SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997 COMMISSION FILE NUMBER 1-9263
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VERTEX COMPUTER CABLE & PRODUCTS, INC.
formerly
VTX ELECTRONICS CORP.
(Exact name of registrant as specified in its charter)
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Delaware 11-2816128
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
920 Conklin Street, Farmingdale, New York 11735
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 293-1610
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $.10 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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 registrant'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] The aggregate market value of the voting stock held by nonaffiliates of the
registrant AS OF APRIL 27, 1998 WAS APPROXIMATELY $ 474,450.
ON APRIL 27, 1998, 25,304,000 SHARES OF COMMON STOCK, $.10 PAR VALUE WERE
OUTSTANDING.
This report consists of 50 consecutively numbered pages (including this cover
page).
VERTEX COMPUTER CABLE & PRODUCTS, INC.
TABLE OF CONTENTS
Page Number
PART I
Item 1. Business...........................................................3
Item 2. Properties.........................................................7
Item 3. Legal Proceedings..................................................8
Item 4. Submission of Matters to a Vote of Security Holders................8
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters............................................................9
Item 6. Selected Financial Data............................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................... 11
Item 8. Financial Statements and Supplementary Data........................14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...............................................14
PART III
Item 10. Directors and Executive Officers of the Company....................15
Item 11. Executive Compensation.............................................17
Item 12. Security Ownership of Certain Beneficial Owners and Management.....20
Item 13. Certain Relationships and Related Transactions.....................20
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................................22
PART I
ITEM ONE - BUSINESS
THE COMPANY
Vertex Computer Cable & Products, Inc., formerly VTX Electronics Corp. (the
"Company") through its wholly-owned Vertex Technologies, Inc. subsidiary
("Vertex") is a multi-regional manufacturer of custom-made electronic cable
assemblies used in providing connectivity solutions. The Company designs
specifically to meet individual customer's unique and complete connectivity
requirements.
Management believes that the Company's technical ability for providing
connectivity solutions between the data system capabilities of many
manufacturers and the specific connectivity needs of its customers, along with
its reputation for providing manufactured, custom-made electronic cable
assemblies that are subject to 100% quality control testing, will be the
principal factors on which the Company will plan its future growth.The Company
expects internal growth to be enhanced by what the Company perceives to be three
continuing trends: (i) the increasing demand for data communications to provide
timely information in the office environment and factory floor that requires
connectivity solutions; and (ii) the growing number of alternatives available to
organizations of all sizes in all types of industries to increase productivity
through improved or upgraded computer data communications.
The Company's executive offices are located at 920 Conklin Street, Farmingdale,
New York 11735 and its telephone number is (516) 293-1610. Unless the context
requires otherwise, all references herein to the Company and Vertex mean Vertex
Computer Cable & Products, Inc.
RECENT DEVELOPMENTS
On January 10, 1997, the Company (the "Debtor") filed petitions for relief under
Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court
for the Eastern District of New York. Under Chapter 11, certain claims against
the Debtor in existence prior to the filing of the petitions for relief under
the federal bankruptcy laws are stayed while the Debtor continues business
operations as Debtor-in-possession. Additional claims (liabilities subject to
compromise) may arise subsequent to the filing date resulting from rejection of
executory contracts, including leases, and from the determination by the courts
(or agreed to by parties in interest) of allowed claims for contingencies and
other disputed amounts. Claims secured against the Debtor's assets ("secured
claims") also are stayed, although the holders of such claims have the right to
move the court for relief from the stay. Secured claims are secured primarily
by liens on the Debtor's property, plant and equipment, accounts receivables and
inventories.
On January 10, 1997, TW Cable LLC, ("TW"), concluded a transaction with the
holders of the Company's preferred stock and debentures pursuant to the terms of
a certain Securities Purchase Agreement (the "Securities Purchase Agreement").
As a result of that transaction, TW acquired all of the issued and outstanding
preferred stock (12,375 shares) and $2,615,000 principal face amount of
debentures,together with warrants to purchase 53,350,000 shares of common stock,
for a total purchase price of $1,100,000. The preferred stock was convertible
into 4,950,000 shares of common stock at a conversion rate equal to 400 common
shares for each share of preferred stock that is converted. Each share of
preferred stock is entitled to 1,500 votes on all matter other than the election
of directors. The holders of the preferred stock, as a class, are entitled to
elect 75% of the members of the Board of Directors.
Effective with the signing of the Securities Purchase Agreement, Mr. Ed
Goodstein, owner of TW, was elected as Chairman of the Board of Directors, and
Mr. Carl Palazzolo, also of TW, was elected as a Director. These elections
filled the vacancies created by the resignations of Mr. Marshall Butler, Mr.
Hiro Hiranandani, Mr. Ivor Jacobson, Mr. Paul Lowell and Mr. Ken Rind.
-3-
On December 20, 1996, the Company sold its 45,000 square foot corporate
headquarters in Farmingdale, NY to an unaffiliated third party. The Company
used proceeds of approximately $1,900,000 to retire the first and second
mortgages and a portion of the secured subordinated debentures, as described in
Notes E & H. The Company recognized a loss of approximately $248,500 on the
sale of the headquarters. Further, the remaining proceeds from the sale were
used to retire $750,000 of subordinated debentures. On May 7, 1997, the Company
entered into an agreement that was subject to Bankruptcy Court approval, with
TW, (the "Asset Purchase Agreement") pursuant to which TW would acquire the
Company's Distribution Business and all of its assets used in connection with
the Distribution Business. The purchase price was $500,000. The payment of
$500,000 was allocated to all distribution intangible assets and fixed assets.
The agreement entitles TW to purchase the Company's distribution inventory for
an amount equal to 82.5% of the book value over a one year period. Pursuant to
the Asset Purchase Agreement, TW agreed to assume certain Leases of the
Company. On June 26, 1997 the closing of the Asset Purchase Agreement took
place. TW assumed three (3) locations, including all employees of these
locations.
On May 29, 1997, the Board appointed Mr. Edward Goodstein as its new Chief
Executive Officer and Mr. Al Roth agreed to step down in favor of the election
of Mr. Goodstein. Mr. Roth will serve as a consultant to Mr. Goodstein. The
Board also appointed Mr. Howard Griffith as its new President and Director, and
Mr. Ron Martyn as a Director.
On July 18, 1997, the Company filed its plan of reorganization and disclosure
statement (the "Plan") with the United States Bankruptcy Courts in Westbury,
New York. The Plan called for an initial distribution to all unsecured creditors
of 13.5% for each allowed claim and future distributions based on cash flow over
the next five years. Under the proposed reorganization, the Company's wholly
owned subsidiary, Vertex Technologies, Inc., would be merged into the Company,
and the Company would change its name to Vertex Computer Cable & Products. Upon
implementation of the proposed plan, 25.3 million of the Company's 40 million
authorized shares of common stock would be issued and outstanding. Each five
shares of the Company's common stock currently outstanding would be exchanged
for one share of the surviving entity. As a result, holders of the Company's
currently outstanding 12,652,000 shares would receive 2,530,000 post-
reorganization shares. TW would receive 22.77 million shares, representing 90%
of the post-reorganization outstanding common stock.
On October 30, 1997, the United States Bankruptcy Court in Westbury, New York
approved the Company's Plan of Reorganization. The Company was required to have
in place exit financing in order for the Company to effectuate the Plan and
emerge from Chapter 11. On January 12, 1998, the Company closed with its'
existing Credit Facility Congress Financial Corp. Congress in effect extended
its Credit facility, which expired on January 10, 1998, for a period of three
months. TW provided additional cash collateral of $500,000 in order for
the Company to fund the Plan of Reorganization.
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BUSINESS STRATEGY
The Company's business strategy is to develop a value-added distribution network
through internal growth with a focus on connectivity solutions for data and
tele-communications. Management believes it will continue to (i) introduce
new connectivity solutions, (ii) improve operating efficiencies through a more
efficient organizational structure, eliminate duplicated activities, and
integrate manufacturing capabilities between the three separate manufacturing
facilities located in the United States, (iii) derive the benefits of critical
mass through the opportunity to develop stronger relationships with, and obtain
improved terms from key suppliers, and (iv) derive the benefits of critical mass
through the ability to distribute to and service large national and
international customers.
In its relationship with its customers, the Company focuses on providing
connectivity solutions. Such solutions include advising customers on the
options available to meet their specific needs, and manufacturing custom-made
electronic cable assemblies for the customers. In addition, the Company
continues to service the customers with components and assemblies as the
customer's system grows. Management believes that manufacturers of products
generally choose to build relationships with distributorships capable of
offering advisory services, technical support, and other services such as
manufacturing custom-made electronic cable assemblies. The Company believes it
is perceived as a value-added manufacturer by both suppliers and customers as a
result of its technical skills and knowledge of the marketplace, access to and
understanding of the product capabilities,and technical design and manufacturing
capabilities for custom-made electronic cable assemblies.
PRODUCTS AND SERVICES
The Company's products and services consist principally of the design and
manufacture of custom-made electronic cable assemblies and harnesses used as
solutions for connectivity requirements in data communications.
The Company employs design, engineering, and technical support personnel to
develop alternative connectivity solutions and manufacture of custom-made
electronic cable assemblies.
PRINCIPAL SUPPLIERS
Management believes that the Company is not dependent on any particular
supplier. For the fiscal year ended June 30, 1997, Lucent Technologies
(formerly AT&T), Westcon, Inc., Madison Wire & Cable Corp., Hitachi Cable and
Amp, Inc. accounted for 28.6%, 13.0%, 10.5%, 10.3%, 10.2% and 10.1%,
respectively. For the fiscal year ended June 30, 1995, purchases from Lucent
accounted for 15.7%. Through stock rotation rights and price protection
arrangements with most of its major suppliers, the Company can reduce the risk
of holding obsolete or over-priced product. Stock rotation rights allow
distributors to return a certain proportion of their purchases in the event
that the product does not sell. A price protection program gives the
distributor a rebate on purchases during a specified period if the
manufacturer subsequently lowers it prices. The price protection generally
covers any purchases made within the most recent 60 to 90 day period prior to
the manufacturer's price reduction.
The Company works off manufacturers' lead times. Deliveries range from one week
to approximately 90 days. The Company has a fully integrated on-line computer
system that enables it to determine immediate inventory availability of the
Company's entire inventory at its stocking facilities. The Company monitors
and maintains manufacturers' delivery schedules to ensure "on-time" delivery
for customers and to maintain proper inventory levels for the Company. The
Company believes that it has adopted more thorough inventory control systems,
and management currently does not believe it will be required to expense any
significant amounts of inventory in the foreseeable future. However, there
can be no assurance there will not be further inventory write-offs.
-5-
The Company's objective is to minimize lead times for its customers without
financing excess stock levels or risking technological obsolescence. Several
manufacturers have provided the Company an expedited shipping function in order
to better service the Company's customers.
SALES AND MARKETING
The Company offers a broad range of custom-made cable assemblies and harnesses
used as connectivity solutions to end-users, professionals who install and
service data communications, and original equipment manufacturers (OEM's).
The Company operates through three locations in the Northeast, Mid Atlantic,
and Western regions of the United States. All of the locations operate as a
sales office, manufacturing facility and warehouse. These operations support
the design and manufacture of custom-made and standard cable assembly
requirements for the entire Company.
In order to effectively meet each customer's needs, the sales force first gains
an understanding of the customer's system connectivity requirements before
recommending one or more possible solutions. The Company generally does not
participate in the design of computer applications but rather participates in
the design and implementation of the connectivity solutions required for data
communications.The field sales force is supported by inside sales personnel
who handle incoming customer calls, perform sales estimates, provide rapid
responses to customer questions and assist in sales prospecting. In addition,
compensation policies have been tailored to promote a profit-oriented, rather
than a revenue oriented, sales philosophy.
Sales leads are typically generated by ongoing interaction with existing
customers, sales calls to companies not currently customers, referrals from
suppliers, and by advertising and promotional efforts. The advertising and
promotion program for the Company consists of: (i) exhibits at national and
regional trade shows; (ii) Company-sponsored seminars and product
demonstrations in regional areas; (iii) advertisements in trade publications;
and (iv) direct mail campaigns to targeted market niches.
