<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, 1998
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: 5,161,979 shares
outstanding as of December 14, 1998.
<PAGE>
VERTEX INDUSTRIES, INC.
FORM 10-Q
October 31, 1998
I N D E X
PAGE
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets-
October 31, 1998 and July 31, 1998. . . . . . . . . . . 3
Statements of Operations
three months ended October 31, 1998 and 1997 . . . . . 5
Statements of Changes in
Stockholders' Equity - for the year ended
July 31, 1998 and three months ended October 31, 1998. 6
Statements of
Cash Flows - three months
ended October 31, 1998 and 1997 . . . . . . . . . . . . 7
Notes to Financial Statements . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . 9
Part II - Other Information
Item 6. Exhibits and Reports on form 8 - K . . . . . .14
Signatures . . . . . . . . . . . . . . . . . . . . . .15
2
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<TABLE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERTEX INDUSTRIES, INC.
BALANCE SHEETS
ASSETS
<CAPTION>
October 31, 1998 July 31, 1998
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $539,128 $631,362
Accounts Receivable, Less Allowance
for Doubtful Accounts of
$75,985 at October 31, 1998 and
July 31, 1998 2,697,639 837,399
Notes and other receivables, net 61,344 67,344
Inventories 795,741 464,389
Investment Securities 212,111 452,502
Prepaid Expenses and
other current assets 31,020 21,348
___________ ___________
Total Current Assets 4,336,983 2,474,344
___________ ___________
PROPERTY, EQUIPMENT,
AND CAPITAL LEASES:
Property and Equipment 1,846,049 1,799,526
Capital Leases 141,757 141,757
___________ ___________
Total Property, Equipment and
Capital Leases 1,987,806 1,941,283
Less: Accumulated Depreciation and
Amortization (1,676,404) (1,653,962)
___________ ___________
Net Property, Equipment
and Capital Leases 311,402 287,321
___________ ___________
OTHER ASSETS:
Deferred tax asset 243,200 400,000
Other Assets 66,401 66,401
___________ ___________
Total Other Assets 309,601 466,401
___________ ___________
Total Assets $4,957,986 $3,228,066
=========== ===========
<FN>
See notes to financial statements.
</TABLE>
3
<PAGE>
<TABLE>
VERTEX INDUSTRIES, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
October 31, 1998 July 31, 1998
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Loan Payable - Bank $100,000 $0
Current portion of obligations
under capital leases 5,792 5,641
Accounts payable 1,800,608 273,726
Accrued Expenses and Other Liabilities 211,970 257,094
Deferred Revenue 497,534 343,612
___________ _________
Total Current Liabilities 2,615,904 880,073
___________ _________
LONG-TERM LIABILITIES:
Obligations Under Capital Leases,
Net of Current Portion 9,918 11,424
___________ __________
Total Long-Term Liabilities 9,918 11,424
___________ __________
Total Liabilities 2,625,822 891,497
___________ __________
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01
per share 2,000,000 shares
authorized; none issued
and outstanding 0 0
Common Stock, par value $.005
per share, authorized 20,000,000
shares; issued 5,156,979 shares at
October 31, 1998 and July 31,1998
respectively 25,785 25,785
Additional paid-in capital 5,223,293 5,223,293
Accumulated Deficit (3,060,415) (3,296,401)
Accumulated other comprehensive income 188,670 429,061
___________ ____________
2,377,333 2,381,738
Less: Treasury stock, 10,000
shares at cost (45,169) (45,169)
___________ ____________
Total Stockholders' Equity 2,332,164 2,336,569
___________ ____________
Total Liabilities and
Stockholders' Equity $4,957,986 $3,228,066
=========== ============
<FN>
See notes to financial statements.
