<PAGE> 1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
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) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (903) 984-0555
-------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.10 PAR VALUE
-------------------------
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of October 30, 1998, 5,099,878 shares of the Registrant's Common Stock, $.10
par value, were outstanding. The aggregate market value of the Registrant's
Common Stock held by non-affiliates based on the closing sales price on October
30, 1998, as reported by The Nasdaq Stock Market (National Market System), was
approximately $72,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended September 30, 1998, are incorporated by reference into Items 5, 6, 7, 7A,
and 8 under Part II and Item 14 of Part IV hereof.
Portions of the Registrant's definitive Proxy Statement to be filed in
connection with the solicitation of proxies for its 1999 Annual Meeting of
Shareholders are incorporated by reference into Items 10, 11, 12, and 13 under
Part III hereof.
===============================================================================
<PAGE> 2
VERTEX COMMUNICATIONS CORPORATION
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended September 30, 1998
===================================================
PART I
ITEM 1. BUSINESS.
GENERAL
Vertex Communications Corporation (the "Registrant," the "Company" or
"Vertex") designs, develops, manufactures, markets and supports an extensive
line of precision products for satellite and deep space communications
applications. These products include sophisticated earth station antennas
ranging in size from 1.2 to 34 meters in diameter (which operate in various
relevant frequency bands, including L-, C-, X-, Ku- and Ka-bands, and are
available for commercial and military applications), integrated communications
network systems, and optical and radio telescopes. The Company also manufactures
state- of-the-art control systems designed to manage and monitor the operation,
guidance, tracking and telemetry capabilities of communications network systems
as well as individual antennas, related electronic components used to amplify
radio frequency ("RF") signals, and precision waveguide components for
application as component parts of communications systems. The Company also
provides custom engineering, turnkey field installation, site testing and
after-sale and maintenance services, and spare and replacement parts in support
of its products.
The Company's strategy is to provide a wide variety of precision
satellite communications products compliant with state-of-the-art technology to
satisfy an expanding range of customer and industry requirements. To accomplish
its objectives, the Company engages in ongoing efforts to introduce, in a timely
manner, products that are designed to meet applicable domestic and international
specifications. The Company believes that it offers a more diverse line of
products than any of its principal competitors. Due to the exacting design and
engineering requirements necessary to produce satellite communications systems,
subsystems and related products, quality control and precision engineering are
central to the manufacturing process. The Company believes it has developed a
reputation as a leader in quality control procedures which has enhanced its
position in the marketplace.
While the Company markets its products to systems integrators and end
users who combine the Company's products with other communications equipment to
form complete communications systems, Vertex also markets integrated
communications network systems utilizing its own products. In the United States,
Vertex markets its products through a direct sales force; while in international
markets, the Company utilizes a direct sales force, supplemented by independent
foreign sales representatives. Vertex's customers include the television
broadcast industry, international telecommunications companies, communications
common carriers, private communications networks, and government agencies,
including certain agencies of the U. S. Government and various foreign
governments.
The Company was organized pursuant to Texas law in 1984. The Company's
wholly-owned subsidiaries include: Vertex Satcom Systems, Inc. (formerly known
as TIW Systems, Inc.), a Nevada corporation headquartered in Santa Clara,
California; Vertex Antenna Systems, LLC (formerly a division of TIW Systems,
Inc.), a Nevada limited liability company with its principal office in Santa
Clara, California; Vertex Microwave Products, Inc. (formerly known as Gamma-f
Corp.), a Nevada corporation headquartered in Torrance, California; Vertex
Electronic Products, Inc. (formerly known as Maxtech, Inc.), a Pennsylvania
corporation which is located in State College, Pennsylvania; Vertex
Antennentechnik GmbH, a corporation organized pursuant to the laws of the
Federal Republic of Germany, with its
-1-
<PAGE> 3
headquarters in Duisburg, Germany; Vertex Foreign Sales Corporation, organized
pursuant to the laws of The Virgin Islands, with its office in St. Thomas, The
Virgin Islands; and Vertex International, Ltd., formed under the laws of
England. As used herein, the terms the "Registrant," the "Company," and "Vertex"
refer to Vertex Communications Corporation and its wholly-owned subsidiaries,
unless otherwise indicated. The Company's principal executive offices are
located at 2600 North Longview Street, Kilgore, Texas 75662; its telephone
number is (903) 984-0555; and its website on the Internet is:
www.vertexcomm.com.
SATELLITE COMMUNICATIONS EQUIPMENT INDUSTRY
Market demand for transmission and reception capacity to support
high-speed voice, video, and data communications has continued to generate
significant demand for additional satellite communications network systems and
related earth station equipment. Communications satellites, once placed in orbit
above the earth, relay microwave radio signals from one or more earth stations
to one or more other earth stations at various geographical locations. The
primary function of an earth station is to transmit or receive a microwave radio
signal via satellite in order to efficiently facilitate the telecommunications
process. Telecommunication is the process of communication through electronic
means such as radio, telegraph, television, and computer. Each earth station is
interconnected to a local communications network which distributes and/or
collects the desired information to or from the users of such information. A
typical earth station consists of several components, including an antenna and
associated electronic components, some of which amplify RF signals and others
that control and manage the movement, monitoring and tracking capabilities of
the antenna.
A principal advantage of satellite communications systems over
terrestrial communications systems is that once a satellite has been launched,
the incremental cost of adding new transmission and reception points is limited
to the cost of the earth station. With a terrestrial communications system, each
transmission route must receive a right-of-way clearance and incur additional
costs attendant to laying connecting cable or erecting microwave towers and
repeater stations. As a result, a satellite communications system frequently
offers advantages as a cost-effective medium for long-distance communications,
as compared to the cost of a terrestrial communications system which is usually
higher.
Communications satellites use the L-band, C-band, X-band, Ku-band and
Ka-band for transmission in the radio frequency spectrum. The Company designs
and manufactures satellite communications network systems as well as individual
earth station antennas that operate in each of these frequency bands. L-band
antennas operate in the frequency band of one to two gigahertz and are primarily
utilized by the maritime industry. C-band antennas are capable of receiving and
transmitting information in the radio frequency band of four to six gigahertz.
The C-band frequency spectrum is also used for terrestrial microwave
transmissions. Due to the increasing use of the C-band frequency, the Ku-band
frequency (12 to 14 gigahertz) has been reserved exclusively for satellite
transmission by the Federal Communications Commission ("FCC") and an
international agreement. Since wavelengths in the Ku-band are relatively short,
they can be gathered and concentrated by a smaller antenna dish than is required
with longer wavelength C-band transmissions. Accordingly, Ku-band transmission
enables earth station vendors and voice, video, and data communications service
providers to bring satellite communications directly to customers' facilities.
Ka-band antennas are in the developmental stage and operate in the radio
frequency band of 27 to 50 gigahertz. These emerging antennas will primarily be
utilized for voice and data transmission. The X-band frequency spectrum (seven
to eight gigahertz) is reserved for utilization in worldwide military satellite
communications.
-2-
<PAGE> 4
THE VERTEX STRATEGY
The Company's strategy is to provide a wide variety of advanced
satellite communications products, including integrated communications network
systems, precision earth station antennas, related control systems, associated
electronic and electroformed components, and services to satisfy evolving
customer requirements. The Company believes its proven products and expertise,
experience in refining current products, and developing new products will enable
it to expand distribution and gain market share.
The Company believes this strategy has been, and will continue to be,
successful because of the following key elements:
TECHNICAL EXPERTISE. Vertex believes its technical expertise, together
with its ability to comply with exacting engineering and design specifications,
has contributed to its ability to increase sales. The ability of its engineering
and design staff to respond rapidly to detailed customer requirements has
enhanced the Company's competitive position.
BROAD PRODUCT LINE. The Company's product strategy is to establish and
maintain a prominent market share by emphasizing the development and
distribution of a wide array of quality systems, subsystems and associated
products. The Company believes its telecommunications products comprise one of
the industry's broadest product lines. This extensive product line positions the
Company to respond to a variety of customer requirements and to gain market
share by expanding penetration into new and existing markets.
SKILLED SALES FORCE. The Company's distribution strategy focuses on the
needs of systems integrators and large end users that require a sales force
possessing advanced technical knowledge and expertise. The Company believes its
sales force is qualified to differentiate and promote the benefits of its
products from those offered by competitors, to respond promptly to solve
customers' communications problems, and to address customers' future
communications requirements as their needs evolve and organizational functions
change.
INTERNATIONAL OPERATIONS. Continuing and emerging demands have created
the need for substantial investment in telecommunications infrastructures in
many international markets. The Company believes that significant opportunities
exist in the market for satellite communications equipment and associated
products outside of the United States. The Company adapts its product
development, marketing and distribution strategies to comply with the unique
requirements of specific international markets. While recent depressed economic
developments in certain international markets indicate that the Company's
international sales volume may suffer during the near term, the Company expects
this trend to return to a more normal growth pattern as these economic
conditions improve or stabilize by fiscal year 2000.
ACQUISITIONS AND GROWTH. The Company expects that planned sales growth
will be largely dependent on its ability to expand its existing plant facilities
and increase personnel or to implement selected, strategic acquisitions which
will complement existing business and enhance market share in the industry.
PRODUCT DEVELOPMENT. The Company works closely with its customers to
identify market needs and define product specifications early in the development
process. This approach results in a thorough understanding of end user
requirements prior to commencement of the design process and often positions the
Company to develop and deliver new products or refinements of existing products
in response to its customers' needs more rapidly than many of its competitors.
The Company believes that the flexibility of its product designs and the
capabilities of its engineering staff, combined with its adherence to superior
quality control standards, have enabled it to be consistently among the
first-to-market with competitive new products or innovative refinements of
existing products.
-3-
<PAGE> 5
VERTEX PRODUCTS
GENERAL. The Company designs, develops, manufactures and markets
communications network systems and subsystems, including an extensive line of
earth station antennas capable of operating in the commercial and military
frequency bands from one to 30 gigahertz, which range in size from 1.2 to 34
meters in diameter, as well as the related electronic components used to
control, manage and monitor the operation, guidance, tracking and telemetry
capabilities of antennas. These products require exacting engineering skills and
detailed standards or specifications as established by each customer, involving
not only systems or product design, but the complete integration of other
components acquired from the Company or other sources.
The Company's products are utilized by its customers principally for
telecommunications applications with certain products used in radio astronomy.
The Company's operating divisions and subsidiaries include Vertex
Antenna Products Division ("VAPD"), Vertex Satcom Systems, Inc. ("VSSI"), Vertex
Antenna Systems, LLC ("VAS"), Vertex Microwave Products, Inc. ("VMPI"), Vertex
Electronic Products, Inc. ("VEPI"), Vertex Control Systems Division ("VCSD"),
Vertex Special Projects Division ("VSPD") and Vertex Antennentechnik GmbH
("VA"). These Vertex business units design, develop, manufacture and market the
respective products described below.
Vertex Antenna Products Division. VAPD, the Company's largest operating
unit, designs, develops and manufactures RF satellite earth station antennas
ranging in size from 1.2 to 34 meters in diameter, RF feed components, and
related products with emphasis in the L-, S-, C-, X-, Ku- and Ka-band frequency
ranges for applications in the domestic, international and military radio
communications frequencies. VAPD also offers custom and unique research and
development solutions for electrical, civil, structural and mechanical
engineering-specific satellite communications projects.
Vertex Satcom Systems, Inc. VSSI designs, manufactures and markets
telecommunications network systems and related RF, intermediate frequency and
baseband equipment used in satellite communications, including a complete line
of satellite-based communications networking products which facilitate voice and
data communications. These products include earth station telemetry tracking,
command and monitoring ("TTC&M") equipment, frequency conversion products and
digital communications products, including Time Division Multiple Access
("TDMA") and Single Channel Per Carrier ("SCPC") modems and voice and data
channel processing equipment which provide multimedia transmission services via
satellite. To address the most prominent evolving segment of the very small
aperture terminal ("VSAT") market, VSSI has developed its FlexiDAMA ("Demand
Assigned Multiple Access") communications network system, with sophisticated
network management, switching and Global Positioning Satellite-based frequency
and network coordination capabilities for applications in thin-route voice
networks, medium- and high-capacity networks and low-rate video conferencing
networks. The Company believes the combination of offering VSSI's TDMA, SCPC and
DAMA modem technologies with broad signaling standard compatibility qualities
provides a competitive advantage in marketing its network systems, which include
comprehensive voice, data and video networking capabilities, to customers around
the world.
Vertex Antenna Systems, LLC. VAS designs, manufactures and markets
large full-motion, steerable parabolic antenna systems, precision major path
earth station antennas, associated equipment and related components utilized in
satellite communications; deep space network systems; telemetry, tracking,
command and monitoring of satellites; radar applications; and optical and radio
telescopes for deep space communications. VAS also provides custom design
support for special tracking systems, including design, testing and hardware for
application in earth station antenna RF subsystems; and integrates customer-
supplied baseband equipment with its products.
-4-
<PAGE> 6
Vertex Microwave Products, Inc. Through this subsidiary, the Company
designs and manufactures precision microwave components for applications in the
telecommunications, space and defense industries. VMPI's products include a
variety of standard antenna feed components as well as custom designed and
fabricated RF components. Additionally, a standard product line of filters,
diplexers, ortho-mode transducers, polarizers, and RF feed subsystems addresses
market requirements for S-band through Q-band frequencies. These products are
sold directly to end users and suppliers who integrate such products with other
components in telecommunications systems. The Company also utilizes these
products as component parts of certain of its antenna products.
Vertex Electronic Products, Inc. Through VEPI, the Company designs and
manufactures a variety of solid-state power amplifiers (SSPAs), low-noise
amplifiers (LNAs), line drivers, redundant amplifier systems and other related
high-performance products used in telecommunications systems.
Vertex Control Systems Division. This division of the Company designs
and manufactures antenna positioning and tracking systems, antenna control
systems, automatic de-ice systems, and uplink power control systems.
Additionally, VCSD specializes in turnkey retrofit services, including the
provision of products, technical engineering expertise, and on-site services
required to modernize and enhance the usefulness of existing earth station
installations and related assets.
Vertex Antennentechnik GmbH. Through this subsidiary, headquartered in
Duisburg, Germany, the Company designs and supplies products which complement
its existing broad line of antenna products, such as precision antenna
reflectors, multi-axis pedestals (antenna support structures), controller drive
systems, radio telescopes, and optical telescopes. VA performs highly technical
antenna engineering designs for applications in the academic institution,
governmental, and radio telescope markets, and is a dominant supplier in Europe
of superior quality RF antennas and radio telescopes. Additionally, VA , VAPD,
and VAS frequently cooperate to combine the technical expertise of the three
Vertex groups in the field of high-precision telescope equipment.
Vertex Special Projects Division. This division of the Company is newly
organized to enhance opportunities to adapt and utilize the Company's existing
products and services primarily for applications pursuant to contracts with the
U. S. Government or its agencies or as subcontractor for government-related
projects. While there can be no assurance that VSPD will be successful, sales
generated by this division are expected to partially offset the impact of
declining foreign sales in fiscal 1999.
CUSTOM ENGINEERING. The Company relies upon its engineering experience
and expertise to provide its customers with custom-engineered products that are
not otherwise readily available in the marketplace. Management believes this
capability is a significant attribute that distinguishes the Company from its
competitors.
CUSTOMER SERVICES. In addition to the manufacture and supply of a broad
line of telecommunications products, systems, subsystems and related products,
the Company also offers a wide range of related services, including consulting;
design and configuration; turnkey field installation; site testing and
performance analysis; and after-sale maintenance services.
MARKETING, SALES, AND CUSTOMERS
MARKETING. The Company's marketing strategy is to offer a complete line
of high-technology antenna and associated products, while also marketing certain
complete communications systems. The Company believes that this approach enables
Vertex to comply with its own communications systems requirements while also
satisfying the needs of systems integrators (companies which sell complete
communications systems, but do not manufacture antennas or the particular
antenna or associated products needed) and end users (ultimate customers) who
combine the antennas and associated products with other
-5-
<PAGE> 7
systems components to form complete communications systems. The Company markets
and supports its products through a distribution system comprised of a direct
sales force, supplemented in international markets by independent sales
representatives. Vertex augments these sales methods by advertising certain
products in trade magazines and by displaying certain products at trade shows.
The marketing and sales activities of the Company focus on domestic and
international markets for commercial, governmental, and military applications.
Vertex's marketing plan contemplates sales growth through increasing market
share and continued development of new markets for its products.
SALES. The Company maintains a direct sales force in the United States
and Germany, and a staffed sales office in Singapore. In addition to providing
product and pricing information, Vertex's sales personnel provide customers and
potential customers value-added solutions and detailed explanations of the
benefits and advantages of the Company's products and services as compared to
those of its competitors. The Company's sales force includes sales managers,
engineers, sales representatives, and technical support personnel. The Company's
worldwide marketing and sales efforts are directed and coordinated from its
headquarters in Kilgore, Texas.
