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, 1998 COMMISSION FILE NUMBER 1-9263
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VERTEX COMPUTER CABLE & PRODUCTS, INC.
(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 No X
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]
Indicate by check mark whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court
Yes X No
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 1, 1999 was approximately $1,166,153.
On February 1, 1999, 26,824,000 shares of common stock, $.10 par value were
outstanding.
This report consists of 48 consecutively numbered pages (including this cover
page).
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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............................. 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 11
Item 7a. Market risk ....................................... 14
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...................................... 19
Item 13. Certain Relationships and Related Transactions...... 19
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................. 21
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PART I
ITEM ONE - BUSINESS
THE COMPANY
Vertex Computer Cable & Products, Inc., (the "Company") 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 two 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.
On October 30, 1997, the United States Bankruptcy Court in Westbury, New York
approved the Company's Plan of Reorganization (the "Plan"). The Company was
required to have in place exit financing in order for the Company to effectuate
the Plan and emerge from Chapter 11. 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 a defined five year period. 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. On December 29, 1997 each five shares of the Company's common
stock were exchanged for one share of common stock. TW Cable LLC. "TW",
received 21,508,400 shares and other outside investors received 1,265,200
shares of the post-bankruptcy outstanding common stock. As a result, 25.3
million of the Company's 40 million authorized shares of common stock were
issued and outstanding. (see Item Thirteen).
On January 12, 1998, the Company entered into a revised credit facility with its
existing lender Congress Financial Corp. ("Congress'). Congress in effect
extended its DIP Credit facility, which had matured 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.
On July 28, 1998 the Company refinanced a revolving credit financing agreement
(see Note F to the Company's fiscal 1998 financial statements) with a financial
institution. The new agreement provides for a maximum borrowing of $3,000,000
through July 31, 2000. Borrowings, at the lenders' discretion, are limited to
85% of eligible accounts receivable (constituting receivables outstanding 90
days or less), 50% of eligible accounts receivable outstanding between 91 and
120 days, 40% of eligible inventories and the lesser of $700,000 or 10% of slow-
moving inventory, as defined. Under the terms of the
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RECENT DEVELOPMENTS - (continued)
refinancing, the Company is required to pay interest at prime plus 2 1/2% but
not less than $15,000 per month in minimum charges and an initial commitment fee
of 1.25% and 1% per annum for the secondyear. The interest rate
shall increase or decrease by one quarter of one percent (1/4 of 1%) per annum
for each increase or decrease, respectfully of one-quarter of one percent in the
prime rate, however that no decrease shall decrease the rate to less than the
prime rate plus 2.50% and the minimum prime rate will be 6%. Borrowing under
the agreement is all collateralized by all assets of the Company. Pursuant to
the agreement, the Company was required to maintain a tangible net worth
(deficiency) of not more than $(750,000) and a Working Capital (deficiency) of
not more than $(500,000), as defined. The Company is in violation of such
covenants and is currently seeking a modification to such covenants. However
no assurances can be given that the Company will be able to obtain such
modifications or receive a waiver from the creditor.
On October 20, 1998, the Company entered into a Purchase and Sale of Assets
agreement the "Sale Agreement" whereby the Company sold certain assets,
principally inventory and fixed assets, of its Maryland facility to an
unrelated party for $200,000. In connection to the Sale Agreement, the Company
agreed to sublease the aforementioned facility to the purchaser under the terms
of the Company's lease, subject to cancellation with thirty days notice to the
Company. Upon notice of cancellation, the purchaser shall bear fifty percent
(50%) of the net loss, if any, resulting from the vacancy of the building.
Further, in connection with the Sale Agreement, the Company agreed to 1)
grant the purchaser the use of the "Vertex" name through April 30, 1999 and 2)
grant non-compete arrangements, as defined. Subsequent to October 20, 1998 the
purchaser cancelled the sublease and the Company is currently pursuing a new
sublease tenant.
On December 17, 1998, the Company entered into an agreement with DataWorld
Solutions, Inc. ("DataWorld"), a distributor of connectivity products,
DataWorld's principal shareholders, Daniel McPhee and Christopher
Francis, TW Cable, LLC. and Edward Goodstein, the Company's then chairman and
principal shareholder. Pursuant to the agreement, (i) Vertex acquired all the
outstanding shares of Dataworld in exchange for the issuance of 1,500,000 shares
of the Company's common stock (ii) TW forgave approximately $2,300,000 in
principal face amount of secured subordinated debt and all accrued interest
relating thereto, (iii) TW forgave $280,000 of indebtedness, contributed
$400,000 cash and arranged for approximately $400,000 of TW funds held in escrow
for the benefit of Vertex's creditors to be released to such creditors as
payment on behalf of Vertex in exchange for 6,000 shares of the Company's
newly issued $6 Senior Cumulative Convertible Preferred Stock having a stated
value of $100 per share, and (iv) Messrs. McPhee and Francis purchased
17,000,000 shares of the Company's common stock from TW for $200,000. As a
result of the above, Messrs. McPhee and Francis collectively own approximately
69% of the Company's common stock and effective December 18, 1998 Messrs.
McPhee and Francis became the Company's Chief Executive Officer and Chief
Operating Officer, respectively.
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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 two 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.
In fiscal 1998, 3M approved the Company as on of their six Value-Added
Reseller ("VAR"). The Company was required to purchase certain manufacturing
equipment necessary to produce Single-Mode fiber cable assemblies.
As a VAR, the Company receives daily orders directly from 3M and will ship
product directly to 3M's customers. The Company is permitted to sell Single-
Mode fiber cable assemblies to any of its customer.
Effective with the transaction with DataWorld Solutions, Inc. in December 1998,
the Company is also a distributor of connectivity products. This will give the
Company the ability to provide its' customers with additional product line they
require.
The Company is in the process of identifying potential acquisitions to grow the
business. The Company will seek capital investment to finance these
acquisitions. The Company believes that acquisitions could provide an
additional customer base necessary to increase sales volume, however, there can
be no assurances that the Company will be successful in marketing suitable
acquisition candidates or obtain the required investment capital
to finance acquisitions.
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, 1998, Amp, Inc. and Siecor
accounted for 27.2% and 11.8% of the Company's purchases. 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 of the Company's purchases.
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PRINCIPAL SUPPLIERS (continued)
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'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 responses to customer questions and assist in sales
prospecting. 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 - (operation sold October 20, 1998)
Farmingdale, New York
Long Island City, New York - (as of December 17, 1998)
San Jose, California
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MAJOR CUSTOMER
During fiscal 1998. one customer, a company formerly owned by the owner of TW
("Former Affiliate") accounted approximately 12.5% or the net sales of the
Company. One customer accounted for approximately 11.4% of net sales in fiscal
1996.
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 January 31, 1999, the Company had 74 full-time employees. Of these, 16
are sales and marketing personnel; 6 are design, engineering, and technical
support personnel; 11 are purchasing, warehouse and inventory control
personnel; 27 are cable assembly manufacturing personnel; 5 are quality
control personnel; and 9 are accounting, data processing and other
administrative personnel. Twenty-five (25) employees are covered by a
collective bargaining agreement in the Company's Farmingdale facility
ITEM TWO - PROPERTIES
The location and size of each of the Company's facilities at June 30, 1998,
the principal use of each facility and lease expiration date are summarized
below:
Lease Square Expiration
Location Footage Use Date
Elkridge, Maryland (1) 11,583 Sales Office, Manufacturing Aug.2003
and Warehouse
Farmingdale, New York (2) 13,000 Executive Office, Sales Office, Feb.1999
Manufacturing and Warehouse
San Jose, California 9,950 Sales Office, Manufacturing June 2000
and Warehouse
(1) In August 1998, the Company renegotiated its Elkridge, Maryland lease by
reducing its space to approximately 11,583 square feet which reduced its
monthly rent. The Company sold this operation in October 1998 (see Recent
events and Note N to the consolidated financial statements).
