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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Year Ended: September 30, 2002
0-15066
Commission file number
Vertex Interactive, Inc.
(Exact name of Company as specified in its charter)
New Jersey 22-2050350
(State of incorporation) (I.R.S. Employer Identification No.)
140 Route 17 North, Paramus NJ 07652
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (201) 634 - 1991
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.005 per share
Indicate by check mark whether the Company (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Company was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the Company's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
Indicate by check mark whether the Company is an accelerated filer
(as defined in Rule 12b-2 of the Act.
Yes ___ No X
As of June 30, 2003 the aggregate market value of the voting
common stock held by non-affiliates of the Company was $1,528,079
based upon the closing price of the common stock as reported on
the "Pink Sheets" on that date.
1
As of June 30, 2003 the Company had 38,201,978 shares of
Common Stock outstanding.
Preferred stock, Series "A", par value $.01 per share: 1,356,852
shares outstanding as of June 30, 2003.
Preferred stock, Series "B", par value $.01 per share: 1,000
shares outstanding as of June 30, 2003.
Preferred stock, Series "C", par value $.01 per share: 997 shares
outstanding as of June 30, 2003.
DOCUMENTS INCORPORATED BY REFERENCE:
Exhibits to the Company's Registration Statement on Form S-18 (No.33-
897-NY) filed under the Securities Act of 1933, as amended and
effective June 2, 1986, Current Reports filed on Form 8-K dated
May 14, 2002, April 9, 2002, September 7, 2001, March 2, 2001
(and amended on March 14, 2001), October 2, 2000, April 12, 2000,
and October 7, 1999, Quarterly Report on Form 10Q filed on May
20, 2002, February 20, 2002, and August 14, 2001, Annual Report
on Form 10-K filed on January 25, 2002 and December 18, 2000 and
Transition Report on Form 10K filed on January 13, 2000.
2
PART I
ITEM 1. BUSINESS
General
Vertex Interactive, Inc. ("Vertex" or "we") is a provider of
supply chain management ("SCM") technologies, including
enterprise software systems and applications, and software
integration solutions, that enable our customers to manage their
order, inventory and warehouse management needs, consultative
services, and software and hardware service and maintenance. We
serve our clients through three general product and service
lines: (1) enterprise solutions; (2) point solutions; and, (3)
service and maintenance for our products and services, including
service and maintenance of software and hardware we resell for
third parties. Our enterprise solutions include a suite of Java-
architected software applications, applications devoted to the
AS/400 customer base, as well as a portfolio of "light-directed"
systems for inventory, warehouse and distribution center
management. Our point solutions provide an array of products and
services designed to solve more specific customer needs from
managing a mobile field workforce, mobile data collection,
distributed bar code printing capabilities, compliance labeling
applications, automated card devices, software development tools
and proprietary software serving SAP R/3 users. We provide a full
range of software and hardware services and maintenance on a 24-
hour, 7-days a week, 365-days a year basis, including the
provision of wireless and wired planning and implementation
services for our customers' facilities.
We have achieved our current focused product and service
portfolio as a result of various acquisitions over the past four
years described in the "Acquisitions" section of Note 2 to the
Consolidated Financial Statements and through the sale and/or
disposal of certain businesses no longer core to the Company's
strategy over the past two years as described in the "Disposals"
Section of Note 2 to the Consolidated Financial Statements.
Our customers are able to maximize the efficiency of the flow
of inventory through their supply chains, by implementing our
integrated systems. Our customers use our software to reduce
procurement and distribution costs, and manage and control inventory
along the supply chain, thereby increasing sales and improving
customer satisfaction and loyalty. We also resell third party
software and hardware as part of our integrated solutions. We
provide service and support for all of our software and systems
from established facilities in North America.
We have sold our products and services worldwide, but now
primarily in North America, through a direct sales force and
through strategic reseller alliances with complementary
software vendors and consulting organizations. We target customers
with a need to manage high volumes of activity along their
supply chains from order intake and fulfillment, through inventory,
warehouse and distribution center management to the ultimate
delivery of goods to end users.
3
Our total revenues for the fiscal year ended September 30, 2002 were
$36.1 million, approximately 43% of which were generated by our
North American operations. For the comparable period ended
September 30, 2001 we reported $59.1 million in revenues,
approximately 51% of which were generated by our North American
operations.
Our principal executive offices are located at 140 Route 17
North, Paramus, New Jersey and its telephone number is (201) 634-
1991. The Company was organized in the State of New Jersey in
November 1974.
Outlook
The successful implementation of our business plan has required,
and will require on an ongoing basis, substantial funds to
finance (i) continuing operations, (ii) the further development
of our enterprise software technologies, (iii) expected future
operating losses, (iv) the settlement of existing liabilities,
including past due payroll obligations to its employees, officers and
directors, and (v) from time to time, selective acquisitions. We do
not anticipate reaching the point at which we generate cash in excess
of our operating expenses until December 2003 at the earliest, about
which there can be no assurance. In order to meet future
cash flow needs, we are aggressively pursuing additional
equity and debt financings including through our enterprise software
subsidiary XeQute Solutions, Inc., and continued cost cutting measures.
Historically, we have financed these activities through both equity
and debt offerings. There can be no assurance that we will
continue to be successful in these efforts. As a result there is
substantial doubt as to our ability to continue as a going
concern. (See Management's Discussion and Analysis, Liquidity
and Capital Resources.)
Throughout the fiscal year, the Company experienced continued
weakness in its core markets, continued operating losses and a
concomitant shortfall in working capital. In order to survive in
these circumstances, the Company adopted a strategy to focus on its core
enterprise level products, while selling or disposing of businesses not
key to its enterprise business to provide cash to fund continuing
operations. To this end the Company sold its TMS product line to
Pitney Bowes in April 2002; its Irish point solutions business in
May 2002; and its Netweave product line in June 2002.
By the summer of 2002, it became apparent that the sharp downturn
in capital spending in the Company's major markets was likely to
continue for the foreseeable future. This factor combined with
the continuing working capital shortfall (which had already
caused the Company to focus on its enterprise level software and
sell off non-core businesses to raise cash to fund current
operations as mentioned above) required the Company to look anew
at its operations with a view to raising additional working
capital and to reducing costs further. In light of the depressed
price of the Company's common stock and the related shrinking
trading volumes, the Company elected to fund its enterprise
software group separately from the Company in order to achieve
better values than could be obtained by funding through Vertex
directly. At the same time as mentioned above, the Company needed
to further contain costs and streamline operations.
4
Thus, during the fourth fiscal quarter, the Company completed the
disposal of all remaining operations in Europe: the sale
of its point solutions business in Germany in July 2002; the sale
of its hardware maintenance businesses in Benelux, France and the
UK and the sale of its Benelux point solutions business all in
July and August 2002; the sale of DynaSys S.A. in France in
August 2002; and the filing for liquidation of its remaining
businesses in the UK, France and Italy in September 2002.
In addition, continued economic weakness in the North American
wireless and cable installation division, particularly in its
telecommunications market, together with a lack of working
capital caused the Company to close down this division in July
2002. See the section "Disposals" under Note 2 of the Consolidated
Financial Statements.
On August 24, 2001, we announced an agreement to a merger of
equals with Plus Integration Supply Chain Solutions, B.V., a
private company based in Haarlem, Holland. This agreement was
terminated in March, 2002.
In August 2002, the Company formed a wholly owned subsidiary,
XeQute Solutions, Inc., ("XeQute") into which, effective October 1,
2002, the Company transferred all of the assets and certain of the
liabilities of its Enterprise Software Division. This action was
intended to consolidate all of the enterprise level products and
services in one entity, under a single brand, namely XeQute Solutions,
to streamline operations, reduce costs, provide a more effective route
to market, and also to provide a new platform for hiring. Then in
October 2002 the Company entered into an agreement with underwriter
Charles Street Securities ("CSS")to raise approximately $3.8 million
of equity into XeQute, on a best efforts basis, in a United Kingdom
offering of XeQute Solutions Plc, the parent company of XeQute, under
the terms of which the Company would retain control of XeQute.
Pending completion of this offering, which is currently on hold
until completion and filing of this Annual Report on Form 10K; CSS
procured on our behalf a bridge loan in an amount of $500,000;
$250,000 equally from the Aryeh Trust and MidMark Capital.
The Supply Chain Management Industry
The term "supply chain management" refers to a wide spectrum of
software applications, consulting services, maintenance services
and hardware products intended to enable businesses to manage
their chains of supply. The primary goals of successful supply
chain planning and execution are to reduce the costs of sales,
recognize early opportunities and act on them to increase sales
and to detect problems as they emerge to address them promptly to
reduce their impact on the operations of the business. The SCM
industry is evolving toward a more software-driven model as
enterprises increasingly seek ways to manage their supply chains
in real-time at a lower cost and in a more decentralized
environment.
SCM spending falls within the Information Technology industry,
which Gartner Dataquest forecasted to account for $1.7 trillion in
worldwide sales in 2002. Because SCM technologies and services
enable enterprises to manage a critical aspect of their
5
operations, namely the chain of supply of components into
products to be manufactured, sold and delivered to end customers,
the Company believes that, despite some cyclicality that may
always characterize investment in software, over the long-term,
SCM solutions are likely to remain significant factors in
corporate IT budgeting. Management believes that applications and
value-added services such as implementation and consulting will
play a more significant role in the overall IT investment of
companies in our target market, as enterprises increasingly focus
on generating the highest return possible on their asset base-
the primary focus of SCM technology.
The Opportunity
Recent analysis from Gartner Dataquest concludes that as
macroeconomic factors that adversely affected spending on
technology in 2001 and 2002 begin to ease in 2003 and beyond, users
will want to derive more value from the effective integration
of existing IT investment. According to Gartner Dataquest
outsourcing demand will continue to spur information technology
growth over the next few years, and pent-up demand for consulting
as well as development and integration of new technologies will
be important growth factors.
According to the U.S. Bureau of Commerce, approximately 10% of
the U.S. gross domestic product, or more than $900 billion in
1999, is spent annually on the movement and storage of raw
materials, parts, finished goods and other activities along the
supply chain. Globalization and the rise of the Internet are
working in conjunction as catalysts for the emergence of supply
chain technologies designed not only to reduce the costs inherent
in the global economy, but to give enterprises unprecedented
visibility into and dynamic control over their supply chains. The
Company's strategy is grounded in the conviction that supply
chain optimization and management, driven by software
applications and integrated systems is a long-term growth
industry still in its early stages of development, in which there
is an attractive opportunity for companies with sufficient scale
and the right product set to emerge as global leaders in this
industry.
