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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO _________
COMMISSION FILE NUMBER: 0-15277
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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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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(Title of Class)
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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 December 2, 1999, 5,116,314 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 December
2, 1999, as reported by the New York Stock Exchange, was approximately
$90,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended September 30, 1999, are incorporated by reference into Items 5, 6, 7, 7A,
and 8 under Part II and Item 14 of Part IV hereof.
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VERTEX COMMUNICATIONS CORPORATION
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended September 30, 1999
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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), communications network
products, 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.
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. 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 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.
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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 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.
THE VERTEX STRATEGY
The Company's strategy is to provide a wide variety of advanced
satellite communications products, including integrated communications network
products, 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.
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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 continue to improve in fiscal year 2000 and beyond.
ACQUISITIONS AND GROWTH. The Company's growth over the past five years
was primarily made possible by the realization of certain strategic acquisitions
of existing businesses and the expansion of manufacturing plant facilities. In
November 1999, the Company entered into a merger agreement under which the
Company would be acquired pursuant to the agreement. See "Recent Developments"
for additional information.
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.
VERTEX PRODUCTS
GENERAL. The Company designs, develops, manufactures, and markets
products used in 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 operations are conducted through two separate
complementary business segments. The Company formed the two segments based upon
the nature of and the differences between the products and services supplied.
These business segments design, develop, manufacture, and market the respective
products described below. The Antenna segment provides earth station antennas,
multi-axis pedestals, precision antenna control and tracking products, and
related microwave components. The
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Electronics segment provides solid-state electronic power amplifiers, radio
frequency conversion products, and digital communications electronics products.
The Antenna business segment includes Vertex Antenna Products Division ("VAPD"),
Vertex Antenna Systems, LLC ("VAS"), Vertex Microwave Products, Inc. ("VMPI"),
Vertex Control Systems Division ("VCSD"), Vertex Special Projects Division
("VSPD"), and Vertex Antennentechnik GmbH ("VA"). The Electronics business
segment consists of Vertex Electronic Products, Inc. ("VEPI") and Vertex Satcom
Systems, Inc. ("Vertex Satcom").
ANTENNA SEGMENT. The Antenna segment of the Company includes the
following business units.
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 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.
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 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 adapts and utilizes 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
continue to be successful, sales generated by this division are expected to
partially offset the impact of declining foreign sales in fiscal 2000.
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ELECTRONICS SEGMENT. The Company's Electronics segment includes the
following business units.
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 electronic products used in telecommunications systems.
Vertex Satcom Systems, Inc. To address the most prominent evolving
segment of the very small aperture terminal ("VSAT") market, Vertex Satcom 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. Vertex Satcom's DAMA modem
technologies with broad signaling standard compatibility qualities are designed
to provide a competitive advantage in certain markets for its network systems,
which include comprehensive voice, data, and video networking capabilities, to
customers around the world.
In the third quarter of fiscal 1999, the Company decided to abandon
ongoing efforts to sell its voice and data single channel processing equipment
for network telecommunications applications which utilizes Time Division
Multiple Access technology. The Company experienced intense competition in
marketing this product line and consequently, was unable to sustain volume
sufficient to support the necessary investment. The decision to exit this
product line was based upon the Company's inability to sell these products
profitability and the realization that future prospects were not acceptable.
Refer to Note 13 of Notes to Consolidated Financial Statements for further
information.
Total sales contributed by each business segment for each of the last
three fiscal years are shown in Note 10 of Notes to Consolidated Financial
Statements.
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 which are normally
tailored to the products provided by each business segment.
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 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
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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. Each business
segment maintains separate sales and marketing staff, and the Company also
maintains a corporate sales and marketing staff. 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 installation, testing, and certain engineering services are
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 20%, 14%, and 14%, of total sales in
fiscal 1999, 1998, and 1997, respectively. Sales in Asian countries were 16%,
20%, and 21%, of total sales in fiscal 1999, 1998, and 1997, 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 any
of the past three fiscal years. In general, both business segments sell products
and services to the same types of customers.
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 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
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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)
1999 1998 1997
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<S> <C> <C> <C>
Sales to Unaffiliated Customers ............... $10,287 $9,403 $5,881
Identifiable Assets ............................ 7,239 5,993 4,034
</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 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 fiscal years 1999, 1998, and 1997, the Company expended $6,600,000,
$5,968,000, and $3,775,000, respectively, on research and development. Costs
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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.
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 31, 1999 and 1998, the Company's backlog of unfilled orders
believed to be firm was approximately $91.4 million and $74.0 million,
respectively. The backlog of unfilled orders at October 31, 1999, included
approximately $9.6 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
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<PAGE> 10
government contract and believes no such event is threatened. The Company
expects that a substantial portion of the October 31, 1999 backlog will be
completed and delivered in fiscal year 2000.
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.
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 31, 1999, the Company employed 803 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.
RECENT DEVELOPMENTS
On November 11, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Tripoint Global Communications Inc.
("Tripoint") pursuant to which Signal Acquisition Corporation, a wholly-owned
subsidiary of Tripoint, commenced a cash tender offer to purchase all of the
outstanding shares of the Company's Common Stock for a cash price of $22.00 per
share. The offer is
-9-
<PAGE> 11
conditioned upon, among other things, regulatory approvals and the tender of at
least a majority of the shares outstanding on a fully diluted basis. The Merger
Agreement provides that following the consummation of the offer, Signal
Acquisition Corporation will be merged with and into the Company and any shares
not purchased in the offer (other than those held by dissenting shareholders or
by the Company, Tripoint, or any subsidiary of the Company or Tripoint) will be
converted into the right to receive $22.00 per share in cash.
The Company has received a civil investigative demand from the
Antitrust Division of the Department of Justice seeking additional information
and documents relating to the offer. In addition, Tripoint received a second
request from the Antitrust Division seeking similar information and documents.
The second request has the effect of extending the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act until 10 calendar days after
compliance with the request. The offer was initially scheduled to expire on
December 16, 1999, but because the second request has the effect of extending
the waiting period past that date, Tripoint extended the expiration date of the
offer to January 14, 2000.
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 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.
-10-
<PAGE> 12
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 31, 1999.
<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 55 acres of land
manufacturing
Kilgore, Texas Manufacturing 33,000 on Owned in fee
1 acre of land
Longview, Texas Administrative, engineering, and 30,000 Leased to February 2003
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 2005
Pennsylvania manufacturing
Duisburg, Germany Administrative and engineering 8,000 Leased to February 2000
Singapore Administrative Less than 1,000 Leased to September 2000
Dallas, Texas Administrative and engineering 8,000 Leased to May 2004
</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.
-11-
<PAGE> 13
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, 1999 (the "1999 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 1999 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 1999 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 1999 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 11
through 16 of the 1999 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 page 13 of the 1999 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 1999 Annual Report, are
hereby incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
-12-
<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The names of current directors and executive officers of the Company,
their ages, and certain other information about them (based upon information
provided by such persons) are set forth below.
<TABLE>
<CAPTION>
DIRECTOR AND/OR
NAME OF DIRECTOR EXECUTIVE
AND/OR EXECUTIVE OFFICER AGE POSITION(S)* OFFICER SINCE
------------------------ --- ------------ -------------
<S> <C> <C> <C>
J. Rex Vardeman(1)(2)............ 60 Chairman of the Board, 1984
President, Chief Executive Officer and
Director of the Company
A. Don Branum(2)................. 62 Senior Vice President, Assistant 1984
Secretary and Director of the Company
James D. Carter(2)............... 53 Vice President and Chief Financial 1984
Officer, Treasurer
and Director of the Company
Bill R. Womble(1)(3)............. 61 Director of the Company 1984
Donald E. Heitzman, Sr.(1)(3).... 74 Director of the Company 1992
John G. Farmer(3)................ 52 Director of the Company 1997
Rein Luik ....................... 63 Vice President and Director of the 1997
Company; and
President, Vertex Electronics Group
Joe A. Ylitalo................... 53 Secretary and General Counsel 1997
of the Company
William L. Anton................. 61 Vice President of the Company 1984
H. Dean Bunnell.................. 52 Vice President of the Company; and 1995
President and Chief Executive Officer,
Vertex Electronic Products, Inc.