(2) 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 11,600 square feet of manufacturing and warehouse space,
is leased by the Company. The Company is presently negotiating its lease
renewal.
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ITEM THREE - LEGAL PROCEEDINGS
None.
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 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
Second Quarter ended December 31, 1997 .06 .02
Third Quarter ended March 31, 1998 .31 .02
Fourth Quarter ended June 30, 1998 .44 .13
FISCAL 1999
First Quarter ended September 30, 1998 .09 .09
Second Quarter ended December 31, 1998 .26 .25
* On January 10, 1997, the Company filed Bankruptcy protection under Chapter 11
of the federal bankruptcy laws.
As of February 16, 1999, there were approximately 275 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.
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ITEM SIX - SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
Year Ended June 30,
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
INCOME STATEMENT DATA:
Net sales $ 7,900 $21,224 $29,116 $34,472 $42,864
Cost of goods sold 7,412 16,779 23,584 26,231 32,149
------- ------- ------- ------- -------
Gross profit $ 488 $ 4,445 $ 5,532 $ 8,241 $10,715
======= ======= ======= ======= =======
Loss before extra-
ordinary items $(3,120) $(5,358) $(4,972) $(1,316) $(2,934)
Extraordinary items
income (loss) 5,128 (120 747
Net income (loss)
attributable
to common stock 2,008 (5,556) (5,058) (1,316) (2,187)
BASIC AND DILUTED
INCOME (LOSS)PER
SHARE DATA: (1)
Loss before extra-
ordinary items (.22) (2.14) (2.00) (.52) (2.35)
Extraordinary items .37 (.05) .60
Net income (loss)
attributable to
common stock
per share .15 (2.19) (2.00) (.52) (1.75)
======= ======= ======= ======= =======
Weighted average
number of shares
outstanding-basic
and diluted (2) 13,914 2,530 2,530 2,530 1,248
------- ------- ------- ------- ------
BALANCE SHEET DATA:
Working capital
(deficiency) $(2,694) $ 1,153 $ 5,079 $ 4,476 $ 5,320
Total assets 2,890 5,663 13,128 13,187 14,431
Long-term debt 2,215 2,211 9,496 5,966 6,338
Liabilities subject to
compromise - 6,192
Stockholders' equity
(deficiency) (4,395) (6,528) (1,011) 1,999 2,808
(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) All periods restated to give effect for the one for five split effectuated
on December 29, 1997.
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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, 1998 AND 1997
Net sales for the year ended June 30, 1998 were approximately $7,900,000, as
compared to the year ended June 30, 1997 of $21,224,000, a decrease of 62.8%.
Value added distribution sales decreased by approximately $8,849,000 or 78.1%
from $11,333,000 in the prior fiscal year to $2,484,000 in the current fiscal
year due to the Company's decision to principally be a manufacturer of cable
assemblies. Sales of manufactured cable assemblies decreased by approximately
$4,474,000 or 45.2% from $9,891,000 in the prior fiscal year to $5,416,000 in
the current fiscal year. The decrease was primarily a result of the Company's
inability to purchase product, due to the Company's lack of working capital and
available financing partially caused by the effects of operating as a debtor-in-
possession through the first and second quarters of fiscal 1998.
Gross profit decreased by $3,957,000 or 89.0% for the year ended June 30, 1998
to $488,000 from $4,445,000 as compared to fiscal 1997. Gross profit percentage
for the years ended June 30, 1998 and 1997 were 6.2% and 20.9%, 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 to the poor absorption of fixed overhead costs caused by
significant decrease in sales volume, in addition to a decrease in unit selling
prices and a $250,000 charge for inventory obsolescence.
Selling, general and administrative expenses decreased approximately $5,128,000
or 63.1% to $3,001,000 for the year ended June 30, 1998 from $8,129,000 as
compared to fiscal 1997. Selling, general and administrative expenses as a
percentage of net sales were 38% in fiscal 1998 as compared to 38.3% in fiscal
1997. 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 downsizing the Company's operations after filing Chapter
11 on January 10, 1997.
Interest expense and dividends on preferred stock decreased by $ 680,000 or
63.7% for the year ended June 30, 1998 to $387,000 from $1,067,000. This
reduction is principally due to the reduced borrowing levels of the Company's
credit facility and non-existence of preferred stock dividends while operating
as a debtor-in-possession and the subsequent cancellation of preferred stock on
January 12, 1998.
Chapter 11 Reorganization related expenses for the year ended June 30, 1998 of
approximately $287,000, which was incurred prior to the January 12, 1998
effective date, includes fees for legal, accounting, financing and consulting
services, as well as court fees and printing expenses.
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ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - (CONTINUED)
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 38.3% in fiscal 1997 as compared to 32.9% 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 ofChapter 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.
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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 $2,565,000 to $2,376,000 at June 30,
1998 as compared to $4,941,000 at June 30, 1997. This decrease resulted
primarily from decreases in cash of approximately $156,000, accounts receivable
of approximately $644,000, and inventories of approximately of $1,750,000,
directly attributable to the Company's decision to sell its distribution
business in May 1997, decreased sales volume in its manufacturing business
and the recurring loss before extraordinary items. The Company had net working
capital deficiency of $2,694,000 at June 30, 1998 as compared to net working
capital of $1,153,000 at June 30, 1997.
Total borrowings outstanding, including subordinated secured debentures, as of
June 30, 1998 were $4,159,000, a decrease of $332,000 or 7.4% from $4,491,000
at June 30, 1997. This decrease was primarily due to the reduction of the
Company's revolving credit facility of approximately $358,000.
The Company's continuing existence as a going concern is dependent on its
ability to obtain profitable operations, generate sufficient cash flow to meet
its obligations on a timely basis, comply with the terms and covenants of its
financing agreement (which is currently in default) and to obtain additional
financing as may be required. As described in Notes F and N to the Company's
fiscal 1998 financial statements, the Company; (1) on July 28, 1998, refinanced
its revolving credit financing agreement with a two year long-term agreement
with more favorable borrowing limits, (2) on October 20, 1998, completed the
sale of certain assets relating to an underutilized facility to reduce costs,
and (3) on December 17, 1998, completed a business combination which provided
additional working capital and a new management team with industry and
distribution experience.
Currently, new management is exploring opportunities to further reduce operating
costs and to obtain additional sources of working capital. However, there can
be no assurances that new management will be successful in further reducing
operating costs or obtaining additional sources of working capital and that
the Company will be able to raise such additional financing to fund ongoing
operating shortfalls or complete other plans.
YEAR 2000
The Year 2000 issue is the result of computer programs which were written using
two digits rather than four to define the applicable year. For example,
date-sensitive software may recognize a date using "00" as the Year
1900 rather than the Year 2000. Such misrecognition could result in system
failures, or miscalculations causing disruptions of operations, including,
among others, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
-13-
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 - (CONTINUED)
The Company has evaluated its programs to prepare computer systems and
applications for the Year 2000. The Company will need to modify or replace
its internal systems by acquiring a Year 2000 compliant system by the end of
fiscal 1999. The Company expects to incur internal staff costs as well as
consulting and other expenses related to the enhancements necessary to complete
the systems for the Year 2000. Management believes that the estimated costs to
modify or replace such applications will not be material to the Company.
