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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 April 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 APRIL 2, 1999, THERE WERE 5,065,984 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 APRIL 2, 1999
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements - (Unaudited)
Condensed Consolidated Balance Sheets - April 2, 1999 and September
30, 1998
Condensed Consolidated Statements of Income - Three months ended
April 2, 1999 and April 3, 1998
Condensed Consolidated Statements of Income - Six Months Ended
April 2, 1999 and April 3, 1998
Condensed Consolidated Statements of Cash Flows - Six months ended
April 2, 1999 and April 3, 1998
Notes to Condensed Consolidated Financial Statements - April 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 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE> 3
VERTEX COMMUNICATONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
APRIL 2, 1999 SEPTEMBER 30, 1998
------------- -------------------
ASSETS (Unaudited) *
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 11,632 $ 11,239
Accounts receivable, net 36,690 39,239
Inventories 32,303 30,946
Deferred income taxes 296 270
--------- ---------
80,921 81,694
PROPERTY AND EQUIPMENT, AT COST 33,173 32,033
Less accumulated depreciation (18,050) (16,560)
--------- ---------
15,123 15,473
GOODWILL, less accumulated amortization of $2,564 and $2,063 12,243 12,744
OTHER ASSETS 837 860
--------- ---------
TOTAL ASSETS $ 109,124 $ 110,771
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,180 $ 5,987
Accrued liabilities 10,213 15,729
Customers' advances 5,001 3,286
Current portion of long-term debt 97 674
--------- ---------
21,491 25,676
LONG-TERM DEBT - less current portion 52 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 35,004 35,030
Retained earnings 53,735 50,119
Treasury stock, at cost, 169,767 shares and 118,073 shares (2,421) (1,491)
Translation adjustment (87) 28
--------- ---------
86,755 84,210
--------- ---------
TOTAL LIABILITIES AND EQUITY $ 109,124 $ 110,771
========= =========
</TABLE>
* The balance sheet at September 30, 1998 has been taken from audited financial
statements at that date and condensed.
1
<PAGE> 4
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 2, 1999 APRIL 3, 1998
------------- -------------
<S> <C> <C>
SALES $ 30,926 $ 31,500
COSTS AND EXPENSES:
Cost of sales 22,244 21,946
Research and development 1,754 1,598
Marketing 2,681 1,768
General and administrative 2,568 2,727
-------- --------
29,247 28,039
-------- --------
OPERATING INCOME 1,679 3,461
OTHER INCOME (EXPENSE):
Income from investments 123 130
Interest expense (12) (16)
-------- --------
INCOME BEFORE INCOME TAXES 1,790 3,575
Provision for income taxes 495 1,128
-------- --------
NET INCOME $ 1,295 $ 2,447
======== ========
EARNINGS PER SHARE
Basic $ .25 $ .48
Diluted .25 .46
======== ========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
Basic 5,101 5,100
Diluted 5,208 5,335
======== ========
</TABLE>
2
<PAGE> 5
VERTEX COMMUNICATONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITIED)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 2, 1999 APRIL 3, 1998
------------- -------------
<S> <C> <C>
SALES $ 62,931 $ 62,279
COSTS AND EXPENSES:
Cost of sales 44,738 43,606
Research and development 3,059 3,038
Marketing 5,287 3,437
General and administrative 5,001 5,315
-------- --------
58,085 55,396
-------- --------
OPERATING INCOME 4,846 6,883
OTHER INCOME (EXPENSE):
Income from investments 222 207
Interest expense (52) (47)
-------- --------
INCOME BEFORE INCOME TAXES 5,016 7,043
Provision for income taxes 1,400 2,243
-------- --------
NET INCOME $ 3,616 $ 4,800
======== ========
EARNINGS PER SHARE
Basic $ .71 $ .94
Diluted .69 .90
======== ========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
Basic 5,102 5,095
Diluted 5,231 5,331
======== ========
</TABLE>
3
<PAGE> 6
VERTEX COMMUNICATONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS CASH FLOWS
(UNAUDITIED)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 2, 1999 APRIL 3, 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 3,952 $ 6,881
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,140) (1,351)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment for business purchased in fiscal 1995 (1,181) (302)
Purchase of treasury stock (1,136) --
Repayment of debt (282) (730)
Proceeds from exercise of stock options 53 141
Other 127 --
-------- --------
(2,419) (891)
INCREASE IN CASH AND EQUIVALENTS 393 4,639
CASH AND EQUIVALENTS:
At beginning of period 11,239 5,407
-------- --------
At end of period $ 11,632 $ 10,046
======== ========
</TABLE>
4
<PAGE> 7
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>
April 2 September 30
1999 1998
------- ------------
<S> <C> <C>
Raw Materials $10,901 $ 8,638
Work-In-Process 16,152 15,427
Finished Goods 5,250 6,881
------- -------
$32,303 $30,946
======= =======
</TABLE>
NOTE C - ACCOUNTS RECEIVABLE (IN THOUSANDS)
Accounts Receivable were comprised of the following items:
<TABLE>
<CAPTION>
April 2 September 30
1999 1998
------- ------------
<S> <C> <C>
Accounts Receivable - Customers $26,273 $24,987
Unbilled costs and related profits 10,417 14,252
------- -------
$36,690 $39,239
======= =======
</TABLE>
5
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NOTE D - EARNINGS 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 were 107,000 and 235,000 during the second
quarter of fiscal 1999 and 1998, respectively. The number of equivalent shares
assumed outstanding were 129,000 and 236,000 during the first six months of
fiscal 1999 and 1998, respectively.
