<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 April 30, 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: (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: 5,137,979 shares
outstanding as of June 15, 1998.
<PAGE>
VERTEX INDUSTRIES, INC.
FORM 10-Q
April 30, 1998
I N D E X
PAGE
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets
April 30, 1998 and July 31, 1997 . . . . . . . . . . 3
Statements of Operations
three and nine months ended April 30, 1998
and 1997. . . . . . . . . . . . . . . . . . . . . . .5
Statements of Changes in
Stockholders' Equity - for the year ended
July 31, 1997 and nine months ended
April 30, 1998. . . . . . . . . . . . . . . . . . . .6
Statements of
Cash Flows - nine months
ended April 30, 1998 and 1997 . . . . . . . . . . . .7
Notes to Financial Statements . . . . . . . . . . . .8
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . 10
Part II - Other Information
Item 5. Other Information . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on form 8 - K . . . . 14
Signatures. . . . . . . . . . . . . . . . . .. . . .15
2
<PAGE>
<TABLE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERTEX INDUSTRIES, INC.
BALANCE SHEETS
ASSETS
<CAPTION>
April 30, 1998 July 31, 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $559,063 $608,553
Accounts Receivable, Less Allowance
for Doubtful Accounts of
$75,985 at January 31, 1998 and
July 31, 1997 519,561 450,266
Notes and other receivables, net 72,501 95,451
Inventories 448,211 582,609
Marketable Securities 678,754 --
Prepaid Expenses and
other current assets 19,918 32,861
----------- -----------
Total Current Assets 2,298,008 1,769,740
----------- -----------
PROPERTY, EQUIPMENT,
AND CAPITAL LEASES:
Property and Equipment 1,790,221 1,753,395
Capital Leases 141,757 141,757
----------- -----------
Total Property, Equipment and
Capital Leases 1,931,978 1,895,152
Less: Accumulated Depreciation and
Amortization (1,632,108) (1,545,071)
----------- -----------
Net Property, Equipment
and Capital Leases 299,870 350,081
----------- -----------
OTHER ASSETS:
Cost in Excess of Net Assets
of Companies Acquired, Net of
accumulated amortization of
$350,395 at July 31, 1997 -- 63,492
Deferred tax asset 195,000 195,000
Other Assets 68,465 55,142
---------- -----------
Total Other Assets 263,465 313,634
---------- -----------
Total Assets $2,861,343 $2,433,455
========== ===========
<FN>
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
</TABLE>
3
<PAGE>
<TABLE>
VERTEX INDUSTRIES, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
April 30, 1998 July 31, 1997
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Long-Term debt, current portion $467 $2,567
Current portion of obligations
under capital leases 5,494 14,516
Accounts Payable 145,710 129,622
Accrued Expenses and Other Liabilities 249,395 170,643
Deferred Revenue 243,492 267,630
----------- -----------
Total Current Liabilities 644,558 584,978
----------- -----------
LONG-TERM LIABILITIES:
Obligations Under Capital Leases,
Net of Current Portion 12,876 17,065
----------- -----------
Total Long-Term Liabilities 12,876 17,065
----------- -----------
Total Liabilities 657,434 602,043
----------- -----------
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 5,147,979 shares at
January 31, 1998 and 5,137,979
shares at July 31, 1997,
respectively 25,740 25,690
Additional paid-in capital 5,209,838 5,201,138
Accumulated Deficit (3,641,813) (3,344,847)
Unrealized gain on Marketable Securities 655,313 --
----------- ------------
2,249,078 1,881,981
Less: Treasury stock, 10,000 shares at
April 30, 1998 and 12,872 shares at July
31, 1997, shares at cost, respectively (45,169) (50,569)
Total Stockholders' Equity 2,203,909 1,831,412
----------- -----------
Total Liabilities and
Stockholders' Equity $2,861,343 $2,433,455
========== ===========
<FN>
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
</TABLE>
4
<PAGE>
<TABLE>
VERTEX INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended April 30 Nine Months Ended April 30
--------------------------- --------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
OPERATING REVENUES $953,741 $681,622 $2,491,946 $2,623,665
COST OF SALES 475,097 367,335 1,318,531 1,269,788
---------- ---------- --------- ---------
GROSS PROFIT 478,644 314,287 1,173,415 1,353,877
---------- ---------- --------- ---------
OPERATING EXPENSES:
Selling and Administrative 370,304 355,466 1,145,378 1,005,501
Research and Development 118,752 135,173 341,679 354,457
---------- ---------- --------- ---------
Total Operating Expenses 489,056 490,639 1,487,057 1,359,958
---------- ---------- ---------- ----------
OPERATING (LOSS) (10,412) (176,352) (313,642) (6,081)
---------- ---------- ---------- ----------
OTHER INCOME AND (EXPENSES):
Interest Income 5,423 12,704 18,968 27,393
Interest Expense (590) (4,537) (2,292) (8,246)
Other -- -- -- 3,068
---------- ---------- ---------- ---------
Net Other Income 4,833 8,167 16,676 22,215
---------- ---------- ---------- ---------
Income (Loss) Before Income Taxes (5,579) (168,185) (296,966) 16,134
---------- ---------- ---------- ---------
Income Tax Provision -- (67,200) -- 6,500
---------- ---------- ---------- ---------
Net Income (loss) ($5,579) ($100,985) ($296,966) $9,634
========== ========== ========== =========
Net Income (loss) per share of
Common Stock $.00 ($.02) ($.06) $.00
========== ========== ========== =========
Weighted Average Number of
Shares Outstanding 5,135,107 5,253,509 5,132,598 5,250,035
========== ========== ========== =========
<FN>
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
</TABLE>
5
<PAGE>
<TABLE>
VERTEX INDUSTRIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
Common Stock Additional Unrealized Gain
$.005 Par Value Paid-In Accumulated on Marketable Treasury
Year ended July 31, 1997 Shares Amount Capital Deficit Securities Stock Total
- ------------------------ ------ ------ ---------- ------------ --------------- -------- -----
<S> <C> <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
--------- ------- ---------- ------------ ------------ --------- ----------
Nine months ended April 30,
1998 (Unaudited)
Issuance of stock in
consideration of services 10,000 50 8,700 -- -- -- 8,750
Unrealized gain on
Marketable Securities -- -- -- -- 655,313 -- 655,313
Decrease in Treasury Stock -- -- -- -- -- 5,400 5,400
Net loss for the nine
months ended April 30, 1998 -- -- -- (296,966) -- -- (296,966)
--------- ------- ---------- ------------ -------- --------- ----------
Balance at April 30, 1998 5,147,979 $25,740 $5,209,838 ($3,641,813) $655,313 ($45,169) $2,203,909
========= ======= ========== ============ ======== ========= ==========
<FN>
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
</TABLE>
6
<PAGE>
<TABLE>
VERTEX INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION> Nine Months Ended
April 30, 1998 April 30, 1997
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (loss) ($296,966) $9,634
------------ ------------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 119,956 138,495
Common stock issued for services 8,750 --
Decrease in Treasury Stock 5,400 --
Deferred taxes -- 6,500
Unrealized Gain on Marketable Securities 655,313 --
(Increase) or decrease in operating assets:
Accounts receivable, net (69,295) 71,758
Inventories 134,398 36,770
Notes and other receivables 22,950 (6,536)
Marketable Securities 648,182 --
Prepaid expenses and other
current assets 12,943 (49,750)
Increase or (decrease) in operating
liabilities:
Accounts payable 16,088 (42,901)
Deferred revenue (24,138) 87,459
Accrued expenses and other
liabilities 78,752 29,442
------------ ------------
Net adjustments to reconcile net income (loss) to
net cash provided by operating activities 312,935 271,237
------------ ------------
Net cash provided by operating activities 15,969 280,871
------------ ------------
Cash Flows from Investing Activities:
Additions to property and equipment (36,826) (17,756)
(Increase) decrease in other assets (13,323) 542
------------- -------------
Net cash used for investing activities (50,149) (17,214)
------------- -------------
Cash Flows from Financing Activities:
Payment of long term debt (2,100) (2,100)
Payment of capitalized lease obligations (13,210) (25,119)
Proceeds from issuance of common stock -- 9,420
------------- -------------
Net cash used for financing activities (15,310) (17,799)
------------- -------------
Net (Decrease) Increase in Cash (49,490) 245,858
Cash and Cash Equivalents at Beginning of Year 608,553 394,344
------------- -------------
Cash and Cash Equivalents at End of Period $559,063 $640,202
============= =============
<FN>
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
</TABLE>
7
<PAGE>
VERTEX INDUSTRIES, INC.