COMPANY LOCATIONS
The Company's locations, which all are leased, are as follows:
Elkridge, Maryland
Farmingdale, New York
San Jose, California
MAJOR CUSTOMER
The Company had one customer that has accounted for 10% or more of its net sales
during the prior two fiscal years. Bloomberg L.P. accounted for approximately
11.4% of net sales in fiscal 1996 and approximately 14.7% of net sales in fiscal
1995. In fiscal 1997, this customer altered its product line and discontinued
using the Company as a supplier of their cable assemblies.
-6-
COMPETITION
All aspects of the Company's business are highly competitive. The Company
competes with several national distributors, which have greater financial and
other resources than the Company. The Company also competes with numerous
distributors on a local or regional basis. The Company is ISO-9002 certified
and therefore more attractive to a customer who requires this industry
certification of quality.
The Company believes that its ability to design and manufacture custom cable
assemblies as well as making available technical support, differentiates the
Company's from its primary competitors and gives the Company a competitive
advantage. There can be no assurance the Company will be able to successfully
exploit such advantage.
PRODUCT LIABILITY INSURANCE
The Company maintains a comprehensive general liability insurance policy in the
amount of $2,000,000, with an umbrella policy, including products liability,
providing coverage in the aggregate amount of $20,000,000, which it believes
to be adequate coverage.
EMPLOYEES
As of October 7, 1997, the Company had 114 full-time employees. Of these, 17
are sales and marketing personnel; 3 are design, engineering, and technical
support personnel; 15 are purchasing, warehouse and inventory control personnel;
58 are cable assembly manufacturing personnel; 10 are quality control personnel;
and 11 are accounting, data processing and other administrative personnel. 27
employees are covered by a collective bargaining agreement in the Company's
Farmingdale facility. In addition to its employees, the Company uses other
workers on a contract basis, as its needs require. The Company considers its
relations with its employees to be good.
ITEM TWO - PROPERTIES
The location and size of each of the Company's facilities, the principal
use of each facility and lease expiration date are summarized below:
Lease Square Expiration
Location Footage Use Date
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Elkridge,MD 16,750 Sales Office, Manufacturing Mar.1998
and Warehouse
Farmingdale, NY 13,000 Executive Office, Sales Office, Feb.1999
Manufacturing and Warehouse
San Jose, CA 9,950 Sales Office, Manufacturing June 2000
and Warehouse
The Company's Headquarters are located in Farmingdale, New York. These premises,
which consist of approximately 3,500 square feet of office space and
approximately 9,500 square feet of manufacturing and warehouse space, is leased
by the Company.
-7-
ITEM THREE - LEGAL PROCEEDINGS
An action was commenced in the New York State Supreme Court, County of Nassau,
by CPI Aerostructures, Inc. ("CPI"), alleging that VTX Electronics Corp. has
wrongfully failed to consummate a proposed merger transaction. The plaintiff
is seeking "break-up" fee damages in the amount of $400,000.
As a result of the Company filing Chapter 11 on January 10, 1997, this potential
liability has been converted to an unsecured claim and will be treated as such
under Bankruptcy rules (see Subsequent Events).
ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-8-
PART II
ITEM FIVE - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock had been trading on the American Stock Exchange under
the symbol VTX since September 17, 1986, its initial public offering date. On
September 15, 1995, the Company's Common Stock was delisted from the American
Stock Exchange, as it no longer satisfied all the financial requirements, and
has since traded on the Over-The-Counter Electronic Bulletin Board under the
symbol VTXL. The following table shows the quarterly range of the high and
low closing sale prices for the Common Stock on the American Stock Exchange
prior to September 15, 1995 and on the Over-The-Counter Electronic Bulletin
Board since September 15, 1995, for the periods indicated.
Common Stock
Period High Low
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FISCAL 1995
First Quarter ended September 30, 1994 1.06 .56
Second Quarter ended December 31, 1994 .81 .38
Third Quarter ended March 31, 1995 .63 .38
Fourth Quarter ended June 30, 1995 .44 .25
FISCAL 1996
First Quarter ended September 30, 1995 .38 .19
Second Quarter ended December 31, 1995 .28 .06
Third Quarter ended March 31, 1996 .35 .18
Fourth Quarter ended June 30, 1996 .39 .20
FISCAL 1997
First Quarter ended September 30, 1996 .32 .10
Second Quarter ended December 31, 1996 .27 .06
Third Quarter ended March 31, 1997 * .12 .02
Fourth Quarter ended June 30, 1997 .05 .02
FISCAL 1998
First Quarter ended September 30, 1997 .08 .04
* On January 10, 1997, the Company filed Chapter 11.
As of September 12, 1997, there were approximately 250 holders of record of the
Company's Common Stock. On December 29, 1997, the NASDAQ changed the stock
symbol from VTXL to VCCP
On December 29, 1997, the Company declared a one-for-five reverse stock split
of all of its issued and outstanding common stock as called for in its Plan of
Reorganization.
The Company has never paid a cash dividend on its Common Stock and the Company
does not anticipate paying any dividends on the Common Stock in the foreseeable
future. Pursuant to the terms of its revolving credit facility, the Company
is not permitted to pay or declare any dividends or otherwise make any
distribution of capital.
-9-
ITEM SIX - SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
Year Ended June 30,
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
INCOME STATEMENT DATA:
Net sales $21,224 $29,116 $34,472 $42,864 $49,407
Cost of goods sold 16,779 23,584 26,231* 32,149* 38,338*
------- ------- ------- ------- -------
Gross profit $ 4,445 $ 5,532 $ 8,241 $10,715 $11,069
======= ======= ======= ======= =======
Loss before extra-
ordinary items $(5,358) $(4,972) $(1,316) $(2,934) $(2,030)
Extraordinary items
income (loss) (120) 747 2,492
Net income (loss)
attributable
to common stock (5,556) (5,058) (1,316) (2,187) 462
PER SHARE DATA: (1)
Loss before extra-
ordinary items (.43) (.40) (.11) (.47) (.35)
Extraordinary items (.01) .12 .43
Net income (loss)
attributable to
common stock
per share (.44) (.40) (.11) (.35) .08
Weighted average
number of shares
outstanding (2) 12,652 12,652 12,265 6,239 5,778
------- ------- ------- ------- ------
BALANCE SHEET DATA:
Working capital $ 1,153 $ 5,079 $ 4,476 $ 5,320 $ 6,473
Total assets 5,663 13,128 13,187 14,431 17,583
Long-term debt 2,211 9,496 5,966 6,338 9,413
Liabilities subject
to compromise 6,192
Stockholders' equity
(deficiency) (6,528) (1,011) 1,999 2,808 1,552
*Reclassified to conform to the current year presentation
(1) Cash dividends per share have never been paid on Common Stock and the
Company is prohibited under its current long-term credit facility from paying
a dividend because it currently has insufficient availability.
(2) See Notes to Consolidated Financial Statements.
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ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1997 AND 1996
Net sales for the year ended June 30, 1997 were approximately $21,224,000, as
compared to the year ended June 30, 1996 of $29,116,000, a decrease of 27.1%.
Value added distribution sales decreased by approximately $7,116,000 or 38.6%
from $18,449,000 in the prior fiscal year to $11,333,000 in the current fiscal
year. Sales of manufactured cable assemblies decreased by approximately
$776,000 or 7.3% from $10,667,000 in the prior fiscal year to $9,891,000 in the
current fiscal year. The decrease was primarily a result of the Company's
inability to purchase product, which lead to the Company filing a petition for
relief under Chapter 11 of the federal bankruptcy laws "Chapter 11" on January
10, 1997 (see Notes to Consolidated Financial Statements).
Gross profit decreased by $1,087,000 or 19.6% for the year ended June 30, 1997
to $4,445,000 from $5,532,000 as compared to fiscal 1996. Gross profit
percentage for the years ended June 30, 1997 and 1996 were 20.9% and 19.0%,
respectively. The decrease in gross profit was primarily the result of the
aforementioned decrease in net sales coupled with the decrease in gross profit
per sales dollar, which is due primarily to the poor absorption of fixed
overhead costs caused by the significant decrease in sales volume, in addition
to a decrease in unit selling prices.
Selling, general and administrative expenses decreased approximately $1,437,000
or 15.0% to $8,129,000 for the year ended June 30, 1997 from $9,566,000 as
compared to fiscal 1996. Selling, general and administrative expenses as a
percentage of net sales were 38% in fiscal 1997 as compared to 33% in fiscal
1996. The decrease in these expenses was the result of cost reductions of
payroll and related expenses, terminated equipment leases, and reducing general
expenses as a result of filing Chapter 11 on January 10, 1997.
Interest expense and dividends on preferred stock increased by $47,000 or 4.6%
for the year ended June 30, 1997 to $1,067,000 from $1,020,000. The increase
was due to the requirements of interest and dividends resulting from the
December 1995, March 1996 and June 1996 financings and also due to the
Company's utilization of its revolving credit facility to its maximum line of
credit for most of the period. As a result of certain 1997 events, including
sale of the Company's headquarters and the bankruptcy related matters certain
interest and dividends costs were eliminated after the second quarter
Chapter 11 Reorganization related Expenses includes an accrual for approximately
$365,000 in professional fees to be paid under the plan of reorganization,
approximately $110,000 for fees paid relating to the revolving credit facility
DIP Financing and approximately $14,000 of printing and filing fees, all
resulting from the filing of Chapter 11 on January 10, 1997.
The Company recognized a loss of approximately $248,500 on the sale of the
headquarters. The loss includes closing costs expenses and non-cash write-offs
of building related expenses.
-11-
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - (CONTINUED)
YEARS ENDED JUNE 30, 1996 AND 1995
Net sales for the year ended June 30, 1996 were approximately $29,116,000, as
compared to the year ended June 30, 1995 of $34,472,000, a decrease of 15.5%.
Value added distribution sales decreased by approximately $2,952,000 or 13.8%
from $21,401,000 in the prior fiscal year to $18,449,000 in the current fiscal
year. Sales of manufactured cable assemblies decreased by approximately
$2,404,000 or 18.4% from $13,071,000 in the prior fiscal year to $10,667,000 in
the current fiscal year. The decrease was primarily attributable to significant
sales employee turnover that had taken place during the eight months preceding
January 1, 1996 in addition to an overall reduction in salesperson headcount.
Gross profit decreased by $2,709,000 or 32.9% for the year ended June 30, 1996
to $5,532,000 from $8,241,000 as compared to fiscal 1995. Gross profit
percentage for the years ended June 30, 1996 and 1995 were 19.0% and 23.9%,
respectively. The decrease in gross profit was primarily the result of the
aforementioned decrease in net sales coupled with the decrease in gross profit
per sales dollar, which is due primarily to the poor absorption of fixed
overhead costs caused by the significant decrease is sales volume, in addition
to a decrease in unit selling prices. The prior year gross profit amount has
been reclassified to conform to the current year presentation, which is being
reclassified in this financial statement, which excludes the costs of receiving,
warehousing and shipping of distribution items. Such costs are presented as
part of selling, general and administrative expenses discussed below.
Selling, general and administrative expenses increased approximately $914,000 or
10.6% to $9,566,000 for the year ended June 30, 1996 from $8,652,000 as compared
to fiscal 1995. Selling, general and administrative expenses as a percentage of
net sales were 33% in fiscal 1996 as compared to 25% in fiscal 1995. The
increase in these expenses was the result of costs associated with the Company's
marketing efforts required to re-establish itself in the marketplace,
recapitalization-related charges pertaining to the settlement of certain
contracts and agreements in connection with the December 1, 1995 transaction,
and an increase in executive headcount in the current year.
Interest expense and dividends on preferred stock increased by $193,000 or 23.3%
for the year ended June 30, 1996 to $1,020,000 from $827,000. The increase was
due to the requirements of interest and dividends resulting from the December
1995, March 1996 and June 1996 financings.
-12-
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Current assets have decreased approximately $4,782,000 to $4,941,000 at June 30,
1997 as compared to $9,723,000 at June 30, 1996. This decrease resulted
primarily from a significant decrease in accounts receivable of approximately
$3,869,000, a decrease in inventories of approximately of $513,000, and a
decrease in prepaid and other current assets of approximately $522,000, which
was offset by a $121,000 increase in cash. The Company had net working capital
of $1,153,000 at June 30, 1997 as compared to $5,079,000 at June 30, 1996.