In addition, the Company has inquired with its major suppliers, including
insight about their progress in identifying and addressing problems related
to the Year 2000. The Company is currently unable to determine the extent to
which the Year 2000 issues will affect its suppliers, or the extent to which
it would be vulnerable to the suppliers' failure to remediate any of their
Year 2000 problems. Although no assurance can be given, the Company believes
that Year 2000 problems will not be significant.
INFLATION
For the last three fiscal years, the Company has not been significantly affected
by inflation.
This Management's Discussion and Analysis of Financial Condition and Result of
Operations contains forward-looking statements which are based upon current
expectations and involve certain risks and uncertainties. Under the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995,
readers are hereby cautioned that these statements may be impacted by several
factors, and, consequently, actual results may differ materially from those
expressed herein.
ITEM SEVEN A - QUANTITATIVE AND QUALITATIVE DISCLOSE ABOUT MARKET RISK
The Company is exposed to interest rate change market risk principally with
respect to its revolving credit financing facility with a financial institution
which is priced based on the prime rate of interest. At June 30, 1998
$1,895,000 was outstanding under the credit facility. Changes in the prime
interest rate during fiscal 1999 will have a positive or negative effect on
the Company's interest expense. Each 1% fluctuation in the prime interest
rate will increase or decrease interest expense for the Company by approximately
$19,000.
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, 1998 are set forth below:
First Year
Became
Name Position With The Company Age Director
- --------------------- ------------------------- --- --------
Edward Goodstein Chairman of the Board and 51 1997
Chief Executive Officer
Ron Martyn * Director 57 1997
Albert Roth Director/Consultant 63 1995
* On December 17, 1998 Mr. Martyn resigned from the Board.
Executive Officers of the Company who are not Directors are set forth below:
Name Position With The Company Age
- ------------------------ ------------------------- ---
Daniel McPhee (1) Chief Executive Officer 35
Christopher Francis (1) Chief Operating Officer 36
Nicholas T. Hutzel Vice President, Controller 29
and Secretary
Abraham Mendez Vice President of Sales 31
(1) Effective December 17, 1998
Mr. Edward Goodstein had been Chairman and Chief Executive Officer of the
Company from June 1997 through December 17, 1998 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. Ron Martyn had been a Director of the Company from January 1997 through
December 17, 1998. 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.
Mr. 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.
-15-
ITEM TEN - (CONTINUED)
The following Executive Officers of the Company are not Directors:
Mr. Daniel McPhee has been Chief Executive Officer since December 17, 1998,
prior thereto Mr. McPhee was a Director and Chief Executive Officer of DataWorld
Solutions, Inc. since its inception in 1998. Prior thereto, and since 1992, Mr.
McPhee was associated with Elcan Technologies Corp. ("ETC") as senior sales
representative and was promoted to Executive Vice President in early 1997. From
1988 to 1992, Mr. McPhee was employed by United Datacom & Cable, Inc. as a
salesman and Vice President. From 1985 to 1988, Mr. McPhee was a project
manager with Forest Electric Corp. In 1985, Mr. McPhee received a bachelors
degree in Business Administration from Adelphi University. Mr. McPhee is a
member of the Communication Managers Association.
Mr. Christopher Francis has been Chief Operating Officer since December 17,
1998, prior thereto Mr. Francis co-founded with Mr. McPhee DataWorld Solutions,
Inc. where he was a Director and Chief Operating Officer. Prior thereto, and
from May 1985 until 1998, Mr. Francis was with ETC. At ETC, Mr. Francis held
various positions including Vice President of Operations. In such capacity, Mr.
Francis' responsibilities included purchasing and inventory management. Mr.
Francis attended Seton Hall University where he majored in Business
Administration.
Mr. 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.
Mr. 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 $100,000 with respect to the fiscal year indicated.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
Other -----------------------------
Annual All Other
Compen- Number Compen-
Name and Fiscal Salary Bonus sation of sation
Principal Position Year ($) ($) ($)(1) Options ($)
- ------------------ ------ ------ ----- -------- -------- -----------
Edward Goodstein 1998 $ - $ - $ - - $ -
Chief Executive 1997 - - - - -
Officer
Albert Roth 1996 $138,000 $ - $ - - $ -
Chief Executive 1996 85,470 - - 250,000 -
Officer (prior)
Donald W. Rowley
President 1996 $182,517 - - - -
(1) Perquisites and other personal benefits, securities or property to each
executive officer did not exceed the lesser of $50,000 or 10% of such
executive officer's annual salary and bonus.
The Company has no pension plan for employees not subject to collective
bargaining arrangements.
DIRECTORS' COMPENSATION
In fiscal 1998, certain directors who were not employees of the Company received
a monthly fee for part of the fiscal year, and for the remainder of the year
waived fees until further notice.
-17-
ITEM ELEVEN - EXECUTIVE COMPENSATION (CONTINUED)
STOCK OPTION TABLE
The following table provides further information with respect to the options
granted to the Executive Officers as of the fiscal year ended June 30, 1998.
Options Granted in Last Fiscal Year
--------------------Individual Grants ----------------
% of Total
Options
Granted to Exercise
Employees or Base Expir-
Options in Fiscal Price ation
Name Granted Year ($/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, 1998.
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 6/30/98 6/30/98($)(1)
Exercise Realized Exercisable/ Exercisable/
Name # $ Unexercisable Unexercisable
- ----------- ----------- ---------- ---------------- ----------------
NONE
(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, 1998, and the exercise price of the options.
As a result of the Company's confirmed Plan of reorganization, all outstanding
options and warrants were canceled upon the effective date of the Plan.
- 18 -
ITEM ELEVEN - EXECUTIVE COMPENSATION (CONTINUED)
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. During the fiscal years ended
June 30, 1998 and 1997, the Company paid this consultant approximately $45,000
and $108,000, respectively.
ITEM TWELVE - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of June 30, 1998, 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 20,529,389 (1) 81 %
81 Executive Blvd.
Farmingdale, N.Y. 11735
All directors and officers as a 10,000 Less than 1%
group (1 person)
ITEM THIRTEEN - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 10, 1997, TW Cable LLC, ("TW") whose owner is a director of the
Company and was Chairman of the Board and Chief Executive Officer from January
1997 through December 1998, 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 (see January 12, 1998 event below).
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
-19-
ITEM THIRTEEN - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
effective on the date the Company secures exit financing. On January 12, 1998,
the Company secured exit financing with lender, effectuating the Plan (see Note
F). The Plan called 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") received a
distribution of 20% of their claim. The initial distribution payments and
certain other administrative claims are guaranteed by TW. 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 were 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 outstanding 12,652,000 common stock shares received 2,530,400
post-reorganization shares. Further, the preferred shareholders (TW) exchanged
such outstanding preferred stock and forgave accrued dividends for 21,508,400
common stock shares, representing 85% of the post-reorganization outstanding
common stock.
On January 12, 1998, pursuant to an Exchange Offer between TW, whose owner was
the Company's principal holder through ownership of the preferred stock
cancelled and exchanged for common stock issued under the Plan and subordinated
debenture holder, and holders of another $400,000 in debentures, TW purchased
$307,367 in debentures for cash and common stock held by TW. The terms of all
outstanding subordinated debentures were modified, pursuant to the Plan (see
Note 3) to an interest rate of 8% per annum, payable semi-annually with the
principal due on January 12, 2005. In addition, TW forgave $115,000,
exclusive of the related debt discount of $14,800, of the $2,423,000 in
debentures held. The forgiveness was accounted for as a capital contribution
as an adjustment to Paid-in-Capital.