The Company believes that the rapidly evolving international market
will continue to be an important source of sales. The Company's international
sales are comprised of products manufactured in the United States, Germany and
Estonia, and services performed on-site by its engineers and technical support
personnel. To enhance its foreign sales, the Company also engages the services
of foreign independent sales representatives to supplement its direct sales
force. These foreign sales representatives also offer products of other
manufacturers which are complementary to, but not competitive with, the
Company's products.
Sales to foreign customers involving products or services originating
in the United States are typically contracted for in U. S. dollars. Foreign
sales of products or services originating in Germany are usually conducted in
the German mark. International sales are subject to certain government controls
and other risks, including export licensing, currency exchange rate
fluctuations, political instability, trade restrictions, and changes in tariffs
and freight rates. Should any of these factors prove onerous or change in a
material unfavorable manner, the Company's delivery or completion of a sales
contract could be adversely affected. To date, the Company has not experienced
any material difficulties related to these factors.
Sales in Western Europe were 14%, 14%, and 19%, of total sales in
fiscal 1998, 1997, and 1996, respectively. Sales in the Middle East were 10% of
total sales in fiscal 1996. Sales in Asian countries were 20%, 21%, and 18%, of
total sales in fiscal 1998, 1997, and 1996, respectively. Export sales were 59%,
56%, and 59%, of total sales in fiscal 1998, 1997, and 1996, respectively.
CUSTOMERS. Typical users of the Company's products include the
broadcast industry, international telecommunications companies, communications
common carriers, universities and academic institutions, private communications
networks, and government agencies. The Company's customers include a number of
major companies and government agencies throughout the world, including certain
agencies of the U. S. Government and various foreign governments.
The Company sells its products throughout the world to many customers.
No single customer accounted for 10% or more of the Company's total sales in
fiscal 1998 or fiscal 1997. Sales to GTE Corporation were 12% of total sales in
fiscal 1996.
The Company has been successful in recent years in diversifying its
customer base by increasing its penetration of existing and emerging markets and
developing new markets for its products. Sales growth during this period has
been fueled, in part, by the Company's ability to secure new customers and to
maintain relationships with existing customers. Due to large contracts which may
occur from time
-6-
<PAGE> 8
to time, one or more different customers may represent a material part of the
Company's total sales or unfilled backlog of orders in any given year or at any
point in time. The Company believes that its relationships with its customers
are excellent and that it will continue to be a major supplier of satellite
communications equipment and associated products to its major customers. If
required, the Company believes that it could maintain sales of its products at
current levels to other customers if current relationships with major customers
were interrupted. Although several of these relationships have existed for a
number of years, there can be no assurance that such relationships will
continue. The loss of any of such major customers could have a material adverse
effect on the Company and its business.
Vertex does not seek to maintain a specific level of sales to the
various agencies of the U. S. Government, but rather targets certain types of
projects where the Company's existing products and/or expertise will enable it
to submit competitive bid proposals. Most of the Company's business with the U.
S. Government is on a fixed-price basis. Contracts with the U. S. Government
customarily include provisions which provide for cancellation at the convenience
of the Government. In addition, upon cancellation by the Government, the Company
could be entitled to reimbursement of costs incurred, plus a pro rata share of
profit. The Company has never received a cancellation of a material Government
contract and has no reason to anticipate any such cancellation. Products sold,
characteristics, and business risks associated with U. S. Government business do
not differ materially from those associated with sales of the Company's products
to its commercial customers.
CUSTOMER SUPPORT AND SERVICE. The Company services, repairs, and
provides technical support for its products. Through its sales network and
design and support services, the Company is constantly made aware of customers'
needs and their use of its products and services. Accordingly, a superior level
of continuing customer service and support is integral to the Company's
objective of developing and maintaining long-term relationships with its
customers. The majority of the Company's service and support activities are
provided by its field engineering team, systems engineers, and sales and
administrative support personnel, both on-site at the customer's location and by
telephone.
FOREIGN OPERATIONS
The Company's foreign operations are conducted through its wholly-owned
German subsidiary, Vertex Antennentechnik GmbH, located in Duisburg, Germany.
Financial information relating to these foreign operations for the past three
years is shown below:
<TABLE>
<CAPTION>
(In thousands)
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Sales to Unaffiliated Customers ............................. $9,403 $5,881 $3,918
Transfers between Geographic Areas .......................... -- 106 1,360
Operating Income (Loss) ..................................... 577 91 (306)
Identifiable Assets .......................................... 5,933 4,034 3,703
</TABLE>
The Company translates the financial statements of its German
subsidiary from its functional currency, the German mark, into U. S. dollars in
accordance with applicable financial accounting standards. Assets and
liabilities are translated at the exchange rate in effect at each fiscal year
end. Sales and expenses are translated at the weighted average exchange rate in
effect for the period reported. Any resulting gains or losses are recorded in
shareholders' equity and excluded from net income.
MANUFACTURING AND ENGINEERING
The Company's products are manufactured from standard components and
parts that are either built by the Company or by other manufacturers pursuant to
the Company's specifications. Vertex considers these components and related
materials to be commercially available in sufficient volume in the
-7-
<PAGE> 9
industry and expects to experience no difficulty in obtaining any materials or
components needed in its manufacturing activities. However, should any of these
materials or components become unavailable for a significant period, the result
could have an adverse effect on the Company's business.
The Company's products require substantial engineering, design, and
technical support. In addition, although many of the Company's products are
standardized, custom engineering is frequently required to accomplish the
product modifications necessary for a particular application or installation.
The Company's engineering staff is also important to its research and
development activities. The Company has been successful in attracting and
retaining well-qualified engineering personnel and does not anticipate a
shortage of qualified personnel in the future.
The Company believes that its current manufacturing facilities provide
adequate manufacturing space for the foreseeable future. See Item 2 -
"Properties."
PRODUCT DEVELOPMENT
The Company's product research and development efforts are directed
primarily toward development, design, engineering, and implementation activities
rather than pure research. These activities are generally undertaken in response
to specific customer requests or anticipated requirements of the U. S.
Government for programs that have been identified by the Company. Funding for
these activities is derived from internally generated sources and customers. For
the years 1998, 1997, and 1996, the Company expended $5,968,000, $3,775,000, and
$3,217,000, respectively, on research and development. Costs associated with
product development work funded by customers are included in the Company's cost
of sales and the related revenues are included in sales. The Company strives to
continually upgrade its existing products and develop new products to meet
changing customer requirements and to keep pace with evolving technology in the
industry.
COMPETITION
The Company experiences substantial competition from a number of
established companies which provide a broad range of products to the satellite
communications equipment market, including Andrew Corporation, Radiation
Systems, Inc., Nippon Electronic Company, and Scientific-Atlanta, Inc. Certain
of these companies have substantially greater financial and personnel resources
than those available to the Company. The Company's products may not be
proprietary or patentable, and may be subject to duplication and exploitation by
its competitors. Although many of these competitors offer satellite
communications products which are among the types or sizes produced by the
Company, the Company believes that no single competitor offers the diversity of
satellite communications products produced by the Company.
The Company believes that the most important competitive factors are
technical performance, capabilities, product performance, dependable delivery,
and price. Maintenance and service capabilities and manufacturing experience in
the industry are also important factors to customers. Accordingly, the Company
strives to price its products competitively while stressing its custom
engineering and servicing capabilities based upon the years of experience and
technical expertise of its personnel in designing and manufacturing satellite
communications products and the Company's precision metal manufacturing methods.
The Company believes that its expertise in custom engineering and its ability to
meet customers' relatively short-lead time requirements provide it with a
distinct competitive advantage.
Due to competition in the industry where the Company competes, periodic
advances in technology can be expected. Therefore, the Company's ability to
maintain and improve in its existing markets and to enter new markets is
partially dependent upon its ability to evaluate advances in technology and
incorporate such advances where appropriate into its products in a timely and
effective manner.
-8-
<PAGE> 10
INTELLECTUAL PROPERTY
The Company holds patents for certain technologies, products and
processes. The Company does not, however, consider patents important to its
business, but instead relies principally upon innovative management, technical
expertise, and marketing and managerial skills to develop, enhance, and market
its products. The Company believes it is less dependent on the protection of
proprietary product information than on its ability to timely and effectively
develop, enhance, and market its products to maintain the competitiveness of its
products with those of others. The Company protects its proprietary product
information through reliance on a combination of trade secrets, copyrights,
patents, and technical measures, the selective use of nondisclosure agreements
with customers, suppliers, and industry partners, and by limiting access to
sensitive information.
The Company has no reason to believe that its products and proprietary
rights infringe on the proprietary rights of any third parties. There can be no
assurance, however, that the Company's protective measures will preclude
competitors from developing products with features similar to its products or
that third parties will not assert infringement claims in the future.
BACKLOG AND SEASONALITY
At October 30, 1998 and 1997, the Company's backlog of unfilled orders
believed to be firm was approximately $74 million and $73 million, respectively.
The backlog of unfilled orders at October 30, 1998, included approximately $15
million of contracts with the U. S. Government. As is customary, these contracts
include provisions which allow for cancellation at the convenience of the
Government or prime contractor. Upon exercise of these provisions, the Company
would be entitled to reimbursement of costs incurred and a pro rata share of
profit. The Company has never received a cancellation of a material government
contract and believes no such event is threatened. The Company expects that a
substantial portion of the October 30, 1998 backlog will be completed and
delivered in fiscal year 1999.
The levels of sales and net income of the Company fluctuate moderately
on a quarterly basis. The variability in recent years has been demonstrated by
typically higher sales and net income in the fiscal quarters ending in June and
September of each fiscal year. The primary reason for this pattern is the need
for customers to complete installations during warm weather months. The fiscal
quarter ending in September can also be affected by the timing of sales to U. S.
Government agencies.
Other factors which have caused quarterly fluctuations in sales and net
income include variability of shipments under large contracts and variations in
product mix and in profitability of individual orders. The Company believes
these aberrations may continue to have similar impact on future results of
operations, but their timing and placement within particular quarterly periods
on an ongoing basis cannot be predicted. Consequently, the Company believes it
is more meaningful to focus on annual rather than interim results. In addition,
due to the timing differences from year-to-year in the receipt of large
nonrecurring sales contracts, year-to-year comparisons of backlog can be
misleading and are not necessarily indicative of future revenues.
ENVIRONMENTAL COMPLIANCE
Due to the nature of the Company's products, it has not been materially
affected to date by environmental laws. The Company does not anticipate its
business will be materially affected by any current or expected environmental
laws.
-9-
<PAGE> 11
GOVERNMENT REGULATION
Although the Company is not directly regulated by any governmental
agency, most of its United States customers, and the telecommunications industry
in general, are subject to regulation by the Federal Communications Commission
(the "FCC"). In recent years, FCC decisions permitting greater competition among
common carriers have had a favorable impact on the Company. In addition, the FCC
controls the allocation of transmission frequencies and the performance
characteristics of earth station antennas. As a result of these controls, the
Company's product design specifications must conform on an ongoing basis to meet
FCC or other regulatory requirements. These regulations are not expected to
adversely affect the operations of the Company.
Outside the United States, where some of the customers of the Company
have been government- owned and operated entities, changes in government
economic policy and communications regulation have affected in the past, and may
be expected to affect in the future, the volume of foreign business. However,
the effect of regulation in countries other than the United States in which the
Company does business has generally not been detrimental to the international
activities of the Company taken as a whole and is not expected to be detrimental
to such activities in the foreseeable future.
EMPLOYEES
As of October 30, 1998, the Company employed 837 full-time employees.
None of the Company's employees is represented by a labor organization
and the Company is not a party to any collective bargaining agreement. The
Company has never had an employee strike or a work stoppage and considers its
relations with its employees to be good. The Company has not experienced any
difficulty in attracting and retaining qualified employees.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish, verbally or in written
form, forward-looking statements relating to such matters as anticipated sales
levels, anticipated financial performance, business prospects, technological
developments, new products, anticipated liquidity and capital requirements, the
effects of year 2000 compliance requirements, research and development
activities, the results of legal proceedings and similar matters. This Annual
Report on Form 10-K (or any other periodic reporting documents required of the
Company) may contain forward-looking statements reflecting the current views of
the Company concerning potential future events or developments, including
statements in this Item and below in Item 3 in "Legal Proceedings", in Item 7 in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in Item 7A in "Quantitative and Qualitative Disclosures About
Market Risk." Such statements are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which provide
a "safe harbor" for such statements. These cautionary statements are being made
pursuant to the applicable provisions of the cited securities laws and with the
intention of obtaining the benefits of such "safe harbor" provisions. In order
to comply with the terms of the "safe harbor", the Company cautions investors
that any forward-looking statements made by the Company are not guarantees of
future performance and that a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements.
Although the Company believes that the expectations reflected in its
forward-looking statements are reasonable, there can be no assurance that the
actual results or developments anticipated by the Company will be realized, or
if substantially realized, that such results or developments will have the
expected effects on the Company's business operations. The risks and
uncertainties which may effect the
-10-
<PAGE> 12
operations, performance, development, and results of the Company's business
include, but are not limited to, the following: general economic conditions,
including the impact of changing economic conditions (including, but not limited
to, the continued weak economic conditions in certain international markets);
fluctuation of foreign currency exchange rates; changes in capital spending
plans of certain international customers; uncertainties inherent in
international operations; uncertainties relating to customer plans and
commitments; rapid or unexpected technological changes; product demand and
industry capacity; product development; the highly competitive environment in
which the Company operates; market acceptance of new products; manufacturing
efficiencies; availability of certain raw materials; domestic and foreign
government regulatory policies and spending; rising costs and availability of
certain components; and reliance by the Company and its suppliers on software
programs that may not be year 2000 compliant and year 2000 problems that may
exist in products currently or historically sold to customers of the Company.
The words "believe," "expect," "anticipate," "project," "plan" and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date made. Subsequent written or oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements in this section and
elsewhere in this Annual Report on Form 10-K.
ITEM 2. PROPERTIES.
The Company owns and maintains executive and administrative offices,
manufacturing facilities, and a product testing site at its headquarters at 2600
North Longview Street, Kilgore, Texas, and owns or leases certain facilities at
other locations. The following is a listing of the properties owned or leased by
Vertex and its subsidiaries as of October 30, 1998.
<TABLE>
<CAPTION>
APPROXIMATE AREA OWNED
LOCATION PRINCIPAL USE IN SQUARE FEET OR LEASED
- -------- ------------- ---------------- ---------
<S> <C> <C> <C>
Kilgore, Texas Executive, administrative, 231,000 on Owned in fee
engineering, and manufacturing 55 acres of land
Kilgore, Texas Manufacturing 33,000 on Owned in fee
1 acre of land
Longview, Texas Administrative, engineering, and 30,000 Leased to October 1999
manufacturing
Santa Clara, California Administrative, engineering, and 83,000 Leased to December 2003
manufacturing
Torrance, California Administrative, engineering, and 37,000* Leased to June 2002
manufacturing
Albuquerque, Administrative and manufacturing 27,000 on Owned in fee
New Mexico 17 acres of land
Chantilly, Virginia Fabrication 9,000 Leased to March 2001
Nepean, Ontario, Fabrication 5,000 Leased to February 2002
Canada
State College, Administrative, engineering, and 20,000 Leased to March 2000
Pennsylvania manufacturing
Duisburg, Germany Administrative and engineering 8,000 Leased to February 1999
</TABLE>
-11-
<PAGE> 13
<TABLE>
<CAPTION>
APPROXIMATE AREA OWNED
LOCATION PRINCIPAL USE IN SQUARE FEET OR LEASED
- -------- ------------- ---------------- ---------
<S> <C> <C> <C>
Singapore Administrative Less than 1,000 Leased to September 1999
Dallas, Texas Administrative and engineering 2,000 Leased to February 1999
</TABLE>
- ------------------------------------
* Approximately 15,000 square feet of the total floor space is
subleased to a third party.
The Company believes its facilities are adequate and will be suitable
to meet its requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings which would have a
material, adverse effect on the Company or its business and does not believe
that any such legal proceedings are threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders of the Company,
through solicitation of proxies or otherwise.
-12-
<PAGE> 14
PART II
The information required by Items 5 through 8, inclusive, of this
report is contained in the Registrant's Annual Report to Shareholders for its
fiscal year ended September 30, 1998 (the "1998 Annual Report"), selected
portions of which are incorporated herein by reference, as described below. With
the exception of the material incorporated by reference herein, the 1998 Annual
Report is not deemed filed as a part of this Annual Report on Form 10-K.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information appearing under the caption "Market for Common Stock"
on page 28 of the 1998 Annual Report is hereby incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information appearing in the "Selected Financial Data" table on
page 1 of the 1998 Annual Report is hereby incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information appearing under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 13
through 16 of the 1998 Annual Report is hereby incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
While the Company's general policy is to sell its products and services
originating in the United States in the U.S. dollar currency, the Company may,
from time to time, be subject to certain market risks, including foreign
currency exchange rate fluctuations relating to certain sales contracts with
foreign customers where payment is made in foreign currency. In the normal
course of business, the Company assesses these risks and has established
policies and procedures to manage its exposure to fluctuations in foreign
currency values. The Company's objective of managing its exposure to foreign
currency exchange rate fluctuations is to reduce the impact of adverse
fluctuations in earnings and cash flows associated with foreign currency
exchange rates for certain selected contracts with foreign customers.