On January 10, 1997, the Company filed petitions for relief under Chapter 11
of the federal bankruptcy laws in the United States Bankruptcy Court for the
Eastern District of New York. Under Chapter 11, certain claims against the
debtor in existence prior to the filing of the petitions for relief under the
federal bankruptcy laws are stayed while the Debtor continues business
operations as Debtor-in-possession. Claims secured against the Debtor's assets
("secured claims") also are stayed, although the holders of such claims have
the right to move the court for relief from the stay. Secured claims are
secured primarily by liens on the Debtor's property, plant and equipment,
accounts receivables and inventories.
Total borrowings outstanding, including subordinated secured debentures, as of
June 30, 1997 were $4,491,000, a decrease of $5,027,000 or 52.8% from $9,518,000
at June 30, 1996. This was due primarily to the reduction of the Company's
revolving credit facility of approximately $2,844,000, the satisfaction of
certain mortgages of approximately $1,279,000 on the Company's headquarters
in Farmingdale, NY, which was sold (see Note E), repaying pro-rata $750,000
to the secured subordinated debenture holders, and the exchange of approximately
$500,000 of subordinated debentures as consideration for the sale of the
distribution business (see Notes A(2) and P).
The Company currently has a revolving credit facility which provides for
maximum borrowings of $10,000,000 at an interest rate of prime plus 2-3/4%
with an additional commitment fee of 1/2% per annum on the daily average unused
portion of the credit. Under the terms of the agreement, borrowings are limited
to 80% of eligible accounts receivable (constituting those amounts outstanding
90 days or less) and 50% of eligible accounts receivable outstanding between 91
and 120 days, and 40% of regular inventory and 20% of slow moving inventory. As
of June 30, 1997, the Company had approximately $2,453,000 of availability under
the facility, of which $2,254,000 was outstanding on that date. The loan is
collateralized by substantially all of the assets of the Company not otherwise
collateralized. This credit facility expired on December 31, 1997 and is
classified as a current portion of long term debt (see Note A(3)).
On January 12, 1998, the Company entered into a Loan and Security Agreement
(the "Loan Agreement") with it's current lender (see Note G). The Loan
Agreement replaced the court approved DIP financing and extended the Company's
credit facility for a 90 day period through April 12, 1998. The terms of the
Loan Agreement are similar to its prior loan except for a reduction to 75% on
advances of eligible accounts receivables and a reduction to 24% on advances of
eligible inventory. As part of the Loan Agreement, TW provided additional
cash collateral of $500,000 in order for the Company to fund the Plan. The
Company is presently seeking to secure long-term financing prior to the
aformentioned expiration date.
-13-
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)
In connection with its revolving credit facility, the Company is subject to
restrictive covenants which impose certain limitations with respect to the
Company's incurrence of indebtedness, capital expenditures, creation or
recurrence of liens, declaration or payment of dividends or other distribution,
mergers, consolidations and sales or purchases of substantial assets.In general,
the Company is not allowed to incur further indebtedness or create additional
liens on its assets except for unsecured current liabilities incurred in the
ordinary course of business or liabilities incurred in the ordinary course of
business secured by purchase money security interests not to exceed an
aggregate of $750,000. The Company is not allowed to make loans or investments
or provide guarantees or to prepay indebtedness. The Company is prohibited from
paying dividends on common stock and may not enter into a merger, consolidation
or sale of all or substantially all of its assets. Additionally, the Company is
required to maintain consolidated net worth, including subordinated debentures,
of not less than $750,000 and to maintain consolidated working capital, defined
as current assets less current liabilities and debt outstanding under the credit
facility, of not less than a negative $1.5 million.
At June 30, 1997, the Company has net operating loss carryforwards for tax
purposes of approximately $15,798,000. Such net operating loss carryforwards
expire through fiscal year 2012. The Company's use of its net operating loss
carryforward is limited as the Company is deemed to have undergone an
"ownership change", as defined in Internal Revenue Code Section 382, during the
fiscal year ended June 30, 1992 and June 30, 1994. Based upon the Company's
estimate of fair value, approximately $1,750,000 of the Company's total net
operating loss of $15,798,000 is limited to approximately $715,000 annually
during the carryforward period.
As part of the overall plan of reorganization, the Company obtained relief of
various unsecured debt of approximately $5.1 million and received an additional
$1.9 million of deemed cancellation of debt attributable to TW's purchase of
debentures at a discount. (See notes A-3 and C.) In addition, TW exchanged its
preferred stock for 90% of the Company's outstanding common stock. This
transaction resulted in a new change in ownership as defined under Internal
Revenue Code (IRC) Section 382.
Due to the bankruptcy provisions of IRC Section 382, the Company's ability to
utilize its net operating loss carryovers remains unchanged. However, the
Company's total net operating loss carryover of $15,798,000 will be reduced by
the amount of total debt forgiven of $7 million, effective January 12, 1998.
Any subsequent changes in ownership within the two year period following the
effective date of reorganization (January 12, 1998) could severly limit the
Company's abiltiy to utilize any of its net operating loss carryovers.
INFLATION
For the last three fiscal years, the Company has not been significantly affected
by inflation.
ITEM EIGHT - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements listed in the accompanying Index to the
Consolidated Financial Statements are attached as part of this report.
ITEM NINE - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
a) Not applicable
b) Not applicable.
-14-
PART III
ITEM TEN - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Directors of the Company and certain information concerning them as of June
30, 1997 are set forth below:
First Year
Became
Name Position With The Company Age Director
- ------------------------------------------------------------------------------
Edward Goodstein Chairman of the Board and 50 1997
Chief Executive Officer
Howard M. Griffith Director / President 65 1997
Carl G. Palazzolo Director 39 1997
Ron Martyn Director 56 1997
Albert Roth Director/Consultant 62 1995
Executive Officers of the Company who are not Directors are set forth below:
Name Position With The Company Age
Nicholas T. Hutzel Vice President, Controller 28
and Secretary
Abraham Mendez Vice President of Sales 30
Mr. Edward Goodstein has been Chairman and Chief Executive Officer of the
Company since June 1997 and director since January 1997. Mr. Goodstein was
formerly President and major stockholder of TW Communications, a privately
held company, which was acquired in December 1997. TW Communications was a
distributor of telecommunication wire, cable, fiber-optics and installation
supplies.
Mr. Howard Griffith has been President and a Director since June 1997. Mr.
Griffith was previously a Manager of TW Communications, which was acquired in
December 1997, from 1990 through June 1997. Before TW Communications, Mr.
Griffith was employed by Phelps Dodge and AT&T.
Mr. Carl Palazzolo has been a Director of the Company since January 1997. Mr.
Palazzolo was Chief Financial Officer & V.P. of Operations of TW Communications,
which was acquired in December 1997, and had been with the company since 1990.
Prior to 1990, Mr. Palazzolo was employed as a Certified Public Accountant at
Margolin Weiner & Evens.
Mr. Ron Martyn has been a Director of the Company since January 1997. Mr.
Martyn was Vice President of Sales for TW Communication, which was acquired in
December 1997, since 1993. Prior to 1993 Mr. Martyn was employed by AT&T and
has over 30 years of sales Experience.
-15-
ITEM TEN - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(CONTINUED)
Albert Roth has been a director since December 1995 and was Chairman and Chief
Executive Officer of the Company from December 1995 through May 1997. For the
five years prior thereto, Mr. Roth was independently employed as a business
consultant as a principal of GPR Eastwood Inc. Mr. Roth has held several
senior management and executive positions at various electronic distribution
companies during the thirty years prior to becoming self-employed.
The following Executive Officers of the Company are not Directors:
Nicholas Hutzel has been Vice President and Controller of the Company since
February 1997. Mr. Hutzel has also been Corporate Secretary since March 1997.
Mr. Hutzel joined the Company in June 1993, and continued service until July
1996. From July 1996 through February 1997, Mr. Hutzel was employed as a
Controller for a private sign manufacturer that handled major commercial
accounts throughout the United States.
Abe Mendez has been Vice President of Sales Since August 1997. Mr. Mendez has
been with the Company since 1985. Prior to becoming Vice President of Sales Mr.
Mendez was Vice President of Operations and also Sales Manager for the New York
facility.
- 16 -
ITEM ELEVEN - EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal year indicated, all compensation
awarded to, earned by or paid to all individuals serving as the Company's Chief
Executive Officer ("CEO") or acting in a similar capacity and the one other
Executive Officer of the Company other than the CEO whose salary and bonus
exceeded $100,000 with respect to the fiscal year indicated.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
Other ----------------------
Annual All Other
Compen- Number Compen-
Name and Salary Bonus sation of sation
Principal Position Year ($) ($) ($)(1) Options ($)
- --------------------- ---- --------- ------ ------- --------- ---------
Albert Roth 1996 $138,000 $ - $ - - $ -
Chief Executive 1996 85,470 - - 250,000 -
Officer (prior)
Donald W. Rowley 1996 182,517 - - - -
President 1995 200,000 - - 100,000 3,580 (2)
(1) Perquisites and other personal benefits, securities or property to each
executive officer did not exceed the lesser of $50,000 or 10% of such
executive officer's annual salary and bonus.
(2) The Company had purchased for Mr. Rowley a split dollar life insurance
policy. The Company had paid the premium on such policy. All obligations
expired March 31, 1997.
The Company has no defined benefit pension plans.
DIRECTORS' COMPENSATION
In fiscal 1997, certain directors who were not employees of the Company did
receive a monthly board fee of approximately $2,000 a month.
- 17 -
STOCK OPTION TABLE
The following table provides further information with respect to the options
granted to the Executive Officers as of the fiscal year ended June 30, 1997.
Options Granted in Last Fiscal Year
----------------Individual Grants -------------------
% of Total
Options
Granted to Exercise
Employees or Base Expir-
Options in Fiscal Price ation
Name Granted Year ($/Sh) Date
- ------- ---------- -------------- --------- ---------
NO OPTIONS GIVEN
The following table provides information with respect to options exercised and
option values as of the fiscal year ended June 30, 1997.
Aggregated Options Exercised in Last Fiscal Year and
Fiscal Year-End Option Values
Value of
Number of Unexercised
Shares Unexercised In-the-Money
Acquired Options Options at
on Value at 6/30/97 6/30/97($)(1)
Exercise Realized Exercisable/ Exercisable/
Name # $ Unexercisable Unexercisable
- -------------- ---------- ------------ ---------------- ----------------
Albert Roth 0 0 0/250,000 0/0
(1) The dollar value of unexercised options is calculated by determining the
difference between the fair market of the Company's Common Stock which underlies
the option at June 30, 1997, and the exercise price of the options.
As a result of the Company's confirmed Plan, all outstanding options and
warrants were cancelled upon the effective date of the Plan.
- 18 -
EMPLOYMENT AGREEMENT
On March 31, 1994, the Company entered into an employment agreement with its
then president which required total annual minimum compensation of $200,000
through March 1997 plus an annual bonus based on a percentage of specified
levels of achieved net profits. Effective December 1, 1995, this agreement was
terminated in connection with his resignation and the obligation was settled for
$134,000, charged to fiscal 1996 operations and is payable monthly through
March 1997.
MANAGEMENT AGREEMENT
On January 1, 1996, the Company entered into a management agreement with a
consulting firm whereas the Company has retained one of the consulting firm's
principals to function as its Chairman of the Board and Chief Executive Officer.
The term of this agreement extends through December 31, 2000 and provides for
monthly management fees of $12,000, provided, however, that the Company does
not hire a president or chief operating officer during that period of time.
On January 9, 1997, this Management agreement was canceled as a result of
the Company filing for Chapter 11 (see Recent Developments).
On January 1, 1996, the Company entered into employment agreements with two of
its newly and recently appointed executive officers. The terms of these
agreements extend through December 31, 1997 and provide for monthly compensation
payments of $11,250 each. As a result of the Company filing for Chapter 11,
these two executive officers were terminated and the balance of the agreements
were treated as claims under the Company's chapter 11 Plan.
On May 1, 1996, the Company entered into an agreement with another executive
officer which provides for compensation of up to a maximum of eight months of
the excutive's base salary, approximating $67,500, upon termination of
employment for any reason other than for certain circumstances, as defined in
the agreement. The term of the agreement extends through May 1, 1999. In
December 1996, this executive officer resigned from the Company.