Manfred Stupnik ................. 57 Vice President of the Company; and 1995
President, Vertex Microwave
Products, Inc.
Louis E. Becker.................. 65 Vice President of the Company; and 1998
President, Vertex Antenna Systems, LLC
</TABLE>
- ------------------------------------------
(1) Member of the Compensation Committee
(2) Member of the Stock Option Committee of the Outside Directors Stock
Option Plan
(3) Member of the Audit Committee
* All executive officers of the Company are elected annually by the Board
of Directors and serve at the discretion of the Board. All directors of
the Company hold office until the next ensuing annual meeting of
shareholders and until their respective successors are duly elected and
qualified. There are no family relationships between any director or
executive officer of the Company and any other such person.
-13-
<PAGE> 15
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.
Bill R. Womble has served as a director of the Company since October
1984. He has been continuously engaged in the private practice of law since 1963
and is a senior partner in the firm of Thompson & Knight L.L.P. (attorneys), in
Dallas, Texas. Mr. Womble holds no other directorships.
Donald E. Heitzman, Sr. has served as a director of the Company since
September 1992. Mr. Heitzman is President of International & Defense
Consultants, of Dallas, Texas, a private consulting firm which he founded in May
1992. He was previously employed by Electrospace Systems, Inc.
(telecommunications systems), as Senior Vice President of International Business
Development for more than five years. Mr. Heitzman holds no other directorships.
John G. Farmer has served as a director of the Company since August
1997. Mr. Farmer is Co-Managing Partner of Stratford Capital Partners, L.P., a
Dallas-based small business investment company (SBIC) founded in 1995 and
affiliated with the investment firm of Hicks, Muse, Tate & Furst, Inc., Dallas,
Texas. Prior to joining Stratford Capital Partners, Mr. Farmer served as Senior
Vice President and Regional Manager for GE Capital's Corporate Finance Group
from 1990 through 1994. From 1975 to 1990, Mr. Farmer served in a variety of
senior management positions at MBank Dallas, N.A. ("MBank"), including Chairman,
Chief Executive Officer, and a director of MVenture Corp. (MBank's wholly-owned
subsidiary and SBIC) from 1985 until his departure from MBank in 1990. Mr.
Farmer also serves as a director of Hollywood Theater Holdings, Inc. (movie
entertainment centers).
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 January 1997, Mr. Ylitalo was employed as
General Counsel to the Company for more than five years.
-14-
<PAGE> 16
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.
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.
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
officers, and persons who own more than 10% of a registered class of the
Company's equity securities, to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission (the "SEC").
Such persons are required by SEC regulation promulgated pursuant to the Exchange
Act to furnish the Company with copies of all Section 16(a) report forms they
file with the SEC.
Based solely on its review of the copies of such report forms
received by it with respect to fiscal year 1999, or written representations from
certain reporting persons, the Company believes that all filing requirements
applicable to its directors, officers and persons who own more than 10% of a
registered class of the Company's equity securities have been timely complied
with in accordance with Section 16(a) of the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION AND OTHER TRANSACTIONS.
SUMMARY COMPENSATION INFORMATION
The following table sets forth certain information regarding all cash
compensation paid or to be paid by the Company or any of its subsidiaries, as
well as other compensation paid or accrued, during the fiscal years indicated,
to the Company's Chief Executive Officer and each of the Company's four other
most highly compensated executive officers (the "Named Executive Officers") for
such respective periods in all capacities in which they served.
-15-
<PAGE> 17
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------ ---------------------------------
AWARDS PAYOUTS
---------- --------
RESTRICTED SECURITIES ALL OTHER
OTHER ANNUAL STOCK UNDERLYING LTIP COMPEN-
FISCAL COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS SATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(3) ($)(1) ($) (#) ($) ($)(2)
- --------------------------- ---- --------- ----------- ------------ ---------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J. Rex Vardeman............. 1999 $275,000 $ 10,000 -- -- 25,000(4) -- $ 4,800
Chairman of the Board, 1998 250,000 105,000 -- -- -- -- 800
President, and Chief 1997 225,000 92,000 -- -- -- -- 800
Executive Officer
A. Don Branum............... 1999 190,000 8,500 -- -- 25,000(4) -- 4,800
Senior Vice President 1998 185,000 87,000 -- -- -- -- 800
1997 175,000 37,000 -- -- -- -- 800
James D. Carter............. 1999 175,000 7,500 -- -- 25,000(4) -- 4,800
Vice President and Chief 1998 165,000 76,000 -- -- -- -- 800
Financial Officer, and 1997 145,000 61,000 -- -- -- -- 800
Treasurer
Rein Luik(5)................ 1999 215,000 -- -- -- -- -- 4,800
Vice President; 1998 210,000 49,000 -- -- -- -- 15,497(6)
President, Vertex 1997 275,000 -- -- -- -- -- 15,041(6)
Electronics Group
Louis E. Becker(7).......... 1999 165,000 21,000 -- -- -- -- 4,800
Vice President; 1998 160,000 30,000 -- -- -- -- 9,692(8)
President, Vertex 1997 170,000 -- -- -- -- -- 12,750(8)
Antenna Systems, LLC
</TABLE>
- --------------------------
(1) Includes incentive bonus payments earned for services rendered to the
Company or a subsidiary in the year indicated that were paid in the
following year.
(2) Excludes certain incidental perquisites, the total of which did not exceed
the lesser of $50,000 or 10% of the cash compensation for any named
individual.
(3) Except as noted in footnotes (6) and (8) below, the amounts reflected in
this column consist of the annual employer matching payments to the
Company's qualified Savings/Profit Sharing Plan.
(4) Incentive stock options to acquire shares of Common Stock pursuant to the
Company's 1995 Stock Compensation Plan.
(5) Information included in the Summary Compensation Table as to Dr. Luik's
1997 salary compensation (i) represents compensation for services to Vertex
Satcom Systems, Inc. ("Vertex Satcom"), formerly known as TIW Systems, Inc.
("TIW"), a wholly-owned subsidiary of the Company, and since June 11, 1997,
as Vice President of the Company, and (ii) reflects the annualized amount
of such compensation as if he had been employed in such capacities for the
entire fiscal year. Dr. Luik actually earned and was paid salary
compensation of $84,800 from the effective date of the Company's
acquisition of Vertex Satcom, June 11, 1997, until the end of the 1997
fiscal year.
(6) Includes the fiscal year 1997 and 1998 respective employer contributions of
(i) $4,750 and $4,846 to Vertex Satcom's qualified 401(k) Plan and (ii)
$10,291 and $10,651 to Vertex Satcom's qualified Money Purchase Pension
Plan for the benefit of Dr. Luik.
(7) Information included in this Summary Compensation Table as to Mr. Becker's
1997 salary compensation (i) represents compensation for services to Vertex
Antenna Systems, LLC ("VAS"), formerly a division of Vertex Satcom, and
since June 11, 1997, as Vice President of the Company, and (ii) reflects
the annualized amount of such compensation as if he had been employed in
such capacities for the entire fiscal year. Mr. Becker actually earned and
was paid salary compensation of $52,500 from the effective date of the
Company's acquisition of Vertex Satcom, June 11, 1997, until the end of the
1997 fiscal year.
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<PAGE> 18
(8) Includes the fiscal year 1997 and 1998 respective employer contributions of
(i) $4,750 and $3,692 to VAS's qualified 401(k) Plan and (ii) $8,000 and
$6,000 to VAS's qualified Money Purchase Pension Plan for the benefit of
Mr. Becker.