As of June 30, 1998, the Company owed to the TW approximately $382,500 for
administrative expenses and loans to the Company. Such demand loans are
non-interest bearing.
Subsequent to June 30, 1998, TW paid additional cash as escrow of $185,000 to
the Class 7 distribution creditors committee, for an aggregate amount of
$389,000, in exchange for an extension of time for the Company to make its
payments required under the Plan and TW paid $300,000 in additional cash
Collateral for an aggregate amount of $1,268,000 to the Company's credit
facility in an effort to increase working capital.
On December 17, 1998, the Company entered into an agreement with DataWorld
Solutions, Inc. ("DataWorld"), a distributor of connectivity products,
DataWorld's principal shareholders, Daniel McPhee and Christopher Francis, TW
Cable, LLC. and Edward Goodstein, the Company's then chairman and principal
shareholder. Pursuant to the agreement, (i) Vertex acquired all the
outstanding shares of Dataworld in exchange for the issuance of 1,500,000
shares of the Company's common stock (ii) TW forgave approximately $2,300,000
in principal face amount of secured subordinated debt and all accrued interest
relating thereto, (iii) TW forgave $280,000 of indebtedness, contributed
$400,000 cash and arranged for approximately $400,000 of TW funds held in
escrow for the benefit of Vertex's creditors to be released to such creditors
as payment on behalf of Vertex in exchange for 6,000 shares of the Company's
newly issued $6 Senior Cumulative Convertible Preferred Stock having a stated
value of $100 per share, and (iv) Messrs. McPhee and Francis purchased
17,000,000 shares of the Company's common stock from TW for $200,000. As a
result of the above, Messrs. McPhee and Francis collectively own approximately
69% of the Company's common stock and effective December 18, 1998 Messrs.
McPhee and Francis became the Company's Chief Executive Officer and Chief
Operating Officer, respectively.
-20-
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 dated December 18, 1998
From 8-K/A dated December 18, 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 dated
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)
-21-
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
-22-
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, Vertex Technologies, Inc. merged into the Company
-23-
VERTEX COMPUTER CABLE & PRODUCTS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Balance Sheets as of June 30, 1998 and 1997 F-3
Statements of Operations for the years ended
June 30, 1998, 1997 and 1996 F-4
Statement of Changes in Stockholders' Equity (Deficiency)
for the years ended June 30, 1998, 1997 and 1996 F-5
Statements of Cash Flows for the years ended
June 30, 1998, 1997 and 1996 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-23
Supplemental Schedule
Schedule II - Valuation and Qualifying Accounts F-24
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. and Subsidiary as of June 30, 1998 and 1997, 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, 1998. 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 Subsidiary as of June 30, 1998 and 1997 and the
consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ending June 30, 1998, in conformity
with generally accepted accounting principles.
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. As
discussed in Note A(1) of the consolidated financial statements, the Company has
incurred significant losses before extraordinary income and its working capital
and stockholders' equity deficiencies at June 30, 1998, raise substantial doubt
about the Company's ability to continue as a going concern. Management's plan
in regard to these matters are also described in Note A(1). 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, 1998. 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
December 17, 1998
F-2
VERTEX COMPUTER CABLE & PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
ASSETS 1998 1997
------------ -------------
CURRENT ASSETS
Cash $ 38,680 $ 194,462
Accounts receivable, net of allowance for
doubtful accounts of $ 63,000 and $241,000,
in 1998 and 1997, respectively 1,222,400 1,866,423
Inventories, net 1,031,322 2,781,650
Prepaid expenses and other current assets 83,381 98,437
------------ ------------
TOTAL CURRENT ASSETS 2,375,783 4,940,972
PROPERTY, PLANT AND EQUIPMENT, net 473,287 565,279
DEFERRED CHARGES AND OTHER ASSETS 40,947 156,613
------------ ------------
TOTAL ASSETS $ 2,890,017 $ 5,662,864
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
CURRENT LIABILITIES
Current portion of long-term debt $ 1,944,469 $ 2,280,433
Accounts payable and accrued expenses 1,962,844 1,507,650
Due to affiliate 382,504 -
Bankruptcy distributions payable 780,000 -
------------ ------------
TOTAL CURRENT LIABILITIES 5,069,817 3,788,083
LONG-TERM DEBT, NET OF CURRENT PORTION 57,119 28,520
LIABILITIES SUBJECT TO COMPROMISE - 6,191,880
SECURED SUBORDINATED DEBENTURES, net 2,157,907 2,182,347
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY)
Redeemable, cumulative, convertible,
preferred stock, stated value $100 per
share; authorized, 5,000,000 shares;
12,375 shares issued and outstanding
in 1997, net - 1,110,661
Common stock, par value $.10 per
share; authorized, 40,000,000 shares;
issued and outstanding, 25,304,000 and
12,652,000 shares in 1998 and 1997,
respectively 2,530,400 1,265,200
Paid-in capital 9,386,887 9,416,226
Accumulated deficit (16,312,113) (18,320,053)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (4,394,826) (6,527,966)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY) $ 2,890,017 $ 5,662,864
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
VERTEX COMPUTER CABLE & PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
1998 1997 1996
----------- ---------- -----------
Net sales $ 7,900,657 $21,224,328 $29,116,469
Cost of goods sold 7,412,316 16,779,191 23,584,189
----------- ----------- -----------
Gross profit 488,341 4,445,137 5,532,280
Selling, general and
administrative expenses 3,001,154 8,129,311 9,566,459
Interest expense 386,558 988,301 932,901
Gain on sale of distribution
business, net of related expenses - (65,700) -
Loss on sale of corporate headquarters - 248,500 -
Other (income) expense (66,216) 13,269 4,626
Chapter 11 Reorganization-related
expenses 286,872 489,386 -
----------- ----------- -----------
Loss before extraordinary items (3,120,027) (5,357,930) (4,971,706)
Extraordinary items
Gain on discharge of Bankruptcy debt 5,127,967
Loss on extinguishment of debt - (120,000) -
----------- ----------- -----------
Net income (loss) 2,007,940 (5,477,930) (4,971,706)
Dividends on preferred stock - 78,242 86,625
----------- ----------- -----------
Net income (loss) attributable to
common stockholders $ 2,007,940 $(5,556,172) $(5,058,331)
=========== ============ ============
Basic and diluted income (loss) per
share attributable to common stock:
Loss before extraordinary item $ (.22) $ (2.14) $ (2.00)
Extraordinary item .37 (.05) -
------------ ------------ ------------
Net income (loss) $ .15 $ (2.19) $ (2.00)
============ ============ ============
Weighted average number of shares
outstanding - basic and diluted 13,914,000 2,530,400 2,530,400
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
VERTEX COMPUTER CABLE & PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended June 30, 1998, 1997 and 1996
<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 July 1, 1995 12,652,000 $1,265,200 $8,591,476 $(7,705,550) $(50,000) $(98,433)
Net loss attributable to
common stockholders (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 stockholders (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) - -
Net income attributable to
common stockholders 2,007 ,940
Compensation expense related
to stock options 25,000
Exchange of one share for
five shares of common
stock per Plan (10,121,600)(1,012,160) 1,012,160
Cancellation of preferred
stock and exchange for
common stock per Plan (12,375) (1,110,661) 22,773,600 2,277,360 (1,166,699)
Debt forgiveness by
principal stockholder,
net of discount 100,200
---------- ----------- ---------- ---------- ---------- ----------- -------- -----------
Balance at June 30, 1998 - - 25,304,000 $2,530,400 $9,386,887 $(16,312,113) $ - $ -
========== =========== ========== ========== ========== =========== ======== ===========
</TABLE>
Total
Cumulative stockholders'
translation equity
adjustment (deficiency)