AMR Research forecasts the worldwide SCM industry to reach $21
billion by 2005, a five year compound annual growth rate of
approximately 32%. Application software license revenues, which
in 2001 comprised an estimated 41% of total SCM industry sales,
according to AMR, are forecast to continue to grow at a 29%
compound annual growth rate and to reach nearly $8 billion by
2005. Software maintenance, which AMR estimated to generate
nearly $1 billion in industry revenues in 2001, is expected to
grow at a 36% compound annual growth rate and to reach $3 billion
by 2005.
6
The two largest geographic markets for SCM technology and
services are North America and Europe. AMR estimated that in 2001
these two markets accounted for roughly 86% of worldwide sales,
with the North American market expected to grow at a 28% annual
compound growth rate through 2005 and Europe expected to grow at
a 38% annual compound growth rate over the same period. In light
of the continuing impact of the recessionary economies in North
American and Europe, management believes that AMR's current
industry growth forecasts may prove to be aggressive.
Asia/Pacific and Central and South America are forecast to grow
more rapidly over this period, but today these markets account
only for an estimated 13% of industry sales and are forecast to
reach about 17% by 2005.
The industry opportunity is being defined by three worldwide
trends:
Two Major Catalysts: Global Competition and the Internet
Many observers point to two fundamental drivers of long-term
growth in the SCM industry: (i) the increase in globalization and
the competitive pressures that trend is creating for businesses;
and (ii) the rise of the Internet as a medium for commerce at
virtually every level of the economy.
As competitive barriers fall around the world, we believe
that there is a secular trend toward more open global commerce
that has the potential to impact businesses of nearly every size.
This may create opportunities for the Company's products in
large as well as in small enterprises.
Coincidental with the increase in the pressures of global
competition, has been the arrival of the Internet. Electronic
commerce is characterized by more interdependent relationships
among companies, their vendors and their customers. Managing the
supply chain in an e commerce environment lies at the heart of
the Company's suite of products.
An Industry Evolving
Despite billions of dollars of capital investment in new software
systems in the decade of the nineties, the benefits of this
investment have been achieved more slowly than corporate buyers
had expected. As corporate buyers began to return to their
technology needs during 2002, after a slowdown in 2001 and early
2002, their approach is a more modest one, seeking affordable
solutions targeted at specific problems and whose projected
return on investment can be more rigorously assessed.
The Company is focusing the marketing of its product portfolio to
meet such buyer expectations and is seeking to offer specific
supply chain products, at a predictable total cost of ownership,
with predictable time to complete implementation.
7
Beyond the "Four Walls"
Traditionally, companies have viewed their supply chains as a
series of discrete activities that could be managed largely
independently of each other and almost certainly independently of
a company's vendors and customers. This approach is changing.
Corporate buyers are understanding the interdependence of each
stage and of each participant in the supply chain and are seeking
"visibility" into their supply chain.
This transition to a new operating model poses challenges for
corporate managers because few internal IT systems or business
practices are yet fully capable of taking advantage of the new
opportunity to access and manage enterprise information in a
decentralized environment. Increasingly, corporations are taking
advantage of opportunities to add value at many more places along
the supply chain. This is placing a more complex set of
functional needs on legacy supply chain management practices and
technologies. These challenges include:
Implementing and managing more dynamic, customer-driven
fulfillment processes;
Supporting a new array of relationships with partners, vendors,
trading partners and customers;
Enhancing visibility into order, inventory, warehouse and
transportation status;
Improving real-time co-ordination among enterprise facilities;
Extending supply chain visibility beyond the enterprise;
Permitting dynamic scalability to address unpredictable increases
in transaction volumes;
Allowing least-cost routing;
Enabling the application of value-added services along the supply
chain;
Providing means to monitor activity along the supply chain; and
Managing events in the supply chain in the optimum time to take
advantage of revenue opportunities and avoid costs.
A premium is developing on SCM systems and software that are more
integrated, scaleable, offering real-time capabilities and that
can support a more complex and dynamic web of business
relationships with vendors, partners and customers. Management
believes that the Company's software and services, coupled with
its expertise in the areas of order fulfillment, inventory,
warehouse and transportation management offer important value-
added in the evolving SCM marketplace.
8
The Business and Products of the Company
The Company is a provider of products designed to meet the emerging
opportunity described above. These products principally
involve the provision of services and enterprise level software
for order fulfillment comprising order management, warehouse and
inventory management and distribution management. This
market is sometimes referred to as supply chain "execution
management" software. The business benefits from an
established, revenue-producing suite of proven products
which have been sold to a client base consisting principally
of Fortune 500 clients in the US, in the Company's target
vertical markets. These vertical markets are pharmaceuticals;
consumer packaged goods, third party logistics providers; and bulk
food distributors.
The following summary relates to the product lines currently
offered by the Company, principally through its wholly-owned
subsidiary, XeQute:
1. Warehouse Management Systems (WMS) Products -
the eSuite Software Products
The Company's core product offerings are its Java-
architected, enterprise level, supply chain execution
systems which include order management (eOMS) and warehouse
management (eWMS) applications. Vertex's eSuite of products
promotes collaboration and the exchange of "real-time"
critical information among users within their trading
environment, including employees, distributors,
manufacturers, suppliers and customers. Portable by design,
the eSuite of products can operate across multiple operating
and hardware environments, incorporate the ability to
utilize various database options, and can easily be
integrated with existing IT infrastructure and third party
applications.
eWMS is a Java architected warehouse management
system that provides companies with real-time
insight into warehouse operations and inventory
availability. eWMS is a true multi-warehouse/owner
system that can be deployed across industries and
has specific functionality for food and third party
warehouse/logistics environments. eWMS can be
implemented to interface with existing enterprise
applications or as an integrated component of eOMS
to facilitate a complete supply chain execution
solution.
9
eOMS is a web-based order management system that
integrates all users in a real-time environment:
internal employees, external sales force,
distributors, and customers, through any means of
deployment: Internet, Intranet, or Extranet. eOMS
provides companies with maximized selling
opportunities by capturing valuable buying pattern
information and then uses this information to
broadcast suggestive selling and promotional
opportunities as well as many other benefits. The
eOMS market is potentially the single largest of the
Company's products because order management is a
function performed by every business irrespective of
whether they operate a warehousing and distribution
facility. The importance of this market is
highlighted by the fact that over the past eighteen
months two of the larger ERP vendors, PeopleSoft and
JD Edwards, among others have entered this segment
of the market. The Company is intending to devote
marketing resources to exploit this opportunity.
eOMS represents one of the largest, new market
opportunities for the Company. Every business has a
requirement to manage its customers' orders properly.
Ideally, the order management system should
ensure accurate order entry and timely fulfillment while
providing readily available information to
customers on progress in meeting their respective
orders. Very few existing order management systems
provide all of this functionality, or all of this
functionality in an easily accessible form. In contrast,
e-OMS addresses these needs in a single complete
package. First, the system allows customers to enter
their orders directly through a browser-based solution.
This permits customers to not only self enter their
orders, but also to track the progress of, and if
required change, such orders during the fulfillment
process in real time over the internet. Again, being
internet based allows for access to, and collaborative
trading among, all of the participants in the chain of
supply, namely customers, employees and vendors.
The Company has commenced a sales campaign targeted
at its existing customer base initially, with plans to
reach the broader market after implementing the system in
certain existing accounts.
In conjunction with the sale of the WMS product suite,
the Company also provides customers with software
maintenance support, business and warehouse consulting,
and other implementation services, including system
design and analysis, project management, and user and
technical training.
10
Customers which have purchased a warehouse management
system from the Company during the period 2000-2002 have
included major US companies such as: McLane, a division of
Walmart Stores and the largest distribution company in the
world, Iowa Beef, ConAgra,CDC Distribution, ABX Logistic,
Air Express International, Branch Electric, Land O'Lakes
Dairy, Avery Dennison, The General Printing Office
(US Government) and Rand McNally. The first release of the
E Suites product was delivered to a large retailer in
February 2001, who indicated that the software was capable
of processing in excess of 100,000 transactions per hour
per distribution center (of which there were 19). A product
for the bulk food and 3PL vertical markets was released
in 2002.
The eSuite product line was recently rewritten in JAVA.
Management believes that the eSuite product line is
presently one of the few completely integrated internet-based
order fulfillment systems in the world. The competitive
importance of this was recently highlighted by SAP's
announcement that its web strategy would center around a
new JAVA version of its SAP R/3 operating system. The
JAVA language is critically important to the future of
the Company's development in that it is the first
software language to be independent of both operating
platforms and databases; that is to say this software can
run in any IT environment without extensive
modifications.
iSeries WMS
The original product developed by Renaissance was a
warehouse management system, iWMS, developed
exclusively for use in an AS/400 environment. iWMS
provides the stability, security and ease-of-
implementation that AS/400 users have learned to expect
and mandate. iWMS is a well established, highly
functional, warehouse management system, that is
currently installed worldwide in a variety of
industries including, 3PL, pharmaceutical, cosmetic and
fragrance, food, office supplies, furniture, fast
moving consumer goods among others.
2. Light-Directed Picking and Put Away Systems
The terms "light-directed" or "light-prompted" systems refer
to the stock picking (or put away) functions in warehousing
management systems whereby a light automatically shines in
the sector where stock needs to be picked. Such "light-
directed" stock picking systems have a proven track record
for making the order fulfillment process dramatically more
efficient with a very significant reduction in the error
rate in the stock picking function and a measured
improvement in productivity.
The Company's light-directed family of software picking
systems was originally developed by our subsidiary, Data
Control Systems, in 1981. The products offer a design and
implementation of state-of-the-art, IT-based solutions that
dramatically improve productivity for the order fulfillment
and warehouse management functions in manufacturing and
distribution companies.
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The Company's light-directed picking solutions interface
with a number of ERP systems and can be modified to work
with almost any system. The order control/fulfillment
systems represent an important facet of the complete E-
commerce system. While E-commerce marketing and order
taking engines can generate substantial sales, without an
optimized order fulfillment process, the promise of E-
commerce will not be fully realized by companies. The
Company is recognized as a leader in electronic warehouse
management systems in real-time, and in light-directed
order processing.
The industry has recognised the Company's products and
services and they were awarded the "Modern Materials
Handling" Productivity Achievement Award in 1999 and the
Vendor of the Year for Merck Pharmaceuticals in 1998.
Our product line includes a mobile cart based system that
appeals to a broader customer base. This system, CartRite,
utilizes light panels and advanced wireless communications
in its warehouse management application.
The Company believes that it is the only supplier in its
industry to develop, engineer, assemble, and install its
own systems, in contrast to other companies which provide
some, but not all, of the systems and services that the
Company is able to provide as a one-stop shop. In-house
personnel implement turn-key solutions that have yielded
to clients the immediate benefit of increased operating
efficiencies, an improved competitive edge and have
offered a platform for future growth.