OPTION GRANTS DURING FISCAL YEAR 1999
The following table provides information related to options to acquire
shares of Common Stock granted to the Named Executive Officers of the Company
during fiscal year 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES
SECURITIES OPTIONS OF STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION
OPTIONS EMPLOYEES EXERCISE FOR OPTION TERM(1)
GRANTED IN FISCAL PRICE EXPIRATION ----------------------
NAME (#)(2) YEAR ($/SH)(3) DATE 5% 10%
- ---- --------- ----------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
J. Rex Vardeman........... 10,000 3.2% $ 14.875 10/13/08 $ 93,548 $237,069
15,000 4.8% 12.4375 8/02/09 117,328 297,333
A. Don Branum............. 10,000 3.2% 14.875 10/13/08 93,548 237,069
15,000 4.8% 12.4375 8/02/09 117,328 297,333
James D. Carter........... 10,000 3.2% 14.875 10/13/08 93,548 237,069
15,000 4.8% 12.4375 8/02/09 117,328 297,333
Rein Luik................. -- -- -- -- -- --
Louis E. Becker........... -- -- -- -- -- --
</TABLE>
- -----------------------
(1) The potential realizable value illustrates the value that may be realized
upon exercise of the option immediately prior to the expiration of its
term, assuming the specified compounded rates of appreciation of the
Company's Common Stock over the term of the option. These values do not
take into account provisions of the option providing for termination of the
option following termination of employment, transferability or vesting over
five years.
(2) Incentive stock options to acquire shares of Common Stock granted pursuant
to the Company's 1995 Stock Compensation Plan for a term of ten years from
the date of grant. The options vest and are initially exercisable with
respect to 20% of the shares covered thereby on each anniversary date
thereof in 2000 through 2004, are nontransferable and are subject to
termination under conditions upon death, disability and cessation of
employment of the optionee.
(3) The exercise price per share of the option was equal to 100% of the fair
market value of the Common Stock per share on the date of grant.
1999 OPTION EXERCISES AND FISCAL YEAR END HOLDINGS
The following table sets forth information with respect to options
exercised by the Named Executive Officers of the Company during fiscal year 1999
and the number and value of unexercised options and SARs held at fiscal year
end.
-17-
<PAGE> 19
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS/SARS
OPTIONS/SARS AT FY-END(#) AT FY-END ($)(*)
-------------------------- --------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Rex Vardeman....... -- -- 35,000 30,000 $17,813 $0
A. Don Branum......... -- -- 35,000 30,000 17,813 0
James D. Carter....... -- -- 30,000 30,000 11,875 0
Rein Luik............. -- -- -- -- 0 0
Louis E. Becker....... -- -- -- -- 0 0
</TABLE>
- ------------
* The closing price for the Company's Common Stock as reported by New York
Stock Exchange on September 30, 1999, was $11.1875 per share. The
indicated value is calculated on the basis of the difference between the
option exercise price per share and $11.1875, multiplied by the number of
shares of Common Stock underlying each option.
COMPENSATION OF DIRECTORS
The Company has adopted a policy whereby all Outside Directors
(non-employees) receive directors' fees of $1,000 for each meeting of the Board
attended (exclusive of telephonic meetings) and for each meeting of a committee
of the Board attended (exclusive of committee meetings held on the same day as
Board meetings). No director who is an employee of the Company receives any fees
for services as a director or member of any committee of the Board. All
directors are reimbursed for reasonable travel and out-of-pocket expenses
incurred in connection with attendance at meetings of the Board or of committees
of the Board.
In addition, the Company has adopted the Outside Directors Plan whereby
stock option grants have been made from time to time on an irregular basis to
reward director performance and to encourage those qualifying directors of the
Company who are not employees to participate in the Company's long-term success.
Pursuant to this plan, the Company has previously granted non-qualified stock in
fiscal year 1993 to Messrs. Womble and Heitzman to purchase 5,000 shares of
Common Stock each at the exercise price of $10 per share, in fiscal year 1995
for an additional 5,000 shares of Common Stock each at an exercise price of $12
per share, and in fiscal year 1998 for an additional 5,000 shares of Common
Stock each at an exercise price of $17 per share. To date, Messrs. Heitzman and
Womble have exercised their 1993 options of 5,000 shares each, and Mr. Womble
has also exercised his 1995 option of 5,000 shares.
In fiscal year 1998, the Company also adopted the Non-Employee
Directors Stock Option Plan, whereby stock option grants may be made from time
to time on an irregular basis to reward director performance and to encourage
those qualifying directors to participate in the Company's success. Pursuant to
this plan, in fiscal year 1998, the Company granted non-qualified stock options
to Messrs. Womble, Heitzman, and Farmer in the amount of 5,000 shares, 5,000
shares, and 10,000 shares, respectively, at an exercise price of $25 per share.
During fiscal year 1999, these 1998 options were modified to amend the exercise
price to $16.4375 per share. In addition, in fiscal year 1999, the Company
granted non-qualified stock options to Messrs. Womble, Heitzman, and Farmer in
the amount of 5,000 shares, 4,000 shares, and 3,000 shares, respectively, at an
exercise price of $12.4375 per share. To date, none of these options has been
exercised.
-18-
<PAGE> 20
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 (c) 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."
If the merger agreement with Tripoint is consummated, a change in
control of the Company will occur. See "Recent Developments" above for further
information.
In addition, Rein Luik and Louis E. Becker, each in his capacity as
President and Vice President, respectively, of TIW, entered into an agreement,
effective as of June 11, 1997, which includes the same provisions for a similar
term as summarized above as related to his employment in such capacity with TIW
or its successors.
Certain key employees of the Company have executed proprietary
information protection agreements acknowledging that all their discoveries made
while an employee of the Company will be the property of the Company and that
they will not disclose trade secrets or other confidential information of the
Company to others.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year 1999, the members of the Compensation Committee were
responsible for determining executive compensation and made decisions related to
stock option grants to certain officers other than executive officers. J. Rex
Vardeman, Chairman of the Board, President and Chief Executive Officer, serves
as Chairman of the Compensation Committee and participated in deliberations
concerning executive officer compensation.
No member or nominee for election as a member of the Board or any
Committee of the Board has an interlocking relationship with the board (or
member of such board) or any committee (or member of such committee) of a board
of any other company.
-19-
<PAGE> 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of shares of the Common Stock of the Company as of December 2, 1999,
by (i) each person known by the Company to own more than 5% of the outstanding
shares of Common Stock, (ii) each director of the Company, (iii) the Company's
Chief Executive Officer, (iv) each of the Company's four other most highly
compensated executive officers for fiscal year 1999, and (v) the directors and
executive officers of the Company as a group. The persons and entities named in
the table have sole voting and investment power with respect to all such shares
owned by them, unless otherwise indicated.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME OF BENEFICIAL OWNER OR GROUP(1) BENEFICIAL OWNERSHIP OF CLASS
------------------------------------ -------------------- --------
<S> <C> <C>
Fidelity Management & Research Company .......... 511,000 10.0%
Ryback Management Corporation ................... 333,000 6.5
EQSF Advisers, Inc. ............................. 306,900 6.0
J. Rex Vardeman(2) .............................. 199,570 3.9
James D. Carter(2) .............................. 103,833 2.0
A. Don Branum(2) ................................ 89,000 1.7
Rein Luik(3) .................................... 71,710 1.4
Bill R. Womble (2) .............................. 30,550 *
Donald E. Heitzman, Sr. (2) ..................... 24,000 *
John G. Farmer(2) ............................... 13,000 *
Louis E. Becker(4) .............................. 2,835 *
All directors and executive officers
as a group (12 persons) (5) .................. 695,561 13.0
</TABLE>
- -----------------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.