Accordingly, the Company utilizes foreign currency forward contracts to hedge
its exposure on firm commitments denominated in foreign currency.
Additional information responsive to this item is contained under the
subtitle "Financial Market Risks" of "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 14 through 15 of the
1998 Annual Report and is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of Vertex Communications
Corporation and Subsidiaries and Notes thereto, appearing on pages 17 through
27, inclusive, together with the Report of Arthur Andersen LLP, Independent
Public Accountants, thereon, appearing on page 28 of the 1998 Annual Report, are
hereby incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
-13-
<PAGE> 15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
The information regarding directors of the Registrant in response to
Item 7 of Schedule 14A promulgated pursuant to the Exchange Act, which will
appear in the Registrant's definitive Proxy Statement in connection with the
solicitation of proxies for its 1999 Annual Meeting of Shareholders, is hereby
incorporated herein by reference.
EXECUTIVE OFFICERS
The following table sets forth the names and ages of all executive
officers of the Registrant, their respective positions and offices with the
Registrant, and the period during which each has served as an executive officer.
<TABLE>
<CAPTION>
SERVED AS
EXECUTIVE
NAME AGE POSITION(S)* OFFICER SINCE
---- --- ----------- -------------
<S> <C> <C> <C>
J. Rex Vardeman...................... 59 Chairman Of The Board, October, 1984
President, Chief Executive Officer And
Director
A. Don Branum........................ 61 Senior Vice President, Assistant October, 1984
Secretary And Director
James D. Carter...................... 51 Vice President And Chief Financial October, 1984
Officer, Treasurer
And Director
Rein Luik ........................... 63 Vice President And Director Of The June, 1997
Company; And
President, Vertex Electronics Group
Joe A. Ylitalo....................... 52 Secretary And General Counsel January, 1997
William L. Anton..................... 60 Vice President December, 1984
H. Dean Bunnell...................... 51 Vice President Of The Company; And January, 1995
President And Chief Executive Officer,
Vertex Electronic Products, Inc.
Manfred Stupnik ..................... 55 Vice President Of The Company; And January, 1995
President, Vertex Microwave
Products, Inc.
Louis E. Becker 63 Vice President Of The Company; And October 1998
President, Vertex Antenna Systems, Llc
</TABLE>
- ----------------------------------------
* All executive officers of the Registrant are elected annually by the Board
of Directors and serve at the discretion of the Board. There are no family
relationships between any director or executive officer of the Registrant
and any other such person.
-14-
<PAGE> 16
The following information, as furnished by each of the persons named,
relates to the business experience of each executive officer of the Registrant
named above.
J. Rex Vardeman is a co-founder of the Company and has served as
Chairman Of The Board, President, Chief Executive Officer and a Director since
its inception in October 1984. Prior to founding the Company, Mr. Vardeman
served as Vice President of Harris Antenna Operations ("Harris Antenna
Operations"), A unit of the Satellite Communications Division of Harris
Corporation ("Harris"), until the acquisition in 1984 of The Harris Antenna
Operations by the Company. In 1973, Mr. Vardeman co-founded Radio Mechanical
Structures, Inc. ("RMS"), The predecessor to The Harris Antenna operations, and
served as its Vice President and General Manager and a Director until the
acquisition of RMS by Harris In 1977. For more than ten years prior thereto, he
was employed by E-Systems, Inc., a major electronics company, in various
engineering and management positions.
A. Don Branum, a co-founder of the company, has served as Senior Vice
President, assistant secretary, and a director since its inception in October
1984. He also served as Vice President/General Manager of the Company's Vertex
Antenna Products Division from April 1994 to April 1998. Prior to joining the
company, Mr. Branum served as Vice President of the Harris Antenna Operations,
with responsibility for product marketing. Mr. Branum served as President of
Dallas Telecommunications, Inc., A communications marketing and consulting firm
which he founded from 1981 through 1984. From 1978 through 1981, Mr. Branum
served as Vice President and General Manager of the Satellite Communications
Division of Harris, of which the Harris Antenna Operations were a part. Mr.
Branum was a co-founder of RMS in 1973 and served as its President and a
director until its acquisition by Harris in 1977.
James D. Carter has served the Company as Vice President and Chief
Financial Officer, Treasurer, and a director since its inception in October
1984. Prior to joining the Company, Mr. Carter was employed by Harris as
Controller of the Harris Antenna Operations since 1978. For more than six years
prior thereto, Mr. Carter was employed by Harris in various accounting
positions.
Rein Luik has served as a director of the Company since August 1997 and
as Vice President of the Company since June 1997, immediately following the
acquisition of Vertex Satcom Systems, Inc. ("Vertex Satcom"), formerly TIW
Systems, Inc., As a wholly-owned subsidiary of the Company. Dr. Luik, a
co-founder of Vertex Satcom, has served as President since its inception in 1976
and has continued to serve in that position since its acquisition by the
Company. Effective October 1998, Dr. Luik became President of the Vertex
Electronics Group. Prior to founding Vertex Satcom, Dr. Luik was employed by the
WDL Division of Aeronutronic Ford Corporation from 1962 to 1976, initially as an
Engineer and subsequently as Manager of its Antenna Subsystems Engineering
Department.
Joe A. Ylitalo has served as Secretary and General Counsel of the
Company since January 1997, prior to which time he was employed as General
Counsel to the Company for more than five years.
William L. Anton has served as Vice President of the Company since
October 1984 and as Vice President - Marketing of Vertex Antenna Products
division from September 1995 to October 1998. Mr. Anton previously served in the
Position of Vice President - International Marketing from October 1987 until
September 1995, and as Vice President - Operations from December 1984 through
October 1987. From April 1984 through December 1984 and from August 1977 until
April 1984, Mr. Anton served as Director of Operations and Program Director,
respectively, of the Harris Antenna Operations.
H. Dean Bunnell has served as Vice President of the Company since
January 1995, immediately following the acquisition of Vertex Electronic
Products, inc. ("Vepi"), formerly Maxtech, Inc., As a wholly-owned subsidiary of
the Company. Mr. Bunnell is a co-founder of VEPI and has served as its President
and Chief Executive Officer since its inception in 1989, and has continued to
serve in such positions since the Company's acquisition of VEPI.
-15-
<PAGE> 17
Manfred Stupnik has served as Vice President of the Company since
January 1995 and as President of Vertex Microwave Products, Inc. ("VMPI"),
formerly Gamma-f Corp., A wholly-owned subsidiary of the Company, since 1991.
Prior thereto, Mr. Stupnik held positions as Vice President of Operations and
Vice President-Commercial Products during his 26 years of continuous tenure with
VMPI.
Louis E. Becker has served as Vice President of the Company since
October 1998 and as President of Vertex Antenna Systems, LLC ("VAS"), formerly a
Division of TIW SYSTEMS, INC., Since its organization in October 1998 following
the acquisition of Vertex Satcom as a wholly-owned subsidiary of the Company. He
was a co-founder of Vertex Satcom in 1976, and served continuously as its
Executive Vice President until October 1998. Prior to 1976, he was employed by
the WDL Division of Aeronutronic Ford Corporation, where he was responsible for
managing the Structural/Mechanical Engineering Department.
EMPLOYMENT AGREEMENTS
J. Rex Vardeman, A. Don Branum, and James D. Carter, in their
capacities as (i) Chairman of the Board, President and Chief Executive Officer,
(ii) Senior Vice President and Assistant Secretary, and (iii) Vice President and
Chief Financial Officer, and Treasurer, respectively, have each executed
employment agreements with the Company. These employment agreements are each for
three-year terms which automatically renew on a daily basis.
Among other provisions, these agreements provide that, in consideration
for remaining in the employ of the Company, each officer is entitled, subject to
certain conditions, to receive benefits in the event of termination of
employment under certain circumstances, including, among other reasons, a change
of control of the Company. If such an officer is terminated for a reason other
than (a) his death, disability or retirement, (b) for cause, or his voluntary
termination other than for good reason, such officer would be entitled to
receive from the Company, except as otherwise indicated below, a lump-sum
severance payment equal to the sum of the following payments: (i) the officer's
full base salary through the effective date of his termination at the rate then
in effect, (ii) any authorized but unreimbursed business expenses and any
vacation benefits which have accrued but are unpaid or unused as of the
effective date of termination, (iii) any accrued but unpaid annual bonus
compensation to the effective date of termination, but without accelerating the
bonus payment date, (iv) an amount equal to three times the average aggregate
direct annual compensation (salary and bonus) of the officer for the five fiscal
years of the Company ended immediately prior to the effective date of his
termination, and (v) in the event such officer is subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), resulting from any "excess parachute payment" received by such officer
as described in Section 280G(b) of the Code, an amount sufficient to ensure that
after payment of such excise tax, plus interest or penalties thereon, if any, as
the result of such "excess parachute payment," such officer will retain free and
clear of all claims, taxes, and impositions an amount equal to such excise tax,
interest and penalties, if any, imposed upon the excess payment received. In the
event that any such officer receives a parachute payment as a result of
termination of employment, such officer would be deemed to receive an "excess
parachute payment" if it equals or exceeds 300% of the officer's "base amount,"
generally the average annual compensation received by such officer over the five
most recent tax years. The "excess parachute payment" is computed as that
portion of the "parachute payment" which exceeds the "base amount."
In addition, Rein Luik and Louis E. Becker, in their capacities as
President of Vertex Electronics Group and Vertex Antenna Systems, LLC,
respectively, entered into agreements effective as of June 11, 1997, which
include the same provisions for a similar term as summarized above as related to
their employment in such capacities.
-16-
<PAGE> 18
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Registrant's directors
and officers, and persons who own more than 10% of a registered class of the
Registrant's equity securities, to file initial reports of ownership and reports
of changes in ownership of the Registrant's securities with the Securities and
Exchange Commission (the "Commission") on Forms 3, 4, or 5, as applicable. Such
persons are required by regulations promulgated by the Commission pursuant to
the Exchange Act to furnish the Registrant with copies of all such Section 16(a)
report forms they file with the Commission.
Based solely on its review of the copies of such report forms received
by it with respect to fiscal year 1998, or written representations from certain
reporting persons, the Registrant believes that all filing requirements
applicable to its directors, officers, and persons who own more than 10% of a
registered class of the Registrant's equity securities have been timely complied
with in accordance with Section 16(a) of the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION.
The information regarding executive compensation in response to Item 8
of Schedule 14A which will appear in the Registrant's definitive Proxy Statement
in connection with the solicitation of proxies for its 1999 Annual Meeting of
Shareholders is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information regarding security ownership of certain beneficial
owners and management in response to Item 6 of Schedule 14A which will appear in
the Registrant's definitive Proxy Statement in connection with the solicitation
of proxies for its 1999 Annual Meeting of Shareholders is hereby incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information regarding certain relationships and related
transactions in response to Item 7 of Schedule 14A which will appear in the
Registrant's definitive Proxy Statement in connection with the solicitation of
proxies for its 1999 Annual Meeting of Shareholders is hereby incorporated
herein by reference.
-17-
<PAGE> 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
PAGE IN 1998
(a)1. CONSOLIDATED FINANCIAL STATEMENTS. ANNUAL REPORT
-------------
<S> <C>
Report of Independent Public Accountants.................................................... 28
Consolidated Income Statements
For the years ended September 30,
1998, 1997, and 1996..................................................................... 17
Consolidated Balance Sheets
As of September 30, 1998 and 1997........................................................ 18
Consolidated Statements of Cash Flows
For the years ended September 30,
1998, 1997, and 1996..................................................................... 19
Consolidated Statements of Shareholders' Equity
For the years ended September 30,
1998, 1997, and 1996..................................................................... 20
Notes to Consolidated Financial Statements.................................................. 21
2. FINANCIAL STATEMENT SCHEDULES. PAGE NO.
--------
Report of Independent Public Accountants on Schedule....................................... S-1
SCHEDULE
--------
II - Valuation and Qualifying Accounts..................................................S-2
</TABLE>
All other schedules are omitted because they are either not required or
not applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
(b) REPORTS ON FORM 8-K.
The Registrant did not file any reports on Form 8-K during the last
quarter of the period covered by this report, and none was required.
-18-
<PAGE> 20
(c) EXHIBITS.
The following Exhibits are filed herewith pursuant to Item 601 of
Regulation S-K or are incorporated herein by reference to previous filings
noted, as applicable:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C> <C>
3.1 ....... Restated Articles of Incorporation of the Registrant, as amended by Articles of
Amendment No. 1 and No. 2 thereto, filed as Exhibit 4.1 to the Registrant's
Registration Statement on Form S-3 (File No. 333-53391).
3.2 ....... Bylaws of the Registrant, as amended by Amendments No. 1 and No. 2 thereto,
filed as Exhibit 4.2 to the Registrant's Registration Statement on Form S-3 (File
No. 333-53391).
10.1 ....... Savings/Profit Sharing Plan of the Registrant, as amended and restated, effective
as of June 1, 1991 filed as Exhibit 10-A to the Registrant's Annual Report on
Form 10-K for the fiscal year ended September 30, 1991 (File No. 0-15277).
10.2 ....... Stock Option Plan for Key Employees of the Registrant filed as Exhibit A to the
Registrant's definitive Proxy Statement in connection with the solicitation of
proxies for its 1987 Annual Meeting of Shareholders (File No. 0-15277).
10.3 ....... First Amendment to the Stock Option Plan for Key Employees filed as Exhibit 10-
E to the Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1988 (File No. 0-15277).
10.4 ....... Second Amendment to the Stock Option Plan for Key Employees - Filed as
Exhibit A to the Registrant's definitive Proxy Statement in connection with the
solicitation of proxies for its 1992 Annual Meeting of Shareholders (File No. 0-
15277).
10.5 ....... 1995 Stock Compensation Plan of the Registrant filed as Exhibit A to the
Registrant's definitive Proxy Statement in connection with the solicitation of
proxies for its 1995 Annual Meeting of Shareholders (File No. 0-15277).
10.6 ....... Outside Directors Stock Option Plan of the Registrant filed as Exhibit B to the
Registrant's definitive Proxy Statement in connection with the solicitation of
proxies for its 1987 Annual Meeting of Shareholders (File No. 0-15277).
10.7 ....... Executive Employment Agreement, dated November 10, 1994, by and between
the Registrant and J. Rex Vardeman, Chairman of the Board, President and Chief
Executive Officer of the Registrant, filed as Exhibit 10.9 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1994 (File No. 0-
15277).
10.8 ....... Executive Employment Agreement, dated November 10, 1994, by and between
the Registrant and A. Don Branum, Senior Vice President of the Registrant, filed
as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1994 (File No. 0-15277).
10.9 ....... Executive Employment Agreement, dated November 10, 1994, by and between
the Registrant and James D. Carter, Vice President - Finance and Treasurer of
the Registrant, filed as Exhibit 10.11 to the Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1994 (File No. 0-15277).
</TABLE>
-19-
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C> <C>
10.10 ....... Executive Employment Agreements, dated June 11, 1997, by and between TIW
Systems, Inc., a wholly-owned subsidiary of the Registrant, and Rein Luik, President
of TIW Systems, Inc. and a Vice President of the Registrant, and Louis E. Becker,
Vice President of TIW Systems, Inc. and a Vice President of the Registrant, filed
as Exhibits to the Registrant's Current Report on Form 8-K/A dated June 26, 1997
(Date of Earliest Event Reported: May 9, 1997; File No. 0-15277).
10.11 ....... Indemnification Agreement, dated October 26, 1994, by and between the Registrant
and J. Rex Vardeman; and schedule of other officers and directors of the Registrant,
each of whom has entered into a similar agreement with the Registrant, filed as
Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994 (File No. 0-15277).
10.12 ....... Management Incentive Compensation Plan of the Registrant, as amended and restated
effective October 1, 1995, filed as Exhibit 10.12 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended September 30, 1995 (File No. 0-15277).
10.13 ....... Management Incentive Compensation Plan for Divisions of the Registrant, as amended
and restated effective October 1, 1995, filed as Exhibit 10.13 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30, 1995 (File
No. 0-15277).
10.14 ....... Management Incentive Compensation Plan of Gamma-f Corp., a wholly-owned
subsidiary of the Registrant, as amended and restated effective October 1, 1995,
filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1995 (File No. 0-15277).
10.15 ....... Management Incentive Compensation Plan of Maxtech, Inc., a wholly-owned
subsidiary of the Registrant, as amended and restated effective October 1, 1995,
filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1995 (File No. 0-15277).
10.16 ....... Employee Profit Sharing Bonus Plan of the Registrant, as amended and restated
effective October 1, 1996, filed as Exhibit 10.16 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended September 30, 1996 (File No. 0-15277).
10.17 ....... Employee Profit Sharing Bonus Plan of Gamma-f Corp., a wholly-owned subsidiary
of the Registrant, as amended and restated effective as of October 1, 1996, filed
as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1996 (File No. 0-15277).