The Company has documented that its light-directed
products achieve dramatic improvements in operating
efficiency for clients. Typically, after introduction of
the Company's light-directed order fulfillment system,
clients eliminate a portion of the staff they previously
required to fill warehouse orders. This is achieved by
automating and optimizing the scheduling, method and the
order of picking items without any paper. The system thus,
among other things, eliminates the multiple steps associated
with paper handling and manual reconciliation.
The software products automate the process from order
receipt to final shipment. The Company has developed
standard communication interfaces with the leading ERP
vendors including SAP, JD Edwards, Oracle, Peoplesoft and
Microsoft Great Plains Resources, and other enterprise
level systems. The Company is an authorized software
provider for all the major shippers in the US which
includes UPS/FedEx/RPS/USPS. The software is capable of
simultaneous production of shipping bar codes when labels
are generated.
Hundreds of the Company's installations of its WareRite
Warehouse Management Systems ("WMS"), PicRite,
TurnRite, and PutRite light-prompt systems are
providing results in a wide range of industries,
including: pharmaceuticals, cosmetics, publishing, mail
order industries, automotive, electronics, direct selling
associations, retail and wholesale distribution. The
above product lines along with the new CartRite system
have the potential to enhance its clients' E-commerce
related processes. Customers include Merck
Pharmaceutical, Pfizer, Wyeth, Estee Lauder, OfficeMax,
Rite Aid, Braun Electronics ( a wholly owned subsidiary
of Gillette) and Dr. Mann Pharma in Germany.
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3. Integration Applications
This line of business is involved in the design,
development and implementation of software that connects
applications on handheld devices used in the distribution
system to the base ERP system and in particular to the
SAP R/3 operating systems.
This product family includes proprietary, patented
products and services that allow companies to leverage
their existing investment in SAP R/3 by extending
its functionality to the warehouse floor. To assist
in ease-of-implementation, the Company has developed
tools for SAPConsole implementation including the
Universal Starter Transaction Set which allows
transactions to be easily modified by new users
of ABAP, BC2SAP for rapid bar code label design,
Z-Builder which develops transactions in hours.
The Company's UMDC is shrink-wrapped software that
enhances SAP R/3 functionality. In addition, Vertex
has professional services to complete its SAP R/3
practice offering including SAPConsole technical training,
ABAP coding for data collection, bar code design,
implementation, training and on-going support.
Customers include Mercedes-Benz U.S. International,
Colgate, Bristol Myers Squibb, Oceanspray, Bodek & Rhodes,
Rexam, SAATI in Italy, among others.
Competition
The industry today is marked by competition in two industry
segments: SCM planning and SCM execution. Vertex competes
primarily in the execution segment. In this segment, the Company
faces competition from numerous foreign and domestic companies of
various sizes. Competition in these areas is further complicated
by possible shifts in market share due to technological
innovation, changes in product emphasis and applications and new
entrants with greater capabilities or better prospects.
Order Management
The order management market is becoming a center of focus for
every business in the world whether or not they run distribution
centers. As a result this market segment could become the largest
part of the Company's business in the future. The importance of
this emerging opportunity is highlighted by the recent entry of
JD Edwards, PeopleSoft, i2 and Manugistics into this market. The
competition for the Company's eOrder product is believed to be as
follows:
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PeopleSoft, an ERP vendor with revenues of $2 billion. The
Company believes that PeopleSoft has a Java-based product
offering which is very competitive with that offered by the
Company.
JD Edwards & Co Inc, an ERP vendor with revenues of
approximately $900 million with a presence in the order
management segment.
i2 Technologies, the largest planning supply chain vendor in the
US based on revenues, with sales of approximately $500 million.
Execution Management
In the execution management segment in the US there are
approximately 275 companies offering a WMS product, of which only
a small number have a top tier product (defined as able to handle
warehouse space in excess of 250,000 square feet and at least 100
simultaneous users of wireless devices at any one time) and
revenues in excess of $10 million. The Company believes that it
is the only supplier with a complete JAVA based cross-platform
solution for Supply Chain Management. In this segment of the
industry the Company's major competitors for the warehouse and
inventory management components and the transportation and
logistics components of its e Suite product are:
EXE Technologies, with revenues of approximately $70 million,
competes most directly with the Company in warehouse management
in the Company's main vertical markets.
Manhattan Associates, the largest warehouse management software
vendor in the world with annual revenues of approximately $170
million. They focus principally on the AS/400 market in retail
distribution and fast moving consumer goods.
Catalyst International, with revenues of $33 million, provides
principally UNIX solution solutions in the Company's vertical
markets.
Light-Directed Systems
In the "Pick-to-light" business, the Company believes that there
are some 25 competitors, of which the largest are Real Time
Solutions, Rapistan, Kingsway and Haupt of Austria, all
privately held companies. These companies compete with aggressive
pricing and turn key solutions. However, the Company's
competitive advantage centers around its product's flexibility
and software capabilities.
The Company believes that it has a strong market share in the
pharmaceutical vertical market.
Research and Development
The Company's research and development ("R&D") initiatives focus
on enhancing the product set with additional functionality aimed
at the Company's core vertical markets.
14
For the years ended September 30, 2002, 2001 and 2000, R&D expense
was $4.2 million (representing 11.6% of revenues), $7.0 million
(representing 11.9% of revenues), and $1.2 million (representing 2.5%
of revenues), respectively.
The high level of R&D expenditure in 2001 arose out of the need
to complete the Java-architected, enterprise level SCM suite.
The Company's research and development timetable, over the next
24 months for the eWMS product includes a number of features
and enhancements which are budgeted to begin development in
mid-2003. However the extent of this development is dependent upon
the Company's ability to raise the required funds.
Employees
At September 30, 2002 we had approximately 80 employees. With the sale
or liquidation of our European operations in the fourth quarter,
96% of the remaining employees are in North America. In our North
American operations, approximately 44% of our workforce is in R&D,
14% in Installation and Implementation, 11% in Sales and Marketing
(including sales support) and the balance in Executive/Administrative.
Designing and implementing the Company's software solutions requires
substantial technical capabilities in many disparate disciplines,
from mechanics and computer science to electronics and mathematics.
While the Company believes that the capability and experience of its
technical employees compare favorably with other similar companies,
there is no guarantee that it can retain existing employees or
attract and hire capable technical employees it may need in the
future, or if it is successful, that such personnel can be
secured on terms deemed favorable to the Company.
ITEM 2. PROPERTIES
Vertex and its subsidiaries occupy approximately 5,000 square
feet of office space in a building in Paramus, New Jersey under a
lease expiring in May 2008. In addition, the Company leases
approximately 15,000 square feet of office & warehouse space for
its light directed order fulfillment solutions in South
Plainfield, New Jersey which lease expires in April 2008. The
Company is attempting to consolidate and further reduce the total
amount of space under lease at these locations. The Company
believes that its current office space and facilities are
sufficient to meet its present needs and does not anticipate any
difficulty securing alternative or additional space, as needed, on
terms acceptable to the Company.
ITEM 3. LEGAL PROCEEDINGS
a) On October 31, 2001, an action was commenced in the United
States District Court, Southern District of New York entitled
Edgewater Private Equity Fund II, L.P. et al. v. Renaissance Software,
Inc. et al. The action, brought against Renaissance Software, Inc.,
a subsidiary of Vertex, and Vertex, alleged the default by
Renaissance Software, Inc. in payment of certain promissory notes
in the principal aggregate sum of $1,227,500. Vertex guaranteed
the notes. The noteholders demanded $1,227,500, together with
interest accruing at the rate of 8% per annum from June 30, 2001.
On March 12, 2002, the noteholders were successful in obtaining a
judgment against Renaissance Software, Inc. in the aggregate amount
of $1,271,407 including interest, late charges and attorney fees.
However, given the Company's current cash position, we
have been unable to pay the judgment and have been pursuing non
cash alternatives.
15
b) On November 7, 2000, Pierce Procurement Ltd. ("Pierce")
brought an action against the Company's subsidiary Renaissance
Software, Inc. ("Renaissance"), in the Boone County Circuit Court in
Northwestern Illinois. The suit was removed to the United States
District Court for the Northern District of Illinois, Western Division,
on February 1, 2001. The claim by Pierce against Renaissance is based
upon allegations that Renaissance sold a computer system which did not
meet the particular purposes of Pierce and that Renaissance made certain
misrepresentations to Pierce with respect to the system. Renaissance
denies such claims, and through its insurance carrier is vigorously
defending the action. Renaissance has counterclaimed against Pierce
alleging that Pierce has paid only a portion of the contract fee agreed
to by the parties. Total damages claimed by Pierce are approximately
$1,500,000 plus interest and penalties. Renaissance seeks approximately
$76,500 on its counterclaim. A mediation has been scheduled for
September 2003.
c) Certain legal proceedings, reported in this Item 3 in prior
periods, have been settled subsequent to September 30, 2002. See
Note 16 - Settled Litigation for a description of these settlements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security
holders during the most recent fiscal quarter.
16
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market for Company's Common Equity
Until August 20, 2002, the principal market for the Company's
shares of Common Stock, par value $.005 per share was the NASDAQ
National Market System under the symbol VETX. From August 21,
2002 until February 17, 2003 the Company's Common Stock was
traded on the NASDAQ Bulletin Board. Thereafter it trades on the
Pink Sheets under the symbol "VETXE" (See Note 1 - Recent
Developments to the Consolidated Financial Statements).
The following table sets forth, for the periods shown, the high
and low sale prices concerning such shares of Common Stock:
High Low
2001
First Quarter $18.50 $5.31
Second Quarter 8.78 1.56
Third Quarter 2.95 1.44
Fourth Quarter 1.97 0.88
2002
First Quarter $1.27 0.71
Second Quarter 1.23 0.27
Third Quarter 0.40 0.08
Fourth Quarter 0.14 0.05
The approximate number of holders of record of the Company's
shares of Common Stock as of February 28, 2003 was 433. This
number includes numerous brokerage firms that hold such shares in
street name. The Company estimates that there are more than 3,000
beneficial shareholders as of February 28, 2003. The Company's
shares of Series A Preferred Stock par value $.01 per share are
held by one holder of record. The Company's shares of Series B
Preferred Stock par value $.01 per share are held by one holder
of record. The Company's shares of Series C Preferred Stock par
value $.01 per share are held by six holders of record.
The Company has not paid any cash dividends on its Common Stock
and does not intend to do so in the foreseeable future.
Securities authorized for issuance under equity compensation plans.
