operations of Vertex, including the Mergers, but
excluding the Purchase Acquisitions. The 2000 net loss includes the operations
of the Purchase Acquisitions, as well as the impact of the amortization of
intangibles, the write-off of in-process research and development costs, and
interest expense related to these acquisitions.
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998.
Operating Revenues:
Operating revenues increased by approximately $3.4 million (or 50%) to $10.1
million in 1999. Approximately $2.2 of the increase is due to the completion of
a large contract during 1999, While $1.0 million of the increase is attributable
to the Mergers. Fiscal 1999 represents the second full year of operations for
each of the merged companies, and each experienced significant growth as their
customer base is expanding.
Gross Profit:
Gross profit increased by approximately $1.4 million (or 49%) to $4.4 million in
1999. As a percent of operating revenues, gross profit remained consistent from
1998 to 1999 at approximately 44%.
Operating Expenses:
Selling and administrative expenses increased $0.7 million (or 30%) to $3.2
million in 1999. The increase is due to additional personnel and related costs
required to support the increased revenue base. As a percentage of revenue,
selling and administrative expenses decreased from 36.7% to 31.7% from 1998 to
1999.
Research and development expenses increased $0.4 million (or 72%) from $0.5
million in 1998, to $0.9 million in 1999. This increase is due mainly to
increased personnel and related costs as the Company focused resources on
software development.
Interest income increased approximately $40,000 (or 170%) in 1999 due to
increased cash balances earning interest.
The 1998 tax provision reflects the benefit of certain deferred tax assets,
which at the time were assessed as being probable of realization. In 1999,
in part as the result of an ownership change under IRS rules, the deferred
tax assets were reassessed as not being probable of realization, and the
resulting provision includes approximately $400,000 expense related to these
deferred tax assets (see Note 11 to the financial statements).
15
<PAGE>
Net Income (loss):
The net loss in 1999 is due primarily to the tax provision adjustment noted
above, and conversely, the net income in 1998 is due to the tax benefit taken in
1998. Pre-tax income for 1999 was $389,000 compared to a pre-tax loss in 1998 of
$2,000. The increase in pre-tax income is due primarily to increased revenues
and related margins, partially offset by increases in operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
In March and April of 2000, the Company executed private placement sales of
common shares resulting in approximately $24.0 million of proceeds (net of cash
transaction costs totaling $2.3 million). The exercise of stock options for the
year ended September 30, 2000, totaled $0.9 million. Cash acquired in
acquisitions totaled $2.7 million. Additionally, the Company obtained a mortgage
of $0.6 million for new facilities of its California operations and received
approximately $0.9 million of proceeds from the sale of certain assets.
Approximately $16.4 million of these proceeds were used to acquire DCS and SIS,
$3.7 million was used to fund operating activities, $1.1 million was used for
capital expenditures (including the mortgaged property mentioned above), $1.7
was used to pay debt obligations, including capital leases. The above activity
resulted in an increase of approximately $5.9 million in the Company's cash
balance to $7.9 million at September 30, 2000.
At September 30, 2000 the Company had approximately $1.4 million available under
various credit lines, most of which are with European banks and are secured by
the respective local subsidiary's accounts receivable. The Company's principal
sources of ongoing liquidity are the cash flows of its subsidiaries, cash
available from various existing credit lines and potential new credit
facilities. The Company is currently negotiating with several international
money-center banks regarding a multi-currency, multi-national credit facility.
The Company may from time to time, sell common equity in private placements or
in public offerings, depending upon such things as market conditions, the
Company's capital needs and general economic at the time of such sales, if any.
The Company intends to continue to pursue acquisition opportunities. The
timing, size or success of any acquisition effort and the associated
potential capital commitments are unpredictable. The Company expects to fund
future acquisitions through the issuance of additional equity, as well as
through a combination of working capital, cash flow from operations and
borrowings under credit lines. The Company believes that liquidity and capital
resources will be sufficient to fund its requirements for at least the next
twelve months.
SUBSEQUENT EVENTS
The Company has continued to pursue acquisition opportunities. Certain
acquisitions have required cash payments, while others involved the issuance of
Vertex common stock (See "Recent Events") and provide additional cash resources
to the Company.
16
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
market prices and rates.
The Company is exposed to market risk because of changes in foreign currency
exchange rates as measured against the U.S. dollar and currencies of the
Company's subsidiaries and operations in Europe. Revenues from these operations
are typically denominated in European currencies thereby potentially affecting
the Company's financial position, results of operations, and cash flows due to
fluctuations in exchange rates. The Company does not anticipate that near-term
changes in exchange rates will have a material impact on future earnings, fair
values or cash flows of the Company. However, there can be no assurance that a
sudden and significant decline in the value of European currencies would not
have a material adverse effect on the Company's financial condition and
results of operations.
The Company's short-term bank debt bears interest at variable rates; therefore,
the Company's results of operations would only be affected by interest rate
changes to the short-term bank debt outstanding. An immediate 10 percent
change in interest rates would not have a material effect on the Company's
results of operations over the next fiscal year.
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.
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.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information required under this item to be incorporated by reference from the
Company's Proxy Statement to be filed on or before January 29, 2001.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item to be incorporated by reference from the
Company's Proxy Statement to be filed on or before January 29, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item to be incorporated by reference from the
Company's Proxy Statement to be filed on or before January 29, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item to be incorporated by reference from the
Company's Proxy Statement to be filed on or before January 29, 2001.
18
<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
Report of Independent Auditors
Balance Sheets as of September 30, 2000 and 1999
Statements of Operations for the years ended September 30, 2000, 1999
and 1998.
Statements of Changes in Stockholders' Equity for the years ended
September 30, 2000, 1999 and 1998.
Statements of Cash Flows for the years ended September 30, 2000, 1999
and 1998.
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES:
Schedules for the three years ended September 30, 2000, 1999 and 1998.
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 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.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
2.1 Form of Common Stock Certificate (incorporated by reference to the
Registration Statement filed under the Securities Act of 1933, as
amended (File No. 33-897-NY).
</TABLE>
19
<PAGE>
<TABLE>
<S> <C>
3.1 Certificate of Amendment to the Certificate of Incorporation of Vertex
Interactive, Inc. filed with the Secretary of State, State of New Jersey
on February 14, 2000 (incorporated by reference to the Form 10 Q filed
on February 18, 2000).
3.2 Amended By-laws, amended as of February 14, 2000 and September 18, 2000
(filed herewith).
10.5 Incentive Stock Option Plan dated October 10, 1985, and amended February
14, 2000(filed herewith).
10.54 Management agreement between the Company and Edwardstone & Company, Inc.
dated September 27, 1999 (incorporated by reference to the Form 10K
filed on January 13, 2000).
10.55 Share Purchase Agreement, by and among Vertex Industries, Inc. St.
Georges Trustees Limited, as trustee on behalf of the John Kenny
Settlement and the Godfrey Smith Settlement, John Kenny and Bryan J.
Maguire and Godfrey Smith dated June 21, 1999, as amended September 27,
1999, (incorporated by reference to the Form 8K filed October 7, 1999).
10.56 Share Purchase and Transfer Agreement, 1999, between Gregor von Opel and
Vertex Industries, Inc. dated as of June 21, 1999 and as amended
September 27, 1999, (incorporated by reference to the Form 8K filed
October 7, 1999).