10.18 ....... Management Incentive Compensation Plan of TIW Systems, Inc., a wholly-owned
subsidiary of the Registrant, effective as of October 1, 1997, filed as Exhibit 10.20
to the Registrant's Annual Report on Form 10-K for the fiscal year ended September
30, 1997 (File No. 0-15277).
10.19 ....... Management Incentive Compensation Plan of Vertex-New Mexico, Inc., a wholly-
owned subsidiary of TIW Systems, Inc., effective as of October 1, 1997, filed as
Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997 (File No. 0-15277).
10.20 ....... Employee Profit Sharing Bonus Plan of Maxtech, Inc., a wholly-owned subsidiary
of the Registrant, effective as of October 1, 1997, filed as Exhibit 10.22 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended September 30,
1997 (File No. 0-15277).
</TABLE>
-20-
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C> <C>
10.21 ....... Employee Profit Sharing Bonus Plan of Vertex-New Mexico, Inc., a wholly-owned
subsidiary of TIW Systems, Inc., effective as of October 1, 1997, filed as Exhibit
10.23 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997 (File No. 0-15277).
10.22 ....... Revolving Credit Loan Agreement and related Promissory Note, each dated June 11,
1997, by and between Bank One, Texas, National Association and the Registrant,
filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997 (File No. 0-15277).
10.23* ....... Second Amendment to Loan Agreement, dated September 15, 1998, by and between
the Registrant and Bank One, Texas, National Association.
10.24* ....... First Amendment to the Savings/Profit Sharing Plan of the Registrant, as amended
and restated, effective as of October 1, 1998.
10.25* ....... Management Incentive Compensation Plan of the Registrant, its Subsidiaries and
its Divisions, as amended and restated, effective as of October 1, 1998.
10.26* ....... Employee Profit Sharing Bonus Plan of the Registrant, its Subsidiaries and its
Divisions, as amended and restated, effective as of October 1, 1998.
13* ....... Annual Report to Shareholders of the Registrant for the year ended September 30,
1998, to the extent specified in Parts II, III and IV hereof.
21* ....... Subsidiaries of the Registrant.
23* ....... Consent of Independent Public Accountants.
27* ....... Financial Data Schedule.
</TABLE>
- ---------------------------
*Filed herewith.
-21-
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: December 21, 1998 Vertex Communications Corporation
(Registrant)
By: /s/ J. REX VARDEMAN
------------------------------------
J. Rex Vardeman
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ------
<S> <C> <C>
/s/ J. REX VARDEMAN Chairman of the Board, December 21, 1998
- ---------------------------------------- President, Chief
J. Rex Vardeman Executive Officer (Principal
Executive Officer) and
Director
/s/ A. DON BRANUM Director December 21, 1998
- ----------------------------------------
A. Don Branum
/s/ JAMES D. CARTER Vice President and December 21, 1998
- ---------------------------------------- Chief Financial Officer
James D. Carter (Principal Financial and
Accounting Officer), Treasurer
and Director
/s/ BILL R. WOMBLE Director December 21, 1998
- ----------------------------------------
Bill R. Womble
/s/ DONALD E. HEITZMAN, SR. Director December 21, 1998
- ----------------------------------------
Donald E. Heitzman, Sr.
</TABLE>
-22-
<PAGE> 24
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ JOHN G. FARMER Director December 21, 1998
- ----------------------------------------
John G. Farmer
/s/ REIN LUIK Director December 21, 1998
- ----------------------------------------
Rein Luik
</TABLE>
-23-
<PAGE> 25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
SCHEDULE
To the Shareholders of Vertex Communications Corporation:
We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements included in Vertex
Communications Corporation's 1998 annual report to shareholders incorporated by
reference in this Form 10-K, and have issued our report thereon dated October
23, 1998. Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The supplemental schedule II is the responsibility
of the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Dallas, Texas
October 23, 1998
S-1
<PAGE> 26
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(In thousands)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
---------------------------
BALANCE AT CHARGES TO CHARGES TO BALANCE
BEGINNING COST AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- --------- -------- -------- ---------- ---------
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
<S> <C> <C> <C> <C> <C>
Year Ended 9/30/98 $ 1,254 $ (159) $ -- $ 198 (1) $ 897
Year Ended 9/30/97 268 210 805(4) 29 (1) 1,254
Year Ended 9/30/96 241 35 -- 8 (1) 268
ALLOWANCE FOR
INVENTORY OBSOLESCENCE
Year Ended 9/30/98 $ 1,453 $ (18) $ -- $ 178 (2) $ 1,257
Year Ended 9/30/97 771 449 518(4) 285 (2) 1,453
Year Ended 9/30/96 417 536 -- 182 (2) 771
ALLOWANCE FOR
WARRANTY CLAIMS
Year Ended 9/30/98 $1,052 $ 1,327 $ -- $ 1,036 (3) $ 1,343
Year Ended 9/30/97 530 761 200(4) 439 (3) 1,052
Year Ended 9/30/96 591 343 -- 404 (3) 530
</TABLE>
- ---------------------------
(1) Doubtful accounts written off, less recoveries.
(2) Disposal of obsolete inventory.
(3) Warranty claims processed.
(4) Beginning balance of allowance account balance brought forward from
acquisition of TIW Systems, Inc.
S-2
<PAGE> 27
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Number DESCRIPTION
- ------ -----------
<S> <C>
10.23 Second Amendment to Loan Agreement, dated September 15, 1998, by
and between the Registrant and Bank One, Texas, National
Association.
10.24 First Amendment to the Savings/Profit Sharing Plan of the
Registrant, as amended and restated, effective as of October 1,
1998.
10.25 Management Incentive Compensation Plan of the Registrant, its
Subsidiaries and its Divisions, as amended and restated,
effective as of October 1, 1998.
10.26 Employee Profit Sharing Bonus Plan of the Registrant, its
Subsidiaries and its Divisions, as amended and restated,
effective as of October 1, 1998.
13 Annual Report to Shareholders of the Registrant for the year
ended September 30, 1998, to the extent specified in Parts II,
III and IV hereof.
21 Subsidiaries of the Registrant.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
================================================================================
VERTEX COMMUNICATIONS CORPORATION
EXHIBIT 10.23
TO
ANNUAL REPORT ON FORM 10-K
For Fiscal Year ended September 30,1998
SECOND AMENDMENT TO LOAN AGREEMENT BY AND BETWEEN
VERTEX COMMUNICATIONS CORPORATION AND
BANK ONE, TEXAS, NATIONAL ASSOCIATION
================================================================================
<PAGE> 2
EXHIBIT 10.23
SECOND AMENDMENT TO
LOAN AGREEMENT
THIS SECOND AMENDMENT TO LOAN AGREEMENT (this "Amendment") is entered into
as of September 15, 1998, by and between VERTEX COMMUNICATIONS CORPORATION
("Borrower") and BANK ONE, TEXAS, NATIONAL ASSOCIATION ("Bank").
WHEREAS, Borrower and Bank entered into that certain Loan Agreement dated
as of June 11, 1997 (as amended by First Amendment, the "Loan Agreement"); and
WHEREAS, the Loan Agreement currently governs, inter alia, Borrower's
Revolving Line of Credit in the maximum amount of $15,000,000.00 as currently
evidenced by that certain promissory note dated June 11, 1997 payable by
Borrower to the order of Bank in the stated principal amount of $15,000,000.00
(the "Note"); and
WHEREAS, the Loan Agreement, the Note and all other documents evidencing,
securing, governing and/or pertaining to the Note are hereinafter referred to
collectively as the "Loan Documents"; and
WHEREAS, the parties hereto now desire to modify the Loan Agreement as
hereinafter provided;
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties, and agreements contained herein, and for other valuable
consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
Definitions
Section 1.01 The terms used in this Amendment to the extent not otherwise
defined herein shall have the same meanings as in the Loan Agreement.
ARTICLE II
Amendment
Section 2.01 Effective as of the date hereof, the term "Termination Date"
in Subparagraph "1.a." of the Loan Agreement is hereby amended to be June 11,
2000.
SECOND AMENDMENT TO LOAN AGREEMENT - Page 1
<PAGE> 3
EXHIBIT 10.23
ARTICLE III
Note
3.01 Contemporaneously with the execution hereof, Borrower agrees to
execute and deliver to Bank a promissory note (the "Renewal Note") in the stated
principal amount of $15,000,000.00, in form and substance satisfactory to Bank,
in renewal and extension of the Note.
ARTICLE IV
Representations, Warranties, Ratification and Reaffirmation
Section 4.01 Borrower hereby represents and warrants that: (i) the
representations and warranties contained in the Loan Agreement are true and
correct on and as of the date hereof as though made on and as of the date
hereof, (ii) no event has occurred and is continuing that constitutes an Event
of Default or would constitute an Event of Default but for the requirement of
notice or lapse of time or both, and (iii) there are no claims or offsets
against, or defenses or counterclaims to, the Note, the indebtedness evidenced
thereby or the liens securing same (including without limitation, any defenses
or offsets resulting from or arising out of breach of contract or duty, the
amount of interest charged, collected or received on the Note heretofore, or
breach of any commitments or promises of any type).
Section 4.02 The terms and provisions set forth in this Amendment shall
modify and supersede all inconsistent terms and provisions set forth in the Loan
Agreement, but except as expressly modified and superseded by this Amendment,
the terms and provisions of the Loan Agreement are ratified and confirmed and
shall continue in full force and effect, Borrower hereby agreeing that the Loan
Agreement and the other Loan Documents are and shall continue to be outstanding,
validly existing and enforceable in accordance with their respective terms.
ARTICLE V
Miscellaneous
Section 5.01 Each of the Loan Documents is hereby amended so that any
reference in the Loan Documents to the Loan Agreement shall mean a reference to
the Loan Agreement as amended hereby.
Section 5.02 This Amendment may be executed simultaneously in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 5.03 This Amendment shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns.
SECOND AMENDMENT TO LOAN AGREEMENT - Page 2
<PAGE> 4
EXHIBIT 10.23
EXECUTED as of the date first above written.
BORROWER:
VERTEX COMMUNICATIONS CORPORATION
By:
-------------------------- -----------------------------
Name:
-------------------------- ---------------------------
Title:
-------------------------- --------------------------
BANK:
BANK ONE, TEXAS, NATIONAL ASSOCIATION
By:
-------------------------- -----------------------------
Name:
-------------------------- ---------------------------
Title:
-------------------------- --------------------------
SECOND AMENDMENT TO LOAN AGREEMENT - Page 3
<PAGE> 1
================================================================================
VERTEX COMMUNICATIONS CORPORATION
EXHIBIT 10.24
TO
ANNUAL REPORT ON FORM 10-K
For Fiscal Year ended September 30,1998
FIRST AMENDMENT TO THE SAVINGS/PROFIT SHARING PLAN OF
VERTEX COMMUNICATIONS CORPORATION
================================================================================
<PAGE> 2
EXHIBIT 10.24
FIRST AMENDMENT
TO THE
VERTEX COMMUNICATIONS CORPORATION SAVINGS/PROFIT-SHARING PLAN
This First Amendment to the Vertex Communications Corporation
Savings/Profit-Sharing Plan (hereinafter referred to as the "Plan") is hereby
executed and adopted on this 17th day of September, 1998, by Vertex
Communications Corporation (hereinafter referred to as the "Employer").
W I T N E S S E T H
WHEREAS, the Employer has heretofore maintained and administered the Plan
and related Trust, in a manner intended to ensure that the Plan continues to
qualify under Sections 401(a) and 501(a) of the Internal Revenue Code of 1986;
and
WHEREAS, pursuant to the terms of the Plan, the Employer reserved the right
to amend the Plan; and
WHEREAS, the Employer desires to amend various provisions of the Plan to be
effective October 1, 1998; and
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein the Employer hereby amends the Plan, notwithstanding any other
provision of the Plan to the contrary as follows:
I.
Section II.F. of the Adoption Agreement is hereby amended and hereinafter reads
as follows:
"F. Service with companies or employers unrelated to the Employer, shall not be
considered for purposes of crediting Service for eligibility and vesting under
the Plan, except however, for purposes of determining eligibility and vesting
under the Plan, Service with an entity that becomes an Affiliate of the Employer
through an acquisition, shall be determined as of the date an Employee of such
Affiliate first performed one (1) Hour of Service with such Affiliate."
II.
Section III.A. of the Adoption Agreement is hereby amended and hereinafter reads
as follows:
"A. Salary Deposit Contributions:
1. For any Plan Year, the amount specified in a Salary Deposit Agreement shall
be between 0% and 15% of Compensation.
2. Salary Deposit Agreements may be modified or stopped each October 1 and
April 1."
III.
Section C1. Is after C. and before D. under Section III. of the Adoption
Agreement and hereinafter reads as follows:
VERTEX COMMUNICATIONS CORPORATION
FIRST AMENDMENT TO SAVINGS/PROFIT SHARING PLAN PAGE 1
<PAGE> 3
EXHIBIT 10.24
"C1. Maximum Salary Deposit Contributions Matched:
1. The amount of Employer Matching, if any, shall be the greater of:
$1 for $1 up to $800; or
50% of Salary Deposit Contributions up to 6% of Plan Year
Compensation.
2. Each location of the Employer may receive a different Employer Matching
Contribution amount."
IV.
In all other respects, the Plan is hereby ratified and affirmed
Vertex Communications Corporation
By: /s/ J. D. Carter
---------------------------------
Title: Vice President and CFO
VERTEX COMMUNICATIONS CORPORATION
FIRST AMENDMENT TO SAVINGS/PROFIT SHARING PLAN PAGE 2
<PAGE> 1
================================================================================
VERTEX COMMUNICATIONS CORPORATION
EXHIBIT 10.25
TO
ANNUAL REPORT ON FORM 10-K
For Fiscal Year ended September 30,1998
MANAGEMENT INCENTIVE COMPENSATION PLAN OF
VERTEX COMMUNICATIONS CORPORATION, ITS SUBSIDIARIES AND ITS DIVISIONS,
AS AMENDED AND RESTATED
================================================================================
<PAGE> 2
EXHIBIT 10.25
MANAGEMENT INCENTIVE COMPENSATION PLAN
OF
VERTEX COMMUNICATIONS CORPORATION
(AS AMENDED AND RESTATED EFFECTIVE OCTOBER 1, 1998)
1. PURPOSE OF PLAN. This Management Incentive Compensation Plan is
intended to attract and retain key employees of outstanding competence and to
promote the growth and development of the Company by providing incentive
compensation as a reward to those officers, managers, and other key employees of
the Company or a Business Unit (as hereinafter defined) who contribute by their
ability, industry, productivity, and ingenuity to the management, development,
and successful operations of the Company.
2. DEFINITIONS. For purposes of the Plan, the following terms shall
have the ascribed meanings unless otherwise clearly apparent from the context:
"Annual Operating Plan" (AOP) - shall mean the projected plan
of operations of the Company or each of its Business Units, as applicable, as
approved by the Board of Directors for a designated Fiscal Year.
"Annual Performance Objectives" - shall mean the financial
objectives of the Company or each Business Unit, respectively, which the
Compensation Committee shall promulgate and define as applicable for each Fiscal
Year relative to various degrees of achievement of Awards under the Plan at
various levels of Net Income After Tax achieved by the Company for such Fiscal
Year and various levels of Pretax Income for each Business Unit, respectively,
for such Fiscal Year and such other measurements of financial accomplishment of
the Company and each respective Business Unit as it shall in its sole discretion
authorize and approve as conditions precedent to full realization by
Participants of Awards under the Plan, which Annual Performance Objectives shall
be communicated annually to all Participants in the Plan.
"Award" - shall mean a cash distribution to be made to a
Participant for a Fiscal Year as determined in accordance with the provisions of
the Plan.
"Board of Directors" - shall mean the Board of Directors of
Vertex Communications Corporation.
VERTEX COMMUNICATIONS CORPORATION
MANAGEMENT INCENTIVE COMPENSATION PLAN PAGE 1
<PAGE> 3
EXHIBIT 10.25
"Business Unit" - shall mean any Subsidiary, Division, or
Group of the Company to which this Plan shall hereafter become applicable by
action of the Board of Directors or as otherwise required by applicable law.
"Company" - shall mean Vertex Communications Corporation.
"Compensation Committee" - shall mean the Compensation
Committee of the Board of Directors.
"Division" - shall mean any Division of the Company, including
Vertex Antenna Products Division, Vertex Control Systems Division, Vertex
Special Projects Division, and any other Division of the Company to which this
Plan may hereafter become applicable by action of the Board of Directors.
"Employee" - shall mean a person who is in the regular
full-time employment of the Company or one of its Business Units as determined
by the personnel policies and practices of the Company or Business Unit,
respectively.
"Fiscal Year" - shall mean the taxable year of the Company and
its Business Units, as applicable, ending September 30.
"Group" - shall mean any separate Group within the Company
that is not defined as a Division or Subsidiary, including Vertex Antenna Group,
Vertex Antenna Group Marketing, Vertex Business Development Group, Vertex
Electronics Group, and any other Group to which this Plan may hereafter become
applicable by action of the Board of Directors.
