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 January 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: (201) 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: 5,100,107 shares outstanding as of
March 17, 1997.
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VERTEX INDUSTRIES, INC. AND SUBSIDIARY
FORM 10-Q
January 31, 1997
I N D E X
PAGE
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
January 31, 1997 and July 31,1996 . . . . . . . . . . .3
Consolidated Statements of Income
three and six months ended January 31, 1997
and 1996. . . . . . . . . . . . . . . . . . . . . . . .5
Consolidated Statements of Changes in
Stockholders' Equity - for the year ended
July 31, 1996 and six months ended
January 31, 1997. . . . . . . . . . . . . . . . . . . .6
Consolidated Statements of
Cash Flows - six months
ended January 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 . . . . . . . . . . . . . . . . .9
Part II - Other Information
Item 4. Submission of Matters to Vote
of Security Holders . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on form 8 - K . . . . . 15
Signatures. . . . . . . . . . . . . . . . . . . . . . 16
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<TABLE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
January 31, 1997 July 31, 1996
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 682,774 $ 394,344
Accounts Receivable, Less Allowance
for Doubtful Accounts of
$75,985 at January 31, 1997 and
July 31, 1996 535,139 608,164
Notes and other receivables 228,680 170,755
Inventories 624,960 693,179
Prepaid Expenses and
other current assets 71,397 13,885
---------- ---------
Total Current Assets 2,142,950 1,880,327
---------- ---------
PROPERTY, EQUIPMENT,
AND CAPITAL LEASES:
Property and Equipment 1,732,451 1,725,502
Capital Leases 141,757 141,757
---------- ---------
Total Property, Equipment and
Capital Leases 1,874,208 1,867,259
Less: Accumulated Depreciation and
Amortization (1,464,529) (1,393,102)
----------- -----------
Net Property, Equipment
and Capital Leases 409,679 474,157
----------- -----------
OTHER ASSETS:
Cost in Excess of Net Assets
of Companies Acquired, Net of
accumulated amortization of
$325,706 at January 31, 1997 and
$301,016 at July 31, 1996 88,182 112,872
Deferred tax asset 121,300 195,000
Other Assets 53,710 53,500
----------- -----------
Total Other Assets 263,192 361,372
----------- -----------
Total Assets $2,815,821 $2,715,856
=========== ==========
<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 BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
January 31, 1997 July 31, 1996
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Long-Term debt, current portion $ 2,800 $ 2,800
Current portion of obligations
under capital leases 27,614 32,849
Accounts payable 148,006 169,632
Accrued Expenses and Other Liabilities 141,273 99,237
Customer Deposits 77,743 86,120
----------- ----------
Total Current Liabilities 397,436 390,638
----------- ----------
LONG-TERM LIABILITIES:
Long-Term Debt, Less Current Portion 1,167 2,567
Obligations Under Capital Leases,
Net of Current Portion 19,302 30,308
----------- ----------
Total Long-Term Liabilities 20,469 32,875
----------- ----------
EXCESS OF NET ASSETS OF ACQUIRED
COMPANIES OVER COST NET OF ACCUMULATED
AMORTIZATION of $486,131 at
January 31, 1997 and $479,165 at
July 31, 1996 -- 6,966
------------ ---------
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 5,112,979 shares at
January 31, 1997 and 5,108,979 shares at
July 31, 1996, respectively 25,565 25,545
Capital in Excess of Par Value 5,184,088 5,182,188
Accumulated Deficit (2,761,168) (2,871,787)
----------- -----------
2,448,485 2,335,946
Less: Treasury stock, 12,872
shares at cost (50,569) (50,569)
------------ -----------
Total Stockholders' Equity 2,397,916 2,285,377
------------ -----------
Total Liabilities and Stockholders' Equity $2,815,821 $2,715,856
============ ===========
<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 INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended Jan. 31 Six Months Ended Jan. 31
1997 1996 1997 1996
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 937,029 $1,041,620 $1,942,043 $1,870,397
COST OF SALES 403,705 457,032 902,453 878,559
---------- ----------- --------- ---------
GROSS PROFIT 533,324 584,588 1,039,590 991,838
---------- ----------- ---------- ---------
OPERATING EXPENSES:
Selling and Administrative 349,414 305,907 650,035 604,475
Research and Development 107,430 98,836 219,284 194,634
---------- ----------- ---------- ----------
Total Operating Expenses 456,844 404,743 869,319 799,109
---------- ----------- ---------- ----------
OPERATING INCOME 76,480 179,845 170,271 192,729
---------- ----------- ---------- ----------
NET OTHER INCOME (Expense) (2,394) 800 14,048 1,731
---------- ----------- ---------- ----------
Income before income taxes 74,086 180,645 184,319 194,460
---------- ----------- ---------- ----------
INCOME TAX PROVISION 29,600 77,406 73,700 78,350
---------- ----------- ---------- ----------
Net Income $ 44,486 $ 103,239 $ 110,619 $ 116,110
=========== ========== ========== ==========
Net Income per share of
Common Stock: $ .01 $ .02 $ .02 $ .02
========== ========== ========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 5,349,500 5,094,507 5,402,086 5,086,442
========== ========= ========= ==========
<FN>
The accompanying notes to consolidated financial statements are an integral part of
these consolidated financial statements.