17
Number of securities to be
issued upon exercise of Weighted average exercise Number of securities
outstanding options, price of outstanding options, remaining available for
Plan category warrants and rights warrants and rights future issuance
- ---------------- ----------------------------- ----------------------------- -----------------------
(a) (b) (c)
- ---------------- ----------------------------- ----------------------------- -----------------------
Equity compensation
plans approved by
security holders 3,269,000 $3.72 2,394,032
Equity compensation
plans not approved
by security holders 0 0 0
---------- ----------
Total 3,269,000 $3.72 2,394,032
Recent Sales of Unregistered Securities
We have issued unregistered securities to (a) employees and (b)
other individuals and institutional investors. Each such issuance
was made in reliance upon the exemptions from registration
requirements of the Securities Act of 1933, contained in Section
4(2) and/or Regulation D promulgated there under, or Rule 701
promulgated there under on the basis that such transactions did
not involve a public offering. When appropriate, we determined
that the purchasers of securities described below were
sophisticated investors who had the financial ability to assume
the risk of their investment in our securities and acquired such
securities for their own account and not with a view to any
distribution thereof to the public. At the time of issuance, the
certificates evidencing the securities contained legends stating
that the securities are not to be offered, sold or transferred
other than pursuant to an effective registration statement under
the Securities Act of 1933 or an exemption from such registration
requirements. The following is a summary of transactions we made
during the quarter ended September 30, 2002 involving sales and
issuances of securities that were not registered under the
Securities Act of 1933 at the time of such issuance or transfer:
In connection with the Company's 401-K Plan, the Company
issued 410,304 shares of Common Stock in satisfaction of
the Company's obligation for the calendar 2001 matching
contribution. The shares were issued within the meaning
of Rule 501 and pursuant to Rule 506 of Regulation D under
the Securities Act of 1933.
18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company should be
read in conjunction with the Company's Consolidated Financial
Statements and notes thereto appearing on pages beginning on F-1.
Such financial data for periods prior to September 30, 1999 were
restated, effective October 1, 1999, to reflect the change in
year end from July 31 to September 30. Also, as discussed in Item
7. and Note 2 to the Consolidated Financial Statements, the
Company has completed various acquisitions and disposals in the
past four years so the amounts shown in selected financial data
are not directly comparable.
SUMMARY OF SELECTED FINANCIAL DATA
2002 2001 2000 1999 1998
OPERATIONS FOR THE
YEAR:
Revenues $36,135,217 $59,087,470 $47,769,311 $10,106,332 $6,754,864
Income (loss)before
amortization,
impairment of goodwill
and in-process
research and
development write-off (25,386,813) (21,568,299) (198,157) 333,542 (20,500)
Intangible amortization 413,734 14,571,757 1,063,775 - -
Impairment of goodwill(2) 18,973,832 78,364,560 - - -
In-process research and
development write-off(1) - 3,600,000 7,500,000 - -
Net (loss) income (44,774,379) (122,952,102) (9,412,424) (160,413) 287,011
Basic Net Income (Loss)Per Share (1.26) (3.95) (0.46) (0.02) 0.04
FINANCIAL POSITION
AT END OF YEAR:
Total Assets $2,800,431 $53,439,283 $110,219,476 $30,348,130 $5,399,704
Long-Term Debt - 7,129,260 1,927,943 1,495,337 115,530
Stockholders' Equity (Deficit) (26,835,525) 11,950,527 84,407,725 13,725,628 2,071,507
(1) For fiscal years 2001 and 2000, the in-process research and
development write off is associated with the acquisitions of
Transcape assets from Pitney Bowes in February 2001 and the
enterprise software applications of Renaissance Software, Inc.,
effective September 30, 2000, respectively.
(2) In fiscal years 2002 and 2001, the Company wrote down
intangible assets (primarily goodwill) to their estimated fair
value (See Note 4 to the Consolidated Financial Statements).
19
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Annual Report on Form 10K contains, in addition to
historical information, certain forward-looking statements that
involve significant risks and uncertainties. Such forward-looking
statements are based on management's belief, as well as
assumptions made by and information currently available to,
management pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Our actual
results could differ materially from those expressed in or
implied by the forward-looking statements contained herein.
Factors that could cause or contribute to such differences
include, but are not limited to, those discussed herein and in
Item 1: "Business", and elsewhere in this Annual Report on Form
10-K. Vertex undertakes no obligation to release publicly the
result of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date of
this Annual Report or to reflect the occurrence of other
unanticipated events.
This discussion and analysis should be read in conjunction with
the Selected Financial Data and the audited consolidated
financial statements and related notes of the Company contained
elsewhere in this report. In this discussion, the years "2002",
"2001" and "2000" refer to fiscal years ended September 30, 2002,
2001, and 2000, respectively.
Overview
Purchase Acquisitions:
As discussed in Note 2 to the Consolidated Financial Statements,
we had completed a number of acquisitions from September 1999
through October 2001, which had substantially expanded our
portfolio of products and services, as well as our geographic
reach throughout North America and into Europe. The magnitude of
these acquisitions had a significant impact on the comparability
of our results of operations from 1999 through 2002. The
following summary of the more significant purchase acquisitions
closed during the last three years is segregated by those first
impacting operations in fiscal 2000 ("Fiscal 2000 Acquisitions"),
fiscal 2001 ("Fiscal 2001 Acquisitions"), and fiscal 2002
("Fiscal 2002 Acquisitions").
Fiscal 2000 Acquisitions:
Effective March 1, 2000, we acquired all of the outstanding
capital stock of Data Control Systems ("DCS"), a provider of
enterprise level "light-directed" warehouse management systems
located in New Jersey.
Effective April 1, 2000, Vertex acquired all of the outstanding
capital stock of Auto-ID, Inc. ("Auto-ID"), a reseller of point
solutions bar coding equipment, primarily in the Southeast.
Effective June 30, 2000, we acquired all of the outstanding
common stock of Societe Italiana Servizi Italservice S.r.l.
("SIS"), a provider of after-market computer maintenance and
software support services, primarily in Italy.
20
Fiscal 2001 Acquisitions:
Effective September 30, 2000, Vertex acquired all of the
outstanding common stock of Renaissance Software Inc. ("RSI"), a
developer of enterprise level supply chain and warehouse
management systems.
In October 2000, we purchased the assets and business of three
former European service and maintenance divisions of Genicom
International (collectively referred to as "ESSC"), which
expanded our ability to provide hardware and software maintenance
to our European customers.
Effective December 31, 2000, Vertex completed a merger with
Applied Tactical Systems, Inc. ("ATS"), a provider of point
solution connectivity software for SAP installations.
Effective February 7, 2001, Vertex purchased from Pitney Bowes
its Transportation Management Software and certain engineering
assets (the Transcape Division, or "Transcape"), which broadened
our portfolio of enterprise level applications.
On February 13, 2001, we acquired all of the capital stock of
Binas Beheer B.V. ("Binas") a Java IT consulting practice.
Fiscal 2002 Acquisitions:
Effective September 30, 2001, we acquired all of the
outstanding stock of DynaSys, a software developer of
enterprise level advance planning and scheduling applications.
In October 2001, Vertex acquired Euronet Consulting S.r.l
("Euronet"), an Italian software applications consulting firm
that expanded our professional services capabilities in Europe.
Vertex has accounted for each of these acquisitions using the
purchase method of accounting in accordance with APB No. 16.
(and SFAS 141 for DynaSys and Euronet) Accordingly, the financial
statements include the results of operations from March 1, 2000
for DCS, from April 1, 2000 for Auto-ID, from July 1, 2000 for
SIS, from October 1, 2000 for RSI, from November 1, 2000 for ESSC,
from January 1, 2001 for ATS, from February 1, 2001 for Binas,
from February 7, 2001 for Transcape and from October 1, 2001
for DynaSys and Euronet (collectively, the "Purchase Acquisitions").
Business Combinations:
In June 2000, we completed mergers with Positive Developments,
Inc. ("PDI"), a provider of point solution applications, and
Communication Services International, Incorporated ("CSI"), a
provider of wireless and cable networking services. These mergers
were accounted for using the pooling of interests method in
accordance with APB No. 16. Accordingly, the accompanying
consolidated financial statements include the results of PDI and
CSI for all periods presented.
21
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements requires
management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and the
related disclosure of contingent assets and liabilities. Management
bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Management continuously
evaluates its estimates and judgments, and actual results may differ
from these estimates under different assumptions or conditions.
Those estimates and judgments that were most critical to the
preparation of the financial statements involved the allowance for
doubtful accounts, inventory reserves, recoverability of intangible
assets and the estimation of the net liabilities associated with
subsidiaries in liquidation.
a) We estimate the collectibility of our trade receivables.
A considerable amount of judgment is required in assessing
the ultimate realization of these receivables including analysis
of historical collection rates and the current credit-worthiness
of significant customers. Significant changes in required reserves
have been recorded in recent periods and may occur in the future
due to the current market and economic conditions.
b) We establish reserves for estimated excess or obsolete inventory
equal to the difference between the cost of inventory and the
estimated fair value based upon assumptions about future demand and
market conditions. In 2002, inventory reserves increased as a result
of the decision to discontinue or significantly reduce certain non-core
product lines. If actual market conditions are less favorable than
those projected by management, additional inventory write-downs may
be required.
c) During 2002 and 2001 we have recorded significant impairment charges
related to the carrying value of goodwill and other intangibles. In
assessing the recoverability of our goodwill and other intangibles,
we have made assumptions regarding estimated future cash flows and
considered various other factors impacting the fair value of these
assets, as more fully described below in the discussions of the results
of operations - provision for impairment of goodwill.
d) As described in the Sales or Divestitures of Non-Core Businesses
section of Note 2 to the Consolidated Financial Statements we have
sought the protection of the respective courts in three European countries,
which have agreed to orderly liquidations of five of our European
subsidiaries. We have used a liquidation accounting model in the
establishment of the net liabilities associated with these entities at
September 30, 2002. This accounting model required the estimation of the
fair value of the assets of these entities. A considerable amount of
judgment was used in determining the amount of cash to be recovered
through the collection of receivables or the sale of inventory and equipment
in a liquidation environment, that will then be available for the respective
creditors. If actual market conditions are less favorable than those
projected by management, the net assets available for creditors may be less
than estimated. However, since the liabilities of these entities remain on
our balance sheet at historical values (and exceed the fair value of their
net assets by approximately $7.3 million), we expect to recognize a gain
upon legal resolution of the liquidations. The amount and timing of such
gain is totally dependent upon the decisions to be issued by the respective
court appointed liquidators.
22
Results Of Operations
Year ended September 30, 2002 ("2002") compared to year ended
September 30, 2001 ("2001").
Revenues:
Revenues decreased by approximately $23 million (or 39%) to
$36.1 million in 2002.
