<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 2, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to _______________
COMMISSION FILE NUMBER: 0-15277
VERTEX COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
TEXAS 75-1982974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2600 N. LONGVIEW STREET, KILGORE, TEXAS 75662
(Address of principal executive offices and zip code)
(903) 984-0555
(Registrant's telephone number, including area code)
Indicate 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
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
AS OF JULY 2, 1999, THERE WERE 5,087,714 SHARES OUTSTANDING OF THE REGISTRANT'S
COMMON STOCK $.10 PAR VALUE.
- --------------------------------------------------------------------------------
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VERTEX COMMUNICATIONS CORPORATION
TABLE OF CONTENTS TO FORM 10-Q
FOR THE THREE MONTHS ENDED JULY 2, 1999
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements - (Unaudited)
Condensed Consolidated Balance Sheets - July 2, 1999 and September
30, 1998
Condensed Consolidated Statements of Income - Three months ended July
2, 1999 and July 3, 1998
Condensed Consolidated Statements of Income - Nine Months Ended July
2, 1999 and July 3, 1998
Condensed Consolidated Statements of Cash Flows - Nine months ended
July 2, 1999 and July 3, 1998
Notes to Condensed Consolidated Financial Statements - July 2, 1999
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE> 3
<TABLE>
<CAPTION>
JULY 2, 1999 SEPTEMBER 30, 1998
------------ ------------------
ASSETS (Unaudited) *
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 13,518 $ 11,239
Accounts receivable, net 32,942 39,239
Inventories 25,558 30,946
Income tax receivable 2,608 --
Deferred income taxes -- 270
------------ ---------------
74,626 81,694
PROPERTY AND EQUIPMENT, AT COST 33,247 32,033
Less accumulated depreciation (18,657) (16,560)
------------ ---------------
14,590 15,473
GOODWILL, less accumulated amortization of $7,616 and $2,063 7,191 12,744
OTHER ASSETS 1,203 860
------------ ---------------
TOTAL ASSETS $ 97,610 $ 110,771
============ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,282 $ 5,987
Accrued liabilities 11,218 15,729
Customers' advances 4,539 3,286
Current portion of long-term debt 38 674
------------ ---------------
19,077 25,676
LONG-TERM DEBT - less current portion 48 59
DEFERRED INCOME TAXES 826 826
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY:
Common stock, $.10 par value, 20,000,000 shares authorized,
5,235,751 shares issued 524 524
Capital in excess of par value 34,925 35,030
Retained earnings 44,709 50,119
Treasury stock, at cost, 148,037 shares and 118,073 shares (2,111) (1,491)
Translation adjustment (388) 28
------------ ---------------
77,659 84,210
------------ ---------------
TOTAL LIABILITIES AND EQUITY $ 97,610 $ 110,771
============ ===============
</TABLE>
* The balance sheet at September 30, 1998 has been taken from audited financial
statements at that date and condensed.