CONSULTING AGREEMENT
On January 9, 1997, the Company entered into a consulting agreement with Albert
Roth, the Company's prior Chairman of the Board of Directors and current
Director to function as a consultant to Company's new President and Chairman
of the Board of Directors. The term of this agreement extended through
November 28, 1997 and provided for monthly consulting fees of $9,000. The
consulting agreement had an option to extend the term upon the same terms and
conditions for an additional period of six (6) months. The Company chose not
to extend this agreement. Mr. Roth continues to receive as per his agreement
certain benefits for a period of six (6) months.
-19-
ITEM TWELVE - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of June 30, 1997, certain information
regarding beneficial ownership of the Common Stock held by each person known
by the Company to own beneficially more than 5% of the Common Stock, each of
the Company's directors, each of the executive officers named in the Summary
Compensation Table, and all of the Company's executive officers and directors
as a group.
Beneficial Ownership
Name and Address Shares %
- -------------------- -------------- ------
TW Cable LLC 9,900,000 (1) 85%
81 Executive Blvd.
Farmingdale, N.Y. 11735
All directors and officers as a 10,000 Less than 1%
group (1 person)
(1) Includes 12,375 shares of preferred stock which are convertible into
4,950,000 shares of common stock as of June 1, 1996 and exercisable warrants
to purchase 4,950,000 shares of common stock. Each share of preferred stock
contains 1,500 votes or voting rights on all matters being voted on by the
shareholders of the Company other than the election of directors.Additionally,
the holders of the preferred stock, voting as a class, shall in each year elect
seventy-five percent of the members of the Board of Directors of the Company.
In connection with the Company's Amended Plan of Reorganization and Disclosure
Statement approved by the court on October 30, 1997 all the aforementioned
warrants will be canceled on the effective date of the Plan.
ITEM THIRTEEN - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 10, 1997, TW Cable LLC, ("TW") whose owner is a director of the
Company concluded a transaction with the holders of the Company's preferred
stock and Subordinated Debentures pursuant to the terms of a certain Securities
Purchase Agreement (the "Securities Purchase Agreement"). As a result of that
transaction, TW acquired all of the issued and outstanding preferred stock
(12,375 shares) and $2,615,000 principal face amount of debentures, together
with warrants to purchase 53,350,000 shares of common stock. The preferred stock
is convertible into 4,950,000 shares of common stock at a conversion rate equal
to 400 common shares for each share of preferred stock that is converted. Each
share of preferred stock is entitled to 1,500 votes on all matter other than the
election of directors. The holders of the preferred stock, as a class, are
entitled to elect 75% of the members of the Board of Directors.
Effective with the signing of the Securities Purchase agreement Mr. Edward
Goodstein, sole member of TW, was elected as Chairman of the Board of Directors,
and Mr. Carl Palazzolo also of TW, was elected as a Director. These elections
filled the vacancies created by the resignations of Mr. Marshall Butler, Mr.
Hiro Hiranandani, Mr. Ivor Jacobson, Mr. Paul Lowell and Mr. Ken Rind.
As part of the Company's DIP Financing TW provided $350,000 cash collateral to
the Company's revolving credit lender in an effort to support the Company's cash
flow requirements.
-20-
ITEM THIRTEEN - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(CONTINUED)
On May 7, 1997, the Company entered into an agreement that was subject to
Bankruptcy Court approval, with TW, (the "Asset Purchase Agreement") pursuant
to which TW would acquire the Company's distribution business and all of its
assets used in connection with the distribution business. The purchase price
for the distribution assets is an amount equal to $500,000. The agreement
entitles TW to purchase the Company's distribution inventory for an amount
equal to 82.5% of the book value over a one year period. Pursuant to the
Asset Purchase Agreement, TW agreed to assume certain facility leases of the
Company. On June 26, 1997, the closing of the Asset Purchase Agreement took
place. TW assumed three (3) locations, including all employees of these
locations.
On June 26, 1997, the Company sold its distribution business to TW. The sale
was completed under Bankruptcy Court Approval under a Section 363 transaction
sale. The purchase price was $500,000. The payment of $500,000 was allocated
to all distribution intangible assets and fixed assets. In addition, the
Company has agreed to sell to TW the distribution inventory of approximately
$1,500,000 at 82.5% of the book value over a one year period. The Company has
recorded a gain on the sale of the distribution business of approximately
$65,700. TW satisfied the selling price by exchanging $500,000 of the Company's
secured subordinated debt. Upon closing of the Asset Purchase Agreement, TW
assigned all rights and benefits of the Asset Purchase Agreement to TW
Communications Corp. an ("Affiliate"), owned 100% by the sole member of TW. As
of January 12, 1998, the Affiliate has purchased approximately $1,237,000 of
distribution inventory at the discounted value.
On October 30, 1997 the Company's second amended plan of reorganization and
disclosure statement (the "Plan") was confirmed by the United States Bankruptcy
Courts in Westbury, New York. The confirmed Plan is effective in the date the
Company secures exit finanancing.
The Plan calls for an initial distribution to unsecured creditors with claims
greater than $1,000 ("Class 7") to received 13.5% of their claim and future
distributions based on cash flow (as defined) over the next five years.
Unsecured creditors with claims less than $1,000 ("Class 6") will receive a
distribution of 20% of their claim. The initial distribution payments and
certain other administrative claims are guaranteed by the Affiliate. Under
the Plan, the Company's wholly owned subsidiary, Vertex Technologies, Inc.,
merged into the Company, and the Company changed its name to Vertex Computer
Cable & Products, Inc. Under the Plan, 25.3 million of the Company's 40
million authorized shares of common stock will be issued and outstanding.
Effective December 29, 1997, each five shares of the Company's common stock
outstanding were exchanged for one share of the surviving entity. As a result,
holders of the Company's currently outstanding 12,652,000 common stock shares
will receive 2,530,400 post-reorganization shares. Further, the preferred
shareholders exchanged such outstanding preferred stock and forgave accrued
dividends for 22,773,600 common stock shares, representing 90% of the post-
reorganization outstanding common stock.
As of June 30, 1997, the Company has a liability to the Affiliate of
approximately $520,000, which includes approximately $337,000 for material
purchases, which is included in accounts payable and accrued expenses and
approximately $183,000 for administrative expenses. As of June 30, 1997, the
Affiliate owed to the Company approximately $86,000 for their purchase of
materials.
-21-
PART IV
ITEM FOURTEEN - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) FINANCIAL STATEMENTS
See index to consolidated financial statements.
(b) Form 8-K Reports
Form 8-K was filed on February 5, 1998
(c) EXHIBITS
2.1 Second Amended Joint Plan of Reorganization dated September 24,1997
(incorporated by reference to Exhibit 2.1 to the registrant's current report
on Form 8-K dated February 5, 1998)
2.2 Second Amended Joint Disclosure Statement dated September 24, 1997
(incorporated by reference to Exhibit 2.2 to the registrant's current report
on Form 8-K dated February 5, 1998)
2.3 Order of United States Bankruptcy Court, Eastern District datedd
October 30, 1997 (incorporated by reference to Exhibit 2.3 to the registrant's
current report on Form 8-K dated February 5, 1998)
3.1(a) Certificate of Incorporation (Exhibit 3(a) of Form S-18
Registration Statement No. 33-7693-NY)
3.1(b) Certificate of Incorporation, as amended (Exhibit 3.1(a) to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993,
File No. 1-9263)
3.1(c) Certificate of Amendment of the Certificate of Incorporation
3.1(d) Certificate of Ownership and Merger dated November 20, 1997
(incorporated by reference to Exhibit 3.1(d) to the registrant's current
report on Form 8-K dated February 5, 1998)
3.1(e) Amendment to Registrant's Certificate of Incorporation dated
December 29, 1997 (incorporated by reference to Exhibit 3.1(d) to the
registrant's current report on Form 8-K dated February 5, 1998)
3.2 By-Laws (Exhibit 3(b) of Form S-18 Registration Statement No. 33-7693-NY)
4.1 Form of Investment Banking Warrants (Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1994, File No. 33-7693)
4.2 Form of Private Placement Warrants (Exhibit 4.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1994, File No. 33-7693)
-22-
4.3 Warrant to Sterling Commercial Capital, Inc. (Exhibit 4.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, File No.
33-7693)
4.7 Form of senior subordinated note (incorporated by reference to Exhibit 4.7
to the registrant's current report on Form 8-K dated March 27, 1996)
4.8 Form of Warrant (incorporated by reference to Exhibit 4.8 to the
registrant's current report on Form 8-K dated March 27, 1996)
4.9 Form of Debenture (incorporated by reference to Exhibit 4.9 to the
registrant's current report on Form 8-K dated August 20, 1996)
4.10 Form of Warrant (incorporated by reference to Exhibit 4.10 to the
registrant's current report on Form 8-K dated August 20, 1996)
4.11 Form of Mortgage note (incorporated by reference to Exhibit 4.11 to the
registrant's current report on Form 8-K dated August 20,1996)
10.1 Sublease Agreements between Registrant and VTX Associates dated December 1,
1985 (Exhibit 10(a) of Form S-18 Registration Statement No. 33-7693-NY)
10.2 Assignment and Assumption Agreement dated June 30, 1986 between Registrant
and VTX Associates (Exhibit 10(i) of Form S-18 Registration Statement No.
33-7693-NY)
10.3 1989 Non-Qualified Stock Option Plan (Exhibit 10.12 of Annual Report on
Form 10-K for the year ended June 30, 1990)
10.4 1991 Stock Option Plan (Exhibit 10.7 to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1993, File No. 1-9263)
10.5 Accounts Receivable Agreement [Security Agreement between Congress
Financial Corporation and Vertex Electronics, Inc., filed as exhibit 10(a) on
Form 8-K on December 31, 1992
10.6 Term Note of Vertex Electronics, Inc. dated December 31, 1992 in the
principal amount of $1,500,000 in favor of Fleet Bank, filed as exhibit 10(b)
on Form 8-K on December 31, 1992
10.7 Stock Purchase Agreement dated as of October 17, 1991 between VX Capital
Partners, L.P. and VTX Electronics Corp., incorporated by reference to exhibit
28(a) to the Registrant's Current Report on Form 8-K dated October 18, 1991
-23-
10.8 Warrant Agreement, dated as of October 17, 1991, between VX Capital
Partners, L.P. and VTX Electronics Corp., incorporated by reference to exhibit
28(b) to the Registrant's Current Report on Form 8-K dated October 18, 1991
10.9 Loan Agreement dated as of October 17, 1991 between Vertex Electronics,
Inc. and VX Capital Partners, L.P., incorporated by reference to exhibit 28(c)
to the Registrant's Current Report on Form 8-K dated October 18, 1991
10.10 Guaranty, dated as of October 17, 1991, by VTX Electronics Corp. in favor
of VX Capital Partners, L.P., incorporated by reference to exhibit 28(e) to the
Registrant's Current Report on Form 8-K dated October 18, 1991
10.11 Investment Banking Agreement with Chatfield Dean & Co., Inc. dated March
28, 1994 (Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1994, File No. 33-7693)
10.12 Employment Agreement with Donald W. Rowley, dated March 31, 1994 (Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1994, File No. 33-7693)
10.13 Loan Agreement dated March 31, 1994 between VTX Electronics Corp., Vertex
Electronics Inc. and Sterling Commercial Capital, Inc. (Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994,
File No. 33-7693)
10.14 $1,200,000 promissory note, dated March 31, 1994 made by VTX Electronics
Corp. and Vertex Electronics Inc. in favor of Sterling Commercial Capital, Inc.
(Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1994, File No. 33-7693)
10.15 1994 Directors' Stock Option Plan.
10.16 Securities Purchase Agreement dated January 10, 1997 between T W Cable LLC
and the various holders of the Company's Secured Subordinated Debentures.
10.17 Asset Purchase Agreement dated May 7, 1997 between T W Cable LLC and
Vertex Technologies, Inc.
