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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 January 1, 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 JANUARY 1, 1999, THERE WERE 5,100,578 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 JANUARY 1, 1999
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements - (Unaudited)
Condensed Consolidated Balance Sheets - January 1, 1999 and
September 30, 1998
Condensed Consolidated Statements of Income - Three months ended
January 1, 1999 and January 2, 1998
Condensed Consolidated Statements of Cash Flows - Three months
ended January 1, 1999 and January 2, 1998
Notes to Condensed Consolidated Financial Statements - January 1,
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
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VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
JANUARY 1, 1999 SEPTEMBER 30, 1998
--------------- ------------------
ASSETS (Unaudited) *
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents $ 6,728 $ 11,239
Accounts receivable, net 40,913 39,239
Inventories 31,842 30,946
Deferred income taxes 251 270
--------- ---------
79,734 81,694
PROPERTY AND EQUIPMENT, AT COST 32,795 32,033
Less accumulated depreciation (17,240) (16,560)
--------- ---------
15,555 15,473
GOODWILL, less accumulated amortization of $2,312 and $2,063 12,495 12,744
OTHER ASSETS 807 860
--------- ---------
TOTAL ASSETS $ 108,591 $ 110,771
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,391 $ 5,987
Accrued liabilities 11,074 15,729
Customers' advances 3,915 3,286
Current portion of long-term debt 159 674
--------- ---------
21,539 25,676
LONG-TERM DEBT - less current portion 56 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 35,000 35,030
Retained earnings 52,440 50,119
Treasury stock, at cost, 135,173 shares and 118,073 shares (1,825) (1,491)
Translation adjustment 31 28
--------- ---------
86,170 84,210
--------- ---------
TOTAL LIABILITIES AND EQUITY $ 108,591 $ 110,771
========= =========
</TABLE>
* The balance sheet at September 30, 1998 has been taken from audited financial
statements at that date and condensed.
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VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 1, 1999 JANUARY 2, 1998
--------------- ---------------
<S> <C> <C>
SALES $32,005 $30,779
COSTS AND EXPENSES:
Cost of sales 22,494 21,660
Research and development 1,305 1,440
Marketing 2,606 1,669
General and administrative 2,433 2,588
------- -------
28,838 27,357
------- -------
OPERATING INCOME 3,167 3,422
OTHER INCOME (EXPENSE):
Income from investments 99 77
Interest expense (40) (31)
------- -------
INCOME BEFORE INCOME TAXES 3,226 3,468
Provision for income taxes 905 1,115
------- -------
NET INCOME $ 2,321 $ 2,353
======= =======
EARNINGS PER SHARE
Basic $ .46 $ .46
Diluted .44 .44
======= =======
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
Basic 5,101 5,090
Diluted 5,269 5,314
======= =======
</TABLE>
2
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VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 1, 1999 JANUARY 2, 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (1,988) $ 3,129
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (762) (672)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment for business purchased in fiscal 1995 (1,181) (302)
Purchase of treasury stock (401) --
Repayment of debt (216) (585)
Proceeds from exercise of stock options 37 88
-------- --------
(1,761) (799)
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (4,511) 1,658
CASH AND EQUIVALENTS:
At beginning of period 11,239 5,407
-------- --------
At end of period $ 6,728 $ 7,065
======== ========
</TABLE>
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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>
January 1 September 30
1999 1998
--------- ------------
<S> <C> <C>
Raw Materials $10,045 $ 8,638
Work-In-Process 16,269 15,427
Finished Goods 5,528 6,881
------- -------
$31,842 $30,946
======= =======
</TABLE>
NOTE C - ACCOUNTS RECEIVABLE (IN THOUSANDS)
Accounts Receivable were comprised of the following items:
<TABLE>
<CAPTION>
January 1 September 30
1999 1998
--------- ------------
<S> <C> <C>
Accounts Receivable - Customers $25,657 $24,987
Unbilled costs and related profits 15,256 14,252
-------- --------
$40,913 $39,239
======= =======
</TABLE>
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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 168,000 and 224,000 during the first
quarter 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>
Three Months Ended
January 1 January 2
1999 1998
--------- ---------
<S> <C> <C>
Net income $2,321 $2,353
Foreign currency translation adjustment 3 (9)
------ ------
Comprehensive income $2,324 $2,344
====== ======
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Sales in the first quarter of fiscal 1999 of $32 million increased by 4 percent
over the comparable quarter despite the somewhat volatile foreign
telecommunications market. New orders received of $32.6 million were 12 percent
below the comparable quarter of fiscal 1998. Management believes this shortfall
in orders is an indication of the current depressed overseas business
environment but long-term prospects and predications are favorable.
Cost of sales when expressed as a percent of sales remained essentially flat
during the first quarter of fiscal 1999 compared to the first quarter of fiscal
1998. Early in fiscal 1999 management reduced the sales price of certain
products in order to maintain volume. In addition, a cost reduction program was
implemented to compensate for the loss in profit margins.
Research and development expenditures of $1.3 million declined by 9 percent as
compared to the same quarter last year mainly as a result of the reassignment of
certain engineering personnel.
The total of general & administrative and marketing expenses incurred during
fiscal 1999's first quarter of $5 million, increased $.8 million or 18 percent
over the comparable period. 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 enhance the Company's marketing
efforts.
The effective tax rate for fiscal 1999 is lower than the prescribed statutory
rates principally due to tax incentives available from export shipments.
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.
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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 during the quarter ended January 1, 1999 consumed $2
million in cash primarily due to the growth in inventories and accounts
receivable.
Financing activities in the first quarter of fiscal 1999 included a $1.2 million
final payment to the selling shareholders of Maxtech Inc. in accordance with the
1995 purchase agreement and $.4 million was used to repurchase 22,100 shares of
the Company's common stock from the public market.
Since September 30, 1998, the balance of cash and equivalents declined by $4.5
million and stood at $6.7 million to end the first quarter of fiscal 1999.
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 has and is currently 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 these efforts
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.
7
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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.
In order to ascertain the full potential impact the Company plans to distribute,
collect, and evaluate questionnaires it sends to certain customers, suppliers,
and other third parties whose lack of readiness as related to year 2000
compliance could have a material adverse effect on the Company or its products.
Until this effort is substantially complete, the Company will be unable to
completely assess its year 2000 risks. The Company has begun to develop a year
2000 contingency plan and expects such plan to be completed by the end of the
second quarter of fiscal 1999.
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
8
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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. $.7 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.
9
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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 January 1, 1999.
10
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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: February 3, 1999 /s/ J. D. Carter
---------------- --------------------------------------------
J. D. Carter
Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
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Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
EX 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 JANUARY 1, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JAN-01-1999
<CASH> 6,728
<SECURITIES> 0
<RECEIVABLES> 40,913
<ALLOWANCES> 0
<INVENTORY> 31,842
<CURRENT-ASSETS> 79,734
<PP&E> 32,795
<DEPRECIATION> 17,240
<TOTAL-ASSETS> 108,591
<CURRENT-LIABILITIES> 21,539
<BONDS> 0
0
0
<COMMON> 524
<OTHER-SE> 85,646
<TOTAL-LIABILITY-AND-EQUITY> 108,591
<SALES> 32,005
<TOTAL-REVENUES> 32,005
<CGS> 22,494
<TOTAL-COSTS> 28,838
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> 3,226
<INCOME-TAX> 905
<INCOME-CONTINUING> 2,321
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,321
<EPS-PRIMARY> .46
<EPS-DILUTED> .44
</TABLE>