10.57 Stock Purchase Agreement by and among Vertex Interactive, Data Control
Systems and The Stockholders of Data Control Systems, Inc. dated March
31, 2000 (incorporated by reference to the Form 8K filed April 12,
2000).
10.58 Agreement and Plan of Merger, dated September 18, 2000, by and among
Vertex Interactive, Rensoft Acquistition Corp. and Renaissance Software,
Inc. (incorporated by reference to the Form 8K filed October 2, 2000).
21.0 Subsidiaries of Vertex Interactive, Inc. (filed herewith)
23.1 Consent of Ernst & Young LLP (filed herewith).
27.0 Financial Data Schedule (filed herewith).
</TABLE>
(b) Reports on Form 8-K
1) Form 8-K dated September 18, 2000, filed October 2, 2000, relating to
the acquisition of Renaissance Software, Inc.
2) Form 8-Ka dated September 18, 2000, filed December 4, 2000.
Financial Statements, Pro forma Financial Information
re: the acquisition of Renaissance Software, Inc.
20
<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: December 18, 2000 VERTEX INTERACTIVE, INC.
/s/Raymond J. Broek
Raymond J. Broek
Chief Financial Officer
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:
<TABLE>
<S> <C>
December 18, 2000 /s/Nicholas R. H. Toms
Nicholas R. H. Toms
Joint Chairman of the Board,
Joint Chief Executive Officer
and Director
December 18, 2000 /s/Hugo H. Biermann
Hugo H. Biermann
Joint Chairman of the Board
Joint Chief Executive Officer
and Director
December 18, 2000 /s/Gregory N. Thomas
Gregory N. Thomas
Vice Chairman and Director
December 18, 2000 /s/George Powch
George Powch
Director
December 18, 2000 /s/Wayne L. Clevenger
Wayne L. Clevenger
Director
December 18, 2000 /s/Joseph R. Robinson
Joseph R. Robinson
Director
December 18, 2000 /s/Stephen M. Duff
Stephen M. Duff
Director
December 18, 2000 /s/Otto Leistner
Otto Leistner
Director
</TABLE>
21
<PAGE>
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS:
Report of Independent Auditors..........................................F-2
Balance Sheets as of September 30, 2000 and 1999........................F-3, F-4
Statements of Operations for the years ended
September 30, 2000, 1999, and 1998......................................F-5
Statements of Changes in Stockholders' Equity for the
Years ended September 30, 2000, 1999, and 1998..........................F-6
Statements of Cash Flows for the Years ended
September 30, 2000, 1999, and 1998......................................F-7
Notes to Consolidated Financial Statements..............................F-8
SUPPLEMENTAL SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts
for the years ended September 30, 2000, 1999, and 1998..................F-24
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders of
Vertex Interactive Inc.
We have audited the accompanying consolidated balance sheets of Vertex
Interactive, Inc. and subsidiaries as of September 30, 2000, and 1999, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended September 30,
2000. Our audits 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 audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Vertex
Interactive, Inc. and subsidiaries at September 30, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 2000 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
December 15, 2000
F-2
<PAGE>
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTI0N>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,892,774 $ 1,987,392
Accounts receivable, less allowance for doubtful accounts
of $180,630 and $125,166 at September 30, 2000 and
1999, respectively 11,093,348 5,712,573
Inventories, net 4,463,218 3,042,994
Prepaid expenses and other current assets 2,236,331 701,047
------------- -------------
Total current assets 25,685,671 11,444,006
------------- -------------
PROPERTY, EQUIPMENT, AND CAPITAL LEASES
Property and Equipment 4,401,827 4,152,166
Capital Leases 373,996 505,792
------------- -------------
Total property, equipment and capital leases 4,775,823 4,657,958
Less: Accumulated depreciation and amortization (1,485,958) (1,850,493)
------------- -------------
Net property, equipment and capital leases 3,289,865 2,807,465
------------- -------------
OTHER ASSETS:
Intangible Assets, net of amortization of $1,063,775 at
September 30, 2000 and $0 at September 30, 1999 78,649,413 15,822,576
Capitalized software, net of amortization of $86,054 1,037,350 --
Other assets 1,557,177 274,083
------------- -------------
Total other assets 81,243,940 16,096,659
------------- -------------
Total assets $110,219,476 $30,348,130
============= =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of obligations under capital leases $ 194,140 $ 165,239
Bank credit lines 1,875,463 996,745
Notes payable 1,957,182 3,205,318
Mortgage notes payable current portion 73,293 103,237
Accounts payable 5,222,658 2,278,835
Loan payable former shareholder 1,814,635 381,220
Acquisition related accruals 1,847,291 978,557
Accrued expenses and other liabilities 6,346,970 3,480,110
Advances from customers 636,355 456,950
Deferred revenue 3,915,821 3,080,954
------------- -------------
Total current liabilities 23,883,808 15,127,165
------------- -------------
LONG-TERM LIABILITIES:
Obligations under capital leases 245,098 217,084
Mortgage notes payable 1,433,417 1,118,153
Other long term liabilities 249,428 160,100
------------- -------------
Total long-term liabilities 1,927,943 1,495,337
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; 2,000,000 shares
authorized, none issued and outstanding -- --
Common stock, par value $.005 per share; 32,000,000 shares
authorized; 26,267,947 and 18,526,746 shares issued at
September 30, 2000 and September 30, 1999, respectively 131,340 92,633
Additional paid-in capital 99,563,198 17,223,403
Deferred compensation (461,012) (21,310)
Accumulated deficit (12,955,221) (3,542,797)
Accumulated other comprehensive income (loss) (1,825,411) 18,868
------------- -------------
84,452,894 13,770,797
Less: Treasury stock, 10,000 shares at cost (45,169) (45,169)
------------- -------------
Total stockholders' equity 84,407,725 13,725,628
------------- -------------
Total liabilities and stockholders' equity $110,219,476 $30,348,130
============= =============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUES $ 47,769,311 $ 10,106,332 $ 6,754,864
COST OF SALES 32,562,140 5,704,282 3,800,364
------------ ------------ ------------
GROSS PROFIT 15,207,171 4,402,050 2,954,500
------------ ------------ ------------
OPERATING EXPENSES:
Selling and administrative 13,937,817 3,207,702 2,475,894
Research and development 1,230,511 860,806 499,106
Amortization of intangibles 1,063,775 -- --
In-process R&D write off and merger
related expenses 7,737,000 -- --
------------ ------------ ------------
Total operating expenses 23,969,103 4,068,508 2,975,000
------------ ------------ ------------
OPERATING INCOME (LOSS) (8,761,932) 333,542 (20,500)
------------ ------------ ------------
OTHER INCOME AND (EXPENSES):
Interest income 311,103 62,989 23,342
Interest expense (470,867) (7,191) (4,721)
Other (113,470) -- --
------------ ------------ ------------
Net other income (expense) (273,234) 55,798 18,621
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (9,035,166) 389,340 (1,879)
INCOME TAX PROVISION (BENEFIT) 377,258 549,753 (288,890)
------------ ------------ ------------
NET INCOME (LOSS) $ (9,412,424) $ (160,413) $ 287,011
============ ============ ============
Net Income (loss) per share of
Common Stock:
Basic ($.46) ($.02) $.04
Diluted ($.46) ($.02) $.04
Weighted Average Number of
Shares Outstanding:
Basic 20,598,502 7,363,018 6,856,086
Diluted 20,598,502 7,363,018 7,083,629
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
VERTEX INTERACTIVE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-In Deferred Accumulated
Shares Amount Capital Compensation Deficit
------------ -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance September 30, 1997 6,748,604 $33,743 $ 5,220,771 $ (3,669,395)
Deferred non cash compensation to employees 25,575 $(25,575)
Amortization of deferred compensation 18,733
Issuance of stock in connection with services 14,000 70 8,905
Decrease in treasury stock
Other comprehensive income:
Net income 287,011
Unrealized gain on investment security