(1) The addresses of the persons or entities shown in the foregoing table who
are beneficial owners of more than 5% of the Common Stock are as follows:
Fidelity Management & Research Company, 82 Devonshire Street, Boston,
Massachusetts 02109; Ryback Management Corporation, 7711 Carondelet Avenue,
Box 16900, St. Louis, Missouri 63105; and EQSF Advisers, Inc., 767 Third
Avenue, New York, New York 10017.
(2) Includes 42,000, 37,000, 42,000, 15,000, 19,000, and 13,000 shares as to
which beneficial ownership could be acquired by Messrs. Vardeman, Carter,
Branum, Womble, Heitzman, and Farmer, respectively, within sixty days of
December 2, 1999, upon the exercise of outstanding options.
(3) Includes 2,080 shares held of record by the TIW Systems, Inc. Stock Bonus
Trust (the "Trust") for the account of Dr. Luik, as to which shares Dr.
Luik shares voting and investment powers pursuant to the terms of the
Trust.
(4) Represents shares held of record by the Trust for the account of Louis E.
Becker, as to which shares Mr. Becker shares voting and investment powers
pursuant to the terms of the Trust.
(5) Includes an aggregate of 226,333 shares as to which beneficial ownership
could be acquired by all such persons within sixty days of December 2,
1999, upon the exercise of outstanding options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Board of Directors of the Company has adopted a policy that
transactions between the Company, its officers, directors, principal
shareholders, and affiliates be conducted on terms at least as favorable to the
Company as those which could be obtained from independent parties.
The Company has entered into certain indemnification agreements with
each of its directors and executive officers to provide the maximum
indemnification allowed pursuant to its articles of incorporation, bylaws, and
applicable law.
Bill R. Womble, a director of the Company, is a partner of Thompson &
Knight L.L.P., a law firm headquartered in Dallas, Texas, that has been retained
by the Company as its outside counsel.
-20-
<PAGE> 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
PAGE IN 1999
(a)1. CONSOLIDATED FINANCIAL STATEMENTS. ANNUAL REPORT
-------------
<S> <C>
Report of Independent Public Accountants........................ 28
Consolidated Income Statements
For the years ended September 30,
1999, 1998, and 1997......................................... 17
Consolidated Balance Sheets
As of September 30, 1999 and 1998............................ 18
Consolidated Statements of Cash Flows
For the years ended September 30,
1999, 1998, and 1997......................................... 19
Consolidated Statements of Shareholders' Equity
For the years ended September 30,
1999, 1998 and 1997.......................................... 20
Notes to Consolidated Financial Statements...................... 21
<CAPTION>
2. FINANCIAL STATEMENT SCHEDULES. PAGE NO.
--------
<S> <C>
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.
On July 9, 1999, the Company filed a current report on Form 8-K under
item 5 regarding the Company's press release dated July 2, 1999 titled "Vertex
Communications Corporation Announces Restructuring." See Note 13 of Notes to
Consolidated Financial Statements.
-21-
<PAGE> 23
(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>
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>
-22-
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <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 -- 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).
10.13 -- Second Amendment to Loan Agreement, dated September 15, 1998,
by and between the Registrant and Bank One, Texas, National
Association, filed as Exhibit No. 10.23 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended September
30, 1998 (File No. 0-15277).
10.14 -- First Amendment to the Savings/Profit Sharing Plan of the
Registrant, as amended and restated, effective as of October
1, 1998, filed as Exhibit 10.24 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30,
1998 (File No. 0-15277).
10.15 -- Management Incentive Compensation Plan of the Registrant, its
Subsidiaries and its Divisions, as amended and restated,
effective as of October 1, 1998, filed as Exhibit No. 10.25 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998 (File No. 0-15277).
10.16 -- Employee Profit Sharing Bonus Plan of the Registrant, its
Subsidiaries and its Divisions, as amended and restated,
effective as of October 1, 1998, filed as Exhibit No. 10.26 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998 (File No. 0-15277).
13* -- Annual Report to Shareholders of the Registrant for the year
ended September 30, 1999, to the extent specified in Parts II
and IV hereof.
21* -- Subsidiaries of the Registrant.
23* -- Consent of Independent Public Accountants.
27* -- Financial Data Schedule.
</TABLE>
- -----------------
* Filed herewith.
-23-
<PAGE> 25
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 22, 1999 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 22, 1999
- --------------------------- President, Chief
J. Rex Vardeman Executive Officer (Principal
Executive Officer) and
Director
/s/ A. DON BRANUM Director December 22, 1999
- ---------------------------
A. Don Branum
/s/ JAMES D. CARTER Vice President and December 22, 1999
- --------------------------- Chief Financial Officer
James D. Carter (Principal Financial and
Accounting Officer), Treasurer
and Director
/s/ BILL R. WOMBLE Director December 22, 1999
- ---------------------------
Bill R. Womble
/s/ DONALD E. HEITZMAN, SR. Director December 22, 1999
- ---------------------------
Donald E. Heitzman, Sr.
/s/ JOHN G. FARMER Director December 22, 1999
- ---------------------------
John G. Farmer
/s/ REIN LUIK Director December 22, 1999
- ---------------------------
Rein Luik
</TABLE>
-24-
<PAGE> 26
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 1999 annual report to shareholders incorporated by
reference in this Form 10-K, and have issued our report thereon dated October
26, 1999. 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 26, 1999
S-1
<PAGE> 27
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
- ----------- ---------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
Year Ended 9/30/99 $ 897 $ 90 $ -- $ 37 (1) $ 950
Year Ended 9/30/98 1,254 (159) -- 198 (1) 897
Year Ended 9/30/97 268 210 805(4) 29 (1) 1,254
ALLOWANCE FOR
INVENTORY OBSOLESCENCE
Year Ended 9/30/99 $ 1,257 $ 1,716 $ -- $ 445 (2) $ 2,528
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
ALLOWANCE FOR
WARRANTY CLAIMS
Year Ended 9/30/99 $ 1,343 $ 2.312 $ -- $ 1,239 (3) $ 2,416
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
</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> 28
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
13 Annual Report to Shareholders of the Registrant for the year ended
September 30, 1999, to the extent specified in Parts II 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 13
TO
ANNUAL REPORT ON FORM 10-K
For Fiscal Year ended September 30,1999
ANNUAL REPORT TO SHAREHOLDERS
<PAGE> 2
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended September 30, 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Sales $ 116,936 $ 130,017 $ 92,433 $ 77,525 $ 65,024
Costs and expenses 125,784 116,571 82,602 69,491 58,547
Income (loss) before income taxes (8,433) 13,798 10,350 8,551 7,015
Net income (loss) (6,721) 10,086 7,175 6,100 5,195
Diluted earnings (loss)per share (1.32) 1.90 1.47 1.32 1.12
--------- --------- --------- --------- ---------
Working capital $ 55,414 $ 56,018 $ 45,584 $ 39,484 $ 33,396
Long-term debt 44 59 988 875 1,312
Total assets 103,131 110,771 100,493 71,974 63,854
Total liabilities 26,499 26,561 27,003 16,500 14,168
Total shareholders' equity 76,632 84,210 73,490 55,474 49,686
--------- --------- --------- --------- ---------
Orders booked $ 132,556 $ 132,338 $ 122,702 $ 74,770 $ 79,132
Backlog of unfilled orders 89,589 73,971 71,650 41,381 44,136
--------- --------- --------- --------- ---------
</TABLE>
No cash dividends have been declared or paid
<PAGE> 3
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The Company operates in two business segments-Antenna and Electronics. The
Antenna business segment provides customers with earth station antennas and
related products while the Electronics business segment supplies customers with
solid-state power amplifiers, radio frequency conversion products, and digital
communications electronic products.