21 Subsidiaries -
Name Place of Incorporation
-------------------------------- ---------------------------
Vertex Technologies, Inc. * New York
Vertex Electronics UK Ltd. United Kingdom (inactive)
* As a result of the Plan, the Company Vertex Technologies, Inc. merged into the
Company
- 24 -
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets as of June 30, 1997
and 1996 F-3
Consolidated Statements of Operations for the
years ended June 30, 1997, 1996 and 1995 F-4
Consolidated Statement of Changes in Stockholders'
Equity (Deficiency) for the years ended June 30, 1997,
1996 and 1995 F-5
Consolidated Statements of Cash Flows for the years
ended June 30, 1997, 1996 and 1995 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-25
Supplemental Schedule
Schedule II - Valuation and Qualifying Accounts F-26
F-1
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Vertex Computer Cable & Products, Inc.
We have audited the accompanying consolidated balance sheets of Vertex Computer
Cable & Products, Inc. (formerly VTX Electronics Corp.) and Subsidiaries as of
June 30, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for each of the three years in
the period ended June 30,1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Vertex Computer
Cable & Products, Inc. and subsidiaries as of June 30, 1997 and 1996 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles.
As shown in the consolidated statements, the Company incurred net losses
attributable to common stock of $5,556,172, $5,058,331 and $$1,316,044
during the years ended June 30, 1997, 1996 and 1995, respectively, and as
described in Note A, on January 10, 1997, the Company filed petitions for
relief under Chapter 11 of the federal bankruptcy laws. The Company continued
to operate as a debtor-in-possession until the plan of reorganization became
effective on January 12, 1998. The accompanying consolidated financial
statements have been prepared assuming that the Company
will continue as a going concern, which assumes realization of assets and
settlement of liabilities in the normal course of business. The uncertainty
as to the Company's ability to raise additional capital or secure long-term
financing and sustain profitable operations, as discussed in Note A to the
consolidated financial statements, raise substantial doubt about the Company's
ability to continue as a going concern after emerging from bankruptcy. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
In connection with our audits of the consolidated financial statements referred
to above, we have also audited Schedule II - Valuation and Qualifying Accounts
for each of the three years in the period ended June 30, 1997. In our opinion,
this schedule presents fairly,in all material respects, the information required
to be set forth therein.
GRANT THORNTON LLP
Melville, New York
September 26 , 1997 (except for Note A 3,
as to which the date is January 12, 1998)
F-2
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED BALANCE SHEETS
June 30,
ASSETS 1997 1996
------------ -----------
CURRENT ASSETS
Cash $ 194,462 $ 73,230
Accounts receivable, net of allowance for
doubtful accounts of $241,000 and $221,000,
in 1997 and 1996, respectively 1,866,423 5,734,965
Inventories, net 2,781,650 3,293,924
Prepaid expenses and other current assets 98,437 620,747
------------ ------------
TOTAL CURRENT ASSETS 4,940,972 9,722,866
PROPERTY, PLANT AND EQUIPMENT, net 565,279 3,006,709
DEFERRED CHARGES AND OTHER ASSETS, net 156,613 398,813
------------ ------------
TOTAL ASSETS $ 5,662,864 $ 13,128,388
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
CURRENT LIABILITIES
Current portion of long-term debt $ 2,280,433 $ 21,747
Accounts payable and accrued expenses 1,324,721 4,535,025
Due to Affiliate 183,000 -
Preferred stock dividends payable - 86,625
------------ ------------
TOTAL CURRENT LIABILITIES 3,788,154 4,643,397
LONG-TERM DEBT, NET OF CURRENT PORTION 28,520 6,388,495
LIABILITIES SUBJECT TO COMPROMISE 6,191,880 -
SECURED SUBORDINATED DEBENTURES, net 2,182,347 3,107,908
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIENCY)
Redeemable, cumulative, convertible,
preferred stock, stated value $100 per
share; authorized, 5,000,000 shares;
12,375 shares issued and outstanding, net 1,110,661 1,073,530
Common stock, par value $.10 per
share; authorized, 40,000,000 shares;
issued and outstanding, 12,652,000 shares 1,265,200 1,265,200
Paid-in capital 9,416,226 9,416,226
Accumulated deficit (18,320,053) (12,763,881)
Cumulative translation adjustment (71) (2,487)
------------ ------------
TOTAL STOCKHOLDERS' (DEFICIENCY) (6,528,037) (1,011,412)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
(DEFICIENCY) $ 5,662,864 $ 13,128,388
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
1997 1996 1995
----------- ----------- -----------
Net sales $21,224,328 $29,116,469 $34,472,386
Cost of goods sold 16,779,191 23,584,189 26,231,037
----------- ----------- -----------
Gross profit 4,445,137 5,532,280 8,241,349
Selling, general and
administrative expenses 8,129,311 9,566,459 8,651,586
Restructuring charges - - 91,000
Interest expense 988,301 932,901 827,088
Gain on sale of distribution
business, net of related
expenses (65,700) - -
Loss on sale of corporate
headquarters 248,500 - -
Other expense (income) 13,269 4,626 (12,281)
Chapter 11 Reorganization-
related expenses 489,386 - -
----------- ----------- -----------
Loss before extraordinary
item (5,357,930) (4,971,706) (1,316,044)
Extraordinary item
Loss on extinguishment
of debt 120,000 - -
----------- ----------- -----------
Net loss (5,477,930) (4,971,706) (1,316,044)
Dividends on preferred stock 78,242 86,625 -
----------- ----------- -----------
Net loss attributable to
common stock $(5,556,172) $(5,058,331) $(1,316,044)
============ ============ ============
Net loss per share
Loss before extraordinary
item $ (.43) $ (.40) $ (.11)
Extraordinary item (.01) - -
------------ ------------ ------------
Net loss per share $ (.44) $ (.40) $ (.11)
============ ============ ============
Weighted average number of
shares outstanding 12,652,000 12,652,000 12,264,985
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Notes
receiv-
Pre- Preferred Common Accumu- able Deferred
ferred stock Common stock Paid-in lated from compensa-
shares amount shares amount capital deficit officers tion
------ --------- ---------- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994 11,837,500 $1,183,750 $8,275,676 $(6,389,506) $(100,000) $(154,687)
Net loss (1,316,044)
Options exercised by
employees 25,000 2,500
Debt conversion to stock 789,500 78,950 315,800
Settlement of officer's note 50,000
Foreign translation adjust-
ment
Amortization of deferred
compensation 56,254
------- ---------- ---------- ----------- ---------- ------------- --------- -----------
Balance at June 30, 1995 12,652,000 1 ,265,200 8,591,476 (7,705,550) (50,000) (98,433)
Net loss attributable to
common stock (5,058,331)
Issuance of preferred stock 12,375 $1,237,500
Discount on preferred stock (185,625)
Issuance of detachable
warrants, net of related
costs of $52,000 824,750
Reclassification of
officer's note 50,000
Foreign translation adjust-
ment
Amortization of discount
on preferred stock 21,655
Amortization of deferred
compensation 98,433
------- ----------- ---------- ---------- ---------- ------------- ---------- -----------
Balance at June 30, 1996 12,375 1,073,530 12,652,000 1,265,200 9,416,226 (12,763,881) - -
Net loss attributable to
common stock (5,556,172)
Foreign translation adjust-
ment
Amortization of discount
on preferred stock 37,131
------- ----------- ---------- ---------- ---------- ------------- ---------- -----------
Balance at June 30, 1997 12,375 $1,110,661 12,652,000 $1,265,200 $9,416,226 $(18,320,053) $ - $ -
======= =========== ========== ========== ========== ============= ========== ===========
</TABLE>
Cumulative Total
transla- stock-
tion holders'
adjust- equity
ment (deficiency)
------------ ------------
Balance at June 30, 1994 $(6,923) $2,808,310
Net loss (1,316,044)
Options exwecised by
employees 2,500
Debt conversion to stock 394,750
Settlement of officer's note 50,000
Foreign translation adjustment 3,371 3,371
Amortization of deferred
compensation 56,254
------------ ------------
Balance at June 30, 1995 (3,552) 1,999,141
Net loss attributable to
common stock (5,058,331)
Issuance of preferred stock 1,237,500
Dicsount on preferred stock (185,625)
Issuance of detachable
warrants, net of related
costs of $52,000 824,750
Reclassification of
officer's note 50,000
Foreign translation adjustment 1,065 1,065
Amortization of discount on
preferred stock 21,655
Amortization of deferred
compensation 98,433
------------ ------------
Balance at June 30, 1996 (2,487) (1,011,412)
Net loss attributable to
common stock (5,556,172)
Foreign translation adjustment 2,416 2,416
Amortization of discount on
preferred stock 37,131
------------ ------------
Balance at June 30, 1997 $(71) $(6,528,037)
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT
F-5
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,477,930) $(4,971,706) $(1,316,044)
Adjustments to reconcile net loss
to net cash provided by
(used in) operating activities
Depreciation and amortization 469,639 532,677 543,848
Noncash compensation - 98,433 56,254
Provision for (recovery of)
losses on accounts receivable 285,000 67,000 (107,000)
Provision for slow-moving and
obsolete inventories - 40,000 65,000
Write-off of note receivable
from officer 50,000 - -
Loss on sale of assets, net 182,800 - (3,967)
Loss on extinguishment of debt 120,000 - -
Changes in operating assets and liabilities
Decrease (increase) in accounts
receivable 3,583,542 (937,522) 1,304,383
Decrease (increase) in inventories 250,274 452,248 (222,223)
Decrease (increase) in prepaid
expenses and other current
assets 582,184 92,770 (155,327)
Decrease (increase) in deferred
charges and other assets 192,200 (36,998) (69,785)
Increase (decrease) in accounts
payable, accrued expenses and
liabilities subject to compromise 2,999,712 (527,444) (109,020)
----------- ----------- -----------
Net cash provided by (used in)
operating activities 3,237,421 (5,190,542) (13,881)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (186,395) (114,085) (126,957)
Proceeds from sale of corporate
headquarters, net 1,919,080 - -
Proceeds from sale of property,
plant and equipment - - 6,500
----------- ----------- -----------
Net cash provided by (used in)
investing activities 1,732,685 (114,085) (120,457)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under debt and loan
agreements 22,069,308 32,362,919 38,847,289
Debt repayments (26,145,801) (32,302,648) (38,700,978)
Repayment of debentures (750,000) - -
Principal payments under capital
leases (24,797) (25,367) (40,394)
Proceeds from officer note - - 12,500
Proceeds from issuance of
debentures, net - 3,073,875 -
Proceeds from issuance of
preferred stock, net - 1,051,875 -
Proceeds from issuance of
warrants - 824,750 -
Issuance of common stock and
exercise of options/warrants,
net - - 2,500
Debt issue costs - (192,000) -
----------- ----------- -----------
Net cash provided by (used in)
financing activities (4,851,290) 4,793,404 120,917
----------- ----------- -----------
Effect of exchange rate changes
on cash 2,416 1,065 3,371
----------- ----------- -----------
INCREASE (DECREASE) IN CASH 121,232 (510,158) (10,050)
Cash at beginning of year 73,230 583,388 593,438
------------ ----------- ------------
Cash at end of year $ 194,462 $ 73,230 $ 583,388
============ ============ ============
F-6
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
(CONTINUED)
1997 1996 1995
----------- ----------- -----------
Supplemental disclosures of
cash flow information:
Cash paid during the year for
Interest $ 649,434 $ 886,380 $ 817,237
=========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-7
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE A - BASIS OF PRESENTATION AND CHAPTER 11 BANKRUPTCY FILINGS
1. BASIS OF PRESENTATION
Vertex Computer Cable & Products, Inc., (formerly VTX Electronics Corp.) and
subsidiaries (the "Company" or "Debtor") operate primarily in one business
segment - distribution and assembly of electronic wire, cable and related
products used primarily for data communication and distribution. The principal
market for the Company's products is in the United States. The consolidated
financial statements include the accounts of Vertex Computer Cable & Products,
Inc. and its wholly-owned subsidiaries, Vertex Technologies, Inc. and its
foreign subsidiary, Vertex Electronics UK, LTD. As a result of the loss of its
major United Kingdom customer, the Company initiated, in February 1997, the sale
of its foreign subsidiary (see Note M). All significant intercompany
transactions and balances have been eliminated in consolidation.