Comprehensive income
------------ -------- ------------ --------- ------------
Balance September 30, 1998 6,762,604 33,813 5,255,251 (6,842) (3,382,384)
Exercise of stock options 107,000 535 96,169
Deferred non cash compensation to employees 75,766 (75,766)
Amortization of deferred compensation 61,298
Issuance of Stock in connection with
new investors and acquisitions 11,657,142 58,285 11,796,217
Other comprehensive income:
Net loss (160,413)
Change in unrealized gain/(loss) on
investment
Comprehensive income (loss)
------------ -------- ------------ --------- ------------
Balance September 30, 1999 18,526,746 92,633 17,223,403 (21,310) (3,542,797)
Exercise of stock options 583,899 2,920 880,020
Issuance of stock in connection with
new investors, net of expenses 3,293,750 16,469 20,199,600
Stock options issued to non-employees 5,061,615
Issuance of stock and stock options in
connection with acquisitions 3,671,144 18,356 54,738,510
Issuance of stock in connection with
license acquisition 80,386 402 999,598
Amortization of deferred compensation 21,310
Stock grants to employees 112,022 560 (560)
Deferred compensation in connection with unvested
stock options of acquired entities 461,012 (461,012)
Other comprehensive income:
Net loss (9,412,424)
Change in unrealized gain/(loss) on investment
Change in unrealized foreign exchange translation
gains/losses
Comprehensive income (loss)
------------ -------- ------------ ---------- ------------
Balance September 30, 2000 26,267,947 $131,340 $ 99,563,198 $(461,012) $(12,955,221)
============ ======== ============ ========== ============
<CAPTION>
Accumulated
Other
Comprehensive Comprehensive
Income (Loss) Income (Loss)
------------- ------------
<S> <C> <C>
Balance September 30, 1997
Deferred non cash compensation to employees
Amortization of deferred compensation
Issuance of stock in connection with services
Decrease in treasury stock
Other comprehensive income:
Net income $287,011
Unrealized gain on investment security 216,838 $216,838
--------
Comprehensive income $503,849
======== -----------
Balance September 30, 1998 216,838
===========
Exercise of stock options
Deferred non cash compensation to employees
Amortization of deferred compensation
Issuance of Stock in connection with
new investors and acquisitions
Other comprehensive income:
Net loss $(160,413)
Change in unrealized gain/(loss) on
investment (197,970) (197,970)
---------
Comprehensive income (loss) $(358,383)
========== ----------
Balance September 30, 1999 18,868
Exercise of stock options
Issuance of stock in connection with
new investors, net of expenses
Stock options issued to non-employees
Issuance of stock and stock options in
connection with acquisitions
Issuance of stock in connection with
license acquisition
Amortization of deferred compensation
Stock grants to employees
Deferred compensation in connection with unvested
stock options of acquired entities
Other comprehensive income:
Net loss $(9,412,424)
Change in unrealized gain/(loss) on investment (18,868) (18,868)
Change in unrealized foreign exchange translation
gains/losses (1,825,411) (1,825,411)
------------
Comprehensive income (loss) $(11,256,703)
============= -----------
Balance September 30, 2000 $(1,825,411)
===========
<CAPTION>
Treasury
Stock Total
---------- ------------
<S> <C> <C>
Balance September 30, 1997 $(50,569) $ 1,534,550
Deferred non cash compensation to employees
Amortization of deferred compensation 18,733
Issuance of stock in connection with services 8,975
Decrease in treasury stock 5,400 5,400
Other comprehensive income:
Net income 287,011
Unrealized gain on investment security 216,838
Comprehensive income
---------- ------------
Balance September 30, 1998 (45,169) 2,071,507
Exercise of stock options 96,704
Deferred non cash compensation to employees
Amortization of deferred compensation 61,298
Issuance of Stock in connection with
new investors and acquisitions 11,854,502
Other comprehensive income:
Net loss (160,413)
Change in unrealized gain/(loss) on
investment (197,970)
Comprehensive income (loss)
---------- ------------
Balance September 30, 1999 (45,169) 13,725,628
Exercise of stock options 882,940
Issuance of stock in connection with
new investors, net of expenses 20,216,069
Stock options issued to non-employees 5,061,615
Issuance of stock and stock options in
connection with acquisitions 54,756,866
Issuance of stock in connection with
license acquisition 1,000,000
Amortization of deferred compensation 21,310
Stock grants to employees --
Deferred compensation in connection with unvested
stock options of acquired entities --
Other comprehensive income:
Net loss (9,412,424)
Change in unrealized gain/(loss) on investment (18,868)
Change in unrealized foreign exchange translation
gains/losses (1,825,411)
Comprehensive income (loss)
---------- ------------
Balance September 30, 2000 $(45,169) $ 84,407,725
========== ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (loss) $(9,412,424) $ (160,413) $ 287,011
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,594,152 120,780 115,464
In-process R & D write off 7,500,000 -- --
Net loss on disposal of assets 201,458 -- --
Imputed interest expense 100,000 -- --
Stock and stock options issued in consideration
for services 404,896 61,299 18,733
Deferred taxes 461,753 (288,890)
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable, net (764,924) 681,158 (1,074,771)
Inventories, net 1,018,739 1,252,198 (1,123,905)
Prepaid expenses and other
current assets (1,333,781) 52,706 (20,367)
Other assets (673,760) (92,911) 16,148
Accounts payable 2,849,172 (1,868,256) 1,943,175
Accrued expenses and other
liabilities (1,174,310) 1,163,976 190,796
Advances from customers (3,239,030) (368) 368
Deferred revenue (734,287) 140,424 296,020
------------ ------------ ------------
Net cash (used for) provided by
operating activities (3,664,099) 1,812,346 359,782
------------ ------------ ------------
Cash Flows from Investing Activities:
Additions to property
and equipment (1,102,932) (110,956) (109,437)
Proceeds from sale of assets 930,020 -- --
Acquisition of businesses, net of cash acquired (13,712,087) (9,805,366) --
------------ ------------ ------------
Net cash used for investing activities (13,884,999) (9,916,322) (109,437)
------------ ------------ ------------
Cash Flows from Financing Activities:
Loans payable bank, net (460,629) -- 26,604
Payment of notes payable (958,201) -- (152,470)
Payment of mortgages (108,659) (86,506) --
Payment of capitalized lease obligations (151,056) (5,741) (20,466)
Proceeds from long term borrowing 572,600 -- --
Net proceeds from issuance of stock 24,012,569 9,439,500 --
Proceeds from exercise of stock options 882,940 96,704 --
------------ ------------ ------------
Net cash provided by (used for)
financing activities 23,789,564 9,443,957 (146,332)
------------ ------------ ------------
Effect of exchange rate changes on cash (335,084) -- --
------------ ------------ ------------
Net Increase in Cash 5,905,382 1,339,981 104,013
Cash and Cash Equivalents at Beginning of Period 1,987,392 647,411 543,398
------------ ------------ ------------
Cash and Cash Equivalents at End of Period $ 7,892,774 $ 1,987,392 $ 647,411
============ ============ ============
Cash paid for:
Interest $411,413 $7,192 $2,305
Income taxes $97,802 $19,000 $--
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
VERTEX INTERACTIVE, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. RECENT DEVELOPMENTS AND NATURE OF PRESENTATION
BACKGROUND
Prior to September 30, 1999, Vertex Interactive Inc. (formerly Vertex
Industries, Inc.) (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 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 sold the Netweave middleware product. As
a result of various acquisitions, as described in detail below, the Company is
now a provider of web-enabled business-to-business fulfillment solutions that
enhance productivity across the supply chain in such critical areas as customer
relationship management, enterprise applications integration, logistics,
inventory and warehouse resource management, route accounting and sales
management. The Company has operations throughout North America and Europe.
