<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended October 31, 1997
Commission file Number 0-15066
Vertex Industries, Inc.
(Exact name of registrant as specified in its charter)
New Jersey 22-2050350
(State of Incorporation) (I.R.S. Employer Identification No.)
23 Carol Street Clifton, New Jersey 07014
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (973) 777-3500
Indicated by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No ______
Common stock, par value $.005 per share: 5,135,107 shares
outstanding as of December 12, 1997.
1
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VERTEX INDUSTRIES, INC. AND SUBSIDIARY
FORM 10-Q
October 31, 1997
I N D E X
PAGE
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets-
October 31, 1997 and July 31, 1997. . . . . . . . . .3
Consolidated Statements of Operations
three months ended October 31, 1997
and 1996 . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Changes in
Stockholders' Equity - for the year ended
July 31, 1997 and three months ended
October 31, 1997. . . . . . . . . . . . . . . . . . .6
Consolidated Statements of
Cash Flows - three months
ended October 31, 1997 and 1996 . . . . . . . . . . .7
Notes to Consolidated Financial Statements. . . . . .8
Item 2. Management's Discussion and Analysis
of Consolidated Financial Condition and
Results of Operations . . . . . . . . . . . . . . . 10
Part II - Other Information
Item 5. Other Information . . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on form 8 - K . . . . 12
Signatures. . . . . . . . . . . . . . . . . . . . . 13
2
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<TABLE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
October 31, 1997 July 31, 1997
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $485,968 $608,553
Accounts Receivable, Less Allowance
for Doubtful Accounts of
$75,985 at October 31, 1997 and
July 31, 1997 478,615 450,266
Notes and other receivables 78,144 95,451
Inventories 508,382 582,609
Prepaid Expenses and
other current assets 32,670 32,861
--------- ---------
Total Current Assets 1,583,779 1,769,740
--------- ---------
PROPERTY, EQUIPMENT,
AND CAPITAL LEASES:
Property and Equipment 1,757,978 1,753,395
Capital Leases 141,757 141,757
--------- ---------
Total Property, Equipment and
Capital Leases 1,899,735 1,895,152
Less: Accumulated Depreciation and
Amortization (1,575,401) (1,545,071)
---------- ---------
Net Property, Equipment
and Capital Leases 324,334 350,081
---------- ---------
OTHER ASSETS:
Cost in Excess of Net Assets
of Companies Acquired, Net of
accumulated amortization of
$362,740 at October 31, 1997 and
$350,395 at July 31, 1997 51,147 63,492
Deferred tax asset 195,000 195,000
Other Assets 55,009 55,142
---------- ---------
Total Other Assets 301,156 313,634
---------- ---------
Total Assets $2,209,269 $2,433,455
========== ==========
<FN>
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
</TABLE>
3
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<TABLE>
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
October 31, 1997 July 31, 1997
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Long-Term debt, current portion $1,867 $2,567
Current portion of obligations
under capital leases 8,241 14,516
Accounts payable 151,411 129,622
Accrued Expenses and Other Liabilities 148,411 170,643
Deferred Revenue 313,982 267,630
---------- -----------
Total Current Liabilities 623,912 584,978
---------- -----------
LONG-TERM LIABILITIES:
Obligations Under Capital Leases,
Net of Current Portion 16,920 17,065
---------- -----------
Total Long-Term Liabilities 16,920 17,065
---------- -----------
Total Liabilities 640,832 602,043
---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01
per share 2,000,000 shares
authorized; none issued
and outstanding -- --
Common Stock, par value $.005
per share, authorized 20,000,000
shares; issued 5,142,979 shares at
October 31, 1997 and 5,137,979
shares at July 31, 1997,
respectively 25,715 25,690
Additional paid-in capital 5,205,801 5,201,138
Accumulated Deficit (3,612,510) (3,344,847)
------------ -----------
1,619,006 1,881,981
Less: Treasury stock, 12,872
shares at cost (50,569) (50,569)
------------ ----------
Total Stockholders' Equity 1,568,437 1,831,412
------------ ----------
Total Liabilities and
Stockholders' Equity $2,209,269 $2,433,455
============ ===========
<FN>
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
</TABLE>
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<TABLE>
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended October 31
1997 1996
<S> <C> <C>
OPERATING REVENUES $652,993 $1,005,014
COST OF SALES 393,894 498,748
---------- ----------
GROSS PROFIT 259,099 506,266
OPERATING EXPENSES:
Selling and Administrative 410,032 300,621
Research and Development 122,363 111,854