In fiscal 1997, the Company acquired TIW Systems, Inc. (TIW). Subsequent to the
acquisition, management divided TIW into two separate business units-Vertex
Satcom Systems, Inc. (Vertex Satcom) and Vertex Antenna Systems, LLC (VAS)-that
would operate within each separate business segment. Vertex Satcom is engaged in
providing electronic networking products and VAS provides customers with
full-motion earth station antennas and related antenna products.
In the third quarter of fiscal 1999, management announced its intentions to
abandon ongoing efforts to offer certain antenna components and electronic
single-channel processing equipment which utilizes Time Division Multiple Access
technology due to the Company's inability to sell these products at a profit and
unacceptable future prospects. As a result, the Company recorded a special
charge of $9.5 million, consisting of Vertex Satcom goodwill impairment of $4.8
million and the write-off of obsolete inventory and other costs associated with
the decision to exit the networking systems business. In the fourth quarter of
fiscal 1999, the Company recorded an additional $1 million reserve for inventory
believed to be obsolete.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
Consolidated sales of $116.9 million in fiscal 1999 declined by $13.1 million,
or 10.1 percent, compared to sales of $130 million in fiscal 1998 primarily due
to lower foreign sales and substantially lower sales of electronic networking
products. A large part of the sales reduction was attributable to the Company's
Electronics segment where its external sales in fiscal 1999 were $9.2 million,
or 30.6 percent, less than fiscal 1998's external sales. Lower fiscal 1999 sales
in this segment were mainly a result of intense competition and lack of
customers' acceptance of products offered by our Vertex Satcom unit. Sales in
the Antenna segment declined by $3.9 million, or 3.9 percent, from fiscal 1998
sales due to receipt of certain large nonrecurring orders late in fiscal 1999
that are scheduled for shipment in fiscal 2000.
Cost of sales expressed as a percent of sales increased from 71.4 percent in
fiscal 1998 to 79.8 percent in fiscal 1999. Approximately half of the cost
increase was due to the special charge of $5.7 million for obsolete inventory,
while the remainder of the cost increase was due to sales price reductions
resulting from competitive pricing pressures in the marketplace. Research and
development spending of $6.6 million in fiscal 1999 increased by $.6 million, or
10.6 percent, over the comparable prior year's spending due to increased product
development. The Company has developed three sizes of bolt-together antennas
designed to eliminate the need for field optical alignment with resulting lower
cost to the customer. The Company's 9.3-meter, 6.3-meter and 4.8-meter antenna
designs are completed and orders are being
<PAGE> 4
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
received for these products. The Company is developing a wideband feed system
specifically designed for use with the next generation satellites.
Marketing expenses were $10.5 million in fiscal 1999 compared to $6.9 million in
fiscal 1998. The $3.6 million, or 51.8 percent, increase in spending was
principally caused by management reassigning certain engineering personnel to
marketing functions and the addition of new employees. Higher advertising costs
and increased travel also contributed to the incremental increase in marketing
expenses in fiscal 1999.
General and administrative expenses in fiscal 1999 of $10.6 million decreased by
3.2 percent from the prior year $10.9 million as a result of lower cash
incentive compensation paid to certain employees.
In fiscal 1999, the Company recorded a $4.8 million charge as impairment of
goodwill because management concluded that the carrying value of goodwill
associated with Vertex Satcom was not recoverable.
In fiscal 1999, the Company recognized an income tax benefit due to the loss
generated by operations. The differences between the effective tax rate and
statutory tax rate were mainly a result of goodwill impairment and amortization
which is not deductible, and higher foreign tax rates which were partially
offset by the favorable effect from tax incentives available from export
shipments.
The Company concluded fiscal 1999 with a net loss of $6.7 million compared to
net income of $10.1 million in fiscal 1998. The loss was caused by the above
factors, inclusive of $10.5 million of special charges.
The Company ended fiscal 1999 with an unfilled order backlog of $89.6 million,
an increase of 21.1 percent from order backlog of $74 million one year earlier.
Management is encouraged by the level and content of the current order backlog
and believes that the Company's profit margins should show modest improvement in
future periods. The Company believes that its consistent investment in the
development of Ka- and Ku-band products should yield favorable future results in
terms of added market share and enhanced profitability.
FISCAL 1998 COMPARED TO FISCAL 1997
Record consolidated sales in fiscal 1998 of $130 million increased by $37.6
million, or 40.7 percent, compared to sales of $92.4 million in fiscal 1997. The
sales increase, in total and within each business segment, was primarily
attributable to the acquisition of TIW in June of 1997. (TIW was reorganized in
early fiscal 1999 into two entities, Vertex Satcom and VAS.) Cost of sales
expressed as a percentage of sales of 71.4 percent in fiscal 1998 remained
essentially unchanged when compared to 71.2 percent in fiscal 1997.
Research and development spending was $6 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
<PAGE> 5
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
$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.
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 $74 million at September 30, 1998,
an increase of 3.2 percent over the $71.7 million at the 1997 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 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.
<PAGE> 6
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
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. As of September 30, 1999, the Company has in
place a forward exchange hedge contract equal to approximately U.S. $.3 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.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities in fiscal 1999 provided $15 million of cash mainly due to
substantial decreases in accounts receivable, inventories, and the positive
effect of the add-back of depreciation and amortization. Cash flow was
negatively impacted by both the net loss of $6.7 million and net change in the
income tax accounts of $4 million. The levels of inventories and accounts
receivable from the end of fiscal 1999, compared to the end of fiscal 1998,
decreased by approximately 19 percent and 23 percent, respectively. The decline
in inventories was caused by lower stocking levels required to support lower
sales volume, write-off of obsolete inventory during the third quarter
restructuring, and inclusion of a $1 million obsolete inventory provision
related to the planned sale or closure of Vertex Satcom. Accounts receivable
were lower as a result of lower sales volume in fiscal 1999, compared to the
prior year, and favorable collections of customer accounts.
Operating activities in fiscal 1998 and 1997 generated $16.2 million primarily
because of strong net income of $17.3 million and the favorable effect of
depreciation and amortization of $7.7 million, which were partially offset by
increased inventories and accounts receivable totaling $12.5 million.
Cash of $9 million was invested during the last three years in 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 common stock
in a purchase transaction.
<PAGE> 7
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
The Company used $2.2 million of cash in the three years ended September 30,
1999 to pay debt incurred in the 1995 acquisition of Vertex Electronic Products,
Inc. (formerly known as Maxtech, Inc.). Cash of $1.3 million was used in fiscal
1999 and 1998 to repurchase the Company's common stock in the public markets
pursuant to a stock repurchase plan approved by the Board of Directors.
In fiscal 1998, the Company paid in full a $.5 million bank note associated with
the TIW acquisition 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. The loan was
repaid 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.
Cash of $1.7 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 .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 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, 1999 and 1998, no principal advances were
outstanding under the Company's credit facilities and issued and outstanding
letters of credit totaled $4,648,000 and $4,476,000, 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. As of
September 30, 1999, the Company had no material commitments outstanding for
capital expenditures.
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, 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 and electronic
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.
<PAGE> 8
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
The majority of these products were designed so that the calendar date changing
to 2000 and beyond will not hinder or affect their performance. There are,
however, a limited number of products sold in prior years that could be affected
by the year 2000 problem. The Company has been and is in the process of
contacting such customers and now offers an upgrade package to properly
recognize the date and remedy the problem.
The Company has sent questionnaires to certain third parties whose lack of
readiness could have an adverse material effect on the Company or its products.
Management has been collecting and evaluating the questionnaire responses. Based
upon those responses received to date, respondents assert that they are year
2000 compliant or they believe they will be timely compliant. The Company
continues to receive and evaluate third party responses and follow-up with those
third parties who have not responded.
Management has been and is currently expending efforts towards developing a
contingency plan which contemplates temporary measures to alleviate disruption
from year 2000 related failures, either from internal or from external sources.