ACQUISITIONS
Pooling of Interests Method
In June 2000, the Company completed a merger with Positive Developments, Inc.
("PDI"), a designer of software solutions for supply chain applications, by
exchanging 400,000 shares of its common stock (40,000 of which are held in
escrow, to be released upon the first issuance of the combined companies audited
financial statements) for all of the common stock of PDI.
Also in June 2000, the Company completed a merger with Communication Services
International, Incorporated ("CSI"), a designer and installer of wireless
communications and cabling networks, by exchanging 1,317,647 shares of its
common stock (50,000 of which are held in escrow, to be released upon the first
issuance of the combined companies audited financial statements) for all of the
common stock of CSI.
Prior to these mergers, PDI's fiscal year ended on December 31, and CSI's fiscal
year ended on February 28. In recording the business combinations, PDI's and
CSI's prior period financial statements have been restated to a year ended
September 30, to conform with Vertex's fiscal year end. These mergers
constituted tax-free reorganizations and have been accounted for as pooling of
interests under Accounting Principles Board Opinion No. 16 "Business
Combinations". The Company's financial statements have been restated to include
the results of PDI and CSI for all periods presented.
F-8
<PAGE>
There were no transactions between Vertex and PDI or CSI prior to the respective
combinations.
The revenues and net income (loss) for Vertex, the pooled entities and the
combined amounts presented in the consolidated financial statements for the
periods prior to consummation of the merger were as follows:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Year Ended
June 30, 2000 September 30, 1999 September 30, 1998
------------- ------------------ -------------------
<S> <C> <C> <C>
Revenues
Vertex $ 28,214,342 $ 6,429,466 $4,040,252
Pooled Entities 4,620,103 3,676,866 2,714,612
------------ ------------ ----------
Combined $ 32,834,445 $ 10,106,332 $6,754,864
============ ============ ==========
Net Income (loss)
Vertex $ ( 993,661) $ (332,876) $ 82,530
Pooled Entities 162,943 172,463 204,481
------------ ------------ ----------
Combined $ ( 830,718) $ ( 160,413) $ 287,011
============ ============ ==========
</TABLE>
Purchase Method
On September 27, 1999, the Company acquired all of the stock of Portable
Software Solutions Limited ("PSS"), Portable Software Solutions (Maintenance)
Limited ("Maintenance") and Trend Investments Limited ("Trend", and together
with PSS and Maintenance, the "PSS Group"). The PSS Group is a leading provider
of handheld terminal solutions to mobile workers in the U.K., primarily in the
door-to-door insurance and dairy industries. The total purchase price was
approximately $10.1 million, including approximately $5.9 million in cash, two
notes payable of approximately $800,000 each and 1,591,984 unregistered common
shares. The shareholders of the PSS Group may be entitled to additional
incentive payments based upon target average annual pre tax profits of the PSS
Group for the two years ending December 31, 1999 and 2000. No incentive payments
have been earned based on the PSS Group profits to date.
On September 22, 1999, the Company acquired all of the outstanding capital stock
of ICS International AG ("ICS"), a leading provider in Germany of integrated
high-end wireless data capture solutions to industrial users and one of the few
multi-national European providers of such solutions. The total consideration
paid to ICS was $5,161,700 of which $3,570,000 was paid in cash at the closing
and the balance was in the form of three notes payable of $531,000 each. In
addition, the Company purchased ICS's headquarters located in Neu Anspach near
Frankfurt, Germany for $1,593,000 of which $372,000 was paid in cash and the
remainder was financed through mortgages, the principal amounts of which were
$1,221,000.
Effective March 1, 2000, the Company acquired all of the outstanding capital
stock of Data Control Systems ("DCS"), a provider of pick-to-light warehouse
management systems located in New Jersey. The Company paid the shareholders
$14,250,000 in cash (10% of which is held in escrow). The purchase price was
also subject to a working capital adjustment, which amounted to an additional
$120,000 to be paid to the shareholders.
Effective April 1, 2000, the Company acquired all of the outstanding common
stock of Auto-ID, Inc. ("Auto-ID"), a reseller of bar coding equipment. As
consideration, the Company issued 100,000 shares of its common stock, which at
the date of the transaction had a fair market value of $6 per share.
Effective June 30, 2000, the Company acquired all of the outstanding common
stock of Societe Italiana Servizi Italservice S.r.l. ("SIS"), a provider of
after-market computer maintenance and software support services. Total
consideration paid was $1,750,000 and is subject to an additional incentive
payment based upon targeted profits for the fiscal year ended December 31, 2000,
up to a maximum of $270,000.
F-9
<PAGE>
Effective September 30, 2000, the Company acquired all of the outstanding common
stock of Renaissance Software Inc. ("RSI"), a developer of supply chain and
warehouse management systems. As consideration, Vertex issued 3,571,144 of
common stock (263,000 of which are held in escrow), which at the date of the
transaction had a fair market value of $13.42 per share. In addition, Vertex
reserved 535,644 shares for issuance upon exercise of RSI stock options. The
vested portion of these options (included in the total consideration paid for
RSI) was estimated to have a total fair market value of $6,217,000. The Company
engaged an independent valuation firm to assist in the identification and
determination of the fair market value of the acquired RSI intangible assets. A
portion of the RSI purchase price was identified, using proven valuation
procedures and techniques, as in-process Research and Development (R&D)
projects. The revenue projections used to value the in-process R&D were based on
estimates of relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product introductions by us
and our competitors. At the date of the acquisition, the products under
development had not reached technological feasibility and had no alternative
future use. Accordingly, $7,500,000 was expensed as in-process R&D in fiscal
2000. The value assigned to in-process R&D is comprised of various research and
development projects. These projects include the introduction of new
technologies as well as revisions or enhancements to certain existing
technologies. There is risk associated with the completion of the projects, and
there is no assurance that each will attain either technological feasibility or
commercial success.