--------------- --------------
Balance at July 1, 1995 $(3,552) $ 1,999,141
Net loss attributable to
common stockholders (5,058,331)
Issuance of preferred stock 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 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 stockholders (5,556,172)
Foreign translation adjust-
ment 2,487 2,487
Amortization of discount
on preferred stock 37,131
-------------- --------------
Balance at June 30, 1997 - (6,527,966)
Net income attributable to
common stockholders 2,007,940
Compensation expense related
to stock options 25,000
Exchange of one share for
five shares of common
stock per Plan -
Cancellation of preferred
stock and exchange for
common stock per Plan -
Debt forgiveness by
principal stockholder
net of discount 100,200
-------------- --------------
Balance at June 30, 1998 - $(4,394,826)
============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT
F-5
VERTEX COMPUTER CABLE & PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,007,940 $ (5,477,930) $ (4,971,706)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 261,721 469,639 532,677
Noncash compensation - - 98,433
Provision for losses on accounts receivable 15,000 285,000 67,000
Provision for slow-moving and obsolete inventories 250,000 - 40,000
Write-off of note receivable from officer - 50,000 -
Compensation expense related to stock options 25,000 - -
Loss on sale of assets, net 19,616 182,800 -
Extraordinary gain on discharge of bankruptcy debt (5,127,967) - -
Loss on extinguishment of debt - 120,000 -
Changes in operating assets and liabilities
Decrease (increase) in accounts receivable 629,023 3,583,542 (937,522)
Decrease in inventories 1,500,328 250,274 452,248
Decrease in prepaid expenses and other
current assets 15,056 582,184 92,770
Decrease (increase) in deferred charges and
other assets 115,666 192,200 (36,998)
Increase (decrease) in accounts payable, accrued
expenses and liabilities subject to compromise 423,212 2,999,712 (527,444)
----------- ------------ ---------------
Net cash provided by (used in) operating activities 134,595 3,237,421 (5,190,542)
----------- ------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (20,241) (186,395) (114,085)
Proceeds from sale of corporate headquarters, net - 1,919,080 -
Proceeds from sale of property, plant and equipment 10,500 - -
----------- ------------ ---------------
Net cash provided by (used in) investing activities (9,741) 1,732,685 (114,085)
----------- ------------ ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under debt and loan agreements 8,321,921 22,069,308 32,362,919
Debt repayments (8,680,079) (26,145,801) (32,302,648)
Repayment of debentures - (750,000) -
Principal payments under capital leases (53,050) (24,797) (25,367)
Loan proceeds from affiliate 130,572 - -
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
Debt issue costs - - (192,000)
------------ ------------ ---------------
Net cash provided by (used in) financing activities (280,636) (4,851,290) 4,793,404
------------ ------------ ---------------
Effect of exchange rate changes on cash - 2,416 1,065
------------ ------------ ---------------
INCREASE (DECREASE) IN CASH (155,782) 121,232 (510,158)
Cash at beginning of year 194,462 73,230 583,388
------------ ------------ ---------------
Cash at end of year $ 38,680 $ 194,462 $ 73,230
============ ============ ===============
</TABLE>
F-6
VERTEX COMPUTER CABLE & PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
(CONTINUED)
1998 1997 1996
----------- ----------- -----------
Supplemental disclosures of cash-
flow information:
Cash paid during the year for
Interest $ 220,991 $ 649,434 $ 886,380
=========== =========== ===========
Equipment acquisitions financed
by capital leases $ 103,843 $ - $ -
=========== =========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-7
VERTEX COMPUTER CABLE & PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE A - BASIS OF PRESENTATION
1. BUSINESS
Vertex Computer Cable & Products, Inc., (the "Company") operates primarily in
one business segment - assembly and distribution 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 foreign subsidiary, Vertex UK, Ltd.
which ceased operation in fiscal 1997. 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 will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. As discussed in A(2) below, on January 12, 1998, after operating as
a debtor-in-possession under Chapter 11 of the federal bankruptcy laws, the
Company emerged from bankruptcy and recorded an extraordinary gain on the
discharge of bankruptcy debt of $5,127,967. The Company had losses before
extraordinary items of $3,120,027, $5,357,930 and $4,971,706 for the years
ended June 30, 1998, 1997 and 1996, respectively. At June 30, 1998, the
Company has a working capital deficiency and stockholders' deficit of
$2,694,034 and $4,394,826, respectively. During fiscal 1998, the Company has
been able to obtain working capital to support ongoing operations through its
revolving credit agreement, loans/advances from its Chairman and Chief
Executive Officer and collateral provided to the revolving credit lenders on
behalf of the Company by the Company's former (effective December 17, 1998)
Chairman and Chief Executive Officer. As described in Note F-1, the
availability of additional financing as of June 30, 1998 under the Company's
secured revolving credit agreement is limited and due to continuing losses
subsequent to June 30, 1998 may not be sufficient to fund on going working
capital requirements.
The Company's continuing existence as a going concern is dependent on its
ability to obtain profitable operations, generate sufficient cash flow to
meet its obligations on a timely basis, comply with the terms and covenants
of its financing agreement (which is currently in default) and to obtain
additional financing as may be required. As described in Notes F and N, the
Company; (1) on July 28, 1998, refinanced its revolving credit financing
agreement with a three year long-term agreement with more favorable borrowing
limits, (2) on October 20, 1998, completed the sale of certain assets relating
to an underutilized facility to reduce costs, and (3) on December 17,
1998, completed a business combination which provided additional working
capital and a new management team with industry and distribution experience.
Currently, new management is exploring opportunities to further reduce operating
costs and to obtain additional sources of working capital. However, there can
be no assurances that new management will be successful in further reducing
operating costs or obtaining additional sources of working capital and that
the Company will be able to raise such additional financing to fund ongoing
operating shortfalls or complete other plans.
F-8
NOTE A - BASIS OF PRESENTATION (CONTINUED)
2. CHAPTER 11 BANKRUPTCY AND PLAN OF REORGANIZATION
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 on
such date, the Company petitioned to liquidate or settle liabilities for amounts
other than those reflected in the June 30, 1997 balance sheet and
operated as a debtor-in-possession through January 12, 1998.
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 consummation of exit financing
(Note F).
The major aspects of the Plan called for unsecured creditors with claims greater
than $1,000 ("Class 7") to receive 13.5% of their claim in quarterly
installments over the then 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") received a distribution of 20% of
their claim. The initial distribution payments and certain other administrative
claims are guaranteed by TW Cable, LLC ("TW"). Furthermore, pursuant to 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. On December 29, 1997, each five shares of the Company's
common stock outstanding were exchanged for one share of the common stock. As
a result, holders of the Company's outstanding 12,652,000 common stock shares
received 2,530,400 post-bankruptcy shares. Further, the preferred shareholders
who maintained voting control under the provisions of the preferred stock,
exchanged such outstanding preferred stock and forgave accrued dividends. TW
received 21,508,400 shares of common stock, representing 85% of the post-
bankruptcy outstanding common stock and the other outside investors received
1,265,200 shares of common stock. As a result, 25.3 million of the Company's
40 million authorized shares of common stock were issued and outstanding.