</TABLE>
4
<PAGE>
<TABLE>
VERTEX INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended
October 31
1998 1997
<S> <C> <C>
OPERATING REVENUES $2,692,970 $652,993
COST OF SALES 1,750,868 393,894
__________ __________
GROSS PROFIT 942,102 259,099
OPERATING EXPENSES:
Selling and Administrative 393,394 410,032
Research and Development 159,544 122,363
___________ __________
Total Operating Expenses 552,938 532,395
___________ __________
OPERATING INCOME (LOSS) 389,164 (273,296)
OTHER INCOME (EXPENSE):
Interest Income 5,637 6,662
Interest Expense (1,490) (1,029)
___________ __________
Net Other Income 4,147 5,633
___________ __________
Income(Loss)Before Income Taxes 393,311 (267,663)
Income Tax Provision 157,325 0
___________ __________
Net Income (loss) $235,986 ($267,663)
=========== ==========
Net Income (loss) per share of
Common Stock:
Basic $.05 $(.05)
Diluted $.04 $(.05)
Weighted Average Number of
Shares Outstanding
Basic 5,146,979 5,128,140
Diluted 5,553,302 5,128,140
<FN>
See notes to financial statements.
</TABLE>
5
<PAGE>
<TABLE>
VERTEX INDUSTRIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION> Accumulated
Additional Other
Common Stock Paid-In Accumulated Comprehensive Comprehensive Treasury
Shares Amount Capital Deficit Income Income Stock Total
______ ______ __________ ___________ _____________ _____________ __________ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE July 31, 1997 5,137,979 $25,690 $5,201,138 ($3,344,847) $0 $0 ($50,569) $1,831,412
Issuance of stock in
consideration of services 19,000 95 22,155 22,250
Other comprehensive
income, net of tax
Net income 48,446 48,446 48,446
Unrealized gain on
investment securities 429,061 429,061 429,061
___________
Comprehensive income 477,507
===========
Decrease in treasury stock 0 5,400 5,400
_________ _________ ___________ ___________ _____________ ___________ __________
BALANCE July 31, 1998 5,156,979 $25,785 $5,223,293 ($3,296,401) $429,061 ($45,169) $2,336,569
Three months ended
October 31, 1998
(Unaudited)
Other comprehensive
income, net of tax
Net income for the three
months ended October 31,
1998 235,986 235,986 235,986
Unrealized loss on
investment securities (240,391) (240,391) (240,391)
____________
Comprehensive loss (4,405)
_________ _________ _________ _____________ ============ _____________ ___________ _________
BALANCE October 31, 1998 5,156,979 $25,785 $5,223,293 ($3,060,415) $188,670 ($45,169) $2,332,164
========= ========= ========= ============= ============= =========== ==========
<FN>
See notes to financial statements.
</TABLE>
6
<PAGE>
<TABLE>
VERTEX INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended
October 31, October 31,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (loss) $235,986 ($267,663)
___________ __________
Adjustments to reconcile net
income (loss) to net cash (used for)
provided by operating activities:
Depreciation and amortization 22,442 42,675
Common stock issued for services 0 4,688
Deferred taxes 156,800 0
(Increase) or decrease in operating
assets:
Accounts receivable, net (1,860,240) (28,349)
Inventories (331,352) 74,227
Notes and other receivables 6,000 17,307
Prepaid expenses and other current assets (9,672) 191
Increase or (decrease) in operating
liabilities:
Accounts payable 1,526,882 21,789
Deferred revenue 153,922 46,352
Accrued expenses and other liabilities (45,124) (22,232)
____________ ___________
Net adjustments to reconcile net income (loss)
to net cash used for by operating activities (380,342) 156,648
____________ ___________
Net cash used for by operating activities (144,356) (111,015)
____________ ___________
Cash Flows from Investing Activities:
Additions to property and equipment (46,523) (4,583)
(Increase) decrease in other assets 0 133
____________ ___________
Net cash used for investing activities (46,523) (4,450)
____________ ___________
Cash Flows from Financing Activities:
Payment of long term debt 0 (700)
Payment of capitalized lease obligations (1,355) (6,420)
Proceeds from bank loan 100,000 0
____________ ___________
Net cash (used for) provided by
financing activities 98,645 (7,120)
____________ ___________
Net (Decrease) Increase in Cash (92,234) (122,585)
Cash and Cash Equivalents at Beginning of year 631,362 608,553
____________ ___________
Cash and Cash Equivalents at End of Period $539,128 $485,968
============ ===========
<FN>
See notes to financial statements.