The accompanying consolidated financial statements assume the PSS and ICS
acquisitions closed effective September 30, 1999, the DCS acquisition closed
effective March 1, 2000, the Auto-ID acquisition closed on April 1, 2000, the
SIS acquisition closed effective June 30, 2000, and the RSI acquisition closed
effective September 30, 2000. The Company has accounted for these acquisitions
using the purchase method of accounting in accordance with APB No. 16 and
accordingly, the financial statements include the results of operations from
October 1, 1999 for PSS and ICS, March 1, 2000 for DCS, April 1, 2000 for
Auto-ID, and July 1, 2000 for SIS. The consolidated balance sheet at September
30, 1999 reflects the purchase prices of PSS and ICS allocated on a preliminary
basis to the assets and liabilities acquired based on their estimated fair
market values. No significant changes have been made to the preliminary
allocation of the purchase price. A preliminary allocation of the purchase price
for DCS, Auto-ID, SIS, and RSI has been made to the assets and liabilities
acquired as of March 1, April 1, June 30, 2000, and September 30, 2000,
respectively, based on their estimated fair market values.
Fair value of net assets acquired:
<TABLE>
<CAPTION>
September 30,
-------------
2000 1999
---- ----
<S> <C> <C>
Accounts Receivable $5,860,616 $4,542,624
Inventories 4,461,560 2,674,900
Other assets 693,738 1,552,695
Intangible assets (including
in-process R&D of $7,500,000) 73,622,084 15,822,576
Short-term debt (3,317,972) (4,426,708)
Deferred revenue and customer
advances (4,684,192) (456,950)
Other liabilities (8,166,881) (7,488,771)
----------- -----------
Total consideration paid, less
cash acquired 68,468,953 12,220,366
Less stock issued to sellers 54,756,866 2,415,000
----------- -----------
Net cash paid $13,712,087 $ 9,805,366
=========== ===========
</TABLE>
F-10
<PAGE>
The following table presents unaudited pro forma results of operations of the
Company as if the above described purchase method acquisitions had occurred at
October 1, 1998:
<TABLE>
<CAPTION>
Year Ended September 30,
2000 1999
---- ----
<S> <C> <C>
Revenues $ 62,607,440 $ 59,033,966
Net loss (13,784,985) (14,390,860)
Net loss per share (0.54) (0.59)
Loss before amortization
of intangibles $ (2,565,975) $ (3,136,996)
</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, the exclusion of the
in-process research and development write-off, net interest expense, the net
effect of the purchase of real estate compared to lease cost, the estimated
federal tax benefit of a consolidated U.S. tax return, and the approximate
number of shares issued to complete the acquisitions.
The estimated purchase price for each acquisition may be subject to certain
purchase price adjustments.
DISPOSALS
Weighing Product Line
On June 30, 2000, the Company sold all of its tangible and intangible assets
related to its weighing product line. As consideration, the Company received
$255,000 in cash, and the right to earn a percentage of the buyer's gross sales
of the weighing product line over the next three years. Included in the sale
were inventory, furniture and equipment, a customer base, trade names, and
patents. The book value of the assets sold was approximately $230,000, and
accordingly, the Company recorded a gain on the sale of $25,000. The percentage
of the buyer's sales that can be earned by the Company will range from 0% to 18%
based on the buyer's annual sales volumes of weighing products. For the year
ended September 30, 2000, the revenue from weighing products represented less
than 2% of consolidated revenues.
PSD
In September, 2000, the Company sold the Printscan (PSD) subsidiary of ICS in
Germany. The Company received approximately $600,000 in cash for the stock of
PSD. In connection with the sale, the Company wrote off related unamortized
goodwill of approximately $634,000. As result of this transaction, the Company
recognized a net loss of approximately $195,000, which is included in other
income (expense). For the year ended September 30, 2000, the revenue from PSD
represented less than 6 % of consolidated revenues.
CHANGE IN FISCAL YEAR END
The Company changed its year-end from July 31 to September 30, effective October
1, 1999. In the Company's Form 10K Transition Report filed in January 2000, the
Company included a two-month transition period (August 1, 1999 to September 30,
1999). The accompanying financial statements for the years ended September 30,
1999 and 1998 have been compiled from the records of the Company and restated to
reflect the results of operations and cash flows of the Company on the basis of
a September 30
F-11
<PAGE>
fiscal year. Accordingly, the restated consolidated financial statements
presented herein are the Company's primary historical financial statements for
the periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
Equipment Sales:
Revenue related to sales of equipment is recognized when the products are
delivered, title has passed and no obligations remain.
Software License Sales:
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
by management; and (iii.) effective with the adoption of SOP 97-2, "Software
Revenue Recognition" as amended by SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions", that vendor specific
objective evidence (V.S.O.E.) of fair value exists for all significant elements,
including postcontract customer support (PCS) in multiple element arrangements.
Prior to adopting SOP 97-2 in fiscal 1999, the Company followed the provisions
of SOP 91-1, which allowed for unbundling of components of multiple element
arrangements when subsequent PCS arrangements were equivalent to the PCS offered
in the initial period.
Where the services relate to arrangements requiring significant production,
modification or customization of software, and the service element does not meet
the criteria for separate accounting, the entire arrangement, including the
software element, is accounted for in conformity with the
percentage-of-completion contract accounting method. Percentage-of-completion
generally uses input measures, primarily labor costs, where such measures
indicate progress to date and provide a basis to estimate completion.
Support and Service:
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. The Company also provides
consulting and other services on a per-diem billing basis and recognizes such
revenues as the services are performed.
DEFERRED REVENUE
Deferred revenue represents the unearned portion of revenue related to PCS and
other service arrangements not yet completed and revenue related to multiple
element arrangements that could not be unbundled pursuant to SOP 97-2 or, in the
case of percentage of completion contracts in accordance with SOP 81-1.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out basis) or
market.
F-12
<PAGE>
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.
The estimated useful lives of depreciable assets are as follows
<TABLE>
<CAPTION>
Category Years
-------- -----
<S> <C>
Buildings 20-25
Office furniture and equipment 3-10
Computer equipment 3-7
Other 3-10
</TABLE>
INTANGIBLE ASSETS
Intangible assets consist primarily of the excess of cost over the value of
identifiable net assets of businesses acquired and are amortized on a
straight-line basis over their estimated useful lives which range from 2 to 25
years. The Company's policy is to evaluate its intangible assets based on an
evaluation of such factors as the occurrence of a significant adverse event or
change in the environment in which the business operates or if the expected
future net cash flows (undiscounted and without interest) would become less than
the carrying amount of the asset. An impairment loss would be recorded in the
period such determination is made based on the fair value of the related
businesses. No impairment losses have been recognized in any of the periods
presented.
NET INCOME (LOSS) PER SHARE OF COMMON STOCK
Basic net income (loss) per common share is calculated by dividing net income
(loss), by the weighted average common shares outstanding during the period.
Diluted net income per common share is computed similar to that of basic net
income per common share, except that the denominator is increased to include the
number of additional common shares that would have been outstanding if all
potentially dilutive common shares, principally stock options, were issued
during the reporting period. For periods in which a net loss occurs, such
additional shares would not be included, as their effect would be anti-dilutive.
CASH EQUIVALENTS
The Company considers all investments with an original maturity period of 90
days or less to be cash equivalents.
LONG-LIVED ASSETS
The Company reviews 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 its long-lived
assets.