NOTES TO 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 April 30,
1998, 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
<PAGE>
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 ("SFAS
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 three and nine months
ended April 30, 1998 SFAS No. 128 had no material impact on
earnings per share.
4. Merger of Subsidiary with MPEL Holding Corporation
On March 4, 1998 the Company entered into an agreement with
MPEL Holdings Corp., parent company of Mortgage Plus Equity and
Loan Corp, a mortgage banking company whereby MPEL Holdings Corp.
merged with Vertex's inactive subsidiary, Computer Transceiver
Systems, Inc. (OTCBB:CPTT). The agreement provided pre-merger
CPTT shareholders with 4% of the merged company, of which Vertex
owns approximately 2.7%. The merged company is traded Over the
Counter Bulletin Board under the symbol MPEH. The Company
currently owns 226,251 shares of MPEH. In accordance with
Financial Accounting Standards Boards Statement of Financial
Accounting Standards No. 115 ("SFAS 115) the Company is
classifying the MPEH shares as securities held for sale and
accordingly has recognized an unrealized gain of $655,313 as of
April 30, 1998.
9
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Three months ended April 30, 1998 compared with three months
ended April 30, 1997.
Overview
The Company experienced a 40% increase in operating revenues
and recorded a net loss of $5,579 for the quarter ended April 30,
1998, compared to a net loss of $100,985 for the same period in
1997. The increase in operating revenues is primarily due to
operating revenues of $288,000 from the NetWeave licensing
agreement and an increase in demand for the software product line
of approximately $80,000 for the quarter ended April 30,1998 as
compared to the same period in 1997. As previously announced the
Company has been awarded a $4.1 million contract. This contract
will significantly impact fiscal 1999. The Company continues to
focus on its middleware and e-commerce technologies and expects
increased revenues in these areas in the future.
Net Loss
The Company recorded a net loss of $5,579 for the quarter
ended April 30, 1998 as compared to a net loss of $100,985 for
the same period in 1997. The decrease in the net loss is due to
an increase in operating revenues of 40% in 1998 compared to
1997.
Operating Revenues
Operating revenues increased $272,119 or 40% to $953,741 for
the quarter ended April 30, 1998, compared to $681,622 for the
same period in 1997. The increase in operating revenues is
primarily attributed to the NetWeave licensing agreement which
generated approximately $288,000 in operating revenues for the
quarter ended April 30, 1998 as compared to $50,000 for the same
period in 1997. The Company expects operating revenue to increase
in future quarters due to its recently announced $4.1 million
contract in addition to its middleware and e-commerce
technologies.
Cost of Sales
Cost of Sales decreased to 50% of revenues in the third
quarter of 1998 compared to 54% for the same period in 1997. The
decrease is primarily due to a change in the sales mix in which
sales of the higher margin products (software and NetWeave
products) increased whereas sales of lower margin products
decreased.
10
<PAGE>
Operating Expenses
Operating expenses decreased $1,583 to $489,056 for the
quarter ended April 30, 1998, as compared to $490,639 for the
same period in 1997. The decrease is primarily due to the
closing of the Company's Philadelphia, Pennsylvania office in
December, 1997. In addition to a decrease in Research and
Development expenses. As Operating Revenue increases the Company
anticipates that operating expenses will also increase.
Net Other Income
Net other income decreased $3,334 to $4,833 for the quarter
ended April 30, 1998 compared to $8,167 for the same period in
1997. The decrease is due to decrease in interest income of
$7,281 coupled with a decrease in interest expense of $3,947 for
1998 as compared to 1997. The decrease in interest income is due
to a decrease in the amount of funds available for the Company's
money market account.
11
<PAGE>
Nine months ended April 30, 1998 compared with nine months ended
April 30, 1996.