"Net Income After Tax" - shall mean for each Fiscal Year the
net income of the Company after federal and state taxes determined in accordance
with generally accepted accounting principles consistently applied and as
approved by the independent public accountants who have examined the financial
accounts and records of the Company for such Fiscal Year; provided, however,
that any such determination of the Net Income After Tax shall be adjusted to
include the effect of the amount of any Award paid or to be paid to a
Participant pursuant to the Plan.
VERTEX COMMUNICATIONS CORPORATION
MANAGEMENT INCENTIVE COMPENSATION PLAN PAGE 2
<PAGE> 4
EXHIBIT 10.25
"Participant" - shall mean any Employee who is eligible to
receive an Award during a Fiscal Year, as designated and approved for such
Fiscal Year by the Compensation Committee.
"Plan" - shall mean the Management Incentive Compensation Plan
of the Company and its Business Units, as amended and restated, effective as of
October 1, 1998.
"Pretax Income" - shall mean for each Fiscal Year the net
income of each Business Unit, as applicable, before federal and state taxes
determined in accordance with generally accepted accounting principles
consistently applied and as approved by the independent public accountants who
have examined the financial accounts and records of the Company and each of its
Business Units for such Fiscal Year; provided, however, that such Pretax Income
determination shall be adjusted to include the effect of the amount of any Award
paid or to be paid to a Participant pursuant to the Plan.
"Projected Net Income After Tax" - shall mean for each Fiscal
Year the level of Net Income After Tax projected and approved by the Board of
Directors to be achieved by the Company for such Fiscal Year pursuant to the
Annual Operating Plan for such Fiscal Year.
"Projected Pretax Income" - shall mean for each Fiscal Year
the level of Pretax Income projected and approved by the Board of Directors to
be achieved by each Business Unit, respectively, for such Fiscal Year pursuant
to the Annual Operating Plan as related to the appropriate Business Group for
such Fiscal Year.
"Subsidiary" - shall mean any Subsidiary of Vertex
Communications Corporation, including Vertex Microwave Products, Inc., Vertex
Electronic Products, Inc., Vertex-New Mexico, Inc.; Vertex Satcom Systems, Inc.,
Vertex Antenna Systems, L.L.C., Vertex Antennentechnik, GmbH, or any other
Subsidiary which may hereafter adopt the Plan.
"Target Bonus Fund" - shall mean the target fund established
from time to time by the Board of Directors to fund the payment of the Awards
for a designated Fiscal Year hereunder.
VERTEX COMMUNICATIONS CORPORATION
MANAGEMENT INCENTIVE COMPENSATION PLAN PAGE 3
<PAGE> 5
EXHIBIT 10.25
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Compensation Committee appointed by the Board of Directors. The Compensation
Committee shall consist of not less than two (2) members of the Board of
Directors. The Board of Directors may from time to time appoint members of the
Compensation Committee in substitution for or in addition to members previously
appointed and may fill vacancies, however caused, in the Compensation Committee.
The Compensation Committee shall select one of its members as its Chairman and
shall hold its meetings at such times and places as it shall deem advisable.
A majority of the members of the Compensation Committee shall
constitute a quorum. All action of the Compensation Committee shall be taken by
a majority of its members. Any action may be taken by written instrument signed
by a majority of the members, and any action so taken shall be deemed fully as
effective as if it had been taken by a vote of the majority of the members at
the meeting duly called and held. The Compensation Committee may appoint a
Secretary, shall keep minutes of its meetings, and shall make such rules and
regulations for the conduct of its business as it shall deem advisable.
The Compensation Committee shall have the sole authority and
power, subject to the express provisions and limitations of the Plan, to
construe the Plan and to adopt, prescribe, amend, and rescind rules and
regulations relating to the Plan, and to make all determinations necessary or
advisable for administering the Plan. No member of the Board of Directors or the
Compensation Committee shall be liable for any action or determination made in
good faith with respect to the Plan.
All determinations, decisions, and directions made or given by
the Board of Directors or the Compensation Committee under the Plan shall be
final and conclusive. The decision of the Board of Directors or the Compensation
Committee on any question concerning or involving the interpretation or
administration of the Plan shall be final and conclusive, and no provision of
the Plan shall be deemed to give any Employee, his/her legal representative or
assigns, any right to participate in the Plan, except to
VERTEX COMMUNICATIONS CORPORATION
MANAGEMENT INCENTIVE COMPENSATION PLAN PAGE 4
<PAGE> 6
EXHIBIT 10.25
such extent, if any, as the Compensation Committee may have determined or
approved pursuant to the provisions of the Plan.
4. PARTICIPATION IN THE PLAN. During the existence of the Plan, the
Compensation Committee shall designate for each Fiscal Year the Employees
eligible to participate in the Plan for such Fiscal Year. The Compensation
Committee shall give consideration to the recommendations and suggestions
submitted to it by officers, managers, and department heads of the Company and
its respective Business Units with respect to Employees who are mainly
responsible in an executive, administrative, professional, technical, or
advisory capacity for the management of the operations of the Company or its
respective Business Units.
5. DETERMINATION OF INCENTIVE COMPENSATION. Prior to the commencement
of each Fiscal Year, the Board of Directors shall determine the Target Bonus
Fund that will be available for payment of Awards for such Fiscal Year, subject
to the achievement and satisfaction of certain Annual Performance Objectives by
the Company and its Business Units, respectively, for such Fiscal Year. Within
thirty (30) days thereafter, the Compensation Committee in its discretion shall
determine the amount of the targeted Award for each of the Participants in the
Plan for such Fiscal Year by determining the share of the Target Bonus Fund that
each Participant will be eligible to receive for such Fiscal Year, subject to
the terms of the Plan, including without limitation, compliance and satisfaction
by the Company and each Business Unit, respectively, with the Annual Performance
Objectives established by the Compensation Committee for such Fiscal Year and
set forth in comprehensive written memoranda to the Participants of the Plan for
such Fiscal Year. The payment schedule will be delineated annually by the
Compensation Committee in a memorandum from the Chairman of the Compensation
Committee as soon as practical after the determination thereof. Each Participant
shall be notified of his/her selection to participate in the Plan and the share
of such Participant in and to the Target Bonus Fund for such Fiscal Year,
including the Annual Performance Objectives applicable for such Fiscal Year.
VERTEX COMMUNICATIONS CORPORATION
MANAGEMENT INCENTIVE COMPENSATION PLAN PAGE 5
<PAGE> 7
EXHIBIT 10.25
6. AWARD OF INCENTIVE COMPENSATION. Within forty-five (45) days after
completion of the Company's Fiscal Year, the Compensation Committee shall
determine the amount of the Award to be paid to each Participant for such Fiscal
Year. The amount of the Award of each Participant for each Fiscal Year shall be
determined by measuring (i) the actual Net Income After Tax achieved for such
Fiscal Year by the Company and actual Pretax Income achieved by each respective
Business Unit compared to the Projected Net Income After Tax for the Company and
Projected Pretax Income for each Business Unit, respectively, as reflected in
the applicable Annual Operating Plan for such Fiscal Year and (ii) the degree of
accomplishment by the Company and its Business Units, respectively, of the
Annual Performance Objectives for such Fiscal Year set forth in the
comprehensive memoranda to Plan Participants referred to in Section 5 hereof as
related to the projected objectives contained in the applicable Annual Operating
Plan for such Fiscal Year. The amount of each Award thus determined shall be
distributed by the Company to the Participants as soon as practical after the
determination thereof. Unless the Participant has filed with the Company or
applicable Business Unit written instructions to the contrary, any Award payable
with respect to a deceased Participant shall be paid to such Participant's
surviving spouse, if any; otherwise, such Award shall be paid to such
Participant's estate.
7. ELIGIBILITY FOR INCENTIVE COMPENSATION; PRORATION FOR LEAVES OF
ABSENCE. An Employee shall be eligible for and shall receive the full amount of
his/her Award for a Fiscal Year, provided such Employee remains in the
continuous, active employment of the Company or Business Unit, as applicable,
for such entire Fiscal Year. A Participant who has taken one or more authorized
leaves of absence lasting, in the aggregate, for four or more weeks during the
Fiscal Year will receive a prorated share of his/her Award reflecting the time
away from work. An Employee whose employment terminates for any reason before
the end of the Fiscal Year is not eligible for participation in the Plan, and
shall not be entitled to any Award for such Fiscal Year. Notwithstanding the
preceding, in the event of termination of employment before the end of the
Fiscal Year by reason of the retirement of a Participant pursuant to the terms
of an
VERTEX COMMUNICATIONS CORPORATION
MANAGEMENT INCENTIVE COMPENSATION PLAN PAGE 6
<PAGE> 8
EXHIBIT 10.25
applicable retirement or savings plan, or the death of such Employee, the
Compensation Committee shall have the power and authority to determine whether
an Award should be paid to such Employee for such Fiscal Year. The determination
of the Compensation Committee in the exercise of such power and authority in its
sole discretion shall be final and binding upon each Employee and anyone
claiming by or through such Employee.
8. AMENDMENT OR TERMINATION. The Board of Directors may, from time to
time, amend, modify, change, suspend, or terminate, in whole or in part, any or
all of the provisions of the Plan, except that:
(a) No amendment, modification, change, suspension, or
termination may affect any right of any Participant to receive Awards made to
such Participant prior to the effective date of such amendment, modification,
change, suspension, or termination; and,
(b) No amendment, modification, or change may withdraw the
obligation and right of interpretation and administration of the Plan from the
Compensation Committee.
9. NO RIGHT TO EMPLOYMENT. Nothing in the Plan shall be deemed to give
any Employee or his/her legal representative or assigns, or any other person or
entity claiming under or though the Employee, any contract or other right to
participate in the benefits of the Plan other than as expressly set forth
herein. Nothing in the Plan shall be construed as constituting a commitment,
guarantee, agreement, or understanding of any kind or nature that the Company or
any of its Business Units will continue to employ any individual (whether or not
an Employee or a Participant); nor shall the Plan affect in any way the right of
the Company or any Business Unit, as applicable, to terminate the employment of
any individual (whether or not an Employee or a Participant) at any time.
10. INDEMNIFICATION OF COMPENSATION COMMITTEE. In addition to such
other rights of indemnification as they may have as members of the Board of
Directors or as members of the Compensation Committee, the members of the
Compensation Committee shall be indemnified by the
VERTEX COMMUNICATIONS CORPORATION
MANAGEMENT INCENTIVE COMPENSATION PLAN PAGE 7
<PAGE> 9
EXHIBIT 10.25
Company against the reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any action, suit, or
proceedings, or in connection with any appeal thereof, to which they or any of
them may be party by reason of any action taken or failure to act under or in
connection with the Plan, and against all amounts paid by them in settlement
thereof (provided such settlement is approved by independent legal counsel
selected by the Company) or paid by them in satisfaction of a judgment in any
such action, suit, or proceedings, except in relation to matters as to which it
shall be adjudged in such action, suit, or proceedings that such Compensation
Committee member is liable for negligence or misconduct in the performance of
his/her duties, provided that within thirty (30) days after institution of any
such action, suit, or proceedings a Compensation Committee member shall in
writing offer the Company the opportunity, at its own expense, to pursue and
defend the same.
11. ADOPTION BY BUSINESS UNITS. This Plan may be adopted by each
Business Unit, as appropriate, by such action as is required to effectively
approve the application of the Plan to such Business Unit.
12. EFFECTIVE DATE AND TERM. This Plan (as hereby amended and restated)
supersedes all prior management incentive compensation plans applicable to the
Company or any of its Business Units, effective as of October 1, 1998, and shall
remain in effect until terminated or otherwise amended or modified by the
Company.
Executed this 19th day of October, 1998, effective, however, as of
October 1, 1998.
VERTEX COMMUNICATIONS CORPORATION
MANAGEMENT INCENTIVE COMPENSATION PLAN PAGE 8
<PAGE> 10
EXHIBIT 10.25
VERTEX COMMUNICATIONS CORPORATION
By: /s/ J. Rex Vardeman
------------------------------
J. REX VARDEMAN, President
ATTEST:
By: /s/ Joe A. Ylitalo
----------------------------
JOE A. YLITALO, Secretary
VERTEX COMMUNICATIONS CORPORATION
MANAGEMENT INCENTIVE COMPENSATION PLAN PAGE 9
<PAGE> 1
================================================================================
VERTEX COMMUNICATIONS CORPORATION
EXHIBIT 10.26
TO
ANNUAL REPORT ON FORM 10-K
For Fiscal Year ended September 30,1998
FIRST AMENDMENT TO THE SAVINGS/PROFIT SHARING PLAN OF
VERTEX COMMUNICATIONS CORPORATION,
AS AMENDED AND RESTATED
================================================================================
<PAGE> 2
EXHIBIT 10.26
EMPLOYEE PROFIT SHARING BONUS PLAN
OF
VERTEX COMMUNICATIONS CORPORATION
(AS AMENDED AND RESTATED EFFECTIVE OCTOBER 1, 1998)
1. PURPOSE OF PLAN. The Employee Profit Sharing Bonus Plan is intended
to promote the growth and development of the Company by providing bonus
compensation as a reward to those employees of the Company or a Business Unit
(as hereinafter defined) who contribute by their ability, industry,
productivity, and longevity to the growth, development, and profitability of the
Company.
2. DEFINITIONS. For purposes of the Plan, the following terms shall
have the ascribed meanings unless otherwise clearly apparent from the context:
"Annual Operating Plan" (AOP) - shall mean the projected plan
of operations of the Company or each of its Business Units, as applicable, as
approved by the Board of Directors for a designated Fiscal Year.
"Annual Performance Objectives" - shall mean the financial
objectives of the Company or each Business Unit, respectively, which the
Compensation Committee shall promulgate and define as applicable for each Fiscal
Year relative to various degrees of achievement of Bonuses under the Plan at
various levels of Net Income After Tax achieved by the Company for such Fiscal
Year and various levels of Pretax Income for each Business Unit, respectively,
for such Fiscal Year and such other measurements of financial accomplishment by
each respective Business Unit as it shall in its sole discretion authorize and
approve as conditions precedent to realization by Participants of Bonuses under
the Plan, which Annual Performance Objectives shall be communicated annually to
all Participants in the Plan.
"Board of Directors" - shall mean the Board of Directors of
Vertex Communications Corporation.
"Bonus" - shall mean a cash distribution to be made to a
Participant for a Fiscal Year as determined in accordance with the provisions of
the Plan. "Bonus Fund" - shall mean the targeted amount established each Fiscal
Year for the Company
VERTEX COMMUNICATIONS CORPORATION
EMPLOYEE PROFIT SHARING BONUS PLAN PAGE 1
<PAGE> 3
EXHIBIT 10.26
or each Business Unit, as applicable, by the Board of Directors to fund the
payment of the Bonuses for such Fiscal Year hereunder.
"Bonus Share" - shall mean the share of the Bonus Fund
allotted to each Participant in accordance with the provisions of the Plan.
"Business Unit" - shall mean any Subsidiary, Division, or
Group of the Company to which this Plan may hereafter become applicable by
action of the Board of Directors or as otherwise required by applicable law.
"Company" - shall mean Vertex Communications Corporation.
"Compensation Committee" - shall mean the Compensation
Committee of the Board of Directors.
"Division" - shall mean any Division of the Company, including
Vertex Antenna Products Division, Vertex Control Systems Division, Vertex
Special Projects Division, and any other Division of the Company to which this
Plan may hereafter become applicable by action of the Board of Directors.
"Employee" - shall mean a person who is in the regular
full-time employment of the Company or one of its Business Units as determined
by the personnel policies and practices of the Company or Business Unit,
respectively, except, however, any such person who is an officer or director of
the Company or a participant pursuant to the Management Incentive Compensation
Plan of the Company or applicable Business Unit thereof for such Fiscal Year.
"Fiscal Year" - shall mean the taxable year of the Company and
its Business Units, as applicable, ending September 30.
"Group" - shall mean any separate Group within the Company
that is not defined as a Division or Subsidiary, including Vertex Antenna Group,
Vertex Antenna Group Marketing, Vertex Business Development Group, Vertex
Electronics Group, and any other Group to which this Plan may hereafter become
applicable by action of the Board of Directors.
VERTEX COMMUNICATIONS CORPORATION
EMPLOYEE PROFIT SHARING BONUS PLAN PAGE 2
<PAGE> 4
EXHIBIT 10.26
"Management Incentive Compensation Plan" - shall mean the
Management Incentive Compensation Plan of the Company, as applicable to the
Company or Business Unit in which the Participant is eligible to participate
during the Fiscal Year.
"Net Income After Tax" - shall mean for each Fiscal Year the
net income of the Company after federal and state taxes determined in accordance
with generally accepted accounting principles consistently applied and as
approved by the independent public accountants who have examined the financial
accounts and records of the Company for such Fiscal Year; provided, however,
that any such determination of the Net Income After Tax shall be adjusted to
include the effect of the amount of any Bonus paid or to be paid to a
Participant pursuant to the Plan.
"Participant" - shall mean any Employee who is eligible to
receive a Bonus during the Fiscal Year.