1
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 2, 1999 JULY 3, 1998
------------ ------------
<S> <C> <C>
SALES $ 25,563 $ 35,603
COSTS AND EXPENSES:
Cost of sales 25,034 25,877
Research and development 1,896 1,405
Marketing 2,682 1,706
General and administrative 2,954 3,070
Impairment of goodwill 4,800 --
------------ ------------
37,366 32,058
------------ ------------
OPERATING INCOME (LOSS) (11,803) 3,545
OTHER INCOME (EXPENSE):
Income from investments 160 117
Interest expense (35) (18)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (11,678) 3,644
Income Tax Expense (Benefit) (2,652) 1,037
============ ============
NET INCOME (LOSS) $ (9,026) $ 2,607
============ ============
EARNINGS (LOSS) PER SHARE
Basic $ (1.77) $ .51
Diluted (1.77) .49
============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
Basic 5,090 5,106
Diluted 5,090 5,333
============ ============
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 2, 1999 JULY 3, 1998
------------ ------------
<S> <C> <C>
SALES $ 88,494 $ 97,882
COSTS AND EXPENSES:
Cost of sales 69,772 69,483
Research and development 4,955 4,443
Marketing 7,969 5,143
General and administrative 7,955 8,385
Impairment of goodwill 4,800 --
------------ ------------
95,451 87,454
------------ ------------
OPERATING INCOME (LOSS) (6,957) 10,428
OTHER INCOME (EXPENSE):
Income from investments 382 324
Interest expense (87) (65)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (6,662) 10,687
Income Tax Expense (Benefit) (1,252) 3,280
------------ ------------
NET INCOME (LOSS) $ (5,410) $ 7,407
============ ============
EARNINGS (LOSS) PER SHARE
Basic $ (1.06) $ 1.45
Diluted (1.06) 1.39
============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
Basic 5,092 5,100
Diluted 5,092 5,327
============ ============
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 2, 1999 JULY 3, 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 6,142 $ 6,090
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,610) (1,874)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment for business purchased in fiscal 1995 (1,181) (302)
Purchase of treasury stock (1,136) --
Repayment of debt (345) (843)
Proceeds from exercise of stock options 277 261
Other 132 --
------------ ------------
(2,253) (884)
INCREASE IN CASH AND EQUIVALENTS 2,279 3,332
CASH AND EQUIVALENTS:
At beginning of period 11,239 5,407
------------ ------------
At end of period $ 13,518 $ 8,739
============ ============
</TABLE>
4
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VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all the adjustments
(consisting of normal recurring accruals) considered necessary for fair
presentation have been included.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended September 30, 1998.
NOTE B - INVENTORIES (IN THOUSANDS)
The components of inventory consist of the following:
<TABLE>
<CAPTION>
July 2 September 30
1999 1998
--------------- ---------------
<S> <C> <C>
Raw Materials $ 6,526 $ 8,638
Work-In-Process 14,283 15,427
Finished Goods 4,749 6,881
--------------- ---------------
$ 25,558 $ 30,946
=============== ===============
</TABLE>
NOTE C - ACCOUNTS RECEIVABLE (IN THOUSANDS)
Accounts Receivable were comprised of the following items:
<TABLE>
<CAPTION>
July 2 September 30
1999 1998
------------ ------------
<S> <C> <C>
Accounts Receivable - Customers $ 23,762 $ 24,987
Unbilled costs and related profits 9,180 14,252
------------ ------------
$ 32,942 $ 39,239
============ ============
</TABLE>
5
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NOTE D - EARNINGS (LOSS) PER SHARE
Basic earnings per share were computed by dividing net income by the weighted
average number of shares outstanding during the period. Diluted earnings per
share were computed by dividing net income by the sum of the weighted average
number of shares outstanding and the number of equivalent shares assumed
outstanding under the Company's stock-based compensation plans. The number of
equivalent shares assumed outstanding during the quarter and nine months ended
July 3, 1998 was 227,000.
Loss per share was computed by dividing net loss by the weighted average number
of shares outstanding during the period presented.
NOTE E - COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS)
In October, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". This new accounting standard establishes standards for reporting and
the display of "comprehensive income" which, for the Company, is the total of
net income (loss) and foreign currency translation adjustments. Comprehensive
income (loss) for the periods presented was as follows:
<TABLE>
<CAPTION>
Nine Months Ended
July 2 July 3
1999 1998
------------ ------------
<S> <C> <C>
Net income (loss) $ (5,410) $ 7,407
Foreign currency translation adjustment (416) 100
------------ ------------
Comprehensive income (loss) $ (5,826) $ 7,507
============ ============
</TABLE>
NOTE F - RESTRUCTURING
In the third quarter of fiscal 1999, the Company announced plans to abandon its
networking products technology business line and redirect certain resources. As
a result of this decision, the Company recorded a special charge of $9.5
million. The charge involves $4.8 million of goodwill impairment and $2.5
million for write-off of obsolete inventory which were related to networking
products. The balance of the special charge or $2.2 million was connected with
slow moving inventory, warranty costs, and non-performing fixed assets. Of the
$9.5 million total charge, $4.7 million was recorded in cost of sales. As of
July 2, 1999, approximately $.5 million of the total charge remained accrued on
the Company's books.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The Company's business relies on, to a large extent, its success in winning
contracts from foreign sources. During the last three fiscal years export sales
have amounted to more than 55 percent of total sales. Through nine months of the
current year, foreign sales of $52.5 million were 18 percent behind last year's
foreign sales during the comparable period. Management believes that several
factors have led to this year's sales downturn. These factors include the
deterioration of several foreign economies and increased competitive pressures.