Products and Services
Sales to external customers by the three significant product and
service line groupings for the years ended September 30, 2002 and
2001 (in thousands) are as follows:
September 30
2002 2001
-------- ----------
Point Solutions............ $15,022 $28,849
Enterprise Solutions....... 6,926 9,921
Service and Maintenance.... 14,187 20,317
--------- ----------
$36,135 $59,087
========= ==========
Point solutions products and services revenues decreased
approximately $13.8 million, to $15.0 million in 2002 from
$28.8 million in 2001, primarily as a result of our strategy
of de-emphasizing lower margin product sales (including the sale
or shutdown of various businesses, both in North America and
Europe no longer core to our focus on enterprise level solutions),
together with the impact of the downturn in the economy, especially
post-September 11, 2001 in both North America and Europe. Sales of
our mobile computing products, principally in the U.K.,
decreased approximately $1.8 million, as revenues in 2001
included two large contracts. In addition, our decision to sell
and/or liquidate all of our European operations effective June 30,
2002 (See Note 2 - Disposals) resulted in a decrease of point
solutions revenue of approximately $4.4 million from the same
period last year.
Enterprise solutions revenues decreased to $6.9 million in 2002
from $9.9 million in 2001. Our light directed order
fulfillment systems revenues decreased $5.4 million in 2002.
Sales of these products have been severely impacted by the
general economic slowdown and the hesitancy of customers to
commit to large system purchases. We expect this slowdown to
have a negative impact on the fiscal 2003 light directed
revenues. The revenues generated by our eSuite of Java (TM)
architected products and services and transportation management
systems acquired in 2001 were $0.2 million lower than the
revenues generated last year. License revenues continue to be
below expectations, both as a result of delays in the
development (now substantially complete) and roll out of the eSuite
of products and the downturn in the economy. Recognition of license
revenues had improved in the fourth quarter of 2001 and the first
half of 2002, but were substantially lower in the second half of
2002. Offsetting these decreases, revenues increased by
approximately $2.6 million as a result of the acquisition
of advanced planning and scheduling software in September
2001, which, in turn, was sold in August 2002 (See Note 2 -
Disposals).
23
Service and maintenance revenues have decreased approximately
$6.1 million from 2001. European service and maintenance
revenues decreased $2.5 million in 2002, primarily as a result of
our decision to sell and/or liquidate all of our European
operations effective June 30, 2002 (See Note 2 - Disposals). In
addition, our North American service and maintenance revenues
decreased approximately $3.6 million in 2002, resulting primarily
from a large $2.2 million cable installation project in 2001,
the reduction in the broadband cabling market due in part to the
downturn in the general economy last year and our resulting
decision in July 2002 to close down the wireless and cable
installation division.
Gross Profit:
Gross profit decreased by approximately $9.3 million (or 43%) to
$12.2 million in 2002. As a percent of operating revenues, gross
profit was 33.9% in 2002 as compared to 36.4% in 2001. The gross
profit percentage has been unfavorably impacted by the decreased
revenue from higher margin software and light directed order
fulfillment systems. These decreases, together with our planned
reduction of point solution sales have substantially impacted the
ability of the company to cover non variable costs and therefore
reduced the gross profit percentage in 2002. In addition,
inventory reserves increased approximately $0.3 million to
provide for discontinued products. Offsetting these decreases,
the gross profit percentage was favorably impacted by a higher
percentage of professional services revenues and higher product
margins generated by the entities acquired during 2002.
Operating Expenses:
Selling and administrative expenses decreased $12.0 million (or
35%) to $22.5 million in 2002. At the end of 2001 we initiated
various cost reduction measures which continued throughout 2002,
including a 67% reduction in the number of our North American
employees, facilities consolidations, as well as reductions in
other expenses such as marketing and advertising, non essential
travel and other headcount-related expenses. As a result, we
reduced our selling and administrative expenses by approximately
$7 million in North America. In addition, prior to the sale
and/or liquidation of all of our European operations effective
June 30, 2002, we had also reduced headcount by approximately 25%
and curtailed non-essential travel and marketing expenses in
Europe. These reductions, together with the elimination of all
European selling and administration expenses in the fourth
quarter, resulted in a reduction of approximately $5 million in
2002. Offsetting these decreases, the 2002 acquisitions accounted
for approximately $0.9 million of additional selling and
administrative expenses.
Research and development expenses have decreased approximately
$2.9 million (or 41%) to $4.2 million in 2002 from $7.0 million
in 2001. In 2001, following our acquisition of the core eSuite
functionality in September 2000, we invested substantially in the
completion of the eSuite of Java (TM) architected products in
order to achieve commercial stability. While on-going research
and development continued in 2002, the R&D expenditures related
to these products have decreased approximately $1.7 million from
the prior year. Other factors impacting R&D were reductions of
approximately $1.5 million of expenditures incurred in the
development of warehouse management products and transportation
management systems, with the latter decrease resulting primarily
from the disposal of the transportation management system product
line in April 2002. Offsetting these decreases, the R&D
expenditures on the products acquired with our purchase of
DynaSys increased R&D by approximately $0.5 million in 2002.
24
Toward the end of 2001 and throughout 2002, the Company sought to
consolidate its facilities. As a result of this process, we
either terminated or negotiated a settlement for the remainder of
numerous office leases, resulting in additional operating
expenses of $1.1 million and $0.3 million in 2002 and 2001,
respectively.
The decrease in depreciation and amortization was primarily due
to a decrease in the amortization of intangibles to $0.4 million
in 2002, as compared to $14.6 million in 2001. This was the
direct result of two factors: (i) the write-off of intangible
assets in the fourth quarter of fiscal 2001, based on an
assessment of the fair value of these assets as of September 30,
2001; and (ii) the adoption of SFAS 142 as of October 1, 2001,
which substantially reduced the amount of intangibles that
were subject to amortization (See Note 4). These intangibles
were being amortized over their estimated lives ranging from 2
to 25 years.
The provision for the impairment of goodwill and other
intangibles was $19 million in 2002 and $78.4 million in 2001.
At September 30, 2002, we assessed the carrying value of our
remaining goodwill using the criteria established in SFAS 142.
As a result of the continuing weak market conditions in our
industry, our significant operating losses and stockholders'
deficit, we determined that the remaining goodwill of
approximately $19 million was impaired and it was written off.
At September 30, 2001 we wrote off approximately $78.4 million,
as the result of an assessment of the carrying values of our
intangible assets recorded in connection with all of our
acquisitions. Management undertook this assessment because of
the significant negative economic trends impacting our current
operations, lower expected future growth rates, a decline in
our stock price, and significantly lower valuations for
companies within our industry. At the time of our analysis, the
net book value of our assets exceeded our market capitalization.
Based on our evaluation of these factors, our belief that the
decline in market conditions within our industry was
significant and permanent, the consideration of all other available
evidence, we determined that the fair value of our long-lived
assets was less than their carrying value.
In 2001, as a result of the February 2001 acquisition of
Transcape, $3.6 million of the purchase price was charged
directly to expense as a write-off of in-process research and
development costs, based on a valuation made by an independent
valuation firm.
Interest expense increased by approximately $1.8 million to 2.9
million in 2002. This increase is due to increased working
capital borrowings at the end of fiscal 2001 and early in fiscal
2002, including approximately $9 million of convertible notes
payable, $2.5 million of demand notes payable, and a $2.4
million senior credit facility. As a result of an imbedded
beneficial conversion feature in a convertible note payable, the
Company incurred a non-cash interest charge of approximately
$1.2 million in 2002. These increases were offset by the effects
of debt conversions, paydowns or settlements of debt.
25
The provision for litigation amounted to $2.7 million and $3.1
million in 2002 and 2001, respectively. These amounts relate to
several matters, which arose in 2001 and were settled in 2002,
and are described in Note 16 to the Consolidated Financial
Statements.
In 2002, the Company incurred a net loss on sale or liquidation
of non-core assets. As more fully described in Note 2 to the
Consolidated Financial Statements, this loss is comprised of (1)
a $1.2 million aggregate net gain on the sale of certain non-core
product lines and business units and (2) a $4.4 million loss on
companies placed into liquidation during 2002. The net loss on
companies in liquidation includes a provision to reduce the net
assets to their estimated net realizable values.
The income tax provision is negligible in both years due
primarily to operating losses. The income tax provision is
comprised primarily of foreign taxes provided on the profit of
certain subsidiaries for which no net operating losses are
available or where the utilization of the pre-acquisition net
operating losses are an adjustment of goodwill.
Year ended September 30, 2001 compared to year ended September
30, 2000.
Revenues:
Revenues increased by approximately $11.3 million (or 23.7%) to
$59.1 million in 2001.
Point solutions products and services revenues decreased
approximately $2.9 million, to $28.8 in 2001 from $31.7 million
in 2000. This is due primarily to our strategy of de-emphasizing
lower margin product sales, which reduced revenues by
approximately $6.8 million, including $3.8 million resulting from
the sale of two divisions in the second half of 2000. Sales of
our mobile computing products, principally in the U.K., decreased
approximately $2.1 million; as revenues in 2000 included a large
contract with one customer aggregating $5.1 million. Offsetting
these decreases, point solutions revenues also increased by
approximately $6 million as a result of additional point solution
products and services acquired during 2001 aimed at inventory,
warehouse management, and the SAP market.
Enterprise solutions revenues increased to $9.9 million from $6.7
million in 2000. Our light directed order fulfillment systems
revenues increased to $8.1 million in 2001 from $6.7 million in
2000. The revenues in 2000 were for the seven-month period
following the acquisition of our light-directed technology, while
2001 includes a full year of revenues. Sales of these products
have been severely impacted by the general economic slowdown and
the hesitancy of customers to commit to large systems purchases.
We expect this slowdown to have a negative impact on the fiscal
2002 enterprise solutions revenues, at least through our third
fiscal quarter ending June 30, 2002. The remainder of the
increase in enterprise solutions revenues was generated by our
eSuite of Java architected products and services acquired during
2001 and by the addition of the enterprise transportation
management assets mid year. These revenues fell substantially
below expectations, both as a result of delays in the development
and roll out of the eSuite of products and the downturn in the
economy.
26
Service and maintenance revenues have increased approximately $11
million from 2000. The acquisitions of ESSC in 2001 and SIS in
June 2000 expanded our capability to provide hardware and
software maintenance in Europe and resulted in an additional $8.1
million of revenue in 2001. Our remaining service and maintenance
revenues grew approximately $2.9 million in 2001 resulting
primarily from service revenue on the products acquired in 2001
and a large $2.2 million cable installation project.