"Plan" - shall mean the Employee Profit Sharing Bonus Plan of
the Company and its Business Units, as amended and restated effective, as of
October 1, 1998.
"Pretax Income" - shall mean for each Fiscal Year the net
income of each Business Unit, as applicable, before federal and state taxes
determined in accordance with generally accepted accounting principles
consistently applied and as approved by the independent public accountants who
have examined the financial accounts and records of the Company and each of its
Business Units for such Fiscal Year; provided, however, that such Pretax Income
determination shall be adjusted to include the effect of the amount of any Bonus
paid or to be paid to a Participant pursuant to the Plan.
"Projected Net Income After Tax" - shall mean for each Fiscal
Year the level of Net Income After Tax projected and approved by the Board of
Directors to be achieved by the Company for such Fiscal Year pursuant to the
Annual Operating Plan for such Fiscal Year.
"Projected Pretax Income" - shall mean for each Fiscal Year
the level of Pretax Income projected and approved by the Board of Directors to
be achieved by each Business Unit, respectively, for
VERTEX COMMUNICATIONS CORPORATION
EMPLOYEE PROFIT SHARING BONUS PLAN PAGE 3
<PAGE> 5
EXHIBIT 10.26
such Fiscal Year pursuant to the Annual Operating Plan as related to the
appropriate Business Unit, as applicable, for such Fiscal Year.
"Subsidiary" - shall mean any Subsidiary of Vertex
Communications Corporation, including Vertex Microwave Products, Inc., Vertex
Electronic Products, Inc., Vertex-New Mexico, Inc., Vertex Satcom Systems, Inc.,
Vertex Antenna Systems, L.L.C., or any other Subsidiary which may hereafter
adopt the Plan.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Compensation Committee appointed by the Board of Directors. The Compensation
Committee shall consist of not less than two (2) members of the Board of
Directors. The Board of Directors may from time to time appoint members of the
Compensation Committee in substitution for or in addition to members previously
appointed and may fill vacancies, however caused, in the Compensation Committee.
The Compensation Committee shall select one of its members as its Chairman and
shall hold its meetings at such times and places, as it shall deem advisable.
A majority of the members of the Compensation Committee shall
constitute a quorum. All action of the Compensation Committee shall be taken by
a majority of its members. Any action may be taken by written instrument signed
by a majority of the members, and any action so taken shall be deemed fully as
effective as if it had been taken by a vote of the majority of the members at
the meeting duly called and held. The Compensation Committee may appoint a
Secretary, shall keep minutes of its meetings, and shall make such rules and
regulations for the conduct of its business as it shall deem advisable.
The Compensation Committee shall have the sole authority and
power, subject to the express provisions and limitations of the Plan, to
construe the Plan and to adopt, prescribe, amend, and rescind rules and
regulations relating to the Plan, and to make all determinations necessary or
advisable for administering the Plan. No member of the Board of Directors or the
Compensation Committee shall be liable for any action or determination made in
good faith with respect to the Plan.
VERTEX COMMUNICATIONS CORPORATION
EMPLOYEE PROFIT SHARING BONUS PLAN PAGE 4
<PAGE> 6
EXHIBIT 10.26
All determinations, decisions, and directions made or given by the Board of
Directors or the Compensation Committee under the Plan shall be final and
conclusive. The decision of the Board of Directors or the Compensation
Committee on any question concerning or involving the interpretation or
administration of the Plan shall be final and conclusive, and no provision of
the Plan shall be deemed to give any Employee, his/her legal representative or
assigns, any right to participate in the Plan, except to such extent, if any,
as the Compensation Committee may have determined or approved pursuant to the
provisions of the Plan.
4. PARTICIPATION IN THE PLAN. All Employees in the regular full-time
employ of the Company or one of its Business Units as of the beginning of each
Fiscal Year (October 1) are eligible to participate in the Plan.
5. DETERMINATION OF THE BONUS FUND. Prior to the commencement of each
Fiscal Year, the Board of Directors shall determine the Projected After Tax
Income for the Company and the Projected Pretax Income of each Business Unit,
respectively, for such Fiscal Year and the amount of the targeted Bonus Fund
that will be available for payment of Bonuses for such Fiscal Year, subject to
the achievement and satisfaction of certain Annual Performance Objectives by
the Company and its Business Units, respectively, for such Fiscal Year. Within
thirty (30) days thereafter, the Compensation Committee in its discretion
shall determine the targeted Bonus Share of the Bonus Fund to be allocated to
each Participant for such Fiscal Year subject to the terms of the Plan,
including, without limitation, compliance and satisfaction by the Company and
each respective Business Unit, with Annual Performance Objectives established
by the Compensation Committee for such Fiscal Year. The Compensation Committee
shall make such determinations pursuant to the following procedures:
Step One:
The aggregate number of years of employment service of each
Participant with the Company or Business Unit, as applicable,
shall be multiplied by the hourly rate of compensation of each
such Participant on October 1 of such Fiscal Year.
VERTEX COMMUNICATIONS CORPORATION
EMPLOYEE PROFIT SHARING BONUS PLAN PAGE 5
<PAGE> 7
EXHIBIT 10.26
Step Two:
The mathematical products thus determined in Step One
above for all Participants employed by the Company or Business
Unit, as applicable, shall be aggregate in a total sum. Step
Three:
The quotient (expressed as a percentage) obtained by
dividing the amount determined in Step One above as to each
Participant by the aggregate amount determined in Step Two
above shall constitute the Bonus Share of each respective
Participant in and to the Bonus Fund for such Fiscal Year.
Step Four:
The amount of the Bonus Share of each Participant
(expressed in dollars) in and to the Bonus Fund for each
Fiscal Year shall be determined by multiplying the Bonus Fund
for such Fiscal Year applicable to the Company or Business
Unit, as appropriate, by the quotient obtained in Step Three
above as to such Participant.
Each Participant in the Plan shall be notified of his/her Bonus Share for such
Fiscal Year as soon as practical after the projected amount thereof has been
determined in accordance with the provisions of the Plan.
6. AWARD OF BONUS COMPENSATION. Within sixty (60) days after completion
of the Company's Fiscal Year, the Compensation Committee shall determine the
amount of the Bonus to be paid to each Participant for such Fiscal Year. The
final pre-tax or net income, as applicable, utilized to calculate the Bonus
Share for each Participant shall be determined using the same method used
pursuant to the Management Incentive Compensation Plan.
7. ELIGIBILITY FOR INCENTIVE COMPENSATION; PRORATION FOR LEAVES OF
ABSENCE. An Employee shall be eligible for and shall receive the full amount of
his/her Bonus for a Fiscal Year, provided such Employee remains in the
continuous, active employment of the Company or Business Unit, as applicable,
for such
VERTEX COMMUNICATIONS CORPORATION
EMPLOYEE PROFIT SHARING BONUS PLAN PAGE 6
<PAGE> 8
EXHIBIT 10.26
entire Fiscal Year. A Participant who has taken one or more authorized leaves of
absence lasting, in the aggregate, for four or more weeks during the Fiscal Year
will receive a prorated share of his/her Bonus reflecting the time away from
work. An Employee whose employment terminates for any reason before the end of
the Fiscal Year is not eligible for participation in the Plan, and shall not be
entitled to any Bonus for such Fiscal Year. Notwithstanding the preceding, in
the event of termination of employment before the end of the Fiscal Year by
reason of the retirement of an otherwise eligible Employee pursuant to the terms
of an applicable retirement or savings plan, or the death of such Employee, the
Compensation Committee shall have the power and authority to determine whether a
Bonus should be paid to such Employee for such Fiscal Year. The determination of
the Compensation Committee in the exercise of such power and authority in its
sole discretion shall be final and binding upon each such Employee and anyone
claiming by or through such Employee.
8. AMENDMENT OR TERMINATION. The Board of Directors may, from time to
time, amend, modify, change, suspend, or terminate, in whole or in part, any or
all of the provisions of the Plan, except that:
(a) No amendment, modification, change, suspension, or
termination may affect any right of any Participant to receive a Bonus made to
him/her prior to the effective date of such amendment, modification, change,
suspension, or termination; and,
(b) No amendment, modification, or change may withdraw the
obligation and right of interpretation and administration of the Plan from the
Compensation Committee.
9. NO RIGHT TO EMPLOYMENT. Nothing in the Plan shall be deemed to give
any Employee or his/her legal representative or assigns, or any other person or
entity claiming under or though him/her, any contract or other right to
participate in the benefits of the Plan other than as expressly set forth
herein. Nothing in the Plan shall be construed as constituting a commitment,
guarantee, agreement, or understanding of any kind or nature that the Company or
any of its Business Units will continue to employ any individual (whether
VERTEX COMMUNICATIONS CORPORATION
EMPLOYEE PROFIT SHARING BONUS PLAN PAGE 7
<PAGE> 9
EXHIBIT 10.26
or not an Employee or a Participant); nor shall the Plan affect in any way the
right of the Company or its Business Units to terminate the employment of any
individual (whether or not an Employee or a Participant) at any time.
10. INDEMNIFICATION OF COMPENSATION COMMITTEE. In addition to such
other rights of indemnification as they may have as members of the Board of
Directors or as members of the Compensation Committee, the members of the
Compensation Committee shall be indemnified by the Company against the
reasonable expenses, including attorneys' fees, actually and necessarily
incurred in connection with the defense of any action, suit, or proceedings, or
in connection with any appeal thereof, to which they or any of them may be party
by reason of any action taken or failure to act under or in connection with the
Plan, and against all amounts paid by them in settlement thereof (provided such
settlement is approved by independent legal counsel selected by the Company) or
paid by them in satisfaction of a judgment in any such action, suit, or
proceedings, except in relation to matters as to which it shall be adjudged in
such action, suit, or proceedings that such Compensation Committee member is
liable for negligence or misconduct in the performance of his/her duties,
provided that within thirty (30) days after institution of any such action,
suit, or proceedings a Compensation Committee member shall in writing offer the
Company the opportunity, at its own expense, to pursue and defend the same.
11. ADOPTION BY BUSINESS UNITS. This Plan may be adopted by each
Business Unit, as appropriate, by such action as is required to approve the
application of the Plan to such Business Unit.
12. EFFECTIVE DATE AND TERM. This Plan (as hereby amended and restated)
supersedes all prior employee profit sharing bonus plans of the Company or any
of its Business Units, effective as of October 1, 1998, and shall remain in
effect until terminated or otherwise amended or modified by the Company.
Executed this 17th day of October, 1998, effective, however, as of October 1,
1998.
VERTEX COMMUNICATIONS CORPORATION
EMPLOYEE PROFIT SHARING BONUS PLAN PAGE 8
<PAGE> 10
EXHIBIT 10.26
VERTEX COMMUNICATIONS CORPORATION
By: /s/ J. Rex Vardeman
----------------------------------
J. REX VARDEMAN, President
ATTEST:
By: /s/ Joe A. Ylitalo
--------------------------------
Joe A. Ylitalo, Secretary
VERTEX COMMUNICATIONS CORPORATION
EMPLOYEE PROFIT SHARING BONUS PLAN PAGE 9
<PAGE> 1
===============================================================================
VERTEX COMMUNICATIONS CORPORATION
EXHIBIT 13
TO
ANNUAL REPORT ON FORM 10-K
For Fiscal Year ended September 30,1998
ANNUAL REPORT TO SHAREHOLDERS
===============================================================================
<PAGE> 2
EXHIBIT 13
Selected Financial Data
Vertex Communications Corporation and Subsidiaries
<TABLE>
<CAPTION>
Year Ended September 30, 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Sales $130,017 $ 92,433 $ 77,525 $ 65,024 $ 56,549
Costs and expenses 116,571 82,602 69,491 58,547 50,880
Income before income taxes 13,798 10,350 8,551 7,015 6,294
Net income 10,086 7,175 6,100 5,195 4,625
Diluted earnings per share 1.90 1.47 1.32 1.12 .98
-------- -------- -------- -------- --------
Working capital $ 56,018 $ 45,584 $ 39,484 $ 33,396 $ 36,035
Long-term debt 59 988 875 1,312 --
Total assets 110,771 100,493 71,974 63,854 58,457
Total liabilities 26,561 27,003 16,500 14,168 11,272
Total shareholders' equity 84,210 73,490 55,474 49,686 47,185
-------- -------- -------- -------- --------
Orders booked $132,338 $122,702 $ 74,770 $ 79,132 $ 55,226
Backlog of unfilled orders 73,971 71,650 41,381 44,136 30,028
-------- -------- -------- -------- --------
</TABLE>
No cash dividends have been declared or paid
<PAGE> 3
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
GENERAL
Over the past several years, a significant portion of the Company's business has
relied on its ability to design and deliver products for commercial applications
and, from time to time, products used for military/defense purposes outside the
United States. Export sales have accounted for more than half of the Company's
revenues in each of the last three fiscal years.
While the Company concluded fiscal 1998 with a favorable backlog of unfilled
orders, current events around the globe are causing customers to delay orders
and, in some cases, cancel projects that provide for the Company's sales. In the
fourth quarter of fiscal 1998 and during the first quarter of fiscal 1999,
bid-proposal activity and incoming orders have declined from expected levels.
Management believes this slowdown is attributable to the current financial
instability and depressed economic conditions in several foreign countries,
particularly certain Asian and European countries. Based upon these factors,
management expects the Company's revenues and corresponding profits in fiscal
1999 to experience a decline in growth rates below the levels of recent years
until international markets stabilize. The current slowdown is expected to be
short-term in duration and international product demand should return to more
normal levels by fiscal year 2000.
The Company recently organized a new U.S. operating division whose primary
purpose is to obtain certain government-related contracts by utilizing and
adapting the Company's existing products and capabilities. While there can be no
assurance that this division will be successful, the sales it generates are
expected to partially offset the impact of declining foreign sales in the near
future.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Record consolidated sales in fiscal 1998 of $130.0 million increased by $37.6
million, or 40.7 percent compared to sales of $92.4 million in fiscal 1997. This
sales increase was primarily attributable to the acquisition of TIW Systems,
Inc. (TIW) in June of 1997. (TIW was restructured in early fiscal 1999 into two
entities, Vertex Satcom Systems, Inc. and Vertex Antenna Systems, LLC.) Cost of
sales expressed as a percentage of sales of 71.4 percent in fiscal 1998 remained
essentially unchanged compared to 71.2 percent in fiscal 1997.
Research and development spending was $6.0 million in fiscal 1998, or $2.2
million (58.1 percent) greater than in fiscal 1997, mainly due to the
acquisition of TIW and, to a lesser extent, certain developmental work on a
small antenna product line. Marketing expenses of $6.9 million in fiscal 1998
increased by $1.9 million, or 36.9 percent, compared to $5.1 million in fiscal
1997, due to the inclusion of TIW operating results in all of fiscal 1998
(fiscal 1997 consolidated operating results reflect the inclusion of TIW since
the date of acquisition) and increased staffing levels. General and
administrative expenses increased by $2.9 million, or 36.6 percent, in fiscal
1998 over fiscal 1997, primarily as a result of the acquisition of TIW.
The effective tax rate for fiscal 1998 of 26.9 percent was lower than the
prescribed statutory tax rates primarily due to tax incentive benefits available
from export sales and research and development tax credits.
<PAGE> 4
EXHIBIT 13
Net income in fiscal 1998 was a record $10.1 million or $1.90 per share, an
increase of 40.6 percent more than the $7.2 million or $1.47 per share achieved
in fiscal 1997, due primarily to increased sales volume and despite increased
spending discussed above. The Company's backlog of unfilled orders was a record
$74.0 million at September 30, 1998, an increase of 3.2 percent over the $71.7
million at the 1997 year end, of which a major portion is scheduled for shipment
in fiscal 1999.
FISCAL 1997 COMPARED TO FISCAL 1996
Consolidated sales of $92.4 million in fiscal 1997 increased by 19.2 percent as
compared to sales of $77.5 million in fiscal 1996. The Company acquired TIW
effective June 11, 1997. TIW's sales (included in consolidated sales since
acquisition date) accounted for approximately 75 percent of this sales increase
and the balance of the increase was due to increased product demand.
Cost of sales expressed as a percentage of sales declined from 73.4 percent in
fiscal 1996 to 71.2 percent in fiscal 1997. This cost reduction was largely
attributable to increased sales volume of higher margin solid-state amplifiers
and standard product antennas, while sales of lower margin low-noise amplifiers
declined.
Research and development expenditures were $3.8 million in fiscal 1997 and $3.2
million in fiscal 1996, or $.6 million (17.3 percent) greater, due to inclusion
of TIW's operating results since the effective date of its acquisition.
Spending for marketing the Company's products of $5.1 million in fiscal 1997
increased by $.8 million, or 19.2 percent, from the prior year mainly due to the
addition of TIW's marketing spending of $.7 million.
General and administrative expenses of $8.0 million in fiscal 1997 increased by
$2.9 million or 55.9 percent over the prior year. The addition of TIW's expenses
of $1.2 million and increased staffing levels were the primary factors
contributing to this increase.
Investment income of $.7 million in fiscal 1997 remained essentially the same as
the $.6 million earned in fiscal 1996. However, the Company's cash available for
investment purposes declined significantly in the fourth quarter of fiscal 1997
due to the TIW acquisition.