---------- ----------
Total Operating Expenses 532,395 412,475
---------- ----------
OPERATING INCOME (LOSS) (273,296) 93,791
---------- ----------
OTHER INCOME AND (EXPENSES):
Interest Income 6,662 15,081
Interest Expense (1,029) (1,707)
Other -- 3,068
---------- ----------
Net Other Income 5,633 16,442
---------- ----------
Income (Loss) Before Income Taxes (267,663) 110,233
---------- ----------
Income Tax Provision -- 44,100
---------- ----------
Net Income (loss) ($267,663) $66,133
========== ==========
Net Income (loss) per share of
Common Stock ($.05) $.01
========== ==========
Weighted Average Number of
Shares Outstanding 5,128,150 5,389,424
=========== =========
<FN>
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
</TABLE>
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<TABLE>
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
Common Stock Additional
$.005 Par Value Paid-In Accumulated Treasury
Year ended July 31, 1997 Shares Amount Capital Deficit Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1996 5,108,979 $25,545 $5,182,188 ($2,871,787) ($50,659) $2,285,377
Exercise of Stock Options 24,000 120 14,600 -- -- 14,720
Issuance of stock in
consideration of services 5,000 25 4,350 -- -- 4,375
Net loss for the year
ended July 31, 1997 -- -- -- (473,060) -- (473,060)
---------- -------- ---------- ------------ --------- -----------
Balance at July 31, 1997 5,137,979 $25,690 $5,201,138 ($3,344,847) ($50,569) $1,831,412
---------- -------- ---------- ------------ --------- -----------
Three months ended October
31, 1997 (Unaudited)
Issuance of stock in
consideration of services 5,000 25 4,663 -- -- 4,688
Net loss for the three
months ended October 31, 1997 -- -- -- (267,663) -- (267,663)
--------- -------- ---------- ------------ --------- ----------
Balance at October 31, 1997 5,142,979 $25,715 $5,205,801 ($3,612,510) ($50,569) $1,568,437
========= ======== ========== ============ ========= ===========
<FN>
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
</TABLE>
6
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<TABLE>
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended
October 31, 1997 October 31, 1996
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (loss) ($267,663) $66,133
---------- -------
Adjustments to reconcile net income (loss) to net
cash (used for) provided by operating activities:
Depreciation and amortization 42,675 41,842
Common stock issued for services 4,688 --
Deferred taxes -- 44,100
(Increase) or decrease in operating assets:
Accounts receivable, net (28,349) 68,177
Inventories 74,227 83,924
Notes and other receivables 17,307 (155,269)
Prepaid expenses and other current assets 191 (64,300)
Increase or (decrease) in operating
liabilities:
Accounts payable 21,789 (6,501)
Deferred revenue 46,352 (69,620)
Accrued expenses and other
liabilities (22,232) 10,763
-------- --------
Net adjustments to reconcile net income (loss) to
net cash (used for) provided by operating activities 156,648 (46,884)
-------- --------
Net cash (used for) provided by operating activities (111,015) 19,249
-------- --------
Cash Flows from Investing Activities:
Additions to property and equipment (4,583) (4,175)
(Increase) decrease in other assets 133 (204)
-------- --------
Net cash used for investing activities (4,450) (4,379)
-------- --------
Cash Flows from Financing Activities:
Payment of long term debt (700) (700)
Payment of capitalized lease obligations (6,420) (7,282)
Proceeds from issuance of common stock -- 1,920
-------- --------
Net cash used for financing activities (7,120) (6,062)
-------- --------
Net (Decrease) Increase in Cash (122,585) 8,808
Cash and Cash Equivalents at Beginning of Year 608,553 394,344
--------- --------
Cash and Cash Equivalents at End of Period $485,968 $403,152
========= =========
<FN>
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
</TABLE>
7
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VERTEX INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with the instructions for Form 10-
Q, and therefore, do not include all information and footnotes
necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted
accounting principles. Reference should be made to the annual
financial statements including the footnotes thereto, included in
the Vertex Industries, Inc. and subsidiary (the "Company") Annual
Report on Form 10-K for the year ended July 31, 1997. In the
opinion of management, the accompanying unaudited interim financial
statements contain all material adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial
condition, the results of operations and cash flows of the Company
and its consolidated subsidiary for the interim periods. Operating
results for interim periods are not necessarily indicative of the
results that may be expected for the entire year.