NOTE E - COMPREHENSIVE INCOME (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 and foreign currency translation adjustments. Comprehensive income
for the periods presented was as follows:
<TABLE>
<CAPTION>
Six Months Ended
April 2 April 3
1999 1998
------- -------
<S> <C> <C>
Net income $ 3,616 $ 4,800
Foreign currency translation adjustment (115) 14
------- -------
Comprehensive income $ 3,501 $ 4,814
======= =======
</TABLE>
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
In each of the past three fiscal years export sales were over 55 percent of
total sales which illustrates the Company's reliance on business generated from
foreign sources. The Company has been experiencing more intense competition
internationally as customers delay, revise or even cancel projects that could
normally provide added sales volume. Management expects this unfavorable trend
to continue for at least over the near term or until such time when the
international marketplace returns to more normal levels. The economic downturn
has affected the Company by causing lower profit margins and loss of product
orders.
Sales for the three months and the six months ended April 2, 1999, were 2
percent lower and 1 percent higher, respectively, compared to the same periods
last year. The Company has been able to maintain its sales volume by discounting
products even though portions of the telecommunications market are somewhat
depressed.
Cost of sales in the second quarter of fiscal 1999 when expressed as a percent
of sales increased by 2.2 percentage points over the comparable period
principally due to sales price reductions of certain products. The six month
period ended April 2, 1999 was also unfavorably impacted by these sales price
reductions where cost of sales increased by 1.1 percentage points from the
comparable period.
The Company has been investing considerable amounts 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. In addition, the Company is developing a wide-band feed
system specifically designed for use with the next generation satellites.
Research and development spending during the second quarter of fiscal 1999
increased by 10 percent over the comparable period because of stepped-up product
development. R & D spending for the six month period was flat as compared to
last year's spending.
The total of general & administrative and marketing expenses incurred during the
second quarter and six month period ended April 2, 1999 increased by 17 percent
and 18 percent over the same periods one year ago, respectively. This higher
spending reflects the incremental costs associated with the Company's 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 effective tax rate for fiscal 1999 is lower than the prescribed statutory
rates principally due tax incentives available from export shipments.
7
<PAGE> 10
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.
FINANCIAL CONDITION
Operating activities generated $4 million of cash during the first half of
fiscal 1999 mainly due to net income of $3.6 million and lower accounts
receivable, but partially offset by lower current liabilities and increased
inventories.
Financing activities consumed $2.4 million of cash in the first half of fiscal
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 Inc. 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.
8
<PAGE> 11
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 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 such responses to date,
respondents assert that they are year 2000 compliant or they believe they will
be 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
9
<PAGE> 12
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 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.
10
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on January 26, 1999 in Kilgore,
Texas. Of the 5,095,578 total shares entitled to vote, 4,483,575 shares or 88
percent were represented in person or by proxy at the meeting.
The following matters were submitted to the shareholders in the meeting and
approved by more than the requisite majority as shown below:
(1) Election of seven directors to serve until the next annual
shareholders meeting:
<TABLE>
<CAPTION>
Votes Votes
For Withheld
--------- --------
<S> <C> <C>
J. Rex Vardeman 4,472,175 11,400
A. Don Branum 4,471,875 11,700
James D. Carter 4,472,575 11,000
Bill R. Womble 4,463,324 20,251
Donald E. Heitzman, Sr 4,464,170 19,405
Rein Luik 4,367,582 115,993
John G. Farmer 4,463,320 20,255
</TABLE>
(2) Approval of an amendment to the 1995 Stock Compensation Plan.
Voting on this matter was adjourned to and reconvened on until
February 1, 1999. The results of voting to approve the proposed
amendment to the 1995 Stock Compensation Plan were as follows:
<TABLE>
<S> <C>
Shares Voted For: 2,866,296
Shares Voted Against: 1,271,710
Shares Abstaining: 25,010
</TABLE>
(3) Ratification of the appointment of Arthur Andersen LLP as independent
public accountants of the Company for the fiscal year ending September
30, 1999.
<TABLE>
<S> <C>
Shares Voted For: 4,464,382
Shares Voted Against: 2,601
Shares Abstaining: 16,592
</TABLE>
11
<PAGE> 14
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 April 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: May 6, 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 No. 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 STATEMENTS FOR THE THREE MONTHS ENDED APRIL 2, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> APR-02-1999
<CASH> 11,632
<SECURITIES> 0
<RECEIVABLES> 36,690
<ALLOWANCES> 0
<INVENTORY> 32,303
<CURRENT-ASSETS> 80,921
<PP&E> 33,173
<DEPRECIATION> 18,050
<TOTAL-ASSETS> 109,124
<CURRENT-LIABILITIES> 21,491
<BONDS> 0
0
0
<COMMON> 524
<OTHER-SE> 86,231
<TOTAL-LIABILITY-AND-EQUITY> 109,124
<SALES> 62,931
<TOTAL-REVENUES> 62,931
<CGS> 44,738
<TOTAL-COSTS> 58,085
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52
<INCOME-PRETAX> 5,016
<INCOME-TAX> 1,400
<INCOME-CONTINUING> 3,616
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,616
<EPS-PRIMARY> .71
<EPS-DILUTED> .69
</TABLE>