The effective tax rate for fiscal 1997 of 30.7 percent was lower than the
prescribed statutory tax rates primarily due to research and development
credits, tax incentives available from export shipments, and non-taxable
investment income.
Net income in fiscal 1997 increased 17.6 percent to $7.2 million or $1.47 per
share, compared to $6.1 million or $1.32 per share for fiscal 1996. The
Company's backlog of unfilled orders was $71.7 million at September 30, 1997,
compared to $41.4 million at the 1996 year end.
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 the following: general economic
conditions, including the impact of changing economic conditions; fluctuation of
foreign currency exchange rates; changes in capital expenditure plans of certain
international customers; rapid or unexpected technological changes; product
demand and industry capacity; product development; competition; market
acceptance of new products; manufacturing efficiencies; availability of
<PAGE> 5
EXHIBIT 13
certain raw materials; domestic and foreign government regulations and spending;
and rising costs and availability of certain components. In addition, the
Company's future operating results and financial condition may be affected by
the size and timing of individual orders booked, which may also cause
fluctuations in quarterly operating results.
Due to the factors noted above, the Company's future earnings and stock price
may be subject to some 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 the levels anticipated
by securities analysts could have an immediate and significant effect on the
trading price of the Company's common stock in any given period.
INFLATION
Generally, inflationary trends do not materially impact the Company's
operations. However, because the Company's sales contracts are usually
negotiated on a fixed-priced basis prior to actual purchase of certain raw
materials and purchased parts, rapid unforeseen price increases in any of these
items could adversely affect profit margins for short periods. The Company has
not experienced a material adverse effect over the past five years from
inflation because of the relatively low rates of inflation experienced in the
United States and Germany over this period of time, and none is currently
anticipated for the foreseeable future.
FINANCIAL MARKET RISKS
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 may 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. $.7 million. The hedge contract
should minimize exposure to an unfavorable foreign currency rate change. Should
the exchange rate between the two 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
fluctuations in the currency exchange rate in the British pound, the Singapore
dollar, or the German mark relative to the U.S. dollar.
<PAGE> 6
LIQUIDITY AND CAPITAL RESOURCES
EXHIBIT 13
Cash flows from operating activities over the past three years totaled $21.7
million, reflecting strong net income of $23.4 million, before the effect of
depreciation and amortization, but partially offset by increased accounts
receivable and inventories. The fiscal 1998 year-end balances in accounts
receivable and inventories, compared to the prior year-end balances, increased
by 9.1 percent and 13.8 percent, respectively, as a result of the 40.7 percent
increase in sales achieved in fiscal 1998.
Cash of $9.0 million was invested during the last three years in new fixed asset
additions. A major portion of these expenditures was made at the Company's
manufacturing facility in Kilgore, Texas. In June 1997, the Company acquired TIW
for approximately $7.9 million in cash and 574,349 shares of Vertex's common
stock in a purchase transaction.
In fiscal 1998, the Company paid in full a $.5 million bank note associated with
the TIWacquisition that was scheduled to mature in November 2000. In fiscal
1997, financing activities included a $1.1 million bank loan through the
Company's German subsidiary to satisfy its working capital needs. Terms of the
loan call for repayment in 24 equal monthly installments. In fiscal 1997, cash
of $7.1 million was used to pay down debt assumed in the acquisition of TIW.
During the three-year period ended September 30, 1998, cash of $1.5 million was
used to pay debt incurred in the 1995 acquisition of Maxtech, Inc. (now known as
Vertex Electronic Products, Inc.).
In June 1998, the Company adopted a plan to repurchase up to a maximum of
500,000 shares of its common stock through open market and private transactions.
Shares acquired under this repurchase plan will be used to satisfy stock option
plan requirements and possibly future acquisitions, although no such transaction
is currently contemplated. As of September 30, 1998, 6,500 shares of stock have
been purchased in the public market under this repurchase plan. In fiscal 1996,
the Company purchased 26,600 shares of its common stock under a similar stock
repurchase plan.
Cash of $1.4 million was generated during the past three fiscal years by sales
of the Company's stock pursuant to stock-based compensation plans (refer to Note
5 of Notes to Consolidated Financial Statements for further information).
The Company's bank credit facilities include a 2.5 million German mark credit
line and an unsecured domestic credit line of $20 million, consisting of $10
million for working capital advances and $10 million to support stand-by letters
of credit. The German credit facility had an unpaid balance of 249,000 German
marks ($150,000 U.S. dollars) at September 30, 1998 and bears interest at the
rate of 4.7 percent per annum. The domestic credit facility bears interest on
advances at LIBOR plus 1.5 percent and credit line fees are .25 percent annually
for the unused portion. As of September 30, 1998 and 1997, no principal advances
were outstanding under this domestic credit facility and issued and outstanding
letters of credit totaled $4,476,000 and $272,000, respectively.
Management believes that forecasted cash flows, combined with the Company's
strong financial condition and available credit lines, will be sufficient to
fund operations for the foreseeable future. The Company is not aware of any
demands that 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, and updating or replacing, as
necessary, in-house systems and equipment,
<PAGE> 7
EXHIBIT 13
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 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.
In order to ascertain the full potential impact, the Company plans to
distribute, collect, and evaluate questionnaires 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, however, begun
to develop a year 2000 contingency plan and expects it to be completed and ready
for implementation 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 are 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.
<PAGE> 8
EXHIBIT 13
CONSOLIDATED INCOME STATEMENTS
Vertex Communications Corporation and Subsidiaries
<TABLE>
<CAPTION>
Year Ended September 30, 1998 1997 1996
---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C>
SALES $ 130,017 $ 92,433 $ 77,525
COSTS AND EXPENSES:
Cost of sales 92,772 65,785 56,911
Research and development 5,968 3,775 3,217
Marketing 6,915 5,050 4,236
General and administrative 10,916 7,992 5,127
---------- ---------- ----------
116,571 82,602 69,491
---------- ---------- ----------
Operating income 13,446 9,831 8,034
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Income from investments 459 686 632
Interest expense (107) (167) (115)
---------- ---------- ----------
Income before income taxes 13,798 10,350 8,551
---------- ---------- ----------
PROVISION FOR INCOME TAXES 3,712 3,175 2,451
---------- ---------- ----------
NET INCOME $ 10,086 $ 7,175 $ 6,100
========== ========== ==========
EARNINGS PER SHARE
Basic $ 1.98 $ 1.54 $ 1.38
Diluted 1.90 1.47 1.32
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Basic 5,105 4,645 4,434
Diluted 5,308 4,878 4,612
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 9
EXHIBIT 13
CONSOLIDATED BALANCE SHEETS
Vertex Communications Corporation and Subsidiaries
<TABLE>
<CAPTION>
As of September 30, 1998 1997
---------- ----------
(In thousands, except share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,239 $ 5,407
Accounts receivable, less allowance for doubtful
accounts of $897 and $1,254 39,239 35,977
Inventories 30,946 27,198
Income tax receivable -- 1,130
Deferred income taxes 270 784
---------- ----------
81,694 70,496
Property and equipment:
Land 558 558
Buildings and improvements 9,161 8,554
Equipment 21,543 19,315
Construction in progress 771 804
Less: accumulated depreciation (16,560) (13,004)
---------- ----------
15,473 16,227
Goodwill, net of accumulated amortization of $2,063 and $1,134 12,744 12,794
Other assets, less accumulated amortization of $1,036 and $975 860 976
---------- ----------
TOTAL ASSETS $ 110,771 $ 100,493
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $ 5,987 $ 7,413
Accrued liabilities 15,729 13,278
Customers' advances 3,286 3,139
Current portion of long-term debt 674 1,082
---------- ----------
25,676 24,912
Long-term debt 59 988
Deferred income taxes 826 1,103
Commitments and contingencies (Note 12) 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 35,030 35,107
Retained earnings 50,119 40,033
Treasury stock, at cost, 118,073 shares and 148,813 shares (1,491) (1,828)
</TABLE>
<PAGE> 10
EXHIBIT 13
<TABLE>
<CAPTION>
<S> <C> <C>
Translation adjustment 28 (346)
---------- ----------
84,210 73,490
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 110,771 $ 100,493
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 11
EXHIBIT 13
CONSOLIDATED STATEMENTS OF CASH FLOWS
Vertex Communications Corporation and Subsidiaries
<TABLE>
<CAPTION>
Year Ended September 30, 1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,086 $ 7,175 $ 6,100
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,546 3,109 2,728
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable (3,262) (612) (4,841)
Inventories (3,748) (4,888) (1,302)
Other assets 55 750 (30)
Accounts payable and accrued liabilities 784 682 2,039
Customers' advances 147 1,402 (278)
Income taxes, net 729 (710) 1,008
-------- -------- --------
Net cash provided by operating activities 9,337 6,908 5,424
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,802) (4,088) (2,149)
Acquisition, net of cash acquired (Note 4) -- (8,043) --
-------- -------- --------
Net cash used in investing activities (2,802) (12,131) (2,149)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -- 1,137 --
Repayment of long-term debt (1,337) (8,216) (437)
Purchase of treasury stock 121) -- (436)
Proceeds from exercise of stock options 381 736 246
Other 346 (370) (95)
-------- -------- --------
Net cash used in financing activities (731) (6,713) (722)
-------- -------- --------
Effect of exchange rate changes on cash 28 (53) (27)
Net increase (decrease) in cash and cash
equivalents 5,832 (11,989) 2,526
Cash and cash equivalents at beginning
of year 5,407 17,396 14,870
-------- -------- --------
Cash and cash equivalents at end of year $ 11,239 $ 5,407 $ 17,396
======== ======== ========
</TABLE>
<PAGE> 12
EXHIBIT 13
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 185 $ 203 $ 35
Income taxes, net of refunds 2,706 3,787 1,443
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 13
EXHIBIT 13
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Vertex Communications Corporation and Subsidiaries
<TABLE>
<CAPTION>
Capital in
Common Excess of Retained Treasury Translation
Stock Par Value Earnings Stock Adjustment Total
-------- -------- -------- -------- -------- --------
(In thousands, except share amounts)
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1995 $ 466 $ 24,963 $ 26,758 $ (2,700) $ 199 $ 49,686
-------- -------- -------- -------- -------- --------
Exercise of stock options
(34,400 shares) -- (157) -- 403 -- 246
Purchase of treasury stock
(26,600 shares) -- -- -- (436) -- (436)
Translation adjustment -- -- -- -- (122) (122)
Net income -- -- 6,100 -- -- 6,100
-------- -------- -------- -------- -------- --------
1996 $ 466 $ 24,806 $ 32,858 $ (2,733) $ 77 $ 55,474
-------- -------- -------- -------- -------- --------
Acquisition of TIWSystems,
Inc. (Note 4)
(574,349 shares) 58 10,470 -- -- -- 10,528
Exercise of stock options
(73,533 shares) -- (169) -- 905 -- 736
Translation adjustment -- -- -- -- (423) (423)
Net income -- -- 7,175 -- -- 7,175
-------- -------- -------- -------- -------- --------
1997 $ 524 $ 35,107 $ 40,033 $ (1,828) $ (346) $ 73,490
-------- -------- -------- -------- -------- --------
Exercise of stock options
(37,240 shares) -- (77) -- 458 -- 381
Purchase of treasury stock
(6,500 shares) -- -- -- (121) -- (121)
Translation adjustment -- -- -- -- 374 374
Net income -- -- 10,086 -- -- 10,086
-------- -------- -------- -------- -------- --------
1998 $ 524 $ 35,030 $ 50,119 $ (1,491) $ 28 $ 84,210
======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 14
EXHIBIT 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Vertex Communications Corporation and Subsidiaries
September 30, 1998
The Company is engaged in the engineering, design, manufacture, and field
installation of satellite communications earth station products, with antenna
sizes ranging from 1.2 meters to 34 meters in diameters, and which operate in
the domestic, international, and military radio frequencies.
1. SUMMARY OF ACCOUNTING PRACTICES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries after elimination of
all significant intercompany transactions.
MANAGEMENT ESTIMATES. The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires management
to make assumptions and estimates that affect certain reported amounts of
assets, liabilities, revenues, and expenses at the date of the consolidated
financial statements. Actual results could differ from those estimates. These
estimates mainly involve the reported amounts of accounts receivable and
inventory reserves, income tax provisions, expected costs to complete sales
contracts accounted for under the percentage of completion method, warranty
provisions, and useful lives of property and equipment.
RECOGNITION OF REVENUES, COSTS AND EXPENSES. Revenues from sales other than
long-term contracts are recognized when the earnings process has been completed.
The earnings process is considered complete upon product shipment or upon
completion and storage of the product, if shipment is delayed at the customer's
request and related payment has been received. Service revenues are recorded
when the services are rendered. Sales contracts which extend beyond one year are
accounted for using the percentage of completion method. Under this method,
revenues are recognized based upon costs incurred compared to total costs
expected. Continual revisions of estimated total contract costs are made during
the life of the contracts based on the best information available and may result
in current period adjustments to contract revenues previously reported. Revenues
include contract costs and related profits. Amounts billed in excess of contract
costs and related profits are included in current liabilities and were
$4,988,000 and $3,449,000 at September 30, 1998 and 1997, respectively. Unbilled
costs and related profits included in accounts receivable at September 30, 1998
and 1997 were $14,252,000 and $14,696,000, respectively. These amounts are
billed according to specific contract terms and should be collected within one
year.
Sales recognized on long-term contracts and the related cost of sales were as
follows:
<TABLE>
<CAPTION>
(In thousands)
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Sales $51,426 $28,356 $14,099
Cost of Sales 39,619 23,640 13,138
======= ======= =======
</TABLE>
RESEARCH AND DEVELOPMENT. Company-funded research and development expenditures
are expensed as incurred, including costs relating to patents or rights which
may result from such expenditures. Costs generated by research and development
work funded by customers are expensed as cost of sales in the period when the
related revenues are recorded. Revenues are recorded in the period in which the
customer-funded work is completed. The Company has no obligation to repay any
funds provided by customers regardless of the outcome of research and
development work.
<PAGE> 15
EXHIBIT 13
CASH EQUIVALENTS. The Company considers cash equivalents to be liquid
investments with original maturities of three months or less.
INVENTORIES. Inventories are valued at the lower of cost or market and include
the cost of raw materials, labor, plant overhead, and purchased parts. Cost is
determined using the first-in, first-out method. The components of inventory
consisted of the following:
<TABLE>
<CAPTION>
(In thousands)
1998 1997
------- -------
<S> <C> <C>
Raw materials $ 8,638 $ 8,844
Work-in-process 15,427 13,626
Finished goods 6,881 4,728
------- -------
$30,946 $27,198
======= =======
</TABLE>
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost and are
depreciated over their estimated useful lives using the straight-line method.
The estimated useful lives of buildings are 25 years and equipment are 3 to 7
years. Expenditures for maintenance and repairs are charged to expense when
incurred; betterments and major renewals are capitalized.
GOODWILL. Goodwill represents the excess of purchase price over the fair market
value of net assets acquired. Goodwill is being amortized on a straight-line
basis over 15 years. The Company periodically reviews the carrying value of this
intangible asset and will make any necessary adjustment if the related facts and
circumstances suggest that its carrying value is impaired or is not recoverable.
This policy is consistent with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of",
which the Company adopted in October 1995.
EARNINGS PER SHARE. Effective October 1, 1997 the Company adopted SFAS No. 128,
"Earnings Per Share" and all prior periods have been restated to conform with
the requirements of this pronouncement. 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
203,000, 233,000, and 178,000 in fiscal 1998, 1997, and 1996, respectively.
CONCENTRATION OF CREDIT RISK. The Company sells its products to its customers
under various payment terms such as: cash in advance, irrevocable letter of
credit, and open account. These customers can generally be classified as
governmental agencies, communications concerns, or other commercial entities.
Management believes no significant credit risk exists as of September 30, 1998.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified in order to
conform with the current year presentation.
<PAGE> 16
EXHIBIT 13
STOCK-BASED COMPENSATION. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" requires certain disclosures for
stock-based compensation awards and permits companies to continue to follow the
intrinsic value method of accounting as prescribed by APB No. 25, "Accounting
for Stock Issued to Employees". Accordingly, the Company follows APB No. 25 to
account for its stock-based compensation awards.
NEW ACCOUNTING STANDARDS. In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" and No. 131, "Disclosure About Segments of an Enterprise
and Related Information". SFAS No. 130 establishes standards for reporting and
the display of "comprehensive income" which is the total of net income and all
other nonowner changes in equity. SFAS No. 131 establishes standards for the way
that a public enterprise reports certain information about its operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. The Company will adopt these new standards in
fiscal 1999. Implementation is not expected to have a material effect on the
Company's financial statements.