2. Income Taxes
At July 31, 1997 the Company had net operating loss ("NOLs")
carryforwards available to offset future taxable income of
approximately $4.5 million and $3.6 million for Federal and state
tax purposes, respectively. Realization of the future tax benefits
associated with the NOLs is dependent on the Company's ability to
generate taxable income within the carryforward period and the
periods in which net temporary differences reverse. Future levels
of operating income and taxable income are dependent upon general
economic conditions, competitive pressures on sales and margins and
other factors beyond the Company's control. Accordingly, no
assurance can be given that sufficient taxable income will be
generated for utilization of all of the NOLs and reversals of
temporary differences. As of October 31, 1997, the Company had a
deferred tax asset valuation allowance of approximately $1.9 million
with a net deferred tax asset of approximately $195,000.
In assessing the realizability of the $195,000 net deferred tax
asset, the Company has considered numerous factors, including its
future operating plans and its recent history of operating losses.
Management believes that the $195,000 net deferred tax asset
represents a reasonable estimate of the future utilization of the
NOLs and the Company will continue to evaluate the likelihood of
future profits and the necessity of future adjustments to the
deferred tax asset valuation allowance.
8
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3. Net Income (Loss) Per Share of Common Stock
Net income (loss) per share is computed based on the weighted
average number of common stock and common stock equivalents, if
dilutive, outstanding during each period.
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" which makes certain changes to the manner in which earnings
per share is reported. The Company is required to adopt this
standard for the year ending July 31, 1998. The adoption of this
standard will require restatement of prior years' earnings per
share. For the first quarter ended October 31, 1997 SFAS No. 128
had no material impact on earnings per share.
9
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ITEM 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
Results of Operations
Three months ended October 31, 1997 compared with three months ended
October 31, 1996.
Overview
The Company experienced a 35% decrease in operating revenues and
recorded a net loss of $267,663 for the quarter ended October 31,
1997, compared to net income of $66,133 for the same period last
year. The decrease in operating revenues is primarily due to a
decrease in demand for the label generating systems, bar code and
software product lines offset by an increase in demand for the
weighing equipment product line. The NetWeave license agreement
generated $134,000 in operating revenue for the quarter ended
October 31, 1997.
Net Income
The Company recorded a net loss of $267,663 for the quarter ended
October 31, 1997 as compared to net income of $66,133 for the same
period last year. The net loss is attributed to a decrease in
operating revenues of approximately $352,021 or 35% in addition to a
decrease of approximately 10% in gross margin percentage in fiscal
1997 as compared to last year. Operating expenses increased
approximately $119,920 or 29% for the three months ended October 31,
1997 compared to the same period last year.
Operating Revenues
Operating Revenues decreased $352,021 or 35% to $652,993 for the
quarter ended October 31, 1997, compared to $1,005,014 for the same
period last year. The decrease in operating revenue is attributed
to a decrease in demand for label generating systems, bar code and
software product lines of approximately $498,000 offset by an
increase in sales in the weighing equipment product line of
approximately $27,000 and revenue of approximately $134,000 from the
NetWeave license agreement. The Company did not receive several
large bar code orders in the first quarter of fiscal 1998 as was
forecasted. The Company expects to receive these orders either in
the second or third quarter of 1998. In an effort to increase
revenues the Company hired an additional salesperson in October
1997. The Company has added new software and hardware products to
its product offerings which include a complete warehouse management
system, a message brokering software product and a new line of
printers.