</TABLE>
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<TABLE>
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<CAPTION>
Common Stock Capital
$.005 Par Value in Excess Accumulated Treasury
Year ended July 31, 1996 Shares Amount Par Value Deficit Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1995 5,080,979 $25,404 $5,167,951 $(3,109,535) $(50,569) $2,033,251
Exercise of Stock Options 28,100 141 14,237 -- -- 14,378
Net income for the
year ended July 31, 1996 -- -- -- 237,748 -- 237,748
--------- -------- ----------- ------------- ---------- -----------
Balance at July 31, 1996 5,108,979 $25,545 $5,182,188 $(2,871,787) $(50,569) $2,285,377
========= ======== =========== ============= ========== ===========
Six months ended
January 31, 1997
Exercise of Stock Options 4,000 20 1,900 -- -- 1,920
Net income for the six
months ended January 31,
1997 -- -- -- 110,619 -- 110,619
---------- -------- ----------- ------------- ---------- -----------
Balance at January
31, 1997 5,112,979 $25,565 $5,184,088 $(2,761,168) $(50,569) $2,397,916
=========== ======== =========== =============
<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 CASH FLOWS
(UNAUDITED)
<CAPTION>
Six Months Ended
January 31,1997 January 31,1996
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 110,619 $ 116,110
----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 89,151 69,985
Deferred taxes 73,700 77,406
(Increase) or Decrease in operating assets:
Accounts receivable 73,025 (50,031)
Inventories 68,219 168,180
Notes and other receivables (57,925) --
Prepaid expenses and other current assets (57,512) (6,222)
Increase or (decrease) in operating liabilities:
Accounts payable (21,626) 3,579
Customer Deposits (8,377) (73,417)
Accrued expenses and other liabilities 42,036 (63,572)
--------- --------
Net adjustments to reconcile net income to
net cash provided by operating activities 200,691 125,908
--------- --------
Net Cash provided by operating activities 311,310 242,018
Cash Flows from Investing Activities:
Additions to property and equipment (6,949) (36,785)
Increase in other assets (210) --
--------- ---------
Net cash used for investing activities (7,159) (36,785)
--------- ---------
Cash Flows from Financing Activities:
Payment of long term debt (1,400) (1,400)
Payment of capitalized lease obligations (16,241) (13,957)
Proceeds from issuance of common stock 1,920 12,978
--------- ---------
Net Cash provided by (used for) financing (15,721) (2,379)
activities --------- ---------
Net Increase in Cash 288,430 202,854
Cash and Cash Equivalents at Beginning of Period 394,344 321,881
--------- ----------
Cash and Cash Equivalents at End of Period $682,774 $524,735
========== ==========
<FN>
The accompanying notes to the consolidated financial statements are an
integral part of these financial statements.
</TABLE>
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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, 1996. 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, 1996, the Company had net operating loss ("NOLs")
carryforwards available to offset future taxable income of
approximately $3.8 million and $3.4 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 January 31, 1997 the Company had a deferred tax asset
valuation allowance of approximately $1.5 million with a net deferred
tax asset of approximately $121,300 which was recorded in prior years
relating to the realization of the NOLs. As of January 31, 1997 the
Company has not adjusted the deferred tax asset valuation allowance.
In assessing the realizability of the $121,300 net deferred tax
asset, the Company has considered numerous factors, including its
future operating plans and its past history of operating losses.
Management believes that the $121,300 net deferred tax asset
represents a reasonable conservative 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.
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3. Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board
("FASB") issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which is effective in the Company's 1997 fiscal year.
The statement encourages entities to adopt the fair value-based method
of accounting for employee stock options, as opposed to the method
which measures compensation cost for those plans using the intrinsic
value-based accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees". The Company has decided not to adopt
the recognition provisions of SFAS No. 123. However, the disclosure
requirements of SFAS No. 123 will be adopted during the 1997 fiscal
year.