2. ACCRUED LIABILITIES
Accrued liabilities were comprised of the following:
<TABLE>
<CAPTION>
(In thousands)
1998 1997
------- -------
<S> <C> <C>
Accrued compensation $ 4,302 $ 3,606
Income taxes payable 691 1,329
Warranty 1,343 1,052
Amounts billed in excess
of costs 4,988 3,449
Employee benefit costs 613 705
Taxes other than income 1,008 684
Other 2,784 2,453
------- -------
$15,729 $13,278
======= =======
</TABLE>
3. FOREIGN OPERATIONS
Financial information relating to the Company's foreign operations is shown
below:
<PAGE> 17
EXHIBIT 13
<TABLE>
<CAPTION>
(In thousands)
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Sales to unaffiliated customers $ 9,403 $ 5,881 $ 3,918
Transfers between geographic areas -- 106 1,360
Operating income (loss) 577 91 (306)
Identifiable assets 5,933 4,034 3,703
</TABLE>
The Company translates the financial statements of its German subsidiary from
its functional currency, the German mark, into U.S. dollars in accordance with
the Financial Accounting Standards Board SFAS No. 52. Assets and liabilities are
translated at the exchange rate in effect at each fiscal year end, and sales and
expenses are translated at the weighted average exchange rate in effect for the
period reported upon. Any resulting gains or losses are recorded in
shareholders' equity and excluded from net income.
4. ACQUISITION
Effective June 11, 1997, the Company acquired all of the outstanding common
stock of TIW Systems, Inc. (TIW), a California corporation engaged in design and
manufacture of products principally used in the satellite communications
industry, for cash of $7.9 million, 574,349 shares of the Company's common stock
and $500,000 of direct acquisition costs. The acquisition was accounted for
under the purchase method of accounting. The excess of purchase price over the
fair value of assets acquired of $8.5 million is being amortized over 15 years
using the straight-line method. The purchase price was allocated on the basis of
the estimated fair value of the assets acquired and liabilities assumed as
follows:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
ASSETS ACQUIRED
Fair value of tangible assets acquired $ 25,641
Goodwill 8,512
PURCHASE CONSIDERATION
Cash paid to selling shareholders (7,893)
Fair value of Vertex's stock exchanged (10,528)
--------
Liabilities assumed $ 15,732
========
</TABLE>
TIW's results of operations are included in the Company's consolidated financial
statements since the effective date of acquisition.
The following unaudited pro forma information presents the consolidated results
of operations as if the effective date of the acquisition occurred on the
beginning of each of the periods presented after giving effect to certain
adjustments which include amortization of goodwill, reduction of investment
income, issuance of common stock, and the related tax effects. The pro forma
information does not purport to be indicative of the results that would have
been obtained if the acquisition had been effected as of the dates indicated
above or that may be obtained in the future.
<PAGE> 18
EXHIBIT 13
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
1997 1996
-------- --------
<S> <C> <C>
Sales $115,563 $118,857
Net income 5,333 4,076
Diluted earnings per share 1.01 .79
</TABLE>
5. STOCK-BASED COMPENSATION PLANS
Pursuant to the Company's stock option plans, options to purchase its common
stock were granted to certain officers, directors, and key employees. These
plans provide for granting of options at a price not less than fair market value
of the stock on the date of grant. Options issued vest over a five-year period
with one-fifth of the options becoming exercisable one year after grant, on a
cumulative basis, and expire seven to ten years after grant. At September 30,
1998, 214,000 options remained available for grant.
At September 30, 1998, 1997, and 1996, options to purchase 299,060, 217,766, and
190,420 shares, respectively, were vested and could be exercised. The
outstanding stock options at September 30, 1998 had a weighted average remaining
contractual life of six years with option prices ranging from $7.38 to $25.38
per share.
As of September 30, 1998, 1997, and 1996, the weighted average exercise price of
the exercisable options at those dates was $12.42, $9.92, and $10.10,
respectively.
<TABLE>
<CAPTION>
Options Weighted Average Exercise Price
---------- -------------------------------
<S> <C> <C>
Outstanding at 10/1/95 537,500 $ 10.61
Granted 50,000 15.25
Exercised (34,400) 7.14
Cancelled (22,600) 13.54
---------- ----------
Outstanding at 9/30/96 530,500 11.06
Granted 35,000 19.79
Exercised (73,533) 10.02
Cancelled (28,200) 12.74
---------- ----------
Outstanding at 9/30/97 463,767 12.10
Granted 30,000 24.67
Exercised (37,240) 10.22
Cancelled (5,400) 13.08
---------- ----------
Outstanding at 9/30/98 451,127 13.08
========== ==========
</TABLE>
As discussed in Note 1, the Company has adopted the disclosure only provisions
of Statement of Financial Accounting Standards No. 123 (SFAS 123) "Accounting
for Stock-Based Compensation". Under SFAS 123, the fair value of stock-based
compensation grants was calculated for the above discussed plans based on
<PAGE> 19
EXHIBIT 13
the fair value at grant date for awards made since October 1, 1995 by using the
Black-Scholes option-pricing model with certain assumptions.
The assumptions used were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Risk free interest rate 5.89% 5.77% 5.77%
Expected term 4 years 4 years 4 years
Expected volatility 32% 38% 38%
Dividend yield 0 0 0
</TABLE>
The weighted-average fair value of options granted under these plans in fiscal
1998, 1997, and 1996 was $8.52, $7.50, and $5.78, respectively. Based upon the
foregoing factors, had the computed fair value of the options granted in fiscal
1998, 1997, and 1996 been amortized to expense, pro forma net income for those
years would not have been materially different from actual net income reported.
6. LONG-TERM DEBT AND CREDIT LINES
In December 1996, the Company borrowed 2 million German marks under a 2.5
million mark bank credit line through its German subsidiary. The debt is being
repaid in 24 equal monthly installments plus accrued interest charged at 4.7
percent per annum.
The Company maintains unsecured bank lines of credit for $20 million which
include a $10 million sub-limit for issuance of stand-by letters of credit. The
credit lines require the Company to maintain certain financial ratios.
Principal advances bear interest at LIBOR plus 1.5 percent and unused credit
line fees are .25 percent annually. As of September 30, 1998 and 1997, no
principal advances were outstanding and issued stand-by letters of credit
totaled $4,476,000 and $272,000, respectively.
As part of the purchase price of Maxtech, Inc. in 1995, the Company incurred
four-year unsecured promissory notes in aggregate principal sum of $1,750,000.
The notes are payable annually in four equal principal payments, including
accrued interest at 7.92 percent per annum with the initial payment beginning
October 1, 1995.
Long-term debt as of September 30, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
-------- ----------
<S> <C> <C>
Installment loan payable to bank in monthly
installments of $50,000 (83,000 German marks) $150,000 $ 717,000
Promissory notes payable to Maxtech selling shareholders
due October 1, 1997 and October 1, 1998
plus accrued interest 302,000 604,000
Bank note payable -- 495,000
Capital lease obligations (see note 12) 281,000 254,000
-------- ----------
733,000 2,070,000
Less current maturities 674,000 1,082,000
-------- ----------
$ 59,000 $ 988,000
======== ==========
</TABLE>
<PAGE> 20
EXHIBIT 13
7. INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes.
Deferred income taxes are a result of certain income and expense items
recognized in different periods for financial reporting and tax reporting
purposes.
The differences between the prescribed statutory income tax rates and the
Company's effective income tax rates were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit .9 1.4 --
Effect of nontaxable investment income (.2) (1.2) (1.6)
Benefit from nontaxable FSC income (5.6) (3.4) (3.5)
Tax benefit from increased R&D activity (1.2) (1.8) (.3)
Foreign tax adjustment .8 .4 (.4)
Other, net (1.8) 1.3 .5
-------- -------- --------
26.9% 30.7% 28.7%
======== ======== ========
</TABLE>
Income (loss) before income taxes from foreign operations was $578,000, $63,000,
and ($406,000) in fiscal 1998, 1997, and 1996, respectively. Income before
income taxes from domestic operations was $13,220,000, $10,287,000, and
$8,957,000 in fiscal 1998, 1997, and 1996, respectively.
The provision for income taxes consists of the following significant components:
<PAGE> 21
EXHIBIT 13
<TABLE>
<CAPTION>
(In thousands)
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 2,789 $ 3,066 $ 2,632
Foreign 416 33 36
State 270 220 5
------- ------- -------
Total Current 3,475 3,319 2,673
------- ------- -------
Total Deferred 237 (144) (222)
------- ------- -------
Total provision for income taxes $ 3,712 $ 3,175 $ 2,451
======= ======= =======
</TABLE>
The table below shows the components of deferred income taxes:
<TABLE>
<CAPTION>
(In thousands)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Accrued liabilities and reserves $ 1,825 $ 1,940 $ 1,073
Other 41 293 309
-------- -------- --------
Deferred tax liabilities:
Property and equipment (826) (896) (827)
Revenue recognition differences (1,596) (1,449) (1,433)
Other -- (207) (124)
-------- -------- --------
Net deferred tax liability $ (556) $ (319) $ (1,002)
======== ======== ========
</TABLE>
8. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution retirement plan which covers a
majority of its domestic employees. Contributions to the plan are discretionary
as determined by the Board of Directors. The Company's contributions to the plan
for fiscal years 1998, 1997, and 1996 were $510,000, $290,000, and $184,000,
respectively.
The Company has an employee stock bonus plan that was formed by TIW in 1989 as
an employee stock ownership plan for the benefit of eligible employees. No
contributions were made to the plan by the Company since the acquisition of TIW
and the plan continues to maintain assets belonging to those eligible employees
in accordance with plan guidelines. The Company is not required nor does it
intend to make future contributions to the plan.
The Company has certain cash incentive compensation plans which are based upon
actual results of operations compared to planned results. The Management
Incentive Compensation Plans' participants are key employees and officers, but
not outside directors. Compensation under these plans was $1,927,000,
$1,066,000, and $1,295,000 for fiscal 1998, 1997, and 1996, respectively. The
Employee Profit Sharing Bonus Plans' participants
<PAGE> 22
EXHIBIT 13
include a majority of the Company's employees except participants in a
management incentive compensation plan. Compensation under these plans was
$185,000, $238,000, and $280,000 for fiscal 1998, 1997, and 1996, respectively.
9. RELATED PARTY TRANSACTIONS
A shareholder and member of the Board of Directors is a shareholder in a firm
retained by the Company for legal counsel. The Company paid fees to his firm
during the years ended September 30, 1998, 1997, and 1996 of $446,000, $541,000,
and $121,000, respectively.
10. SALES AND INDUSTRY SEGMENT INFORMATION
No single customer accounted for 10 percent or more of total sales in fiscal
1998 or fiscal 1997. Sales to one customer were 12 percent of total sales in
fiscal 1996.
Export sales were 59 percent, 56 percent, and 59 percent in fiscal 1998, 1997,
and 1996, respectively, of total sales.
Sales in Western Europe were 14 percent, 14 percent, and 19 percent, of total
sales in fiscal 1998, 1997, and 1996, respectively. Sales in the Middle East
were 10 percent of total sales in fiscal 1996. Sales in Asian countries were 20
percent, 21 percent, and 18 percent of total sales in fiscal 1998, 1997, and
1996, respectively.
The Company operates primarily in a single industry segment, as a manufacturer
and supplier of microwave antennas and related equipment.
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
1998 Fiscal Quarters
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 30,779 $ 31,500 $ 35,603 $ 32,135
Gross Profit 9,119 9,554 9,726 8,846
Net Income 2,353 2,447 2,607 2,679
Diluted Earnings Per Share .44 .46 .49 .51
-------- -------- -------- --------
1997 Fiscal Quarters
First Second Third Fourth
-------- -------- -------- --------
Sales $ 19,680 $ 20,436 $ 23,266 29,051
Gross Profit 5,391 5,934 6,626 8,697
Net Income 1,525 1,694 1,861 2,095
Diluted Earnings Per Share .33 .36 .38 .40
-------- -------- -------- --------
</TABLE>
<PAGE> 23
EXHIBIT 13
12. COMMITMENTS AND CONTINGENCIES
The Company rents certain equipment and facilities under operating leases. Rent
expense under these leases for fiscal 1998, 1997, and 1996 was $1,231,000,
$767,000, and $641,000, respectively.
Certain items of equipment are subject to capital leases. As of September 30,
1998, $698,000 ($321,000 net) of such leased equipment was included in property
and equipment.
Below are the future payments due under these lease obligations and the amounts
of rental income due to be received under subleases as of September 30, 1998.
<TABLE>
<CAPTION>
Operating Capital
Fiscal Year Leases Leases
---------- ----------
<S> <C> <C>
1999 $1,233,000 $ 236,000
2000 1,028,000 21,000
2001 921,000 21,000
2002 823,000 21,000
2003 721,000 10,000
Thereafter 396,000 0
---------- ----------
$5,122,000 $ 309,000
---------- ----------
Less: Sublease income 262,000 --
Amount representing interest -- 28,000
---------- ----------
$4,860,000 $ 281,000
========== ==========
</TABLE>
The Company indemnifies its directors and officers, but does not maintain
directors' and officers' liability insurance. No claims against directors or
officers have been asserted.
<PAGE> 24
EXHIBIT 13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Vertex Communications Corporation:
We have audited the accompanying consolidated balance sheets of Vertex
Communications Corporation (a Texas Corporation) and subsidiaries as of
September 30, 1998 and 1997, and the related consolidated statements of income,
cash flows, and shareholders' equity for each of the three years in the period
ended September 30, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vertex Communications
Corporation and subsidiaries as of September 30, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Dallas, Texas
October 23, 1998
<PAGE> 25
EXHIBIT 13
MARKET FOR COMMON STOCK
The Company's common stock is traded on The Nasdaq Stock Market (National Market
System) under the symbol VTEX. At December 4, 1998, there were approximately
2,000 holders of record of Vertex's common stock. The table below sets forth,
for the periods indicated, the high and low sales prices of the Company's common
stock, as reported by The Nasdaq Stock Market.
<TABLE>
<CAPTION>
Quarter Ended High Low Quarter Ended High Low
- ------------- ---- --- ------------- ---- ---
<S> <C> <C> <C> <C> <C>
September 30, 1998 $24 $18 September 30, 1997 $26 1/4 $24 1/8
July 3, 1998 26 5/8 21 1/2 June 30, 1997 27 1/4 20 7/8
April 3, 1998 26 5/8 24 1/4 March 28, 1997 23 1/2 19 3/4
January 2, 1998 26 23 December 27, 1997 18 3/4 16 1/4
</TABLE>
The Company has never declared nor paid a cash dividend on its common stock and
does not expect that dividends will be declared or paid in the foreseeable
future. The Company currently intends to retain all of its available funds for
the operation and expansion of its business.
<PAGE> 1
================================================================================
VERTEX COMMUNICATIONS CORPORATION
EXHIBIT 21
TO
ANNUAL REPORT ON FORM 10-K
For Fiscal Year ended September 30,1998
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
================================================================================
<PAGE> 2
EXHIBIT 21
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
AS OF OCTOBER 30, 1998
Vertex Communications Foreign Sales Corporation
100% - Owned Subsidiary
Incorporated in the United States Virgin Islands
Vertex Microwave Products, Inc. (formerly Gamma-f Corp.)
100% - Owned Subsidiary
Incorporated in the State of Nevada
Vertex Antennentechnik GmbH
100% - Owned Subsidiary
Incorporated in the Federal Republic of Germany
Vertex International, Ltd.
100% - Owned Subsidiary
Incorporated in England
Vertex Antenna Systems, LLC (formerly a division of TIW Systems, Inc.)
100% - Owned Subsidiary
Incorporated in the State of Nevada
Vertex Electronic Products, Inc. (formerly Maxtech, Inc.)
100% - Owned Subsidiary
Incorporated in the State of Pennsylvania
Vertex Satcom Systems, Inc. (formerly TIW Systems, Inc.)
100% - Owned Subsidiary
Incorporated in the State of Nevada
<PAGE> 1
================================================================================
VERTEX COMMUNICATIONS CORPORATION
EXHIBIT 23
TO
ANNUAL REPORT ON FORM 10-K
For Fiscal Year ended September 30,1998
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
================================================================================
<PAGE> 2
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in or incorporated by reference in this Form 10-K, into
the Company's previously filed Registration Statements File No. 33-27012 and
File No. 333-53389 on Form S-8, and File No. 333-53391 on Form S-3.
Arthur Andersen LLP
Dallas, Texas
December 21, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 11,239
<SECURITIES> 0
<RECEIVABLES> 40,136
<ALLOWANCES> 897
<INVENTORY> 30,946
<CURRENT-ASSETS> 81,694
<PP&E> 32,033
<DEPRECIATION> 16,560
<TOTAL-ASSETS> 110,771
<CURRENT-LIABILITIES> 25,676
<BONDS> 0
0
0
<COMMON> 524
<OTHER-SE> 83,686
<TOTAL-LIABILITY-AND-EQUITY> 110,771
<SALES> 130,017
<TOTAL-REVENUES> 130,017
<CGS> 92,772
<TOTAL-COSTS> 92,772
<OTHER-EXPENSES> 23,799
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 107
<INCOME-PRETAX> 13,798
<INCOME-TAX> 3,712
<INCOME-CONTINUING> 10,086
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,086
<EPS-PRIMARY> 1.98
<EPS-DILUTED> 1.90
</TABLE>