COMPREHENSIVE INCOME
Comprehensive income is defined to include all changes in equity except those
resulting from investments by shareholders and distribution to shareholders and
is reported in the Statement of Changes in Stockholders' Equity. Included in the
Company's comprehensive income are net income (loss), unrealized gains (losses)
on investments and foreign exchange translation adjustments.
F-13
<PAGE>
STOCK BASED COMPENSATION
The Financial Accounting Standards Board issued SFAS No. 123, "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 9).
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and the Emerging Issues Task
Force in Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or In Conjunction with Selling, Goods or
Services", which require that such equity instruments are recorded at their fair
value on the measurement date.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentration of credit
risks consist primarily of cash and cash equivalents and accounts receivable.
The Company maintains its cash and cash equivalents in bank accounts which, at
times, exceed federally insured limits. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to significant
credit risk on cash and cash equivalents. Concentration of credit risks with
respect to accounts receivable are limited because of the credit worthiness of
the Company's major customers.
The Company had one customer that accounted for approximately 11% of revenue for
the fiscal year ended September 30, 2000. For the fiscal years ended September
30, 1999 and 1998, two other customers accounted for 48% and 33% of revenue,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, short-term borrowings and accounts payable are carried at
cost, which approximates their fair value because of the short-term maturity of
these instruments. The fair value of long-term borrowings are estimated based on
current interest rates available to the Company for debt instruments with
similar terms, degrees of risk and remaining maturities. The carrying values of
these obligations approximate their fair values.
INVESTMENT SECURITIES
The Company has classified its investment securities as available for sale. Such
securities are measured at fair value in the financial statements based on
quoted market prices with unrealized gains and losses included in stockholders'
equity.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign affiliates are translated at
current exchange rates, while revenue and expenses are translated at average
rates prevailing during the respective period. Translation adjustments are
reported as a component of comprehensive income in stockholders' equity.
F-14
<PAGE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30,
2000 1999
---- ----
<S> <C> <C>
Raw materials $1,486,574 $ 7,183
Work in process 429,741 338,599
Finished goods and parts, net of
reserves of $10,000 and
$225,290 2,546,903 2,697,212
---------- ----------
$4,463,218 $3,042,994
========== ==========
</TABLE>
4. PROPERTY, EQUIPMENT AND CAPITAL LEASES
Details of property, equipment and capital leases are as follows:
<TABLE>
<CAPTION>
September 30,
2000 1999
---- ----
<S> <C> <C>
Property and equipment:
Land $ 307,287 $ 206,468
Buildings 1,754,645 1,386,650
Leasehold improvements 363,560 299,956
Other equipment 241,364 822,739
Office furniture and equipment 1,027,626 1,094,335
Computer equipment 707,345 342,018
---------- ----------
Total 4,401,827 4,152,166
Less: Accumulated depreciation and
amortization (1,336,170) (1,717,532)
---------- ----------
Net property and equipment 3,065,657 2,434,634
Capital leases:
Office equipment 175,308 253,736
Computer equipment 34,847 27,564
Automobiles 163,841 224,492
---------- ----------
Total 373,996 505,792
Less: Accumulated amortization (149,788) (132,961)
---------- ----------
Net Capital leases 224,208 372,831
---------- ----------
Net property, equipment and
capital leases $ 3,289,865 $ 2,807,465
========== ==========
</TABLE>
5. BANK LINES OF CREDIT
The Company maintains lines of credit with several banks. In the United States,
the Company has a line of credit with a New York bank with an outstanding
balance of $422,000 at September 30, 2000 with an interest rate of prime plus
2%. As of result of the RSI acquisition by the Company, this bank debt became
due and payable in November.
F-15
<PAGE>
In addition, the Company has several foreign lines of credit, which allow it to
borrow in the applicable local currency. These lines of credit total
approximately $2,700,000 and are concentrated in Germany, Italy and the United
Kingdom. The Company's lines of credit generally are collateralized by the
accounts receivable of the respective subsidiary. As of September 30, 2000 the
Company had outstanding balances of approximately $1,453,000 on these foreign
lines of credit. These loans bear interest at rates ranging from 5.75% to 9.75%.
At September 30, 2000 the Company had a total of approximately $1,400,000
available under all of its lines of credit.
6. NOTES PAYABLE
The Company has a note payable with a remaining balance of $493,000 bearing
interest at 8% relating to the acquisition of ICS. In addition there is a note
payable of approximately $1,464,000 due to the sellers of the PSS Group. Vertex
and the sellers are currently negotiating the settlement of these notes payable.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
Capital lease obligations 2000 1999
------------------------- ----- ----
<S> <C> <C>
Obligations under capital leases, due in
varying quarterly/monthly principal
installments and at varying
interest rates not exceeding 11 1/2% $439,238 $383,323
Less: Current portion 194,140 165,239
-------- --------
Long term capitalized leases $245,098 $217,084
======== ========
Mortgage notes payable
----------------------
Mortgage notes payable bearing interest
at rates from 6% to 8%, collateralized by
buildings, due in monthly installments
through 2030 $1,506,710 $1,221,390
Less: Current portion 73,293 103,237
---------- ----------
Long term mortgage notes payable $1,433,417 $1,118,153
========== ==========
</TABLE>
Mortgage payments, including interest, for the next five years approximate
$180,000 per year.
OTHER LONG TERM LIABILITIES
Other long-term liabilities consist of $126,580 of deferred rent expense and
$122,848 of Irish government non-interest bearing loans that are repayable at
rates linked to future revenues earned. Under the terms of the agreement, the
loan is repaid at a rate of 4.2% of project sales made in the United States by
PSS in the period from July 1998 to June 2001 and is due for repayment
commencing in July 1999 and ending in July 2002. If the repayments calculated as
a percentage of sales are not sufficient to repay the loans in full, the Irish
government may write-off the balance. PSS has not made any sales in the United
States to date and thus no repayments have been made against these borrowings
through September 30, 2000.
F-16
<PAGE>
8. ACCRUED EXPENSES AND OTHER LIABILITIES
The components of accrued expenses and other liabilities consist of the
following:
<TABLE>
<CAPTION>
September 30,
2000 1999
---- ----
<S> <C> <C>
Professional fees $ 599,343 $ 487,755
Vacation salaries, bonus and severance 1,432,476 798,075
Sales and other taxes, excluding income and payroll 567,267 450,206
Income taxes 374,256 94,800
Payroll and related deductions 1,081,613 528,495
Project costs 433,494 0
Other 1,858,521 1,120,779
--------- ----------
$6,346,970 $3,480,110
========== ===========
</TABLE>
9. STOCKHOLDERS' EQUITY
On September 16, 1999, the Company entered into a Subscription agreement with
Edwardstone & Company, Incorporated, ("Edwardstone") and Midmark Capital, L.P.
("Midmark", and together with Edwardstone, the "Buyers"). Edwardstone and
Midmark purchased 5,449,642 shares and 5,000,000 shares, respectively, of the
Company's common stock. The total consideration paid by Edwardstone and Midmark
for such shares was $10,000,000. As a result of such transactions, the Buyers
beneficially owned approximately 60% of the Company's common shares outstanding
at the time of the transaction. As a condition to the Buyers' purchase of the
shares, the Buyers and the Company entered into a Stockholders Agreement, dated
September 16, 1999 (the "Stockholders Agreement") containing certain terms and
conditions concerning the acquisition and disposition of such shares of the
Company and the corporate governance of the Company.