Overview
The Company's operating revenues decreased approximately 5%
and the Company recorded a net loss of $296,966 for the nine
months ended April 30, 1998 as compared to net income of $9,634
for the same period in 1997. The decrease in operating revenues
is primarily due to a decrease in demand for all of the Company's
product lines except for the Netweave product line. The NetWeave
licensing agreement had operating revenues of approximately
$804,000 for the nine months ended April 30, 1998 as compared to
$50,214 for the same period in 1997. In 1998 the Company had
nine months of operating revenue from the Netweave licensing
agreement as compared to two months in 1997.
Net Income (Loss)
The Company had a net loss of $296,966 for the nine months
ended April 30, 1998 compared to net income of $9,634 for the
same period in 1997. The net loss is attributed to a decrease in
operating revenues of approximately $132,000 an increase in
operating expenses of approximately $127,000 and a decrease in
gross margin of approximately $180,000 for the nine months ended
April 30, 1998 as compared to the same period in 1997.
Operating Revenues
Operating revenues decreased 5% to $2,491,946 for the nine
months ended April 30, 1998 compared to $2,623,665 for the same
period last year. The decrease is due to a decrease in demand
for all of the Company's products except for the Netweave
product. The NetWeave licensing agreement generated operating
revenues of approximately $804,000 for the nine months ended
April 30, 1998 as compared to $50,000 for the same period last
year.
Cost of Sales
Cost of Sales increased to 53% of revenues for the nine
months ended April 30, 1998, compared to 48% for the same period
in 1997. The increase is due to a shift in the sales mix from
the higher margin products to the lower margin products. In
addition to costs associated with the Netweave licensing
Agreement. Cost of Sales for the Netweave licensing agreement
should continue to decrease due to the closing of the Company's
Philadelphia, Pennsylvania office in December 1997.
12
<PAGE>
Operating Expenses
Operating expenses increased 9% or $127,099 to $1,487,057
for the nine months ended April 30, 1998 compared to $1,359,958
for the same period in 1997. The increase is comprised of an
increase of $139,877 or 14% in selling and administrative
expenses which is due to additional sales personnel and expenses
from the NetWeave Licensing Agreement of approximately $19,000.
Research and development expenses decreased $12,778 or 4% for the
nine months ended April 30, 1998 as compared to the same period
in 1997.
Net Other Income
Net other income decreased $5,539 to $16,676 for the nine
months ended April 30, 1998, compared to net other income of
$22,215 for the same period in 1997. The decrease is primarily
due to a decrease in the interest income of $8,425 in 1998 as
compared to 1997.
Liquidity and Capital Resources
At April 30, 1998 the Company had $559,063 in cash compared
to $608,553 at July 31, 1997. Working Capital and the current
ratio were $1,653,450 and 3.56 to 1 at April 30, 1998 versus
$1,184,762 and 3.03 to 1 at July 31, 1997. Net cash provided by
operating activities was $15,969 for the first nine months of
1998.
Capital expenditures were approximately $36,826 and $17,756
for the nine month periods ended April 30, 1998 and 1997,
respectively.
The Company requires additional financing to meet the short
and long term needs of the Company and 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.
13
<PAGE>
Vertex Industries, Inc.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8 - K
(a) None
(b) The Company filed a report on form 8-K on March 6,
1998 regarding a change in the Company's
Independent Public Accountants from Arthur
Andersen, LLP to Sax, Macy, Fromm & Co. P.C.
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
(on behalf of the Registrant and as
principal financial officer)
June 15, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> APR-30-1998
<CASH> 559,063
<SECURITIES> 678,754
<RECEIVABLES> 792,194
<ALLOWANCES> 200,132
<INVENTORY> 448,211
<CURRENT-ASSETS> 2,298,008
<PP&E> 1,931,978
<DEPRECIATION> 1,632,108
<TOTAL-ASSETS> 2,861,343
<CURRENT-LIABILITIES> 644,558
<BONDS> 18,837
0
0
<COMMON> 25,740
<OTHER-SE> 2,178,169
<TOTAL-LIABILITY-AND-EQUITY> 2,861,343
<SALES> 2,491,946
<TOTAL-REVENUES> 2,491,946
<CGS> 1,318,531
<TOTAL-COSTS> 1,145,378
<OTHER-EXPENSES> 341,679
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,292
<INCOME-PRETAX> (296,966)
<INCOME-TAX> 0
<INCOME-CONTINUING> (296,966)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (296,966)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> 0
</TABLE>