4. License Agreement with NetWeave Corporation
On February 20, 1997 the Company entered into a license agreement
with NetWeave Corporation to develop, market, sell and support the
NetWeave product worldwide. Vertex Industries will pay NetWeave a
royalty on the initial licenses sold and on annual license fees paid
by the customer for maintenance and support of the NetWeave product.
Under terms of the agreement, the NetWeave Corporation assigns
its existing customer base to Vertex Industries along with the
existing sales representative agreements in the U.S. and the master
distributor with SX Consultancy for Europe and Asia. SX Consultancy
is a European software distributor and developer of custom software
based in the UK with ties to distributors in Asia. Vertex will
maintain the current NetWeave Corporation facility in Philadelphia
along with existing employees. The Licensing Agreement replaces the
Conditional Acquisition Agreement which the Company announced in May,
1996. The Sombers Group, Inc. custom software portion of the original
agreement remains part of The NetWeave Corporation.
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<PAGE>
ITEM 2. Management's Discussion and Analysis of Consolidated
Financial Conditions and Results of Operations
Results of Operations
Three months ended January 31, 1997 compared with three months ended
January 31, 1996.
Overview
The Company experienced a 10% decrease in operating revenues and
recorded net income of $44,486 for the quarter ended January 31, 1997,
compared to net income of $103,239 for the same period in 1996. The
decrease in operating revenues is attributed to a decrease in demand
for the bar code product line coupled with an increase in demand for
the weighing and label generating systems product lines. The decrease
in net income is primarily due to an decrease in operating revenues in
addition to an increase in operating expenses.
Net Income
Net income decreased $58,753 to $44,486 for the quarter ended
January 31, 1997 as compared to net income of $103,239 for the same
period in 1996. The decrease in net income is primarily due to an
decrease in the operating revenues of approximately $104,591 or 10% in
1997 as compared to the same period in 1996. The decrease in net
income is also attributed to an increase in operating expenses of
approximately $52,101 or 13% in 1997 as compared to the same period in
1996.
Operating Revenues
Operating revenues decreased $104,591 or 10% to $937,029 for the
quarter ended January 31, 1997, compared to $1,041,620 for the same
period in 1996. The decrease in operating revenues is attributed to a
decrease in demand for the bar code product line of approximately
$243,000 coupled with an increase in demand of approximately $138,000
in the weighing and label generating systems product lines.
Cost of Sales
Cost of Sales remained relatively flat at 43% for both periods
and the Company continues to strive for increased product margins.
Operating Expenses
Operating expenses increased $52,101 or 13% to $456,844 for the
quarter ended January 31, 1997, as compared to $404,743 for the same
period in 1996. The increase is comprised of an increase of $43,507
or 14% in selling and administrative expenses and an increase of
$8,594 or 1% in research and development expenses.
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The increase in selling and administrative expenses are due to an
increase in advertising costs which are associated with the BridgeNet
product line, an increase in salesmen's commissions and an increase in
consulting fees and salary increases for personnel. The increase in
research and development expenses is due to the Company's expanded
research and development efforts on its BridgeNet product. The
Company anticipates that the funds allocated to R&D will position the
Company for future growth.
Net Other Income (Expense)
Net other income (expense) decreased to an expense of $2,394 for
the quarter ended January 31, 1997 compared to income of $800 for the
same period in 1996. The expense relates primarily to interest
expense of $2,002 for the quarter ended January 31, 1997.
Income Tax Expense
The Company recorded an income tax provision of $29,600 for the
quarter ended January 31, 1997 as compared to $77,406 for same period
in 1996. The income tax provision of $29,600 was offset against the
Company's deferred tax asset at January 31, 1997.
Six Months Ended January 31, 1997 compared with six months ended
January 31, 1996.
Overview
The Company's operating revenues increased $71,646 to $1,942,043
for the six months ended January 31, 1997 as compared to the same
period in 1996. The increase in operating revenues is due to an
increase in demand for the weighing and label generating systems
product lines coupled with a decrease in the bar code and software
product lines. The decrease in net income is attributed to an
increase in operating expenses.
Net Income
Net Income decreased $5,491 to $110,619 for the six months ended
January 31, 1997, compared to net income of $116,110 for the same
period in 1996. The decrease in net income is primarily attributed to
an increase in operating expenses of $70,210 or 9% for the six months
ended January 31, 1997 compared to the same period in 1996.
Operating Revenues
Operating revenues increased $71,646 to $1,942,043 for the six
months ended January 31, 1997 compared to $1,870,397 in the same
period last year. The increase is due to an increase in demand of
approximately $388,000 in the weighing and label generating systems
product lines coupled with a decrease in the bar code, software and
card device product lines of approximately $316,000.