10
<PAGE>
Cost of Sales
Cost of Sales increased to 60% of revenues for the first quarter of
fiscal 1997 compared to 50% for the same period last year. The
increase is primarily due to a change in the sales mix from higher
margin products to lower margin products. The increase is also due
to the NetWeave license agreement which had a cost of sales of 71%
of revenues for the quarter ended October 31, 1997.
Operating Expenses
Operating expenses increased $119,920 or 29% for the first quarter
of fiscal 1997 compared to the same period in 1996. Selling and
administrative expenses increased $109,411 or 36% to $410,032 for
the quarter ended October 31, 1997 as compared to $300,621 for the
same period in 1996. Research and development expenses increased
$10,509 or 9% to $122,363. The increase in selling and
administrative expense is primarily due to operating costs
associated with the NetWeave license agreement. In an effort to
reduce expenditures the Company will close the NetWeave
Philadelphia, Pennsylvania office on December 31, 1997 and
consolidate that operation into its Clifton NJ office. The Company
continues its effort to streamline operations and reduce operating
expenses.
Other Income and Expenses
Net other income was $5,633 for the quarter ended October 31, 1997
compared to $16,442 for last year. The decrease of $10,809 is
primarily due to a decrease in interest income from notes and other
receivables from NetWeave Corporation.
Liquidity and Capital Resources
At October 31, 1997 the Company had $485,968 in cash and cash
equivalents compared to $608,553 at July 31, 1997. Working Capital
and the current ratio were $959,867 and 2.54 to 1 at October 31,
1997 versus $1,184,762 and 3.03 to 1 at July 31, 1997. Net cash
used for operating activities was $111,015 in the first three months
of fiscal 1997.
Capital expenditures were approximately $4,583 and $4,175 for
the three month periods ended October 31, 1997 and 1996,
respectively.
The Company believes that cash and working capital are at
sufficient levels to support the short term needs of the Company.
The Company is seeking additional financing to deal with the long
term financing needs of the Company.
11
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VERTEX INDUSTRIES, INC. AND SUBSIDIARY
Part II - Other Information
Item 5. Other Information
On October 30, 1997 the Company was notified by NASDAQ that the
Company was not in compliance with the current NASDAQ listing
requirements. The Company has until January 30, 1998 to cure the
deficiency or to request a hearing. Otherwise the Company will be
de-listed effective with the close of business on January 30, 1998,
in which case it is probable that the Company would trade in the
Over-the-counter Bulletin Board Market.
The Company is currently formulating a plan to achieve compliance
with both the current and future NASDAQ listing requirements.
Item 6. Exhibits and Reports on Form 8 - K
(a) None
(b) There have been no reports filed
on form 8 - K for the quarter ended
October 31, 1997
12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
VERTEX INDUSTRIES, INC.
Registrant
By S/ Robert T. McLaughlin
Robert T. McLaughlin
Chief Financial Officer, Treasurer
December 12, 1997
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> OCT-31-1997
<CASH> 485,968
<SECURITIES> 0
<RECEIVABLES> 748,237
<ALLOWANCES> 191,480
<INVENTORY> 508,382
<CURRENT-ASSETS> 1,583,779
<PP&E> 1,899,735
<DEPRECIATION> 1,575,401
<TOTAL-ASSETS> 2,209,269
<CURRENT-LIABILITIES> 623,912
<BONDS> 0
0
0
<COMMON> 25,715
<OTHER-SE> 1,542,722
<TOTAL-LIABILITY-AND-EQUITY> 2,209,269
<SALES> 652,993
<TOTAL-REVENUES> 652,993
<CGS> 393,894
<TOTAL-COSTS> 410,032
<OTHER-EXPENSES> 122,363
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (267,633)
<INCOME-TAX> 0
<INCOME-CONTINUING> (267,633)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (267,633)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> 0
</TABLE>