In light of these events, management elected to exit the networking systems
business and record a $9.5 million special charge in the third quarter of this
year. In conjunction with exiting the networking systems business, the Company
developed and initiated a plan of restructuring that involved winding down of
existing related activities and reassigning certain personnel. The purpose of
the restructuring was not only to react to depressed market conditions but to
focus the Company's overall strategy on activities that offer attractive
potential for growth and profitability.
Based on current available information, management expects that the Company's
financial results over the next two quarters will remain below last year's
levels. However, we are pleased by the recent favorable volume of customer
orders received and customer inquiries related to pending contract awards.
During the third quarter the Company booked $35.2 million of orders and we
closed the quarter with and an order backlog of $88.2 million.
RESULTS OF OPERATIONS
In June 1999 the Company recognized a $9.5 million special charge associated
with an internal restructuring as described more fully in "Note F" of "Notes to
Condensed Consolidated Financial Statements". This special charge reduced after
tax income by $7.9 million to produce an after tax loss in both reporting
periods of fiscal 1999.
Sales for the three months and the nine months ended July 2, 1999, were 28
percent and 10 percent lower than the same periods last year, respectively,
primarily due to lower foreign sales. Cost of sales in the third quarter and
nine month period of fiscal 1999 when expressed as a percent of sales increased
by 25 percent and 8 percent over the comparable periods, respectively,
principally due to inclusion of the special charge of $4.7 million related to
the restructuring and sales price reductions of certain products.
The Company has been investing considerable resources in the development of
three separate size bolt together antennas. These antennas are designed to
eliminate the need for field optical alignment and thus offers customers a more
cost effective product. One of the three, the 9.3 meter antenna design is
complete and is now offered for sale. To-date, the Company has sold ten such
antennas. In addition, the Company is developing a wideband feed system
specifically designed for use with the next generation satellites.
Research and development spending during the third quarter and nine month period
of fiscal 1999 increased by 35 percent and 12 percent over the comparable
periods, respectively, because of increased product development.
7
<PAGE> 10
The total of general & administrative and marketing expenses incurred during the
third quarter and nine month period ended July 2, 1999 increased by 18 percent
over the same periods one year ago, respectively. This higher spending reflects
the incremental costs associated with the new U.S. operating division that was
organized near the end of fiscal 1998 and the movement of expenses related to
employees who were transferred from engineering in order to intensify the
Company's marketing efforts.
The income tax benefit for fiscal 1999 resulted from recognition of an operating
loss carryback and was computed by estimating the full year's taxable loss
inclusive of the effect of non-deductible goodwill amortization and impairment
and tax credits available from export sales.
The Company incurred a $9 million and $5.4 million loss after tax benefit in the
quarter and nine month periods of fiscal 1999, respectively. The loss was
principally caused by recording a $9.5 million before tax or $7.9 million after
tax special charge as discussed above. In addition to the charge, the third
quarter and the nine month period of fiscal 1999 were unfavorably impacted by
lower sales as compared to the same periods last year.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
GENERAL
The Company's future operating results and financial condition may be affected
by various trends and factors including general economic conditions, technology
changes, product demand, product development, volume and mix of products sold,
size and timing of individual orders booked, competition, market acceptance,
availability of certain raw materials, rising costs for or unavailability of
selected components, domestic and foreign government regulations and spending,
or fluctuation in certain foreign currency exchange rates as related to the U.S.
dollar.