The Company's liabilities subject to compromise at June 30, 1997 were recorded
at the amounts which had been allowed by the Bankruptcy Court rather than the
amounts which were actually settled under the Plan of Reorganization. On
January 12, 1998, the Company recorded an extraordinary gain on the discharge
of bankruptcy debt of $5,127,967, paid claims aggregating approximately
$64,000 relating to administrative, interest and other expenses, and recorded a
liability for bankruptcy distributions due the Class 7 unsecured creditors of
$780,000, which was originally payable over twelve months.
Subsequent to January 12, 1998, the unsecured creditors agreed to delay the
initial payment until November 15, 1998 in exchange for a guarantee in the form
of cash escrow payment by the Company's principal stockholder, TW (see Note N).
The Company is currently in default of this payment, and as part of the business
combination agreement signed on December 17, 1998, the Company is negotiating
the release of the cash collateral to satisfy the first and second payment
due the unsecured creditors (see Note N).
F-9
VERTEX COMPUTER CABLE & PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
1. INVENTORIES
Inventories, consisting principally of finished goods which are purchased as
components to be used in the assembly of manufactured goods, 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 and title
passes to the customer.
4. 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.
5. NET INCOME (LOSS) PER SHARE
In fiscal 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," which requires public companies to
present basic earnings per share and, if applicable, diluted earnings per share.
In accordance with SFAS No. 128, all comparative periods have been restated,
if applicable. Basic earnings per share are based on the weighted average
number of common shares outstanding without consideration of potential common
stock equivalents. Diluted earnings per share are based on the weighted average
number of common and potential common shares outstanding. The calculation takes
into account the shares that may be issued upon exercise of stock options,
reduced by the shares that may be repurchased with the funds received from the
exercise, based on the average price during the period. All potential common
shares have been excluded from the computation of diluted loss per share as
their effect would be antidilutive in fiscal 1998, 1997 and 1996.
All per share amounts have been retroactively restated to reflect the one for
five reverse stock split effectuated on December 29, 1997.
F-10
VERTEX COMPUTER CABLE & PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
6. 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.
7. FINANCIAL INSTRUMENTS
The Company's principal financial instruments consist of accounts receivable,
accounts payable, long-term debt and subordinated debentures. As a result of
the Chapter 11 reorganization, the Company believes that the fair value of its
financial instruments approximates the recorded value.
8. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
year presentation.
9. NEW PRONOUNCEMENT NOT YET ADOPTED
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
is effective for the Company's fiscal 1999 year. The statement redefines how
operating segments are determined and requires disclosure of certain financial
and descriptive information about a company's operating segments. The Company
has not completed its evaluation of the effects that SFAS No. 131 will have on
its financial reporting and disclosures.
NOTE C - INVENTORIES
Inventory consists primarily of finished goods purchased as parts/components,
which are used in the assembly of manufactured goods. 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, 1998 and
1997, the reserve for obsolete and slow-moving items was approximately $825,000
and $575,000, respectively. Inventory consists of the following at:
June 30,
1998 1997
------------ -------------
Raw materials $ 72,893 $ 80,142
Work in process 14,042 46,885
Finished goods 944,387 2,654,623
------------ -------------
Inventories, net $1,031,322 $ 2,781,650
============= =============
F-11
VERTEX COMPUTER CABLE & PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE D - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consist of the following:
Asset lives June 30,
(years) 1998 1997
---------- -------------- -------------
Building improvements 2-5 $ 81,707 $ 72,681
Machinery and equipment 10 1,676,671 1,622,002
Furniture and fixtures 5-10 1,829,527 1,807,132
Vehicles 4 26,798 26,798
-------------- ------------
3,614,703 3,528,613
Less accumulated depreciation
and amortization (3,141,416) (2,963,334)
-------------- ------------
$ 473,287 $ 565,279
============== ============
Depreciation and amortization of property, plant and equipment was $185,961,
$296,203, and $372,351 for the years ended June 30, 1998, 1997 and 1996,
respectively.
NOTE E - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30,
1998 1997
-------------- --------------
Accounts payable-trade $1,340,341 $ 477,624
Accrued payroll and commissions 133,313 179,666
Other accrued expenses 263,833 423,360
Accrued professional fees 225,357 427,000
-------------- --------------
$1,962,844 $1,507,650
============== ==============
NOTE F - LONG-TERM DEBT
Long-term debt consists of the following:
June 30,
1998 1997
-------------- --------------
Revolving asset-based loan (1) $1,895,616 $2,253,774
Capitalized lease obligations (2) 105,972 55,179
-------------- --------------
2,001,588 2,308,953
Less current portion of long-term debt 1,944,469 2,280,433
-------------- --------------
$ 57,119 $ 28,520
============== ==============
F-12
VERTEX COMPUTER CABLE & PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE F - LONG-TERM DEBT (CONTINUED)
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. Under the terms of the DIP credit facility, the Company
is required to pay interest at prime plus 2-3/4% 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% of the maximum credit if such termination occurs before December 31, 1997.
On January 12, 1998, the Company entered into a Loan and Security Agreement (the
"Loan Agreement") with it's then current lender. The Loan Agreement replaced
the Company's court approved DIP financing and extended the Company's credit
facility for a 90 day period through April 12, 1998, which was subsequently
extended through July 28, 1998. The Loan Agreement provides for maximum
borrowings of $10,000,000 at an interest rate of prime plus 2-3/4% (11.25% per
annum at June 30, 1998) 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 75% 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 24% of regular
inventory and 10% of slow moving inventory. As part of the Loan Agreement, TW
provided additional cash collateral of $500,000, for an aggregate amount of
$850,000, in order for the Company to fund the Plan. As of June 30, 1998, the
Company had approximately $1,908,000 of availability under the facility, of
which $1,896,000 was outstanding on that date. The 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 as
amended, 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, 1998, the Company is in default of the
above covenants. The creditor continued to lend under the agreement.
F-13
VERTEX COMPUTER CABLE & PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE F - LONG-TERM DEBT (CONTINUED)
On July 28, 1998 the Company refinanced the revolving credit financing agreement
with a financial institution. The new agreement provides for a maximum
borrowing of $3,000,000 through July 31, 2000. Borrowings, at the lenders'
discretion, are limited to 85% of eligible accounts receivable (constituting
receivables outstanding 90 days or less), 50% of eligible accounts receivable
outstanding between 91 and 120 days, 40% of eligible inventories and the lesser
of $700,000 or 10% of slow moving inventory, as defined. Under the terms of the
refinancing, the Company is required to pay interest at prime plus 2 1/2% but
not less than $15,000 per month in minimum charges and an initial commitment fee
of 1.25% and 1% per annum for the second year. The interest rate
shall increase or decrease by one quarter of one percent (1/4 of 1%) per
annum for each increase or decrease, respectfully of one-quarter of one percent
in the prime rate, however that no decrease shall decrease the rate to less than
the prime rate plus 2.50% and the minimum prime rate will be 6%. Borrowing
under the agreement is all collateralized by all assets of the Company. The
Company is required to maintain tangible net worth (deficiency) of not more
than $(750,000) and a Working Capital (deficiency) of not more than $(500,000),
as defined. Subsequent to the refinancing, the Company is in violation of such
covenants. The Company is currently seeking to renegotiate the affected
covenants with the lender, however no assurance can be given as to whether the
Company will be able to successfully amend the covenants or receive a waiver
from the creditor.