Gross Profit:
Gross profit increased by approximately $6.3 million (or 41.4%)
to $21.5 million in 2001. As a percent of operating revenues,
gross profit was 36.4% in 2001 as compared to 31.8% in 2000. The
increase in the gross profit percentage is due, in part, to the
higher margin software and system sales, principally from the
enterprise solutions products and services, which represented 17%
of total revenues in 2001 and 14% in 2000. The gross profit
percentage was also favorably impacted by our de-emphasis of low
margin point solution products mentioned above.
Operating Expenses:
Selling and administrative expenses increased $21.4 million (or
160%) to $34.8 million in 2001. The Fiscal 2001 Acquisitions
accounted for $8.1 million of the increase, and the impact of a
full year of the Fiscal 2000 Acquisitions in 2001 added
approximately $1.5 million. Additionally during 2001, we incurred
approximately $1.3 million on a consolidated corporate marketing,
advertising and communications program; which included the
creation of corporate identity and product collateral literature,
development of advertising materials, as well as advertising
space, and attendance at key industry trade shows. In
anticipation of the roll out of our eSuite of products, together
with a new point solution warehouse management system, we
recruited, hired and trained additional sales personnel in North
America and Europe. Corporate level general and administrative
expenses have increased approximately $6 million reflecting, in
part, a full year of expense related to the corporate
infrastructure that we began to establish during 2000, to
integrate and manage the expansion of our products and services
through acquisitions. This included human resources, data
processing, finance, investor relations and administrative
personnel. In addition, professional fees (including legal,
accounting, recruiting, financial and strategic consulting)
increased approximately $2.3 million.
Research and development expenses have increased approximately
$5.8 million (or 472%) to $7.0 million in 2001 from $1.2 million
in 2000. This increase reflects our acquisition of the eSuite of
Java architected products and, in part, the transportation
management system assets. In addition, following our acquisition
of the core eSuite functionality, we determined that it was not
sufficiently commercialized, consequently, we accelerated our R&D
investment in these key applications in order to achieve
commercial stability.
27
The amortization of intangibles of $14.6 million in 2001, as
compared to $1.1 million in 2000 is a direct result of the
Purchase Acquisitions. These intangibles were being amortized
over their estimated lives ranging from 2 to 25 years. At
September 30, 2001 we wrote off approximately $78.4 million (see
Note 4), as the result of an assessment of the carrying values of
our intangible assets recorded in connection with all of our
acquisitions. Management undertook this assessment because of the
significant negative economic trends impacting our current
operations, lower expected future growth rates, a decline in our
stock price, and significantly lower valuations for companies
within our industry. At the time of our analysis, the net book
value of our assets exceeded our market capitalization. Based on
our evaluation of these factors, our belief that the decline in
market conditions within our industry was significant and
permanent, the consideration of all other available evidence, we
determined that the fair market value of our long-lived assets
was less than their carrying value.
Our intangible assets are associated with our acquisitions of
technologies and services capabilities that we have made as part
of our growth and competitive strategy described above. A number
of these acquisitions were closed during a period of rapid change
and evolution within the technology industry generally and within
the developing supply chain management industry in particular.
Since making some of our acquisitions we have concluded that some
of our original long-term assumptions about how the market we
serve would evolve and what customers would be requiring in
supply chain management technologies have changed. We now expect
future cash flows from these acquired assets to be less than our
initial expectations. We have, therefore, reduced the carrying
value of these assets on our balance sheet, as described in
detail in Note 4, and recorded a $78.4 million write off at
September 30, 2001.
As a result of the February 2001 acquisition of Transcape assets,
$3.6 million of the excess purchase price was charged directly to
expense as a write-off of in-process research and development
costs. The allocation of $3.6 million of the excess purchase
price to in-process research and development costs was based on a
valuation made by an independent valuation firm, as more fully
described in Note 2 to the financial statements.
Interest income decreased approximately $170,000 (or 55%) in
2001. The decrease is due to lower cash balances maintained
during 2001 as compared to 2000. Interest expense increased by
approximately $560,000 to $1.0 million in 2001. This increase is
due to increased working capital borrowings, including $5.8
million of convertible notes payable, and acquisition related
debt. Other expenses increased $3.7 million primarily due to
provisions for litigation in 2001.
The income tax provision decreased $227,000 (or 60%) in 2001, due
primarily to increased losses. The income tax provision is
comprised primarily of foreign taxes provided on the profit of
certain subsidiaries for which no net operating losses are
available or where the utilization of the pre-acquisition net
operating losses are an adjustment of goodwill.
28
Net Income (loss):
The 2001 net loss includes the impact of the amortization of
intangibles, increased operating expenses, the write-off of in-
process research and development costs, and the recognition of
impairment of certain long-lived assets.
Liquidity and Capital Resources
Based upon our substantial working capital deficiency ($27.4
million at September 30, 2002), our current rate of cash consumption,
the uncertainty of liquidity- related initiatives described in detail
below, and the reasonable possibility of on-going negative impacts
on our operations from the overall economic environment for a further
unknown period of time, there is substantial doubt as to our ability
to continue as a going concern.
The successful implementation of our business plan has required,
and will require on a going forward basis, substantial funds to
finance (i) continuing operations, (ii) further development of
our enterprise software technologies, (iii) expected future operating
losses, (iv) settlement of existing liabilities, including past due payroll
obligations to its employees, officers and directors, and (v) possible
selective acquisitions to achieve the scale we believe will be
necessary to remain competitive in the global SCM industry. There can be no
assurance that we will be successful in raising the necessary funds.
Fiscal 2002:
In fiscal 2002, the overall decline in the enterprise applications software and
telecommunications industries, continued to have a substantial negative impact
on our results of operations. These factors, in combination with our continuing
negative operating cash flows, placed significant pressures on our financial
condition and liquidity and negatively impacted our operations. Operating
activities resulted in cash consumption of $8.5 million in 2002. During fiscal
2002 we raised approximately $9.8 million (net of cash transaction costs)
through the issuance of: (1) Series "B" Convertible Preferred Stock to
Pitney Bowes valued at $1 million; (2) $3 million in notes payable
convertible into Series "C" Convertible Preferred Stock to Midmark Capital II,
LP; (3) $3.6 million of demand notes payable from Pitney Bowes and Midmark
Capital II L.P. and (4) $2.4 million in a senior credit facility
collateralized by North American accounts receivable. During the same period,
we sold various businesses and assets (See Note 2) resulting in net cash of $1.2
million and we paid various debt obligations ($3.8 million). At September 30,
2002, the above activities resulted in a net cash balance of $74,000 (a decrease
of $1.3 million) and a negative working capital balance of $27.4 million.
Outlook:
In light of current economic conditions and the general expectation that there
will be no significant upswing in the economy or technology capital expenditures
for the foreseeable future, we do not now anticipate reaching the point at which
we generate cash in excess of our operating expenses until December 2003 at the
earliest, about which there can be no assurance. To the extent we cannot settle
existing obligations in stock or defer our obligations until we generate
sufficient operating cash, we will require significant additional funds
to meet accrued non-operating obligations, working capital to fund
operating losses, short term debt and related interest, capital expenditures,
expenses related to cost-reduction initiatives, and potential liabilities
related to litigation claims and judgments (See Note 16 to Consolidated
Financial Statements).
29
Our sources of ongoing liquidity include the cash flows of our operations,
potential new credit facilities, and potential additional equity
investments. Consequently, Vertex continues to aggressively pursue
additional debt and equity financing, restructure certain existing debt
obligations, reduce its operating expenses, and is structuring its overall
operations and resources around high margin enterprise products and services.
However, in order to remain in business, the Company must raise additional
cash in a timely fashion.
Subsequent to September 30, 2002 the following initiatives have been
completed or are in process to raise the required funds, settle liabilities
and/or reduce expenses:
(i) In December 2002, Vertex, through XeQute, closed a $500,000 Bridge Loan
arranged by Charles Street Securities, Inc. (CSS) from MidMark Capital and
Aryeh Trust. The Bridge Loan is to be repaid with proceeds from a proposed
Private Placement funding (see iii below). The Bridge Loan is for a term of
180 days, which matured on June 9, 2003, at which time it converted to a term
loan payable in 24 monthly installments. The first monthly installment was
due July 1, 2003 and has not been paid. The Bridge Loan is secured by a
first security interest in all of the assets of XeQute and carries an
interest rate of 3% per month.
XeQute received an additional $480,000 from MidMark under a Convertible Loan
Note. The Convertible Loan Note will automatically convert into Non-Voting
Shares of XeQute Solutions PLC when a minimum subscription of $480,000 of the
Private Placement is reached.
In addition, as of June 30, 2003, Vertex and XeQute have borrowed a further
$893,000 from MidMark Capital II, L.P. pursuant to a series of demand notes,
of which $425,000 was restricted for usage on XeQute obligations. These notes
are payable on demand, bear interest at 10% per annum and are secured by the
same collateral in which the Company previously granted a security interest
to MidMark under its convertible notes payable.
Vertex also executed a Grid Note which provides for up to $1 million of
availability from MidMark Capital, L.P. This note will be funded by the
proceeds, if any, from the sale of any shares of Vertex Common Stock held
by MidMark Capital. This note is payable on demand but in any event no
later than December 31, 2003, carries interest at the rate of 10% per
annum and is secured by the same collateral in which the Company previously
granted a security interest to MidMark under its convertible notes payable.
In consideration of MidMark providing this facility, the Company agreed to
issue warrants to purchase a number of unregistered shares equal to 120% of
the number of tradeable shares sold by MidMark to fund such note, at a
purchase price per share equal to 80% of the price per share realized in
the sale of shares to fund the Grid Note. As of June 30, 2003, the
Company had borrowed $77,000 under this arrangement.
(ii) The Company has completed the sale of certain entities and assets (See
Note 2 - Disposals). After being unsuccessful in attempting to sell its five
remaining European operations (Vertex UK-previously PSS, Vertex Service and
Maintenance Italy - previously SIS, Vertex Italy, Euronet and Vertex France -
previously ICS France) and based on the continuing cash drain from these
operations the respective boards of directors determined that in the best
interest of their shareholders that they would seek the protection of the
respective courts in each country, which have agreed to an orderly liquidation
of these companies for the benefit of their respective creditors. Upon legal
resolution of the $7.3 million of net liabilities of these remaining European
entities, we expect to recognize a non- cash gain (and no significant cash
outlay), however the amount and timing of such gain and cash outlay is totally
dependent upon the decisions to be issued by the respective court appointed
liquidators.