Due to the factors noted above, the Company's future earnings and stock price
may be subject to fluctuation, particularly on a quarterly basis. Past business
trends should not be used to anticipate future trends and historical performance
should not be considered as a reliable indicator of future performance.
Additionally, any shortfall in revenue or earnings from levels anticipated by
securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's common stock.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, certain matters discussed in this
quarterly report are forward-looking statements that involve risks and
uncertainties, including but not limited to, economic conditions, trends in the
telecommunications industry, product acceptance and demand, competitive products
and pricing, new product development, availability of competitive components and
other risks indicated in this filing and prior filings of the Company with the
Securities and Exchange Commission.
8
<PAGE> 11
FINANCIAL CONDITION
Operating activities generated $6.1 million of cash during the nine month period
ended July 2, 1999 because of the favorable effect of decreased accounts
receivable and inventories but was partially offset by lower accrued
liabilities, accounts payable, and an operating loss.
Financing activities consumed $2.3 million of cash in the nine month period
ended July 2, 1999. The Company used $1.1 million to repurchase 66,534 shares of
the Company's common stock from the public market and $1.2 million was used for
the final payment to the selling shareholders of Maxtech Incorporated in
accordance with the 1995 purchase agreement.
Management believes that forecasted cash flows combined with the Company's
favorable financial condition and available credit lines, will be sufficient to
fund operations over the foreseeable future.
The Company is not aware of any demands which are likely to affect liquidity in
an adverse manner.
YEAR 2000 COMPLIANCE
The Company is assessing and correcting the potential impact of the problem with
computer software programs, operating systems, and equipment containing computer
processing chips that are unable to properly interpret the upcoming calendar
year 2000 and beyond. As this problem pertains to internal concerns, this
process has involved identification, review, testing, and updating or replacing,
in-house systems and equipment, beginning with the most significant through the
least important. The costs associated with this effort have not been material
and additional costs not yet incurred are expected to be immaterial to the
Company.
Management believes that the Company's significant systems and equipment that
can be affected by improperly recognizing the date of the year 2000 and beyond
are capable of operating properly and are year 2000 date compliant.
A substantial portion of the Company's products sold over the past years and
those products currently being offered for sale are earth station antennas which
include drive motors, feed assemblies, and other mechanical components. The
function of these products is not directly affected by the changing of a
calendar date. Certain other of the Company's products, such as antenna
controllers, operate by the use of embedded software and vendor-supplied
electronic components that may be date sensitive. The majority of these products
were designed so that the calendar date changing to 2000 and beyond will not
hinder or affect their performance. There are, however, a limited number of
products sold in prior years that could be affected by the year 2000 problem.
The Company has been and is in the process of contacting such customers and now
offers an upgrade package to properly recognize the date and remedy the problem.
The Company has sent questionnaires to certain third parties whose lack of
readiness as related to year 2000 compliance could have a material adverse
effect on the Company or its products. Management has been collecting and
evaluating the questionnaires received. Based upon those responses to-date,
respondents assert that they are year 2000 compliant or they believe they will
be
9
<PAGE> 12
timely compliant. The Company continues to receive and evaluate third party
responses and follow-up with those third parties who have not responded.
Management has been and is still expending efforts towards developing a
contingency plan which contemplates temporary measures to alleviate disruption
from year 2000 related failures, either from internal or by external sources.
Central to development of a contingency plan is the identification of risks and
related potential impact. The Company has not yet identified any such
significant risks and consequently has not yet developed a comprehensive year
2000 contingency plan. In addition, the Company does not believe it is possible
to ascertain all aspects of the year 2000 problem that may affect it, including
those relating to efforts of customers, suppliers, or other third parties.