The Company's consolidated financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company had
net losses attributable to common stock of $5,556,172, $5,058,331 and $1,316,044
for the years ended June 30, 1997, 1996 and 1995, respectively. These losses
resulted primarily from a decrease in sales.
On January 10, 1997, the Company filed petitions for relief under Chapter 11 of
the federal bankruptcy laws in the United States Bankruptcy Court for the
Eastern District of New York. As a result of the Chapter 11 proceedings (as
described in Note A(2)), the Company petitioned to liquidate or settle
liabilities for amounts other than those reflected in the accompanying
consolidated financial statements. Furthermore, as a result of the Company's
plan of reorganization being approved, it is likely that substantial adjustments
will be made to the carrying amount of assets and liabilities by adjusting their
values as of the date of the plan of reorganization (the "Confirmation Date").
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern which assumes the realization
of assets and settlement of liabilities in the normal course of business. The
uncertainty as to the Company's ability to raise additional capital or secure
adequate long-term financing and sustain profitable operations raises
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The Company's consolidated financial statements as of June 30, 1997 have been
presented in conformity with the AICPA's Statement of Position 90-7,
"Financial Reporting By Entities In Reorganization Under the Bankruptcy Code,"
issued November 19, 1990 ("SOP 90-7"). SOP 90-7 requires a segregation
of liabilities subject to compromise by the Bankruptcy Court as of the
bankruptcy date (January 10, 1997) and identification of all transactions and
events that are directly associated with the reorganization of the Company.
F-8
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A(1) CONTINUED
Prior years' comparative balances have not been classified to conform with the
current year's balances stated under SOP 90-7. The most significant difference
between the current year's and prior years'presentations is the reclassification
of certain outstanding debt to current liabilities and pre-petition accounts
payable to "liabilities subject to compromise" (see Note C).
2. CHAPTER 11 BANKRUPTCY PROCEEDINGS
Under Chapter 11, certain claims against the Debtor in existence prior to the
filing of the petitions for relief under the federal bankruptcy laws are stayed
while the Debtor continues business operations as debtor-in-possession ("DIP").
Additional claims (liabilities subject to compromise) may arise subsequent to
the filing date resulting from rejection of executory contracts, including
leases, and from the determination by the courts (or agreed to by parties in
interest) of allowed claims for contingencies and other disputed amounts.
Claims secured against the Debtor's assets ("secured claims") also are stayed,
although the holders of such claims have the right to move the court for relief
from the stay. Secured claims are secured primarily by liens on the Debtor's
property, plant and equipment, accounts receivable and inventories.
The Company received approval from the Bankruptcy Court to pay or otherwise
honor certain of its prepetition obligations, including wages. The Company
continued to manage its affairs and operate its business as a DIP, subject to
the supervision of the Bankruptcy Court while the case was pending.
In January 1997, the Company's revolving credit facility provided DIP Financing
(the "DIP Financing") under a court-approved order. The cost to secure the DIP
Financing was $50,000. TW Cable LLC ("TW"), whose owner is a director of the
Company and a holder of secured subordinated debentures, provided $350,000 of
cash collateral to the Company's revolving credit lender in an effort to support
the Company's cash flow requirements.
On May 7, 1997, the Company entered into an agreement (the "Asset Purchase
Agreement") that was subject to Bankruptcy Court approval, with TW, pursuant
to which TW would acquire the Company's distribution business product lines and
all of its assets used in connection therewith (see Note P2).
3. PLAN OF REORGANIZATION
On October 30, 1997, the Company's second amended plan of reorganization and
disclosure statement (the "Plan") was confirmed by the United States Bankruptcy
Courts in Westbury, New York. The confirmed Plan became effective on January
12,1998 concurrent with the Company's consumation of exit financing (see below).
F-9
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A(3) (CONTINUED)
The Plan calls for unsecured creditors with claims greater than $1,000 ("Class
7") to receive 13.5% of their claim in quarterly installments over the next
twelve months and future distributions based on cash flow (as defined) over
the next five years. Unsecured creditors with claims less than $1,000 ("Class
6") will receive a distribution of 20% of their claim. The initial distribution
payments and certain other administrative claims are guaranteed by TW
Communication Corp. (the "Affiliate"). Under the Plan, the Company's wholly-
owned subsidiary, Vertex Technologies, Inc., merged into the Company, and the
Company changed its name to Vertex Computer Cable & Products, Inc. Under the
Plan, 25.3 million of the Company's 40 million authorized shares of common
stock will be issued and outstanding. Effective December 29, 1997, each five
shares of the Company's common stock outstanding at June 30, 1997 were exchanged
for one share of the surviving entity. As a result, holders of the Company's
currently outstanding 12,652,000 common stock shares will receive 2,530,400
post-reorganization shares. Further, the preferred shareholders exchanged
such outstanding preferred stock and forgave accrued dividends for 22,773,600
common stock shares, representing 90% of the post-reorganization outstanding
common stock.
On January 12, 1998, the Company entered into a Loan and Security Agreement (the
"Loan Agreement") with it's current lender (see Note G). The Loan Agreement
replaces the court-approved DIP financing and extended the Company's credit
facility for a 90-day period through March 31, 1998 and can be extended if
necessary. The terms of the Loan Agreement are similar to its prior loan
except for a reduction to 75% on advances of eligible accounts receivable and
a reduction to 24% on advances of eligible inventory. As part of the Loan
Agreement, TW provided additional cash collateral of $500,000 in order for the
Company to fund the Plan. The Company is presently seeking to secure long-term
financing prior to the aforementioned expiration date. The Company continues to
manage down its costs while focusing on improving revenues by developing
training programs for sales personnel, hiring national sales representatives
and reducing its costs to allow for competitive bidding.
Pursuant to SOP 90-7, the Company will adopt "Fresh Start" reporting on January
12, 1998, the effective date of the Plan. Under Fresh Start reporting, the
reorganization value of the new entity is allocated to the new entity's assets.
If any portion of the reorganization value cannot be attributed to specific
tangible or identified intangible assets of the emerging entity, such amounts
are to be reported as "reorganization value in excess of amounts allocable to
identifiable assets" and amortized over future periods. As a result of
adopting "Fresh Start" reporting, the new entity's financial statements will
not be comparable to the historical financial statements (see Note C).
F-10
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
1. INVENTORIES
Inventories, consisting principally of products held for sale, are stated at the
lower of cost (first-in, first-out method) or market.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation
and amortization computed on a straight-line basis over the estimated useful
lives of the respective assets. Building improvements are amortized over the
useful life of the improvement. Expenditures for maintenance, repairs and
betterments which do not materially extend the useful lives of the assets
are charged to operations as incurred. The cost and related accumulated
depreciation of assets retired or sold are removed from the respective accounts
and any gain or loss is recognized in operations.
3. REVENUE RECOGNITION
The Company recognizes revenue on the date the product is shipped to the
customer.
4. DEFERRED COSTS
Costs incurred in connection with debt refinancing, consisting primarily of loan
origination fees, broker's commission, legal and other fees, have been
capitalized and are being amortized on a straight-line basis over the term of
the loans. Amounts of unamortized refinancing costs deferred at June 30, 1997
and 1996 were $0 and $334,000, respectively.
5. INCOME TAXES
Deferred income taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities and loss carryforwards
for which income tax benefits are expected to be realized in future years. A
valuation allowance has been established to reduce the deferred tax assets as
it is more likely than not that all, or some portion, of such deferred tax
assets will not be realized.
6. NET LOSS PER SHARE
Net loss per share is based upon the weighted average number of common shares
outstanding during the year. The fiscal 1997 and 1996 net loss per share
computation includes an adjustment for the preferred stock dividends in
deriving the net loss per share before and after extraordinary item. The
effect of stock options on the calculation of net loss per common share was
antidilutive in each of the years ended June 30, 1997, 1996 and 1995.
7. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
Assets and liabilities of the Company's foreign subsidiary are translated at
year-end exchange rates. Results of operations are translated using the
average exchange rates prevailing throughout the year. Exchange rate changes
arising from translation are included in the cumulative translation component
of stockholders' equity. Gains and losses from foreign currency transactions
are included in the net loss for the years ended June 30, 1997, 1996 and 1995.
F-11
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE B (CONTINUED)
8. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
9. FINANCIAL INSTRUMENTS
The Company's principal financial instruments consist of accounts receivable,
accounts payable, long-term debt and subordinated debentures. Due to the
Chapter 11 reorganization, the Company believes that the fair value cannot be
reasonably determined with respect to accounts payable and debt instruments.
10. NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share," which
is effective for financial statements for both interim and annual periods ending
after December 15, 1997. Early adoption of the new standard is not permitted.
The new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The adoption of this
new standard is not expected to have a material impact on the calculation and
disclosure of earnings per share in the financial statements.
NOTE C - LIABILITIES SUBJECT TO COMPROMISE
The Company's liabilities subject to compromise at June 30, 1997 were recorded
at the amounts which had been allowed or were expected to be allowed by the
Bankruptcy Court rather than the amounts for which the claims will be settled
under the Plan of Reorganization. In some cases the amounts that are expected
to be allowed will differ from the amounts at which the liabilities were
recorded prior to the Chapter 11 case because of negotiations and resulting
agreements in the Bankruptcy Court which determines the allowed amounts.
Liabilities subject to compromise of $6,191,880 include approximately $93,000
in accrued interest, $165,000 of accrued preferred stock dividends in arrears
and the balance represents trade payables.
If the Company's Plan of Reorganization had become effective (out of Chapter 11
status) by June 30, 1997, the amount of liabilities subject to compromise would
have been reduced to approximately $898,000.
F-12
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE D - INVENTORIES
Inventory consists principally of products held for sale. The Company regularly
reviews its inventory for obsolete and slow-moving items, which includes reviews
of inventory levels of certain product lines and an evaluation of the inventory
based on changes in technology and markets. As of June 30, 1997 and 1996, the
reserve was approximately $575,000.
June 30,
1997 1996
------------ ------------
Raw materials $ 80,142 $ 77,011
Work in process 46,885 33,555
Finished goods 2,654,623 3,183,358
------------- -------------
Inventories, net $ 2,781,650 $ 3,293,924
============== =============
NOTE E - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consist of the following:
Asset
lives June 30,
(years) 1997 1996
---------- --------- ----------
Land -- $ - $ 545,776
Building and building improvements 2-5 72,681 2,574,116
Machinery and equipment 10 1,622,002 1,680,922
Furniture and fixtures 5-10 1,807,132 2,144,125
Vehicles 4 26,798 26,798
---------- -----------
3,528,613 6,971,737
Less accumulated depreciation
and amortization 2,963,334 3,965,028
---------- ----------
$ 565,279 $3,006,709
========== ==========
Depreciation and amortization of property, plant and equipment was $296,203,
$372,351, and $418,464 for the years ended June 30, 1997, 1996 and 1995,
respectively.
On December 20, 1996, the Company sold its 45,000 square foot corporate
headquarters in Farmingdale, NY to an unaffiliated third party and recorded a
loss of $248,500. The Company used proceeds of approximately $2,332,000 to
retire the first and second mortgages and a portion of the secured subordinated
debentures, as described in Note G (2).
F-13
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE F - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30,
1997 1996
------------- -------------
Accounts payable-trade $ 477,624 $3,806,840
Accrued payroll and commissions 179,666 263,400
Other accrued expenses 240,431 464,785
Accrued professional fees 427,000 -
------------- ------------
$1,324,721 $4,535,025
============= ============
NOTE G - LONG-TERM DEBT
Long-term debt consists of the following:
June 30,
1997 1996
------------ ------------
Revolving asset-based loan (1) $2,253,774 $5,097,664
First mortgage loan, net of imputed
interest (2) - 1,029,053
Second mortgage loan (2) 250,000
Capitalized lease obligations (3) 55,179 33,525
------------ ------------
2,308,953 6,410,242
Less current portion of long-term debt 2,280,433 21,747
------------ ------------
$ 28,520 $6,388,495
============ ============
1. On February 10, 1995, the Company entered into an amended and restated
revolving credit agreement with a lending institution. Such agreement provided
for a revolving credit facility with maximum availability of $10,000,000 and
expiring on December 31, 1997. As a result of the Company filing for Chapter
11 on January 10, 1997, the Company entered into a court-approved DIP financing
agreement with such lending institution. The cost of the financing was $50,000
and extended the Company's credit facility for a one-year period or until exit
financing is in place (see Note A(3)).