30
(iii) We are aggressively pursuing additional capital raising initiatives in
particular through the formation of XeQute Solutions PLC, a wholly owned
subsidiary of Vertex and parent company of XeQute, into which we have an
agreement with CSS to raise, in conjunction with MidMark Capital,
approximately $3.8 million of new equity. This transaction is currently on
hold pending completion and filing of this Annual Report on Form 10-K and
an interim audit of XeQute Solutions, Plc. for the nine months ended June 30,
2003. We have also conducted extensive negotiations with various sources to
invest up to an additional $8 million of new equity or convertible debt into
Vertex, contingent among other things, upon the completion of the new
financing into XeQute.
(iv) We have continued to reduce headcount (to approximately 40 employees in
our continuing North American business at June 30, 2003, of whom 14 are
currently furloughed until additional funds are raised), consolidate
facilities, and generally reduce costs.
(v) Effective July 31, 2003, the Company completed the sale of 10,000,000
shares of its common stock, which had a fair market value at that time of
approximately $500,000, to American Marketing Complex, Inc. (AMC). Payment
for this purchase was in the form of cash equivalent trade credits with a
face value of $4,000,000, which the Company can utilize for the purchase of
merchandise and services. The face value is not necessarily indicative of
the ultimate fair value or settlement value of the cash equivalent trade
credits. Any trade credits not utilized by June 30, 2008 shall expire,
unless the Company exercises an option to extend the agreement for one year.
In addition, the Company agreed to loan AMC $150,000 of which $10,000
was delivered at closing; $40,000 will be delivered by August 15, 2003;
$50,000 will be delivered by Septemer 10, 2003 and $50,000 will
be delivered by October 10, 2003. This loan will be repaid exclusively
from funds received from the sale of the 10,000,000 shares. The Company
is required to register these shares within six months of the closing.
(vi) We are seeking to settle certain of our current liabilities through
non-cash transactions. Vertex is negotiating with vendors to settle balances
at substantial discounts, including through the use of the cash equivalent
trade credits set forth in (v) above. In addition, we are negotiating to
settle certain notes payable and approximately $4 million of litigation
accruals at a discount or with the issuance of shares of either Vertex or
XeQute.
While we are continuing our efforts to reduce costs, gain scale, resolve
lawsuits on favorable terms and settle certain liabilities on a non-cash basis
there is no assurance that we will achieve these objectives. In addition, we
continue to pursue strategic business combinations and opportunities to raise
both debt and equity financing. However, there can be no assurance that
we will be able to raise additional financing in the timeframe necessary to
meet our immediate cash needs, or if such financing is available, whether the
terms or conditions would be acceptable to us.
The financial statements have been prepared on a basis that contemplates
Vertex's continuation as a going concern and the realization of assets and
liquidation of liabilities in the ordinary course of business. The
financial statements do not include any adjustments, with the exception of
the provision to reduce the carrying values of the assets of the subsidiaries in
liquidation to their estimated net realizable value (See Note 2), relating to
the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should we
be unable to continue as a going concern. If Vertex fails to raise capital
when needed, the lack of capital will have a material adverse effect on
Vertex's business, operating results, and financial condition.
31
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 provides that separable intangible assets that
have finite lives will continue to be amortized over their useful lives
and that goodwill and indefinite-lived intangible assets will no longer be
amortized but will be reviewed for impairment annually, or more frequently if
impairment indicators arise. Under the provisions of SFAS 142, any impairment
loss identified upon adoption of this standard is recognized as a cumulative
effect of a change in accounting principle. Any impairment loss recognized
subsequent to initial adoption of SFAS 142 will be recorded as a charge to
current period earnings. We elected to early adopt the provisions of
SFAS 142, including the provisions for nonamortization of intangible
assets, as of October 1, 2001. As a result of our analysis of the fair
market value of intangible assets at September 30, 2001 and the resulting
charge for impairment recorded at that time, the transitional goodwill
impairment provisions of SFAS 142, did not have a significant impact on our
consolidated financial statements.
In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." This issue provides guidance on when and how to separate elements
of an arrangement that may involve the delivery or performance of multiple
products, services and rights to use assets into separate units of accounting.
The guidance in the consensus is effective for revenue arrangements entered into
in fiscal periods beginning after June 15, 2003. The Company will adopt Issue
No. 00-21 in the quarter beginning July 1, 2003. The transition provision allows
either prospective application or a cumulative effect adjustment upon adoption.
The Company is currently evaluating the impact of adopting this guidance, but
does not believe it will have a material effect on its results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Market risk represents the risk of loss that may impact the
financial position, results of operations or cash flows of the
Company due to adverse changes in market prices and rates.
The Company is exposed to market risk because of changes in
foreign currency exchange rates as measured against the U.S.
dollar and currencies of the Company's subsidiaries and
operations in Europe. Revenues from these operations are
typically denominated in European currencies thereby potentially
affecting the Company's financial position, results of
operations, and cash flows due to fluctuations in exchange rates.
The Company does not anticipate that near-term changes in
exchange rates will have a material impact on future earnings,
fair values or cash flow of the Company, especially now that all
of the European operations have been either sold or placed into
liquidation. However, there can be no assurance that a sudden and
significant change in the value of European currencies would not
have a material adverse effect on the Company's financial
condition and results of operations.
The Company's short-term bank debt bears interest at variable
rates; therefore, the Company's results of operations would only
be affected by interest rate changes to the short-term bank debt
outstanding. An immediate 10 percent change in interest rates
would not have a material effect on the Company's results of
operations over the next fiscal year.
32
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this "Item 8" is included following
the "Index to Financial Statements and Schedules" appearing at
the end of this Form 10-K.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
(a) In a letter dated April 9, 2002, Ernst & Young LLP ("Ernst
& Young") resigned as auditors of the Company, effective
immediately. Management, under the direction of the Audit
Committee of the Board of Directors, commenced the process of
naming new auditors for the Company.
The reports of Ernst & Young on the Company's consolidated
financial statements for the past two fiscal years did not
contain an adverse opinion or a disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope, or
accounting principles, except for their report dated January 25,
2002 on the Company's consolidated financial statements as of
September 30, 2001, and 2000 and for each of the three years in
the period ended September 30, 2001, which contained an
explanatory paragraph indicating substantial doubt about the
Company's ability to continue as a going concern.
In connection with the audits of the Company's consolidated
financial statements for each of the two fiscal years ended
September 30, 2001 and 2000, and in the subsequent interim period
through April 9, 2002, there were no disagreements with Ernst &
Young on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of Ernst & Young would
have caused Ernst & Young to make reference to the matter in
their report.
In connection with the audit of the Company's 2001 consolidated
financial statements, Ernst & Young advised the Company and the
Audit Committee that material weaknesses existed with regard to
the Company's financial accounting systems, including the
financial reporting and closing process, impacting the Company's
ability to timely prepare accurate financial statements. The
Company authorized Ernst & Young to respond fully to the
inquiries of any successor auditor concerning this matter.
The Company requested Ernst & Young to furnish it with a letter
addressed to the Commission stating whether it agrees with the
above statements. A copy of that letter, dated April 16, 2002
was filed as Exhibit 16 to our Form 8-K filed on April 16, 2002.
b) On May 13, 2002 by unanimous written consent, the Board of
Directors of the Company engaged WithumSmith+Brown P.C. as the
Company's independent auditors for the fiscal year ending
September 30, 2002. The Company's Audit Committee, approved and
recommended to the Board of Directors, approval of the
appointment of WithumSmith+Brown P.C. based on a recommendation
by management and a Proposal to Serve presented to the Company
by WithumSmith+Brown P.C. dated May 7, 2002.
WithumSmith+Brown P.C. is affiliated with HLB International, a world-
wide organization of professional accounting firms and business
advisors, which has member and correspondent firms in 100
countries.
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Certain information about directors and officers of the Company
is contained in the following table as of September 30, 2002.
Director
Name of Director Age Principal Occupation Since
- ----------------- ---- ---------------------- --------
Hugo H. Biermann 53 Executive Chairman 1999
Vertex Interactive, Inc
Nicholas R. H. Toms 54 Chief Executive Officer 1999
Vertex Interactive, Inc
Otto Leistner 58 Managing & Senior Partner 2000
Leistner Pokoj Schnedler
There is no family relationship between any of the foregoing
directors or between any of such directors and any of the
Company's executive officers. The Company's executive officers
serve at the discretion of the Board of Directors.
Hugo H. Biermann has served as Executive Chairman of the Board of
Directors since July 2001 and served as Joint Chairman and Joint
Chief Executive Officer and a Director of the Company from
September 1999 through June 2001. Mr. Biermann has been a
principal in Edwardstone & Company, Incorporated ("Edwardstone"),
an investment management company, since 1986 as well as serving
as President of Edwardstone since 1989. From 1988 to 1995 Mr.
Biermann served as Director and Vice Chairman of Peak
Technologies Group, Incorporated ("Peak Technologies"), a company
involved in automated data capture technologies.
Nicholas R. H. Toms has served as Chief Executive Officer since
July, 2001 and served as Joint Chairman of the Board of
Directors, Joint Chief Executive Officer and a Director of the
Company from September 1999 through June 2001. Mr. Toms has been
a principal of Edwardstone, an investment management company,
since 1986 and Chairman and Chief Executive Officer of
Edwardstone since 1989. From 1988 to 1997, Mr. Toms served as
Chairman, President and Chief Executive Officer of Peak
Technologies.
Otto Leistner has been a Director since April 2000. He has been a
Partner since 1995 in Leistner Pokoj Schnedler, a midsize
accounting and consulting firm in Frankfurt, Germany with a staff
of approximately 100.
Due to various reasons Stephen Duff, George Powch, Michael
Monahan, Larry Schafran, Wayne Clevenger and Joseph Robinson
found it necessary to resign during fiscal 2002.
34
Operation of Board of Directors and Committees
The Board of Directors met 20 times during the fiscal year ended
September 30, 2002. Standing committees of the Board include an
Audit Committee and a Stock Option/Compensation Committee. The
Company does not have a Nominating Committee. During the time in
which they were members, all directors attended in excess of 75%
of the meetings.
During the year 2002, Stephen Duff(2), George Powch(2), Mike
Monahan(2), Larry Schafran(2), Joe Robinson(3) and Otto Leistner
all served for periods of time as members of the Audit Committee.
As of September 30, 2002, the Audit Committee was solely
comprised of Messr. Leistner, a non-employee director. Pursuant
to the Audit Committee Charter, the Committee's primary duties
and responsibilities are to 1) serve as an independent and
objective party to monitor the Corporation's financial reporting
process and internal control system; 2) review and appraise the
audit efforts of the Corporation's independent accountants; and
3) provide an open avenue of communication among the independent
accountants, financial and senior management and the Board of
Directors. Audit Committee Meetings primarily were combined with
regular Board Meetings and included full Board participation.