The shares of the Company's Common Stock issued in connection with the
consummation of the transactions set forth above and the purchase of the PSS
Group carried certain registration rights. A Registration Statement on Form S-3
was filed with the Securities and Exchange Commission to register such shares
and was effective on May 24, 2000.
During March and April, 2000, the Company closed on the sale of 3,293,750
unregistered common shares through private placement offerings, resulting in net
proceeds (after deducting issuance costs of $2,337,000) of approximately
$24,013,000. All of the common shares issued in these private placement
offerings carry registration rights requiring the Company to register such
shares within six months of the closing. In addition, the Company granted
options to financial advisors to purchase an aggregate of 1,100,000 common
shares at prices ranging from $4.00 to $8.00 per share contingent upon raising
at least $25,000,000, which became fully earned and exercisable in April 2000 on
completion of the private placement offerings discussed above. The fair market
value of these options was $3,797,000, and was determined in accordance with
SFAS #123 using the Black-Scholes formula. This amount was recorded as
additional paid in capital, as well as a direct charge against equity as a cost
of the private placement offerings.
Pursuant to employment and consulting agreements, one of the pooled entities
granted 112,022 restricted shares that were earned from fiscal 1998 through the
date of the share issuance in January 2000; this resulted in compensation
expense of $21,310, $61,299 and $18,733 in 2000, 1999 and 1998, respectively.
On August 31, 2000, the Company purchased all rights to the NetWeave software
product from Netweave Corporation. Consideration for the software was 80,386
shares of Vertex stock, which at the time of the transaction had an aggregate
fair market value of approximately $1 million, and the cancellation of
approximately $71,000 of debt. The total cost of this software is included in
other assets and is being amortized over the five year estimated life of the
product. Prior to the acquisition, the Company sold the Netweave software under
a licensing agreement with NetWeave Corporation. For the years ended
F-17
<PAGE>
September 30, 2000, 1999, and 1998, the NetWeave licensing agreement generated
revenues of approximately $926,000, $799,000, and $742,000, respectively, and
the Company incurred royalty expenses related to the revenues in the amount of
$106,000, $176,000, and $155,000, respectively.
INCENTIVE STOCK OPTIONS
The Company has an Incentive Stock Option Plan (the "Plan") that provides for
the granting of options to officers and other key employees to purchase shares
of the Company's common stock. During the current fiscal year, the Company's
Board of Directors approved an increase in the number of shares available for
issuance from 2,000,000 to 4,000,000. Options granted under the Plan generally
vest over five years and expire after ten years. The exercise 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
granted at less than 110% of fair market value.
The following table summarizes the common stock options granted, cancelled or
exercised under the Plan:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
Common Weighted Common Weighted Common Weighted
Stock Average Stock Average Stock Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,016,600 $ 1.75 871,600 $ 1.63 737,600 $ 1.76
Granted 2,635,000 7.11 325,000 1.60 150,000 0.89
Exercised (295,800) (2.34) (77,000) (0.87) -- --
Cancelled (98,200) (4.57) (103,000) (0.86) (16,000) (1.04)
--------- --------- -------
Outstanding at end of year 3,257,600 5.95 1,016,600 1.75 871,600 1.63
========= ========= =======
Weighted average fair value of
options granted during the year $ 4.28 $ 0.92 $ 0.50
</TABLE>
The following table summarizes information on stock options outstanding under
the Plan at September 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------ -------------------
Options Weighted Weighted Options Weighted
Outstanding Average Average Exercisable Average
Range of at September 30, Exercise Remaining at September 30, Exercise
Exercise Prices 2000 Price Contractual Life 2000 Price
--------------- ------------- -------- ---------------- ------------- --------
<S> <C> <C> <C> <C> <C>
$.50 to $1.50 441,000 $ 0.91 6.81 324,000 $0.85
1.51 to 2.25 375,000 1.74 8.77 55,000 1.65
2.26 to 3.40 53,600 2.50 5.43 13,600 2.50
3.41 to 5.00 993,000 3.96 9.27 55,000 3.82
5.01 to 7.65 295,000 5.98 7.48 20,000 5.75
7.66 to 11.50 635,000 10.39 9.19 5,000 8.13
11.50 to 13.13 465,000 12.71 9.55 -- --
--------- -------
3,257,600 472,600 1.62
========= =======
</TABLE>
F-18
<PAGE>
OTHER STOCK OPTIONS
In addition to the stock options granted under the employee "Plan" discussed
above, the Company periodically grants stock options to non-employees in
consideration for services rendered, as well as for services to be rendered.
Options issued for services rendered were accounted for under SFAS #123 and EITF
Issue 96-18, using the Black-Scholes formula to determine their fair market
value. In fiscal 2000, options for 367,691 shares were granted to non-employees,
which resulted in additional paid in capital of approximately $1,275,000 and
non-cash expenses of approximately $383,000 and prepaid expenses of $882,000. In
certain instances, options issued for services to be rendered are contingent
upon specific performance by the grantee, and will be valued when performance is
completed.
In connection with the purchase of Renaissance Software Inc., the Company
assumed 535,644 outstanding stock options of Renaissance employees. The fair
market value of the vested portion of these options amounted to $6,217,472 and
was included as part of the consideration paid for Renaissance. The unvested
portion of these options was $461,000 and is included as deferred compensation
in Shareholders' Equity and will be amortized as compensation expense over the
employees remaining vesting period.
In January, 2000, the Company also granted non-qualified options aggregating
1,200,000 to directors and officers of the Company at an exercise price of $3.85
(110% of the fair value on the date of grant).
The following table summarizes common stock options granted, cancelled and
exercised in addition to those in the Employee Plan:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
Common Weighted Common Weighted Common Weighted
Stock Average Stock Average Stock Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 475,000 $ .61 505,000 $ .64 510,000 $ 2.24
Granted 3,203,335 4.07 -- -- 115,000 .68
Exercised (288,099) (.66) (30,000) 1.00 -- --
Cancelled -- -- -- -- (120,000) (7.50)
--------- ------- --------
Outstanding at end of year 3,390,236 $ 3.88 475,000 $ .61 505,000 $ .64
========= ======= ========
Options exercisable 2,915,578 $ 3.92
=========
</TABLE>
PRO-FORMA SFAS 123 DISCLOSURE
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). In accordance with the provisions, the Company accounts for its stock
option plans under Accounting Principles Board 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 the grant
date as proscribed by SFAS 123, net income (loss) and net income (loss) per
share would have been decreased (increased) to the pro forma amounts indicated
in the table below:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net income (loss)--as reported $ (9,412,424) $(160,413) $287,011
Net income (loss)--pro-forma (11,861,944) (206,588) 230,613
Income (loss) per share--as reported (.46) (.02) .04
Income (loss) per share--pro-forma (.58) (.03) .03
</TABLE>
F-19
<PAGE>
The fair value of each option grant is estimated on the date of grant using the
Black Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected stock price volatility 88.7 84.2 81.9
Risk-free interest rate 6.98 6.67 6.67
Expected life of options 3 years 3 years 3 years
</TABLE>
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.