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<PAGE>
Cost of Sales
Cost of Sales increased to 54% of revenues for the six months
ended January 31, 1997, compared to 53% for the same period in 1996.
The Company has been able to maintain without much fluctuation
favorable profit margins for both periods.
Operating Expenses
Operating expenses increased 9% or $70,210 to $869,319 for the
six month ended January 31, 1997 compared to $799,109 in the same
period in 1996. The increase is comprised of an increase of $45,560
or 8% in selling and administrative expenses and an increase of
$24,650 or 13% in research and development expenses. The Company has
increased its direct selling efforts as systems integrators (while
still supporting its Distributor and VAR channels) in an effort to
produce an improved revenue stream. The Company continues to increase
its research and development on its BridgeNet software products. The
increase in selling and administrative expenses is primarily due to an
increase in advertising and marketing, salesmen's commissions
consulting fees and salary increases.
Net Other Income (Expenses)
Net other income increased $12,371 to $14,048 for the six months
ended January 31, 1997, compared to net other income of $1,731 for the
same period in 1996. The increase is primarily due to an increase in
interest income from the Company's money market account.
Income Tax Expense
The Company recorded an income tax provision of $73,700 for the
six months ended January 31, 1997 as compared to $78,350 for the same
period in 1996. See footnote two on page 8 for additional information
on income taxes.
Liquidity and Capital Resources
At January 31, 1997 the Company had $682,774 in cash and cash
equivalents compared to $394,344 at July 31, 1996. Working Capital
and the current ratio were $1,745,514 and 5.39 to 1 at January 31,
1997 versus $1,489,689 and 4.81 to 1 at July 31, 1996. Net cash
provided by operating activities was $311,310 for the first six months
of 1996.
Capital expenditures were approximately $6,900 and $36,800 for
the six month periods ended January 31, 1997 and 1996, respectively.
The Company believes that cash and working capital are at
sufficient levels to support the needs of the Company for the near
future.
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<PAGE>
With the Company entering into a licensing agreement with
NetWeave Corporation, the Company will require additional working
capital. The Company is currently seeking a working capital line of
credit and has approached several lenders and expects to have a line
of credit in place within the near future.
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<PAGE>
VERTEX INDUSTRIES, INC. AND SUBSIDIARY
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held an Annual Meeting of Stockholders on
January 15, 1997.
(b) The names of each Director elected at the Annual
Meeting are as follows:
James Q. Maloy
Ronald C. Byer
Irwin Dorros
Wilbur Highleyman
George Powch
The above directors were elected for a one year term.
FOR AGAINST ABSTAIN
James Q. Maloy 3,425,672 195,125 15,089
Ronald C. Byer 3,456,747 164,050 15,089
Wilbur Highleyman 3,619,247 1,550 15,089
George Powch 3,619,797 1,000 15,089
Irwin Dorros 3,619,247 1,550 15,089
(c) A brief description of each other matter voted upon at
the Annual Meeting and the number of affirmative votes
and the number of negative votes cast with respect to
each such matter follows. Each such matter was
approved.
(i) The ratification of Arthur Andersen LLP as the
Company's Independent Public Accountants for the
fiscal year ending July 31, 1997:
For Against Abstain
3,609,403 12,991 13,492
(ii) To amend the Company's Incentive Stock Option
Plan to increase the number of shares of Common
Stock available under the plan from 1,000,000
shares to 1,500,000 shares
For Against Abstain
3,352,191 106,316 177,379
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<PAGE>
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
January 31, 1997
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<PAGE>
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
March 17, 1997
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<PAGE>
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
March 17, 1997
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JAN-31-1997
<CASH> 682,774
<SECURITIES> 0
<RECEIVABLES> 839,804
<ALLOWANCES> 75,985
<INVENTORY> 624,960
<CURRENT-ASSETS> 2,142,950
<PP&E> 1,874,208
<DEPRECIATION> 1,464,529
<TOTAL-ASSETS> 2,815,821
<CURRENT-LIABILITIES> 397,436
<BONDS> 3,967
0
0
<COMMON> 25,565
<OTHER-SE> 2,372,351
<TOTAL-LIABILITY-AND-EQUITY> 2,815,821
<SALES> 1,942,043
<TOTAL-REVENUES> 1,942,043
<CGS> 902,453
<TOTAL-COSTS> 902,453
<OTHER-EXPENSES> 869,319
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,709
<INCOME-PRETAX> 184,319
<INCOME-TAX> 73,700
<INCOME-CONTINUING> 110,619
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 110,619
<EPS-PRIMARY> .02
<EPS-DILUTED> 0
</TABLE>