2. The Company leases its telephone system and certain warehouse equipment which
is accounted for as capital leases. The obligation for the telephone system
required 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
-------- -------------
1999 1,944,469
2000 51,261
2001 5,858
-------- -------------
Total $2,001,588
======== =============
F-14
VERTEX COMPUTER CABLE & PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE G - 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 H(2)). The debentures were originally 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 bonds. Such bonds were
secured by all of the assets of the Company, however, subordinate to the
secured debt under the revolving asset-based loan and certain mortgage loans
of the Company, which were subsequently paid in full.
The preferred stock was stated to be 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 were 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 could have been converted into common stock of
the Company at a conversion rate of $.25 per share (400 common shares for each
preferred share converted). Each share of preferred stock originally contained
1,500 votes of 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 (see Note A(2)).
The warrants to purchase common stock of the Company issued under the Agreement
to the new investors were exercisable at $.125 per common share and had 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 H(2)). In connection with
these issuance, 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 had been recorded as a deferred charge and
was 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 had been recorded as a direct reduction to the equity received by the
Company.
F-15
VERTEX COMPUTER CABLE & PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE G - SECURED SUBORDINATED DEBENTURES, PREFERRED STOCK AND WARRANTS
ISSUED (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 H(2)). The debentures were
substantially identical and pari passu with the debentures issued on December
1, 1995. Accordingly, such debentures were originally 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
were secured by all of the assets of the Company, however, subordinate to the
secured debt under the revolving asset-based loan and certain mortgage loans
subsequently paid by the Company in full. The warrants to purchase 50,550,000
shares of common stock of the Company were exercisable at $.125 per common
share and had a term commencing April 1, 1999 and expiring on March 31, 2009
(see Note H(2)). 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 was 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 was recognized as
interest expense on a straight-line basis over the 60-month term of the
agreement to the date of filing for bankruptcy and again after emerging for
the bankruptcy. 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. In
addition, the Company recorded a loss on extinguishment of debt of
approximately $120,000. This loss resulted from the accelerated write-off of
the bond discount in conjunction with the satisfaction of the first and second
mortgages.
On January 12, 1998, pursuant to the Plan (see Note A(2)) the terms of all
outstanding subordinated debentures were modified to an interest rate of 8%
per annum, payable semi-annually with the principal due on January 12, 2005.
The subordinated debentures remain secured by all of the Company's assets
subordinated to all current and future institutional loan facilities. In
addition, payments on account of the subordinated debentures shall be
subordinated to future cash distributions based on cash flows to the
unsecured (Class 7) creditors under the Plan. TW forgave $115,000, exclusive
of the related debt discount of $14,800, of the $2,423,000 in principal face
amount of debentures held. The forgiveness was accounted for as a capital
contribution with an adjustment to paid-in-capital.
F-16
VERTEX COMPUTER CABLE & PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE G - SECURED SUBORDINATED DEBENTURES, PREFERRED STOCK AND WARRANTS
ISSUED (CONTINUED)
Further, pursuant with the Plan the Company's outstanding preferred stock was
canceled and exchanged for common stock. The Company reclassified the
preferred stock of approximately $1.1 million , which included an unamortized
discount of $126,839 to common stock with a charge to paid-in-capital to
reflect the par value of the common stock. Pursuant to the business combination
(see Note N) TW forgave approximately $2.3 million in principal face amount of
debentures.
NOTE H - 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 plan of
reorganization, all of the outstanding stock options and warrants and related
stock option plans in existence were canceled on January 12, 1998, the
effective date of the Plan. The Company issued stock options in fiscal 1998 for
consulting services rendered by a former diretor.
The following is a summary of stock option activity:
Range of
Shares Exercise Price
------------- ------------------
Balance at July 1, 1995 2,168,750 $.10 - $1.25
Issued 1,605,000 $.25 - $.35
Canceled (93,750) $.25
-------------
Balance at June 30, 1996 3,680,000 $.10 - $1.25
Canceled / expired (1,515,000) $.25 - $1.25
--------------
Balance at June 30, 1997 2,165,000 $.10 - $1.25
Canceled (2,165,000) $.10 - $1.25
Issued 100,000 $.05
--------------
Balance at June 30, 1998 100,000 $.05
==============
F-17
VERTEX COMPUTER CABLE & PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE H - OTHER EQUITY TRANSACTIONS (CONTINUED)
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.
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 $5,070,331 in fiscal 1997 and fiscal 1996, respectively, and
the pro forma net (loss) per common share would be unchanged for both periods.
The weighted average fair value of options issued in fiscal 1998 and 1996 ($.25
and $.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 1998: expected volatility of 150%; risk-free interest rate of
5.5%; and expected option life of 2 years. The weighted-average assumptions
for the options issued in fiscal 1996 was as follows: 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 debt financings which occurred from 1995
through 1996 (see Note G), 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 canceled on the effective date of January 12, 1998.
F-18
VERTEX COMPUTER CABLE & PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE I - INCOME TAXES
As a result of the Company's fiscal 1998, 1997 and 1996 losses and inability to
realize tax benefits, the Company recorded no tax benefit for the years ended
June 30, 1998, 1997 and 1996.
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:
1998 1997 1996
--------------- --------------- ---------------
Tax expense (benefit)
at statutory federal
income tax rates $ 692,000 $(1,862,000) $(1,690,400)
Permanent difference
attributable to
cancellation of debt
income (1,743,500)
Respective years' net
operating loss not
currently utilizable 1,051,500 1,862,000 1,690,000
--------------- ---------------- -------------
$ - $ - $ -
=============== ================ =============
The tax effects of temporary differences and loss carryforwards giving rise to
deferred tax (assets) and liabilities are as follows:
June 30,
1998 1997
--------------- ---------------
Net operating loss carryforwards $(4,681,000) $(6,003,000)
Other deferred assets
Allowance for bad debts (27,000) (127,000)
Inventory reserves (314,000) (219,000)
Inventory capitalization (12,000) (18,000)
Other deferred assets (18,000) (85,000)
--------------- ---------------
Gross deferred tax (asset) (5,052,000) (6,452,000)
Depreciation (deferred liability) 94,000 78,000
Other deferred costs 92,000 178,000
--------------- ----------------
Net deferred tax (asset) (4,866,000) (6,199,000)
Deferred tax asset valuation allowance 4,866,000 6,199,000
--------------- ----------------
Net deferred tax asset $ - $ -
=============== ================
F-19
VERTEX COMPUTER CABLE & PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE I - INCOME TAXES (CONTINUED)
The Company anticipates that for the foreseeable future it will continue to be
required to provide a 100% valuation allowance for the tax benefit of its net
operating loss carryforwards and temporary differences.
At June 30, 1997, the Company had a net operating loss carryforward for tax
purposes of approximately $15,798,000. Such net operating losses expire
through fiscal year 2012. The Company's use of this net operating loss
carryforward was limited as the Company was deemed to have undergone an
"ownership change", as defined in Internal Revenue Code Sec. 382, during the
fiscal year's ended June 30, 1992 and June 30, 1994. Based upon the Company's
estimates of fair value, approximately $1,750,000 of the Company's total net
operating loss of the $15,798,000 was limited pursuant to Internal Revenue Code
Sec. 382, to approximately $715,000 annually.
On January 12, 1998, the Company entered into a loan and security agreement with
its then current lender (Note F) which effectuated its Plan of reorganization.