</TABLE>
7
<PAGE>
VERTEX INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited 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.
(the "Company") Annual Report on Form 10-K for the year
ended July 31, 1998. 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 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, 1998 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, 1998,
the Company had a deferred tax asset valuation allowance of
approximately $1.4 million with a net deferred tax asset of
approximately $243,200.
In assessing the realizability of the $243,200 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 $243,200
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.
3. Net Income (Loss) Per Share of Common Stock
Basic net income (loss) per common share is calculated by
dividing net income, by the weighted average common shares
outstanding during the period.
8
<PAGE>
Diluted net income per common share is computed similar to
that of basic net income per common share except that the
denominator is increased to include the number of additional
common shares that would have been outstanding if all
potentially dilutive common shares, principally stock
options, were issued during the reporting period.
4. Comprehensive Income
In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130. "Reporting Comprehensive
Income," which establishes standards for reporting and
display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from
investments by owners and distribution to owners. Among
other disclosures, SFAS No. 130 requires that all items
that are required to be recognized under current accounting
standards as components of comprehensive income be reported
in a financial statement that is displayed with the same
prominence as other financial statements.
The Company has classified its investment securities as
available for sale. Such securities are measured at fair
value in the financial statements based on quoted market
prices with unrealized gains and losses included in
stockholders' equity. The company currently owns 226,251
shares of Mortgage Plus Equity and Loan Corp., (OTCBB:MPEH),
a mortgage banking company. The Company has reduced its
unrealized gain on investment securities to $188,670 as of
October 31, 1998 based on the then current stock price of
$.906 per share. The above unrealized gain is considered
comprehensive income and is a component of stockholders' equity.
5. Loan Payable - Bank
In September 1998 the Company obtained a $600,000 working
capital line of credit from a New Jersey Bank. The interest
rate is prime plus 1% the line expires on February 28, 1999
and the Company is restricted to using the line for the Bell
Atlantic contract. The line is secure by Company assets
which includes 226,251 shares of MPEH stock.
At October 31, 1998 the loan balance was $100,000.
9
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Three months ended October 31, 1998 compared with three months
ended October 31, 1997.
Overview
The Company experienced a significant increase in operating
revenues and recorded net income of $235,986 for the quarter
ended October 31, 1998, compared to a net loss of $267,663 for
the same period last year. The increase in operating revenues is
primarily due to the Company's contract to upgrade Bell
Atlantic's Data Collection devices and coin collection systems.
There were no material increases or decreases in the Company's
other product lines. The NetWeave license agreement generated
approximately $104,000 in operating revenues for the quarter
ended October 31, 1998 as compared to $134,000 for the same
period last year.
Net Income
The Company recorded net income of $235,986 for the quarter ended
October 31, 1998 as compared to a net loss of $267,663 for the
same period last year. The net income is attributed to a
significant increase in operating revenues of approximately
$2,039,977. Operating expenses increased approximately $20,543 or
4% for the three months ended October 31, 1998 compared to the
same period last year.
Operating Revenues
Operating Revenues increased $2,039,977 to $2,692,970 for the
quarter ended October 31, 1998, compared to $652,993 for the same
period last year. The increase in operating revenue is
attributed to the Company's contract with Bell Atlantic to
upgrade its data collection devices and coin collection software.