Central to development of a contingency plan is the identification of
significant risks and related potential impact from year 2000 perceived
failures. The Company has not yet identified any such significant risks and
consequently has not developed a comprehensive year 2000 contingency plan. In
addition, management does not believe it is possible to ascertain all aspects of
the year 2000 problem that may affect the Company, including those related to
efforts or readiness of customers, suppliers, or other third parties.
Management, however, is committed to pursuing reasonable means to minimize the
Company's exposure. Should the Company identify a significant risk related to a
year 2000 predicted failure, management intends to develop a contingency plan in
order to eliminate or minimize the effect on the Company.
The foregoing discussion regarding year 2000 compliance represents management's
best estimate regarding the Company's state of readiness and the reasonable
steps it has taken and should take to achieve year 2000 compliance in order to
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, management
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 or anticipated results. The Company is relying on analysis and
recommendations from informed employees and third parties in making the above
forward-looking statements, which may prove to be inadequate or incomplete.
SUBSEQUENT EVENT
On November 12, 1999, the Company announced that it had entered into a
definitive merger agreement with TriPoint Global Communications, Inc. (TriPoint)
of Gastonia, North Carolina. Under the agreement, TriPoint will acquire the
Company for $22.00 per share or aggregate consideration of approximately $128
million. Pursuant to the agreement, on November 18, 1999, TriPoint initiated a
cash tender offer for all of the Company's outstanding common stock, including
outstanding stock options, which is expected to be followed by a second-step
merger with the Company. There can be no assurances that Tripoint's tender offer
for the Company's outstanding shares will be successful or that the merger will
be consummated.
The consummation of the merger agreement is dependent upon, among other
conditions, certain government regulatory clearances. Assuming these required
regulatory clearances are received, the
<PAGE> 9
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
Company anticipates the acquisition will be completed in February, 2000. If the
merger agreement is terminated by the Company under certain circumstances
specified in the agreement, the Company would be obligated to pay a termination
fee of $3.8 million. Management does not expect to terminate the agreement,
therefore no provision has been made in the Company's financial statements
related to the termination fee.
<PAGE> 10
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
Year Ended September 30, 1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
(In thousands, except per share amounts)
SALES $ 116,936 $ 130,017 $ 92,433
COSTS AND EXPENSES:
Cost of sales 93,321 92,772 65,785
Research and development 6,600 5,968 3,775
Marketing 10,496 6,915 5,050
General and administrative 10,567 10,916 7,992
Impairment of goodwill 4,800 -- --
--------- --------- ---------
125,784 116,571 82,602
--------- --------- ---------
Operating income (loss) (8,848) 13,446 9,831
OTHER INCOME (EXPENSE):
Income from investments 533 459 686
Interest expense (118) (107) (167)
--------- --------- ---------
Income (loss) before income taxes (8,433) 13,798 10,350
PROVISION (BENEFIT) FOR INCOME TAXES (1,712) 3,712 3,175
--------- --------- ---------
NET INCOME (LOSS) $ (6,721) $ 10,086 $ 7,175
========= ========= =========
EARNINGS (LOSS)PER SHARE
Basic $ (1.32) $ 1.98 $ 1.54
Diluted (1.32) 1.90 1.47
========= ========= =========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Basic 5,096 5,105 4,645
Diluted 5,096 5,308 4,878
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 11
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
As of September 30, 1999 1998
--------- ---------
(In thousands, except share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,824 $ 11,239
Accounts receivable, less allowance for doubtful
accounts of $950 and $897 30,219 39,239
Inventories 25,151 30,946
Income tax receivable 2,993 --
Deferred income taxes 1,704 270
--------- ---------
81,891 81,694
--------- ---------
Property and equipment:
Land 558 558
Buildings and improvements 9,135 9,161
Equipment 23,577 21,543
Construction in progress 483 771
Less: accumulated depreciation (19,611) (16,560)
--------- ---------
14,142 15,473
--------- ---------
Goodwill, net of accumulated amortization of $7,775 and $2,063 7,032 12,744
Other assets 1,071 860
--------- ---------
TOTAL ASSETS $ 104,136 $ 110,771
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $ 4,421 $ 5,987
Accrued liabilities 18,322 15,729
Customers' advances 3,981 3,286
Current portion of long-term debt 17 674
--------- ---------
26,741 25,676
--------- ---------
Long-term debt 44 59
Deferred income taxes 719 826
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 34,780 35,030
Retained earnings 43,398 50,119
Treasury stock, at cost, 119,437 and 118,073 shares in
1999 and 1998, respectively (1,704) (1,491)
Translation adjustment (366) 28
--------- ---------
76,632 84,210
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 104,136 $ 110,771
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 12
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30, 1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,721) $ 10,086 $ 7,175
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization, and goodwill impairment 8,998 4,546 3,109
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable 9,020 (3,262) (612)
Inventories 5,795 (3,748) (4,888)
Other assets (211) 55 750
Accounts payable and accrued liabilities 1,328 784 682
Customers' advances 695 147 1,402
Income taxes, net (3,956) 729 (710)
-------- -------- --------
Net cash provided by operating activities 14,948 9,337 6,908
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,115) (2,802) (4,088)
Acquisition, net of cash acquired (Note 4) -- -- (8,043)
-------- -------- --------
Net cash used in investing activities (2,115) (2,802) (12,131)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -- -- 1,137
Repayment of long-term debt (370) (764) (7,779)
Payment for business purchased in fiscal 1995 (1,181) (573) (437)
Purchase of treasury stock (1,136) (121) --
Proceeds from exercise of stock options 540 381 736
Other 41 346 (370)
-------- -------- --------
Net cash used in financing activities (2,106) (731) (6,713)
-------- -------- --------
Effect of exchange rate changes on cash (142) 28 (53)
Net increase (decrease) in cash and cash
equivalents 10,585 5,832 (11,989)
Cash and cash equivalents at beginning
of year 11,239 5,407 17,396
-------- -------- --------
Cash and cash equivalents at end of year $ 21,824 $ 11,239 $ 5,407
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 196 $ 185 $ 203
Income taxes, net of refunds 1,317 2,706 3,787
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 13
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital in Compre-
Common Excess of Retained Treasury Translation hensive
Stock Par Value Earnings Stock Adjustment Total Income
-------- ---------- -------- -------- ----------- -------- --------
(In thousands, except share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
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) $ (423)
Net income -- -- 7,175 -- -- 7,175 7,175
--------
Comprehensive Income $ 6,752
-------- -------- -------- -------- -------- -------- --------
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 -- -- -- -- 374 374 374
Net income -- -- 10,086 -- -- 10,086 10,086
--------
Comprehensive Income $ 10,460
-------- -------- -------- -------- -------- -------- --------
1998 $ 524 $ 35,030 $ 50,119 $ (1,491) $ 28 $ 84,210
========= ======== ======== ======== ======== ======== ========
Exercise of stock options
(57,000 shares) -- (267) -- 807 -- 540 --
Employee stock bonus
(8,170 shares) -- 17 -- 116 -- 133 --
Purchase of treasury stock
(66,534 shares) -- -- -- (1,136) -- (1,136) --
Translation adjustment -- -- -- -- (394) (394) $ (394)
Net income -- -- (6,721) -- -- (6,721) (6,721)
--------
Comprehensive Income $ (7,115)
-------- -------- -------- -------- -------- -------- --------
1999 $ 524 $ 34,780 $ 43,398 $ (1,704) $ (366) $ 76,632
========= ======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 14
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
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 diameter, which operate in the
domestic, international, and military radio frequencies. The Company also
provides a wide variety of electronic components used in various
telecommunications applications.