Under the terms of the credit facility, the Company is required to pay interest
at prime plus 2-3/4% (11.25% at June 30, 1997) and a commitment fee of 1/2% per
annum on the daily unused portion of the credit. The agreement also provides
for termination fees as a result of default or early termination of 1% and .5%
of the maximum credit if such termination occurs before December 31, 1996 and
1997, respectively. In connection with this financing amendment, the Company
incurred in fiscal 1995 costs approximating $80,000, which have been accounted
for as deferred charges and are being amortized through December 31, 1997. As a
result of the bankruptcy filing unamortized deferred costs aggregating
approximately $123,500 were written off in fiscal 1997.
F-14
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE G (CONTINUED)
Under the terms of the agreement, borrowings are limited to 80% of eligible
accounts receivable (constituting those amounts outstanding 90 days or less)
and 50% of eligible accounts receivable outstanding between 91 and 120 days,
and 40% of regular inventories and 20% of slow moving inventory. As of June
30, 1997 and 1996, the Company had $2,453,000 and $5,431,000 available under
the eligibility terms of the facility, $2,254,000 and $5,098,000 of which was
outstanding on such dates, respectively. This loan is collateralized by
substantially all of the assets of the Company not otherwise collateralized.
In connection with its revolving credit facility, the Company is subject to
restrictive covenants which impose certain limitations with respect to the
Company's incurrence of indebtedness, capital expenditures, creation or
recurrence of liens, declaration or payment of dividends or other distributions,
mergers, consolidations and sales or purchases of substantial assets. In
general, the Company is not allowed to incur further indebtedness or create
additional liens on its assets except for unsecured current liabilities incurred
in the ordinary course of business or liabilities incurred in the ordinary
course of business secured by purchase money security interest not to exceed an
aggregate of $750,000. The Company is not allowed to make loans or investments
or provide guarantees or to prepay indebtedness. The Company is prohibited from
paying dividends on common stock and may not enter into a merger, consolidation
or sale of all or substantially all of its assets. Additionally, the Company is
required to maintain consolidated net worth, amended on March 15, 1996, to
include subordinated debentures, of not less than $750,000 and to maintain
consolidated working capital, defined as current assets less current liabilities
and debt outstanding under the credit facility, of not less than a negative $1.5
million.
As of June 30, 1997, the Company was in default of certain covenants of the
aforementioned agreement. The lender continued to provide DIP financing under
an approved order from the United States Bankruptcy Court.
2. On December 20, 1996, the outstanding first and second mortgage loans were
satisfied using the proceeds from the sale of the Company's headquarters in
Farmingdale, NY. The Company recognized a loss of approximately $248,500 on
the sale of the headquarters. The loss includes closing costs and
non-cash write-offs of building-related expenses.
The first mortgage loan was with a group of lenders, and was payable over five
years in monthly installments of $15,980, inclusive of principal and interest at
14%, commencing May 1, 1994, with a final installment of principal of $1,033,183
payable on April 1, 1999 and was collateralized by a first mortgage lien on the
Company's corporate headquarters. In connection with such loan, the Company
issued to one of the lenders 250,000 common stock purchase warrants exercisable
on or before March 31, 2001 at an exercise price of $.50 per share, which was
subsequently reduced to $.125 per share (see Note I2). A portion of the proceeds
of the loan had been allocated to the warrants based on the Company's Board of
Directors' assessment of their fair value at the time of issuance ($.70 per
share). For financial statement purposes, the fair value ascribed to the
warrants of $175,781 had been deducted from the proceeds of the mortgage loan as
additional interest expense and was being amortized over the term of the
mortgage to yield an effective interest rate of approximately 20% per annum. The
loan had prepayment penalties which are calculated as a percentage of the
prepayment amount.
F-15
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE G (CONTINUED)
The second mortgage loan was with substantially the same group of lenders, and
was payable over five years in monthly installments of $3,630, inclusive of
principal and interest at 14.875%, commencing August 1, 1996, with a final
installment of principal of $204,206 payable on July 1, 2001 and was
collateralized by a second mortgage lien on the Company's corporate
headquarters. In connection with such loan, the Company issued 1,250,000
common stock purchase warrants, which are exercisable beginning April 1, 1999
through March 31, 2009 at an exercise price of $.125 per share (see Note I2).
The loan had prepayment penalties which are calculated as a percentage of the
prepayment amount.
3. The Company leases its telephone system and certain warehouse equipment which
is accounted for as capital leases. The obligation for the telephone system
requires the Company to make monthly payments of $1,963 through December 1997.
The obligation for the warehouse equipment requires the Company to make monthly
payments of $1,240 through May 2000.
The following is a summary of the aggregate annual maturities of long-term debt:
June 30, Total
---------- -------------
1998 2,280,433
1999 14,880
2000 13,640
-------------
Total $2,308,953
=============
F-16
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE H - SECURED SUBORDINATED DEBENTURES, PREFERRED STOCK AND WARRANTS
ISSUED
Under a Capitalization Agreement (the "Agreement") signed on December 1, 1995,
the Company received $2,475,000 from an unaffiliated investor group ("new
investors") in exchange for Secured Subordinated Debentures (the "debentures")
with a principal amount of $1,237,500, 12,375 shares of Senior Redeemable
Cumulative Convertible Preferred Stock ("preferred stock") with a stated value
of $100 per share and warrants to purchase 19,800,000 shares of common stock
(see Note I2).
The debentures are due on June 19, 2001 and accrue interest at an annual rate of
2% over the published prime rate of interest (10.50% at June 30, 1997), payable
quarterly over the life of the bonds. Such bonds are secured by all of the
assets of the Company, however, subordinate to the secured debt under the
revolving asset-based loan and the first and second mortgage loans described
in Note F.
The preferred stock is redeemable on December 1, 2000 for $1,237,500 in cash or
common stock, based upon the lower of 70% of the fair market value of the
underlying common stock on such date or $.25 per common share, at the option of
the Company. The preferred stockholders are entitled to receive dividends
quarterly at an annual fixed rate of 12%, the effect of which is cumulative to
the extent the Company does not make such quarterly payment on the prescribed
basis. On or after June 1, 1996 and through December 1, 2000, each preferred
share may be converted into common stock of the Company at a conversion rate of
$.25 per share (400 common shares for each preferred share converted) (see Note
A3). Each share of preferred stock contains 1,500 votes or voting rights on all
matters being voted on by the shareholders of the Company other than the
election of directors. Additionally, the holders of the preferred stock, voting
as a class, shall in each year elect seventy-five percent of the members of the
Board of Directors of the Company. Effective December 1, 1995 and pursuant to
the Agreement, the existing Board of Directors ("former directors") resigned in
favor of a new Board of Directors ("new directors").
The warrants to purchase common stock of the Company issued under the Agreement
to the new investors are currently exercisable at $.125 per common share and
have a term commencing June 1, 1996 and expiring December 1, 2000 for 4,950,000
of the warrants and an additional term commencing April 1, 1999 and expiring
March 31, 2009 for the remaining 14,850,000 warrants (see Note I2). In
connection with these issuances, the Company recorded a discount on the bonds
payable of $185,625 and a discount on preferred stock of $185,625, representing
the estimated relative fair market value of the warrants on the date of such
issuance as determined by the Company, which will be recognized as interest
expense and preferred stock dividends, respectively, on a straight-line basis
over the 60-month term of the Agreement.
Expenses of approximately $104,000 relating to various legal, accounting,
consulting and other fees were incurred in connection with the Agreement,
$52,000 of which has been attributed to the issuance of the debentures, which
has been recorded as a deferred charge and is being amortized over the 60-month
term on a straight-line basis, and $52,000 of which has been attributed to the
issuance of the preferred stock/warrants, which has been recorded as a direct
reduction to the equity received by the Company.
F-17
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE H (CONTINUED)
On March 21, 1996 and June 19, 1996, the Company received an additional
$1,237,500 and $1,290,000, respectively, from the new investors and certain
additional individual and institutional investors, in exchange for additional
Secured Subordinated Debentures for a principal amount of $1,237,500 and
$1,290,000 and warrants to purchase 24,750,000 and 25,800,000 shares of common
stock of the Company, respectively (see Note I2).
The debentures are substantially identical and pari passu with the debentures
issued on December 1, 1995. Accordingly, such debentures are due on June 19,
2001 and accrue interest at an annual rate of 2% over the published prime rate
of interest, payable quarterly over the life of the debentures. Such debentures
are secured by all of the assets of the Company, however, subordinate to the
secured debt under the revolving asset-based loan and the first mortgage loan
as described in Note G.
The warrants to purchase 50,550,000 shares of common stock of the Company are
exercisable at $.125 per common share and have a term commencing April 1, 1999
and expiring on March 31, 2009 (see Note I2). In addition, the exercise price
for the 19,800,000 warrants issued in connection with the December 1, 1995
agreement was reduced from $.25 to $.125 per share in connection with the March
financing. The exercise of these warrants is contingent upon the authorization,
by the shareholders, of additional authorized common stock. In connection with
this issuance, the Company recorded a discount on the secured subordinated
debentures of $247,500 and $258,000 in March and June 1996, respectively, which
represents the estimated fair market value of the warrants on the date of such
issuance as determined by the Company, which will be recognized as interest
expense on a straight-line basis over the 60-month term of the agreement.
Expenses of approximately $25,000 and $115,000 in March and June 1996,
respectively, relating to various legal, accounting and other fees incurred
in connection with the financings have been recorded as deferred charges and
are being amortized over the 60-month term on a straight-line basis.
On December 20, 1996, the Company paid pro-rata to all secured subordinated
debenture holders, the sum of $750,000 with the proceeds received from the
closing of the sale of the Farmingdale, New York facility, as required (See
Note G(2)). In addition, the Company recorded a loss on extinguishment of
debt of approximately $120,000. This loss resulted from the accelerated write-
off the bond discount in conjunction with the satisfaction of the first and
second mortgages.
F-18
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE I - OTHER EQUITY TRANSACTIONS
1. During the period from June 1989 to February 1996, the Company issued stock
options and warrants to key employees, directors and outside consultants under
various stock option plans. In accordance with the Company's filed second
amended plan of reorganization and disclosure statement, all of the outstanding
stock options and warrants and related stock option plans in existence as of
June 30, 1997 will be canceled on the effective date.
The following is a summary of activity under various plans:
Range of
Shares Exercise Price
---------- --------------
Balance at June 30, 1994 2,238,750 $.10 - $1.25
Issued 100,000 $ .50
Exercised (25,000) $.10 - $1.13
Cancelled (145,000) $.10 - $1.25
-----------
Balance at June 30, 1995 2,168,750 $.10 - $1.25
Issued 1,605,000 $.25 - $.35
Cancelled (93,750) $.25
-----------
Balance at June 30, 1996 3,680,000 $.10 - $1.25
Cancelled / expired (1,515,000) $.25 - $1.25
-----------
Balance at June 30, 1997 2,165,000 $.10 - $1.25
===========
Effective in fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 allows for a choice of the method of accounting used for stock-based
compensation. Entities may elect the "intrinsic value" method based on APB
Opinion No. 25, "Accounting for Stock Issued to Employees," or the new "fair
value" method contained in SFAS 123. The Company has elected to continue to
account for stock-based compensation under the guidelines of APB Opinion No.
25. Accordingly, no compensation expense has been recognized concerning stock
options and warrants granted to key employees and to members of the Board of
Directors in their capacity as Directors.
F-19
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE I (CONTINUED)
If the Company had elected to recognize compensation expense based upon the fair
value at the grant date for options granted under these plans to key employees
and to members of the Board of Directors, consistent with the methodology
prescribed by SFAS 123, the Company's pro forma net (loss) would have been
$5,580,172 and $5,070,331 in fiscal 1997 and fiscal 1996, respectively, and the
pro forma net (loss) per common share would be unchanged for both periods.
These pro forma amounts may not be representative of future disclosures because
they do not take into effect pro forma compensation expense related to grants
made before fiscal 1996. The weighted average fair value of these options
($.22) was estimated at the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions for the options issued in
fiscal 1996:
expected volatility ranging from 135% to 145%; risk-free interest rates ranging
from 5.38% to 5.80%; and expected option life of 3 years. The Company issued no
stock options or warrants in fiscal 1997 and all options issued in fiscal 1996
were to either key employees or directors.