There were 4 meetings during the 2002 fiscal year during which
Audit Committee agenda items were addressed. All members attended
in excess of 75% of the meetings which were held while they were
members.
During the year 2002, Wayne Clevenger(3), Stephen Duff(2) and
Otto Leistner all served for periods of time as members of the
Stock Option/Compensation Committee. As of September 30, 2002 the
Stock Option/Compensation Committee was comprised solely of
Messr. Leistner. The Committee's primary functions are to
determine remuneration policies applicable to the Company's
executive officers and to determine the bases of the compensation
of the Chief Executive Officer, including the factors and
criteria on which such compensation is to be based. The Committee
also administers the Company's Stock Option Plan. Stock
Option/Compensation Committee Meetings primarily were combined
with regular Board Meetings and included full Board
participation. All members attended 100% of the meetings which
were held while they were members.
35
Compensation of Directors
With the exception of Messrs. Clevenger (3) and Robinson(3) who
are partners in Midmark Associates, which firm was paid a
management fee by Vertex (this management fee was discontinued in
August 2002), non-employee directors had in the prior two years
received compensation of 15,000 stock options per year for their
services as directors. No options were granted to directors for
the 2002 fiscal year. The Company reimburses directors for their
reasonable out-of-pocket expenses with respect to board meetings
and other Company business. Stephen Duff(2), Otto Leistner and
George Powch(2) each received 30,000 in-plan non-qualified
options on February 6, 2001 at an exercise price of $8.50. Of these
options, 15,000 vested immediately for services provided in the
year 2000 and 15,000 vested on December 31, 2001 for services
provided during 2001. In August, 2001 L. G. Schafran(2) received
15,000 in-plan, non-qualified options at an exercise price of
$1.51 which vested on December 31, 2001 for services provided
during 2001. Options received by Directors for services provided
terminate one year from the date of resignation.
In addition, in January 2000, the Company granted options to
purchase 100,000 shares of common stock at $3.85 (110% of the
fair market value of the stock on the date of grant) to each of
Mr. Clevenger(3), Mr. Robinson(3), Mr. Thomas(1) and Mr. Denis
Newman (a former Director, who resigned from the Board effective
August 9, 2000). These options were granted to compensate these
individuals for consultation, advice, due diligence and other
work performed in addition to the standard scope of
responsibilities of an outside director. Such options were fully
vested on the date of grant and expire five years from that date.
(1) Mr. Thomas resigned from the Board in January, 2001.
(2) Mr. Duff, Mr. Powch, Mr. Monahan, and Mr. Schafran have
resigned from the Board, in November, 2001, December, 2001,
February 2002, and July 2002 respectively.
(3) Mr. Clevenger and Mr. Robinson resigned from the Board in
August 2002.
EXECUTIVE OFFICERS
In addition to Messrs. Biermann and Toms the following persons
were executive officers of Vertex Interactive, Inc. as of
September 30, 2002:
Name Age Position
Raymond J. Broek 51 Treasurer and Vice President-Finance
Mark A. Flint 56 Chief Financial Officer
Jacqui Gerrard 48 Chief Operating Officer-Europe
Donald W. Rowley 51 Executive Vice President-Strategic
Development
Barbara H. Martorano 46 Corporate Secretary
36
Raymond J. Broek has been with Vertex since March 2000 and,
previously had been a consultant to Vertex and other middle
market companies. From 1973 to 1999, Mr. Broek was with Ernst &
Young LLP; the last 12 years as a partner providing accounting
and auditing services. Mr. Broek resigned from his executive
officer position effective November 27, 2002, but continues in the
employ of the Company in a non-officer capacity.
Mark A. Flint joined Vertex in June 2001. From December 2000 to
May 2001, he was Chief Financial Officer of Industria Solutions,
a Silicon Valley B2B supply chain software company. From October,
1998 to December, 2000 he was an independent management
consultant. From September, 1996 to September, 1998 he served as
the CFO of Dart Group, as the COO of Crown Books, and CEO of
Shoppers Food Warehouse. He has held additional positions in
several other distribution, retail and professional service
companies as a Board member, Chairman of the Executive Committee,
CFO, and CIO.
Jacqui Gerrard joined Vertex in March 2000. From March 1999 to
February 2000 Ms. Gerrard served as the Director of Human
Resources for Logical, the systems integration division of
Datatec, a software networking corporation. From February 1998 to
February 1999 she managed the European organization of Peak
Technologies, after first serving as the Human Resource Director
for the European Division from September 1997. Prior to that, Ms.
Gerrard was a Director of Human Resources for ICL, an information
technology systems company. Ms. Gerrard terminated her employment
with the Company effective October 31, 2002 following the disposal
of all of our European operations.
Donald W. Rowley joined the Company in December 2000. Previously,
Mr. Rowley was with Brightstar Information Technology Group from
January 1999, when he was appointed its Chief Financial Officer
and Secretary, and was elected to the Brightstar Board. Prior to
that appointment, he was interim Chief Financial Officer and a
director of PetroChemNet, Inc., a business-to-business internet-
based marketplace serving the petrochemical and petroleum
segments of the energy industry, from 1998 to 1999. Mr. Rowley
resigned from his executive officer position effective March 31,
2003, but continues in the employ of the Company on a part-time
basis in a non-officer capacity.
Barbara H. Martorano joined the Company in June 1990 and has
served in a variety of positions, including Sales Order
Processing Coordinator, Office Administrator, Executive Assistant
to the President, CEO and Chairman of the Board, as well as,
Corporate Secretary as of January 17, 1996.
37
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual
and long-term compensation for services in all capacities to the
Company for the fiscal years ended September 30, 2002, 2001, and
2000 of the five highest compensation persons who were, at
September 30, 2002, executive officers of the Company and earned
$100,000 or more in any of the respective fiscal years:
Long Term
Annual Compensation
Compensation Securities
Name and Principal Bonus & Other Underlying
Position Year Salary Cash Items Options(#)
------------------ ----- -------- -------------- -------------
Hugo H. Biermann 2002 $300,000 - -
Executive Chairman 2001 300,000 - -
of the Board of Directors 2000 300,000 - 475,000
Nicholas R. H. Toms 2002 300,000 - -
Chief Executive Officer 2001 300,000 - -
And Director 2000 300,000 - 475,000
Mark A. Flint 2002 275,000 $100,000(1) -
Chief Financial Officer 2001 40,104 - 400,000
2000 - - -
Jacqui Gerrard 2002 187,200 - -
Chief Operating Officer - 2001 188,500 71,050 50,000
Europe 2000 95,425 39,800 100,000
Donald W. Rowley 2002 225,000 - -
Executive Vice President - 2001 206,731 - 200,000
Strategic Development 2000 - - -
(1)Such amount is accrued however unpaid as of June 30, 2003.
(2)All officers and U.S. based employees of Vertex are
eligible to participate in the 401k Savings and Retirement
plan that is funded by voluntary employee and Company
contributions. See "401(k) Savings and Retirement Plan".
(3)In accordance with the rules of the Securities and
Exchange Commission, other compensation received in the form
of perquisites and other personal benefits has been omitted
because such perquisites and other personal benefits
constituted less than the lesser of $50,000 or 10% of the
total annual salary and bonus for the Named Executive Officer
for such year.
38
Employment Agreements
Effective October 1, 1999, Edwardstone entered into an agreement
with the Company pursuant to which Edwardstone agreed to provide
the services of Messrs. Biermann and Toms to act as the Joint
Chairmen and Joint Chief Executive Officers of the Company. Such
Agreement provided for aggregate annual compensation of $600,000
and entitled them to participate in all employee benefit plans
sponsored by Vertex in which all other executive officers of
Vertex participate. The agreement had an initial five-year term
and continued thereafter on a year-to-year basis on the same
terms and conditions existing at the time of renewal, unless
terminated by either the Company or the employee upon thirty days
written notice prior to the end of either the initial (5 year)
term or any subsequent one-year term, as the case may be. This
agreement was terminated by mutual consent effective September
30, 2002.
On April 17, 2000, the Company entered into an agreement with
employee, Mr. Raymond J. Broek, commencing on March 6, 2000 for a
period of five (5) years. The employment agreement provides for
an annual base salary of at least $150,000 and a bonus of up to
$100,000 per annum based on performance goals established. The
agreement further provides Mr. Broek with options to purchase up
to 125,000 shares of the Company's common stock at an exercise
price of $6.00 per share. Of these options, 25,000 vested
immediately and the balance vest ratably over 5 years. In the
event Mr. Broek is discharged without cause, he will be entitled
to receive the greater of his base salary for the remaining term
of the Agreement or, his base salary for 12 months, in a lump sum
payment.
On May 30, 2001, the Company entered into an agreement with
employee, Mr. Donald W. Rowley, commencing on December 4, 2000.
The employment agreement provides for an annual base salary of
$250,000, and a bonus of up to 100% of base salary based on
performance goals established. The agreement further provides Mr.
Rowley with the option to purchase up to 200,000 shares of the
Company's common stock. These options vest ratably over 5 years.
In the event Mr. Rowley is discharged without cause, he will be
entitled to receive his base salary and bonus for 12 months.
Stock Option Grants in Last Fiscal Year
The following table describes certain information regarding
stock options granted to each of the named executive officers in
the fiscal year ended September 30, 2002, including the potential
realizable value over the ten-year term of the options, based on
assumed rates of stock appreciation of 5% and 10%, compounded
annually. These assumed rates of appreciation comply with the
rules of the Securities and Exchange Commission and do not
represent Vertex's estimate of future stock price. Actual gains,
if any, on stock option exercises will be dependent on the timing
of such exercises and the future performance of Vertex's common
stock.
39
Potential
Percent realizable
of total value at assumed
options annual rates of
Number of granted to stock price
Securities employees appreciation for
Underlying in Exercise options terms
Options fiscal Price Expiration ---------------
Granted year ($/share) Date 5% 10%
---------- ---------- ---------- ---------- ----- ------
None in 2002
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-
End Option Values
The following table describes for the named executive
officers, the exercisable and unexercised options held by them as
of September 30, 2002. No options were exercised by the named
executive officers in fiscal 2002. The "Value of Unexercised In-
the-Money Options at Fiscal Year End" is based on a value of $.07
per share, the closing price of Vertex's common stock on The
Nasdaq Stock Market's National Market, on September 30, 2002,
less the per share exercise price, multiplied by the number of
shares to be issued upon exercise of the options.
Number of Securities Value of unexercisied
Underlying unexercised in-the-money options
Options at fiscal year end at fiscal year end
--------------------------- ------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Hugo Biermann 475,000 - n/a n/a
Nicholas Toms 475,000 - n/a n/a
Mark Flint 160,000 240,000 n/a n/a
Jacqui Gerrard