10. PENSION PLANS
The Company and certain of its subsidiaries maintain 401(k) plans, which are
defined contribution plans (the "Plans") covering substantially all employees in
the United States. Eligible employees can contribute up to 17% of their
compensation not to exceed Internal Revenue Code limits. The Plans provide for
matching contributions based on management's discretion. No Company
contributions were made for the year ended September 30, 2000. Company
contributions for the years ended September 30, 1999 and 1998 were $18,000, and
$3,000, respectively.
11. INCOME TAXES
The Company accounts for income taxes under FASB Statement No. 109, "Accounting
for Income Taxes (FASB 109)." Deferred income tax assets and liabilities are
determined based upon differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
The components of the income tax provision (benefit) included in the statements
of operations for the years ended September 30, 2000, 1999, and 1998 consist of
the following;
<TABLE>
<CAPTION>
September 30,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ - $ 63,000 $ -
Foreign 227,686 - -
State 149,572 25,000 -
------- ------ ----------
Total Current 377,258 88,000 -
------- ------ ----------
Deferred:
Federal - 461,753 $(288,890)
Foreign - - -
State - - -
-------- -------- ---------
Total Deferred - 461,753 (288,890)
-------- -------- ---------
Total income tax
provision $377,258 $549,753 $(288,890)
======== ======== =========
</TABLE>
F-20
<PAGE>
The net deferred tax assets in the accompanying balance sheets consist of the
following:
<TABLE>
<CAPTION>
September 30,
2000 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 149,188 $ 23,831
Inventory 63,904 82,073
Net operating loss carryforwards 2,506,000 1,751,369
Other 59,373 19,970
----------- -----------
Total deferred tax assets 2,778,465 1,877,243
----------- -----------
Deferred tax liabilities:
Depreciation (20,292) (18,848)
Capitalized software (266,915) -
Deferred revenue (255,459) (37,339)
----------- -----------
Total deferred tax liabilities (542,666) (56,187)
----------- -----------
Valuation allowance (2,235,799) (1,821,056)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
</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 statements and tax
returns of certain inventory costs, bad debt allowances on receivables,
depreciation on fixed assets and amortization of certain intangible assets.
A valuation allowance on the net deferred tax assets has been provided based on
the Company's assessment of its ability to realize such assets in the future.
For the year ended September 30, 2000 the valuation allowance for net deferred
tax assets increased by $414,743, as a result of net changes in temporary
differences.
The tax provision for the year 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
imposition of annual limitations on the use of the NOL carryforwards
attributable to the periods before the change. Management presently believes it
is no longer more likely than not that the deferred tax asset will be realized.
At September 30, 2000, the net operating loss carryforwards available to offset
future taxable income consist of approximately $4,450,000 in Federal net
operating losses, which will expire in various amounts through 2020, and state
net operating losses of approximately $4,666,000 which will expire in various
amounts through 2007. Total net operating losses available in foreign
jurisdictions are approximately $3,575,000, of which $2,935,000 relate to
periods prior to the acquisition of certain subsidiaries by Vertex. When the
Company utilizes pre-acquisition net operating losses, the benefit will be
reflected as a reduction of goodwill related to the respective subsidiary.
Approximately $200,000 of pre-acquisition net operating losses were utilized
during fiscal 2000, and the resulting reduction of tax liability was credited
directly to goodwill.
F-21
<PAGE>
A reconciliation of income tax at the statutory rate to the Company's effective
rate is as follows:
<TABLE>
<CAPTION>
September 30,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
Effect of:
Valuation allowances (4.2) 103.0 15,341.0
Permanent differences (32.0)
State income taxes, net (2.0) 4.0
------- ----- --------
Effective income tax rate (4.2%) 141.0% 15,375.0%
======= ===== ========
</TABLE>
For 2000, the primary permanent differences relate to amortization of goodwill
and in-process R&D write off, which are not deductible for tax purposes.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $970,000 at September 30, 2000. All of these earnings are
considered to be indefinitely reinvested and, accordingly, no provision for U.S
federal and state income taxes has been provided thereon. Upon distribution of
those earnings in the form of dividends or otherwise, the Company would be
subject to both U.S. income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to the various foreign countries.
12. COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
The Company and its subsidiaries lease office facilities and certain office
equipment under operating leases that expire at various dates through 2007.
Rent expense for the years ended September 30, 2000, 1999, and 1998 was
approximately $780,000, $230,000 and $225,000, respectively.
Minimum lease payments and sublease rental income are as follows:
<TABLE>
<CAPTION>
Sublease
Operating Rental
Year Ended September 30, Leases Income
------ ------
<S> <C> <C>
2001 $1,454,884 $ 83,725
2002 1,191,662 83,725
2003 940,636 68,367
2004 757,632 35,340
Thereafter 961,703 0
---------- --------
Total $5,306,517 $271,157
========== ========
</TABLE>
EMPLOYMENT AGREEMENTS AND OTHER COMMITMENTS
The Company has employment agreements with its key employees, the terms of which
expire at various times through 2004. Such agreements provide for minimum salary
levels as well as for incentive bonuses.
F-22
<PAGE>
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.
13. SEGMENT INFORMATION AND INTERNATIONAL OPERATIONS
The Company has one business segment, which is the design, development,
marketing and support of business-to-business fulfillment solutions across the
supply chain. The following geographic information presents total revenues,
gross margin and indentifiable assets for the years ended September 30, 2000,
1999, and 1998 (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Revenues
North America $ 18,514 $ 10,106 $6,755
Europe 29,255 - -
-------- -------- ------
$ 47,769 $ 10,106 $6,755
======== ======== ======
Gross Margin
North America $ 7,430 $ 4,402 $2,955
Europe 7,777 - -
-------- -------- ------
$ 15,207 $ 4,402 $2,955
======== ======== ======
Identifiable assets
North America $102,390 $ 24,145 $5,400
Europe 31,097 27,687 -
Eliminations (23,268) (21,484) -
-------- -------- ------
$110,219 $ 30,348 $5,400
======== ======== ======
</TABLE>
14. SUBSEQUENT EVENTS
On December 11, 2000, the Company entered into a definitive agreement to acquire
Applied Tactical Systems (ATS) in a transaction valued at approximately $26
million, to be paid for through the issuance of 3.0 million shares of Vertex
common stock. The transaction is expected to close by the end of December, 2000.
F-23
<PAGE>
VERTEX INTERACTIVE, INC.AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
Balance at Additions Deductions Balance
Beginning Charged to From at End of
of Year Expense Reserves Year
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year Ended September 30, 2000:
Deducted from accounts receivable for
doubtful accounts $125,166 $ 69,470 $ 14,006 $180,630
Deducted from inventory as valuation
allowance $225,290 $ 34,664 $249,954(1) $ 10,000
Year Ended September 30, 1999:
Deducted from accounts receivable for
doubtful accounts $ 75,985 $ 94,500 $ 45,319 $125,166
Deducted from inventory as valuation
allowance $253,419 $119,406 $147,535 $225,290
Year Ended September 30, 1998:
Deducted from accounts receivable for
doubtful accounts $ 75,985 $ 0 $ 0 $ 75,985
Deducted from inventory as valuation
allowance $155,419 $ 98,000 $ 0 $253,419
</TABLE>
(1) Primarily related to sale of weighing product line.
F-24
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as................... 'r'