2. In connection with various mortgage and debt refinancings which occurred
from 1994 through 1996 (see Notes G(2) and H), the Company issued 71,868,750
common stock purchase warrants at an exercise price of $.125, of which
71,850,000 are outstanding at June 30, 1997. In accordance with the Company's
filed second amended plan of reorganization and disclosure statement, all the
aforementioned warrants were cancelled on the effective date of January 12,1998.
3. On December 19, 1994, the Company issued 789,500 shares of its common stock
to extinguish $394,750 of an equipment note originally issued on October 18,
1991.
F-20
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE J - INCOME TAXES
As a result of the Company's fiscal 1997, 1996 and 1995 losses and inability to
realize tax benefits, the Company recorded no tax benefit for the years ended
June 30, 1997, 1996 and 1995.
Reconciliation between actual income tax benefit and the amount computed by
applying the statutory federal income tax rate to the pre-tax loss is as
follows:
1997 1996 1995
--------------- --------------- ---------------
Tax benefit at statutory
federal income tax rates $(1,862,000) $(1,690,000) $(447,455)
Respective years' net
operating loss not
currently utilizable 1,862,000 1,690,000 447,455
--------------- ---------------- -------------
$ - $ - $ -
=============== ================ =============
The tax effects of temporary differences and loss carryforwards giving rise to
deferred tax (assets) and liabilities are as follows:
June 30,
1997 1996
--------------- ---------------
Net operating loss carryforwards $(6,003,000) $(4,495,000)
Other deferred assets
Allowance for bad debts (127,000) (115,000)
Inventory reserves (219,000) (219,000)
Inventory capitalization (18,000) (17,000)
Other deferred assets (85,000) (292,000)
--------------- ---------------
Gross deferred tax (asset) (6,452,000) (5,138,000)
Depreciation (deferred liability) 78,000 58,000
Other deferred costs 175,000 -
--------------- ----------------
Net deferred tax (asset) (6,199,000) (5,080,000)
Deferred tax asset valuation allowance 6,199,000 5,080,000
---------------- ----------------
Net deferred tax asset $ - $ -
================ ================
F-21
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE J (CONTINUED)
The Company anticipates that for the foreseeable future it will continue to be
required to provide a 100% valuation allowance for the tax b3nefit of its net
operating loss carryforwards and temporary differences.
At June 30, 1997, the Company has net operating losses available to carryforward
of approximately $15,798,000 for tax purposes. Such net operating loss
carryforwards expire through fiscal year 2012. No benefit has been recorded for
such loss carryforwards since realization cannot be assured.
The Company's use of its net operating loss carryforward is limited as the
Company is deemed to have undergone an "ownership change", as defined in
Internal Revenue Code Sec. 382, during the fiscal years ended June 30, 1992 and
June 30, 1994. Based upon the Company's estimates of fair value, approximately
$1,750,000 of the Coompany's total net operating loss of $15,798,000 is limited,
pursuant to Internal Revenue Sec. 382 to approximately $715,000 annually during
the carryforward period.
As part of the Plan, effective January 12, 1998, the Company obtained relief of
various unsecured debt of approximately $5.1 million and received an additional
$1.9 million of deemed cancellation for tax purposes of debt attributable to
TW's purchase of debentures at a discount (See Notes A (3) and C.). In addition,
TW exchanged its preferred stock for 90% of the Company's outstanding common
stock. This transaction resulted in a new change in ownership as defined under
Internal Revenue Code (IRC) Section 382.
Due to the bankruptcy provisions of IRC Section 382, the Company's ability to
utilize its net operating loss carryovers remains unchanged. However, the
Company's total net operating loss carryover of $15,798,000 will be reduced by
the amount of total debt forgiven of approximately $7 million.
Any subsequent changes in ownership within the two year period following the
date of reorganizaiton (January 12, 1998), could severely limit the Company's
ability to utilize any of its net operation loss carryovers.
F-22
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE K - COMMITMENTS AND CONTINGENCIES
1. CONSULTING AGREEMENT
On January 10, 1997, the Company entered into a consulting agreement with the
Company's prior Chairman of the Board of Directors and current Director to
function as a consultant to Company's new President and Chairman of the Board
of Directors. The term of this agreement extends through November 28, 1997 and
provides for monthly consulting fees of $9,000. The consulting agreement has
the option to extend the term upon the same terms and conditions for an
additional period of six (6) months provided it delivers notice to the
individual at least thirty days prior to expiration.
2. LEASES
The Company's minimum annual lease commitments under noncancellable operating
leases for premises at June 30, 1997 are as follows:
Total Related party Other
----------- ------------ ------------
1998 $279,406 $101,851 $177,555
1999 181,881 67,901 113,980
2000 118,497 - 118,497
2001 123,067 - 123,067
2002 116,633 - 116,633
----------- ------------ ------------
$819,484 $169,752 $649,732
=========== ============ ============
Rent expense, including related real estate taxes and other operating charges,
was approximately $697,000, $620,000 and $429,000 for the years ended June 30,
1997, 1996 and 1995, respectively.
F-23
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE L - MAJOR CUSTOMER AND VENDORS
During fiscal 1996 and 1995, one customer accounted for 11.4% and 14.7%,
respectively, of the net sales of the Company. For the fiscal year ended June
30, 1997, six vendors accounted for 28.6%, 13.0%, 10.5%, 10.3%, 10.2%, and 10.1%
of the Company's purchases. For the year ended June 30, 1996, no vendor
accounted for more than 10.0% of the Company's purchases. For the year ended
June 30,1995, one vendor accounted for 15.7% of the Company's product purchases.
Although the Company believes that it may be able to obtain competitive
products of comparable quality from other suppliers, the loss of certain
suppliers could have an adverse impact on operations.
NOTE M - UNITED KINGDOM OPERATIONS
On January 10, 1995, the Company purchased the remaining 20% minority
shareholder interest in Vertex Electronics UK, LTD for approximately $8,400.
During fiscal 1997, under an agreement with an unrelated third party, the
Company sold its U.K. fixed assets and inventories. The Company did not record
any material gain or loss as a result of this liquidation.
NOTE N - EMPLOYEE PENSION PLAN
The Company participates in a multi-employer, union-sponsored pension plan
covering all union employees pursuant to a negotiated labor contract. Pension
expense for the defined contribution plan for the years ended June 30, 1997,
1996 and 1995 was $41,000, $48,000 and $61,000, respectively. In the event of
the Company's withdrawal from the multi-employer, union-sponsored plan, the
Company could be liable for a portion of the plan's underfunding, if any.
NOTE O - LITIGATION
An action was commenced in the New York State Supreme Court, County of Nassau,
by CPI Aerostructures, Inc.("CPI"), alleging that the Company had wrongfully
failed to consummate a proposed merger transaction. The plaintiff is seeking
"break-up" fee damages in the amount of $400,000. The Company has served an
answer and counterclaim, denying any wrongdoing and alleging that CPI misled
the Company by failing to adequately disclose material losses. This case is
included as a claim under the Company's Chapter 11 proceedings. The claim will
be treated under the Company's Plan of Reorganization as an unsecured claim.
NOTE P - RELATED PARTY TRANSACTIONS
1. On January 10, 1997, TW, whose owner is a director of the Company, concluded
a transaction with the holders of the Company's preferred stock and subordinated
debentures (see Note H) pursuant to the terms of a certain Securities Purchase
Agreement (the "Securities Purchase Agreement"). As a result of that
transaction, TW acquired all of the issued and outstanding preferred stock
(12,375 shares) and $2,615,000 principal face amount of debentures, together
with warrants to purchase 53,530,000 shares of common stock.
F-24
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE P (CONTINUED)
2. On May 7, 1997, the Company entered into an agreement (the "Asset Purchase
Agreement") that was subject to Bankruptcy Court approval, with TW, pursuant to
which TW would acquire the Company's distribution business product lines and all
of its assets used in connection therewith for $500,000. In addition, the Asset
Purchase Agreement entitles TW to purchase approximately $1,500,000 of the
Company's distribution inventory for an amount equal to 82.5% of the book value
over the next twelve months. Pursuant to the Asset Purchase Agreement, TW
agreed to assume certain leases of the Company. On June 26, 1997, the closing
of the Asset Purchase Agreement took place. TW assumed three (3) locations,
including all employees of these locations.
The Company recorded a gain on the sale of the distribution business product
lines of approximately $65,700 (net of a $262,000 write-down for the inventory
price concession granted to TW). TW satisfied the selling price by exchanging
$500,000 of the Company's secured subordinated debt. Upon closing of the Asset
Purchase Agreement, TW assigned all rights and benefits of the Asset Purchase
Agreement to an Affiliate, owned 100% by the sole member of TW.
3. As of June 30, 1997, the Company has a liability to the Affiliate of
approximately $520,000, which includes approximately $337,000 for material
purchases, which is included in accounts payable and accrued expenses and
approximately $183,000 for administrative expenses. As of June 30, 1997, the
Affiliate owed to the Company approximately $86,000 for their purchase of
materials.
4. On March 17, 1997, the Company entered into a sublease agreement with the
Affiliate for the Farmingdale, NY facility. The sublease is for a term of two
years and the Company pays monthly rent to the Affiliate of approximately
$8,500. During fiscal 1997, the Company was charged $34,000 in rent by the
Affiliate.
NOTE Q - RESTRUCTURING CHARGES
The consolidated statement of operations for the year ended June 30, 1995
reflects the costs of a fiscal 1994 restructuring plan designed to realign the
Company's corporate headquarters and field operations to increase its overall
profitability through the closing of certain branches, the elimination of
certain marginally profitable product lines and the disposal of certain assets.
Prior to fiscal 1995, restructuring charges consisted of provisions for
termination of certain employment contracts, employee severance and benefit
settlements, inventory write-downs for discontinued product lines, and the
abandonment of leased facilities, equipment and other assets. Additional costs
of $91,000 associated with the Company's restructuring effort were incurred in
fiscal 1995. Such costs were primarily associated with final settlements
reached in fiscal 1995 for the termination of certain employment contracts,
employee severance and benefit arrangements, as well as additional related legal
fees associated therewith.
F-25
VERTEX COMPUTER CABLE & PRODUCTS, INC.
DEBTOR-IN-POSSESSION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance, charged to Balance,
beginning costs and end of
Description of year expenses Deductions year
- ------------------------------- ---------- ----------- ---------- --------
Year ended June 30, 1997:
Allowance for doubtful accounts $221,000 $ 285,000 $265,000(A) $241,000
Allowance for slow-moving
and obsolete inventories $575,00 $575,000
Year ended June 30, 1996:
Allowance for doubtful accounts $154,000 $ 67,000 $221,000
Allowance for slow-moving
and obsolete inventories $535,000 $ 40,000 $575,000
Year ended June 30, 1995:
Allowance for doubtful accounts $394,000 $133,000(A) $154,000
$107,000(C)
Allowance for slow-moving
and obsolete inventories $903,000 $ 65,000 $433,000(B) $535,000
(A) Net write-offs of uncollectible amounts.
(B) Inventory returned to vendor or liquidated.
(C) Net recovery of losses on accounts receivable.
F-26
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 on the 3rd day of April 1998.
VERTEX COMPUTER CABLE & PRODUCTS, INC.
By: /s/
---------------------------
Edward Goodstein,
Chairman of the Board
By: /s/
---------------------------
Nicholas T. Hutzel,
Vice President & Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on April 3, 1998 by the following persons in the
capacities indicated:
/s/ Chairman of the Board
- --------------------------
Edward Goodstein
/s/ Director
- ---------------------------
Carl Palazzolo
/s/ Director
- ---------------------------
Ron Martyn
/s/ Director
- ---------------------------
Albert Roth
/s/ Director
- ---------------------------
Michael Recca
/s/ Vice President & Controller
- ---------------------------
Nicholas T. Hutzel
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 195
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<RECEIVABLES> 2107
<ALLOWANCES> 241
<INVENTORY> 2782
<CURRENT-ASSETS> 4941
<PP&E> 3529
<DEPRECIATION> 2963
<TOTAL-ASSETS> 5663
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