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
$7,053,000 and $4,988,000 at September 30, 1999 and 1998, respectively. Unbilled
costs and related profits included in accounts receivable at September 30, 1999
and 1998 were $12,411,000 and $14,252,000, 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)
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Sales $52,136 $51,426 $28,356
Cost of Sales 41,349 39,619 23,640
</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
<PAGE> 15
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
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.
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)
1999 1998
------- -------
<S> <C> <C>
Raw materials $ 7,110 $ 8,638
Work-in-process 13,651 15,427
Finished goods 4,390 6,881
------- -------
$25,151 $30,946
======= =======
</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 ranges from 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.
EARNINGS (LOSS) PER SHARE. Basic earnings per share were computed by dividing
net income by the weighted average number of shares outstanding during the
period. Diluted earnings per share were computed by dividing net income by the
sum of the weighted average number of shares outstanding and the number of
equivalent shares assumed outstanding under the Company's stock-based
compensation plans. The number of equivalent shares assumed outstanding was
203,000 and 233,000 in fiscal 1998 and 1997, respectively. No equivalent shares
were assumed outstanding in fiscal 1999 because the effect on loss per share
would be anti-dilutive.
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, 1999.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified in order to
conform with the current year presentation.
STOCK-BASED COMPENSATION. Statement of Financial Accounting Standards No. 123
(SFAS 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.
<PAGE> 16
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
NEW ACCOUNTING STANDARDS. In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Reporting Comprehensive Income," and No. 131 (SFAS 131), "Disclosure About
Segments of an Enterprise and Related Information." SFAS 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.
The Company adopted this standard in October 1998. SFAS 131 establishes
standards for the way that a public enterprise reports certain information about
its operating segments in annual financial statements.
The Company adopted this new standard in September 1999. In June 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which will be effective for the Company's fiscal year 2001.
Adoption of this new standard will not have a material effect on the Company's
financial statements.
2. ACCRUED LIABILITIES
Accrued liabilities were comprised of the following:
<TABLE>
<CAPTION>
(In thousands)
1999 1998
------- -------
<S> <C> <C>
Accrued compensation $ 4,211 $ 4,302
Warranty 2,416 1,343
Amounts billed in excess of costs 7,053 4,988
Employee benefit costs 797 613
Taxes other than income 566 1,008
Other 3,279 3,475
------- -------
$18,322 $15,729
======= =======
</TABLE>
3. FOREIGN OPERATIONS
Financial information relating to the Company's foreign operations is shown
below:
<TABLE>
<CAPTION>
(In thousands)
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Sales to unaffiliated customers $10,287 $ 9,403 $ 5,881
Identifiable assets 7,239 5,933 4,034
======= ======= =======
</TABLE>
Sales are attributed to geographic areas based on the location of the assets
producing such revenues. The Company translates the financial statements of its
German subsidiary from its functional currency, the German mark, into U.S.
dollars in accordance with Statement of Financial Accounting Standards 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.
<PAGE> 17
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
Sales in Western Europe were 20 percent, 14 percent, and 14 percent of total
sales in fiscal 1999, 1998, and 1997, respectively. Sales in Asian countries
were 16 percent, 20 percent, and 21 percent of total sales in fiscal 1999, 1998,
and 1997, respectively.
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 fiscal 1997 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 date indicated above or that may be
obtained in the future.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
1997
--------
<S> <C>
Sales $115,563
Net income 5,333
Diluted earnings per share 1.01
</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,
1999, 401,800 options remained available for grant.
<PAGE> 18
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
At September 30, 1999, 1998, and 1997, options to purchase 304,193, 299,060, and
217,766 shares, respectively, were vested and could be exercised. The
outstanding stock options at September 30, 1999 had a weighted average remaining
contractual life of six years with option prices ranging from $10.00 to $25.38
per share.
As of September 30, 1999, 1998, and 1997, the weighted average exercise price of
the exercisable options at those dates was $13.13, $12.42, and $9.92,
respectively.
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price
-------- ----------------
<S> <C> <C>
Outstanding at 10/1/96 530,500 $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
Granted 324,000 13.66
Exercised (57,000) 9.49
Cancelled (15,400) 14.95
-------- ------
Outstanding at 9/30/99 702,727 $13.60
======== ======
</TABLE>
As discussed in Note 1, the Company has adopted the disclosure only provisions
of 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 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>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Risk free interest rate 5.89% 5.89% 5.77%
Expected term 4 years 4 years 4 years
Expected volatility 32% 32% 38%
Dividend yield 0 0 0
</TABLE>
The weighted-average fair value of options granted under these plans in fiscal
1999, 1998, and 1997 was $4.72, $8.52, and $7.50, respectively. Based upon the
foregoing factors, had the computed fair value of the options granted in fiscal
1999, 1998, and 1997 been amortized to expense, pro forma net income (loss) for
those years would have been ($7,007,000), $10,014,000, and $7,138,000,
respectively, and earnings (loss) per share would have been ($1.38), $1.89, and
$1.46, respectively.
<PAGE> 19
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
6. LONG-TERM DEBT AND CREDIT LINES
In December 1996, the Company borrowed 2 million German marks through its German
subsidiary. The debt was repaid in 24 equal monthly installments plus accrued
interest charged at 4.7 percent per annum. As of September 30, 1999, this
available German credit line was 500,000 marks or approximately $270,000.
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, 1999 and 1998, no
principal advances were outstanding and issued stand-by letters of credit
totaled $4,648,000 and $4,476,000, respectively.
As part of the purchase price of Maxtech, Inc. in 1995, the Company incurred
four-year unsecured promissory notes in the aggregate principal sum of
$1,750,000. The notes were 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, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Installment loan payable to bank
in monthly installments of $50,000
(83,000 German marks) $ -0- $150,000
Promissory notes payable to
Maxtech selling shareholders
due October 1, 1998 plus
accrued interest -0- 302,000
Capital lease obligations
(see note 12) 61,000 281,000
-------- --------
61,000 733,000
Less current maturities 17,000 674,000
-------- --------
$ 44,000 $ 59,000
======== ========
</TABLE>
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:
<PAGE> 20
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Federal statutory rate (34.0)% 34.0% 34.0%
State income taxes, net of federal benefit .6 .9 1.4
Effect of nontaxable investment income (.7) (.2) (1.2)
Benefit from nontaxable FSC income (8.9) (5.6) (3.4)
Tax benefit from increased R&D activity (1.8) (1.2) (1.8)
Foreign tax adjustment 3.3 .8 .4
Effect of non-deductible goodwill 21.2 1.3 .3
Other, net -0- (2.2) 1.0
------ ------ ------
(20.3)% 26.9% 30.7%
====== ====== ======
</TABLE>
Income before income taxes from foreign operations was $1,383,000, $578,000, and
$63,000, in fiscal 1999, 1998, and 1997, respectively. Income (loss) before
income taxes from domestic operations was $(9,816,000), $13,220,000, and
$10,287,000 in fiscal 1999, 1998, and 1997, respectively.
The provision (benefit) for income taxes consists of the following significant
components:
<TABLE>
<CAPTION>
(In thousands)
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $(1,197) $ 2,789 $ 3,066
Foreign 976 416 33
State 50 270 220
------- ------- -------
Total Current (171) 3,475 3,319
Total Deferred (1,541) 237 (144)
------- ------- -------
Total provision (benefit)
for income taxes $(1,712) $ 3,712 $ 3,175
======= ======= =======
</TABLE>
The table below shows the components of deferred income taxes:
<TABLE>
<CAPTION>
(In thousands)
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Deferred tax assets:
Accrued liabilities and
Reserves $ 2,540 $ 1,825 $ 1,940
Other 30 41 293
Deferred tax liabilities:
Property and equipment (719) (826) (896)
Revenue recognition
differences (866) (1,596) (1,449)
Other -- -- (207)
------- ------- -------
Net deferred tax asset (liability) $ 985 $ (556) $ (319)
======= ======= =======
</TABLE>
<PAGE> 21
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
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 1999, 1998, and 1997 were $551,000, $510,000, and $290,000,
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 Plan's participants are key employees and officers, but
not outside directors.