The Company's other product lines remained relatively flat. The
NetWeave license agreement generated approximately $104,000 in
revenue for the quarter ended October 31, 1998 as compared to
$134,000 for the same period in 1998. 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 an e-commerce product, "evolve".
The Company expects increased revenues in future periods from
these products.
Cost of Sales
Cost of Sales increased to 65% of revenues for the first quarter
of fiscal 1998 compared to 60% for the same period last year.
The increase is due to a change in the sales mix from higher
margin products to lower margin products.
10
<PAGE>
Operating Expenses
Operating expenses increased $20,543 or 4% to $552,938 for the first
quarter of fiscal 1999 compared to $532,395 for the same period in
1998. Selling and administrative expenses decreased approximately
$17,000 or 4% to $393,394 for the quarter ended October 31, 1998 as
compared to $410,032 for the same period in 1997. Research and development
expenses increased $37,181 or 30% to $159,544. The decrease 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 closed the NetWeave Philadelphia, Pennsylvania office on
December 31, 1997 and consolidated that operation into its Clifton NJ
office. The increase in research and development expenses is due to
the hiring of additional personnel and consultants to develop and
support the Company's existing and future products. The Company continues
its effort to streamline operations and reduce operating expenses.
Other Income and Expenses
Net other income was $4,147 for the quarter ended October 31,
1998 compared to $5,633 for last year. The decrease of $1,486 is
comprised of a decrease in interest income of $1,025 and an
increase in interest expense of $461, as compared to the same
period last year.
Income Tax Provision
The Company recorded an income tax provision of $157,325 for the
quarter ended October 31, 1998 as compared to no income tax
provision for the same period last year. See footnote 2 on page
8 for additional information on income taxes.
Year 2000
The Year 2000 issue arises because many computer hardware and
software systems use only two digits to represent the year. As a
result, these systems and programs may not process dates beyond
1999, which may cause errors in information or systems failures.
Assessments of the potential effects of the Year 2000 issues vary
markedly among different companies, governments, consultants,
economists and commentators, and it is not possible to predict
what the actual impact may be. Given this uncertainty, the
Company recognizes the need to remain vigilant and is continuing
its analysis, assessment and planning for the various Year 2000 issues.
In early 1998, the Company developed a program to determine Year
2000 compliance of its computer systems, products and services,
as well as computer hardware which it has sold but which it did
not manufacture. The Company's current product and service
offerings have been designed to be Year 2000 ready. A Year 2000
committee was formed and several meetings have taken place to
address the Company's Year 2000 issues. The Company has
identified three areas of inquiry respecting Year 2000 compliance
- -- (1) the Company's internal finance and informational systems,
(2) software and hardware sold or licensed to customers, and (3)
third-party relationships, including vendors, suppliers and customers.
11
<PAGE>
The Company has conducted a review of the above areas to determine
exposure to Year 2000 issues. In the financial and information system
areas, a number of applications have been identified as being Year 2000
compliant due to their recent implementation. The Company's core
financial and reporting systems are Year 2000 compliant. Tests on the
remaining systems are being performed. The Company anticipates completing
these tests in early 1999.
In the software and hardware area, the Company is in the process of
identifying areas of exposure. The original version of Netweave
which is no longer sold has been determined not to be Year 2000 compliant.
The Company is presently developing an upgrade to the old version of
Netweave which is Year 2000 compliant which will be supplied to the
customers currently using this old version of Netweave.
The Company will supply all BridgeNet customers with the processing
code to insure Year 2000 compliance. Both of the above upgrades will
be available by early 1999.
In the third-party area, the Company is in the process of assessing
the Year 2000 readiness of its key suppliers, subcontractors and
business partners. This project has been undertaken with a view toward
assuring that the Company has adequate resources for required supplies
and components, and to enable the Company to identify potential Year 2000
non-compliance problems with hardware which it has sold but did not
manufacture. The Company plans to complete this project in early 1999.
Letters and questionnaires have been sent out and the Company is waiting for
responses.