Management, however, is committed to pursuing reasonable means to minimize
exposure. Should the Company identify a significant risk related to a year 2000
perceived failure, management intends to develop a contingency plan.
The foregoing discussion regarding year 2000 compliance, the Company's
assessment, and the Company's state of readiness represent management's best
estimate as to the reasonable steps it has taken and should take to achieve year
2000 compliance and minimize or eliminate possible related disruptions to
operations. However, there can be no assurance that management's assessment of
the risks and potential problems is accurate, or that its actions and planned
actions will timely resolve the problems inherent with year 2000 compliance.
Therefore, the Company cannot be assured that the year 2000 problem will not
materially affect operations or perhaps expose the Company to third party
liability.
Certain of the preceding statements related to year 2000 compliance issues are
forward-looking and actual results could vary significantly from the Company's
planned and anticipated results. The Company is relying on analyses and
recommendations of informed employees and third parties in making the above
forward-looking statements, which may prove to be inadequate or incomplete.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains two foreign sales offices and operates a foreign
subsidiary which are subject to the effects of fluctuations in foreign currency
exchange rates. The sales offices are located in England and Singapore. Should
the British pound currency or the Singapore dollar currency as related to the
U.S. dollar turn materially unfavorable, the Company's marketing expenses could
increase accordingly.
The Company's operations located in Duisburg, Germany involve a complete
operating entity. Daily operations (sales, costs and expenses, and income taxes)
are conducted in its functional currency, the German mark. Should this currency
as related to the U.S. dollar change in a material adverse manner, consolidated
results of operations could be materially impacted. In addition, to the extent
taxable income is generated by the German operations, the consolidated effective
tax rate can be unfavorably impacted. The German statutory tax rate is
approximately 50 percent compared to the present U.S. statutory tax rate of 34
percent on taxable income up to $10 million. The Company's general policy is to
sell products manufactured or supplied by its domestic operations in the U.S.
dollar currency. Products supplied by its German operations are sold in its
functional currency. The Company has one sales contract that will be performed
by a domestic subsidiary where
10
<PAGE> 13
payment will be made in the European Currency Unit. The Company has in place a
forward exchange hedge contract equal to approximately U.S. $.6 million. The
hedge contract should minimize exposure to an unfavorable foreign currency rate
change. Should the exchange rate between the currencies suffer an adverse change
of 10 percent, the effect on net income would not be material.
The Company has not suffered any material losses or adverse effects due to
currency rate changes in the British pound, the Singapore dollar, or the German
mark relative to the U.S. dollar.
11
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
(b) Form 8-K:
The Company filed no reports on Form 8-K and none were required
to be filed during the three months ended July 2, 1999.
12
<PAGE> 15
SIGNATURE
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 COMMUNICATIONS CORPORATION
(Registrant)
Date: August 4, 1999 /s/ J. D. Carter
----------------------- ---------------------------------------------
J. D. Carter
Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
13
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENT FOR THE THREE MONTHS ENDED JULY 2, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUL-02-1999
<CASH> 13,518
<SECURITIES> 0
<RECEIVABLES> 32,942
<ALLOWANCES> 0
<INVENTORY> 25,558
<CURRENT-ASSETS> 74,626
<PP&E> 33,247
<DEPRECIATION> 18,657
<TOTAL-ASSETS> 97,610
<CURRENT-LIABILITIES> 19,077
<BONDS> 0
0
0
<COMMON> 524
<OTHER-SE> 77,135
<TOTAL-LIABILITY-AND-EQUITY> 97,610
<SALES> 88,494
<TOTAL-REVENUES> 88,494
<CGS> 69,772
<TOTAL-COSTS> 95,451
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87
<INCOME-PRETAX> (6,662)
<INCOME-TAX> (1,252)
<INCOME-CONTINUING> (5,410)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,410)
<EPS-BASIC> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