As part of the Plan, the Company obtained relief in fiscal 1998 of various
unsecured debt of approximately $5,127,967 and an additional
$1,850,000 of deemed cancellation of debt, for tax purposes only, attributable
to TW's purchase of debentures at a discount (see Note A(2)).
The provisions of Section 108 of the Internal Revenue Code require net operating
losses to be reduced by the amount of debt forgiven. The losses reduced first
are the current year's operating loss followed by the reduction of the prior
year's net operating loss carryforwards on a first in, first out basis. As a
result of this reduction, the net operating loss carryforwards from June 1992
and June 1994 were eliminated and are no longer subject to the limitations
under Internal Revenue Code Section 382.
As of June 30, 1998, the Company's net operating loss carryforward is
approximately $12,317,000. The Company's future use of this net operating
loss may be limited on an annual basis as the Company may be deemed to have
undergone an ownership change, pursuant to Internal Revenue Code Section 382,
as a result of the business combination consummated subsequent to year end
(see Note N).
NOTE J - 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 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 provided it delivers notice to the
individual at least thirty days prior to expiration. The Company did not
exercise its option to extend this consulting agreement. During fiscal years
ended June 30, 1998 and 1997 the Company paid to this consultant
approximately $45,000 and $108,000, respectively.
F-20
VERTEX COMPUTER CABLE & PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE J - COMMITMENTS AND CONTINGENCIES (CONTINUED)
2. LEASES
The Company's minimum annual lease commitments under noncancellable operating
leases for premises at June 30, 1998 are as follows:
Total
-----------
1999 $289,965
2000 198,064
2001 206,614
2002 204,352
2003 92,105
-----------
$991,100
===========
Rent expense, including related real estate taxes and other operating charges,
was approximately $364,000, $697,000 and $620,000 for the years ended June 30,
1998, 1997 and 1996, respectively.
NOTE K - MAJOR CUSTOMER AND VENDORS
During fiscal 1998, one customer, a company formerly owned by the owner of TW
("Former Affiliate"), accounted for approximately 12.5% of the net
sales of the Company. During fiscal 1996, one customer accounted for 11.4%, of
the net sales of the Company. For the fiscal year ended June 30, 1998, two
vendors accounted for 27.2 and 11.8% of the Company's purchases. 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.
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 L - 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, 1998,
1997 and 1996 was $25,000, $41,000 and $48,000, 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.
F-21
VERTEX COMPUTER CABLE & PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE M - RELATED PARTY TRANSACTIONS
On January 10, 1997, TW, whose owner is a director of the Company and was
Chairman and Chief Executive Officer from May 29, 1997 through December 17,
1998, 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 53,530,000 shares of common stock (see Note G) .
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 products lines
and all of its assets used in connection therewith for $500,000. In addition,
the Asset Purchase Agreement entitled 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.
On the closing date all rights under the Asset Purchase Agreement were assigned
to the Former Affiliate, in settlement of advances to TW. At June 30, 1998, the
Company has an amount owed from the Former Affiliate of approximately $301,000
for purchase of material and a liability to the Former Affiliate of
approximately $460,000 for material purchases and other expenses charged, which
amounts are included in accounts receivable and accounts payable, respectively.
As of June 30, 1997, the Company was owed approximately $86,000 from the Former
Affiliate for their purchase of material and had a liability to the Former
Affiliate of approximately $520,000, which includes approximately $337,000 for
material purchases and approximately $183,000 for administrative expenses, which
is included in accounts payable and accrued expenses.
In 1997, the Company entered into a sublease agreement with the Former Affiliate
for the Farmingdale, NY facility. The sublease is for a term of two years and
the Company pays monthly rent to the Former Affiliate of approximately $8,500.
During fiscal 1998 and 1997, the Company was charged $102,000 and $34,000,
respectively in rent by the Former Affiliate.
On January 12, 1998, pursuant to an Exchange Offer, between TW and holders of
another $400,000 debentures, TW purchased $307,367 in principal face amount of
debentures for cash and for common stock of the Company held.
During fiscal 1998, TW or its shareholder loaned the Company, with no interest,
approximately $130,000. In addition, the shareholder assumed certain advances
made by the Former Affiliate for administrative expenses paid on behalf of the
Company during fiscal 1998 and 1997. In connection with the business
combination subsequent on December 17, 1998 approximately $280,000 of such
amounts were forgiven.
F-22
VERTEX COMPUTER CABLE & PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE N - SUBSEQUENT EVENTS
On October 20, 1998, the Company entered into a Purchase and Sale of Assets
agreement the ("Sale Agreement") whereby the Company sold certain assets,
principally inventory and fixed assets, of its Maryland facility to an
unrelated party for $200,000. In connection to the Sale Agreement, the Company
agreed to sublease the aforementioned facility to the purchaser under the terms
of the Company's lease, subject to cancellation with thirty days notice to the
Company. Upon notice of cancellation, the purchaser shall bear fifty percent
(50%) of the net loss, if any, resulting from the vacancy of the building.
Further, in connection with the Sale Agreement, the Company agreed to 1)
grant the purchaser the use of the "Vertex" name through April 30, 1999 and 2)
grant non-compete arrangements, as defined.
On December 17, 1998, the Company entered into an agreement with DataWorld
Solutions, Inc., its principal shareholders, Daniel McPhee and Christopher
Francis, TW Cable, LLC. and Edward Goodstein, the Company's then chairman
and principal shareholder. Pursuant to the agreement, (i) Vertex acquired
all the outstanding shares of Dataworld in exchange for the issuance of
1,500,000 shares of the Company's common stock (ii) TW forgave approximately
$2,300,000 of secured subordinated debt and all accrued interest relating
thereto, (iii) TW forgave $280,000 of the indebtedness, contributed
$400,000 cash and arranged for approximately $400,000 of TW funds held in
escrow for the benefit of Vertex's creditors to be released to such creditors
as payment on behalf of Vertex in exchange for 6,000 shares of the Company's
newly issued $6 Senior Cumulative Convertible Preferred Stock having a stated
value of $100 per share, and (iv) Messrs. McPhee and Francis purchased
17,000,000 shares of the Company's common stock from TW for $200,000. As a
result of the above, Messrs. McPhee and Francis collectively own approximately
69% of the Company's common stock and effective December 18, 1998 Messrs.
McPhee and Francis became the Company's Chief Executive Officer and Chief
Operating Officer, respectively.
F-23
VERTEX COMPUTER CABLE & PRODUCTS, INC.
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, 1998:
Allowance for doubtful
accounts $241,000 $ 15,000 $193,000(A) $ 63,000
Allowance for slow-moving
and obsolete inventories $575,000 $ 250,000 $825,000
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 $575,000 $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
(A) Net write-offs of uncollectible amounts.
F-24
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 17th day of February 1999.
VERTEX COMPUTER CABLE & PRODUCTS, INC.
By: /s/ Daniel McPhee
---------------------------
Daniel McPhee,
Chief Executive Officer
By: /s/ Nicholas T. Hutzel
---------------------------
Nicholas T. Hutzel,
Vice President & Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on February 16, 1999 by the following persons in the
capacities indicated:
/s/ Daniel McPhee Chief Executive Officer
- --------------------------
Daniel McPhee
/s/ Edward Goodstein Director
- ---------------------------
Edward Goodstein
/s/ Albert Roth Director
- ---------------------------
Albert Roth
/s/ Nicholas T. Hutzel Vice President & Controller
- ---------------------------
Nicholas T. Hutzel
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