The Year 2000 readiness of the Company's customers varies and the Company is
actively encouraging its customers to prepare their own systems for the
Year 2000. The Company's major customer, Bell Atlantic, has tested the
Company supplied software, BridgeNet, in conjunction with their internal
systems and found BridgeNet to be Year 2000 compliant. Efforts by
customers to address Year 2000 issues may absorb a substantial part of
their information technology budgets in the near term and customers may
either delay or accelerate the deployment and implementation of new
applications and systems. This could potentially decrease demand for
the Company's products and services and thereby effect the Company's
operating revenues.
Although the Company believes its costs in steps addressing any Year 2000
issues (for testing, third party inquiries, and remedies) shall be
minimal and will not have a material adverse impact on the Company's financial
position, any failure or delay in addressing the issues could result in
the disruption of business in the Year 2000. In addition, the Company is
aware of the potential for claims against it and other companies for
damages arising from products and services provided by the Company
that were not Year 2000 ready. The Company continues to believe that any such
claims against it would be without merit.
The Company has reviewed all internal equipment (excluding
computer equipment) which may have embedded systems which could
be date sensitive and determined that there would be no adverse
affect on Company operations if these systems were determined not
to be Year 2000 compliant.
12
<PAGE>
The Company has developed a contingency plan appointing a trouble
shooting team of employees to quickly evaluate and remedy a Year
2000 problem when one may occur upon reaching that year.
Finally, the Year 2000 presents a number of other risks and
uncertainties that could effect the Company, including utilities
failures, competition for its personnel skilled in the resolution
of Year 2000 issues, building systems failures, environmental
systems failures, office equipment failures, and the nature of
government responses to Year 2000 issues, among others. While
the Company continues to believe that the Year 2000 matters
discussed above will not have a material impact on its business,
financial condition or results of operations, it remains
uncertain whether or to what extent the Company may be effected.
Liquidity and Capital Resources
At October 31, 1998 the Company had $539,128 in cash and cash
equivalents compared to $631,362 at July 31, 1998. Working
Capital and the current ratio were $1,721,079 and 1.66 to 1 at
October 31, 1998 versus $1,594,271 and 2.81 to 1 at July 31,
1998. Net cash used for operating activities was $144,356 in the
first three months of fiscal 1998.
Capital expenditures were approximately $46,523 and $4,583 for
the three month periods ended October 31, 1998 and 1997,
respectively.
In September 1998 the Company obtained a $600,000 capital working
capital line of credit from a New Jersey bank. The interest rate
is prime plus 1% and the line expires on February 28, 1999. The
Company is restricted to using the line of credit for the Bell
Atlantic contract. The Company intends to extend the line upon
the February 28, 1999 expiration date.
13
<PAGE>
VERTEX INDUSTRIES, INC.
Part II - Other Information
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, 1998
14
<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
December 14, 1998
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> OCT-31-1999
<CASH> 539,128
<SECURITIES> 212,111
<RECEIVABLES> 2,971,383
<ALLOWANCES> 212,400
<INVENTORY> 795,741
<CURRENT-ASSETS> 4,336,983
<PP&E> 1,987,806
<DEPRECIATION> 1,676,404
<TOTAL-ASSETS> 4,957,986
<CURRENT-LIABILITIES> 2,615,904
<BONDS> 100,000
0
0
<COMMON> 25,785
<OTHER-SE> 2,306,379
<TOTAL-LIABILITY-AND-EQUITY> 4,957,986
<SALES> 2,692,970
<TOTAL-REVENUES> 2,692,970
<CGS> 1,750,868
<TOTAL-COSTS> 2,144,262
<OTHER-EXPENSES> 159,544
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 393,311
<INCOME-TAX> 157,325
<INCOME-CONTINUING> 235,986
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 235,986
<EPS-PRIMARY> .05
<EPS-DILUTED> .04
</TABLE>