Compensation under this plan was $840,000, $1,927,000, and $1,066,000 for fiscal
1999, 1998, and 1997, respectively. The Employee Profit Sharing Bonus Plan's
participants include a majority of the Company's employees, except participants
in the Management Incentive Compensation Plan. Compensation under this plan was
$313,000, $185,000, and $238,000 for fiscal 1999, 1998, and 1997, 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, 1999, 1998, and 1997 of $418,000, $446,000,
and $541,000, respectively.
10. SALES AND INDUSTRY SEGMENT INFORMATION
The Company has segregated its business into two operating business segments
based primarily upon the nature of and the differences between the products and
services supplied. The Antenna segment provides earth station antennas,
multi-axis pedestals, precision antenna control and tracking products, and
related microwave components. The Electronics segment provides solid-state
electronic power amplifiers, radio frequency conversion products, and digital
communications electronic products. Both segments provide products and services
from various locations to customers throughout the world. The chief executive
officer regularly measures and evaluates the performance of each segment
separately. The Company rewards employees of each business segment separately
with cash incentives through certain benefit plans based upon actual income
before tax results achieved as compared to planned results within each business
segment. The Company maintains a corporate administrative staff and a corporate
marketing staff.
The accounting policies in both business segments are the same as described in
Note 1, Summary of Accounting Policies. Corporate expenses in fiscal 1999
include impairment of goodwill of $4.8 million. Corporate assets consisted of
cash and goodwill net of accumulated amortization. Corporate losses are a result
of goodwill amortization, corporate marketing expenses and corporate
administration. Business segment information for the past three years is shown
below.
<PAGE> 22
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
FISCAL 1999
<TABLE>
<CAPTION>
(In thousands)
Antenna Electronics Consolidated
Segment Segment Corporate Eliminations Total
--------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales - external $ 96,125 $ 20,811 $ -- $ -- $ 116,936
Sales - inter-segment 722 2,878 -- (3,600) -0-
Income from investments 171 30 332 -- 533
Interest expense 43 15 60 -- 118
Income (loss) before income tax 9,237 (4,766) (12,017) (887) (8,433)
Depreciation and amortization 2,804 482 5,712 -- 8,998
Purchase of property
and equipment 1,444 671 -- -- 2,115
Total assets 61,296 14,540 28,300 -- 104,136
</TABLE>
FISCAL 1998
<TABLE>
<CAPTION>
Antenna Electronics Consolidated
Segment Segment Corporate Eliminations Total
-------- -------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales - external $100,009 $ 30,008 $ -- $ -- $130,017
Sales - inter-segment 203 1,779 -- (1,982) -0-
Income from investments 120 38 301 -- 459
Interest expense 41 11 55 -- 107
Income (loss) before income tax 14,377 2,356 (2,858) (77) 13,798
Depreciation and amortization 2,905 712 929 -- 4,546
Purchase of property
and equipment 2,503 299 -- -- 2,802
Total assets 68,109 21,596 21,066 -- 110,771
</TABLE>
FISCAL 1997
<TABLE>
<CAPTION>
Antenna Electronics Consolidated
Segment Segment Corporate Eliminations Total
-------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales - external $ 75,403 $ 17,030 $ -- $ -- $ 92,433
Sales - inter-segment 3 1,455 -- (1,458) -0-
Income from investments 172 7 507 -- 686
Interest expense 60 14 93 -- 167
Income (loss) before income tax 10,142 2,597 (1,978) (411) 10,350
Depreciation and amortization 2,246 361 502 -- 3,109
Purchase of property
and equipment 3,326 762 -- -- 4,088
Total assets 77,597 5,872 17,024 -- 100,493
</TABLE>
No single customer accounted for 10 percent or more of total sales in any of the
past three fiscal years.
<PAGE> 23
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
1999 Fiscal Quarters
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 32,005 $ 30,926 $ 25,563 $ 28,442
Gross Profit 9,511 8,682 529(1) 4,893
Net Income (Loss) 2,321 1,295 (9,026)(2) (1,311)
Basic Earnings (Loss) Per Share .46 .25 (1.77) (.26)
Diluted Earnings (Loss) Per Share .44 .25 (1.77) (.26)
</TABLE>
<TABLE>
<CAPTION>
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
Basic Earnings Per Share .46 .48 .51 .53
Diluted Earnings Per Share .44 .46 .49 .51
</TABLE>
(1) Includes $4.7 million restructuring charge related to inventory
write-off, warranty costs, and write-off of non-performing assets.
(2) Includes $4.7 million restructuring charge discussed above and $4.8
million charge for impairment of goodwill. Refer to Note 13 for
additional information.
12. COMMITMENTS AND CONTINGENCIES
The Company rents certain equipment and facilities under operating leases. Rent
expense under these leases for fiscal 1999, 1998, and 1997 was $1,321,000,
$1,231,000, and $767,000, respectively.
Certain items of equipment are subject to capital leases. As of September 30,
1999, $79,000 ($62,000 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, 1999.
<TABLE>
<CAPTION>
Operating Capital
Fiscal Year Leases Leases
---------- ----------
<S> <C> <C>
2000 $1,397,000 $ 21,000
2001 1,266,000 21,000
2002 1,164,000 21,000
2003 534,000 9,000
2004 312,000 0
Thereafter 325,000 0
---------- ----------
$4,998,000 $ 72,000
Less: Sublease income 175,000 --
Amount representing interest -- 11,000
---------- ----------
$4,823,000 $ 61,000
========== ==========
</TABLE>
<PAGE> 24
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
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.
13. RESTRUCTURING
In the third quarter of fiscal 1999, the Company announced plans to abandon its
networking products technology business line and redirect certain related
resources. As a result of this decision, the Company recorded a special charge
of $9.5 million. The charge involved $4.8 million of goodwill impairment and
$2.5 million for write-off of obsolete inventory related to networking products.
The balance of the special charge or $2.2 million consisted of slow-moving
inventory, warranty costs, and non-performing fixed assets. Of the $9.5 million
total charge, $4.7 million was recorded in cost of sales. As of September 30,
1999, approximately $.3 million of the $9.5 million charge remained accrued on
the Company's books.
14. SUBSEQUENT EVENT (UNAUDITED)
On November 12, 1999, the Company announced it had entered into a definitive
merger agreement whereby TriPoint Global Communications, Inc. (Tripoint) of
Gastonia, North Carolina, would acquire the Company for $22.00 per share or
aggregate consideration of approximately $128 million. Pursuant to the
agreement, TriPoint initiated a tender offer for all of the Company's
outstanding shares, including outstanding stock options.
The merger agreement is dependent upon, among other conditions, clearance under
the Hart-Scott-Rodino Antitrust Act. Assuming the receipt of required regulatory
approvals, the Company anticipates the acquisition will be completed in February
2000. If the merger agreement is terminated by the Company under certain
circumstances specified in the agreement, the Company could be obligated to pay
a termination fee of $3.8 million. The Company has not provided an accrual for
any amount related to this termination fee as management believes its likelihood
is remote. There are no assurances that Tripoint's tender offer for the
Company's outstanding shares will be successful or that the merger will be
consummated.
<PAGE> 25
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
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, 1999 and 1998, and the related consolidated statements of income,
cash flows, and shareholders' equity for each of the three years in the period
ended September 30, 1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1999, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Dallas, Texas
October 26, 1999 (except with respect to the matter
discussed in Note 14, as to which the
date is November 12, 1999)
<PAGE> 26
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 13
MARKET FOR COMMON STOCK
The Company's common stock is traded on the New York Stock Exchange under the
symbol VTX. At December 2, 1999, there were approximately 2,600 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 through January 1, 1999, and the New York
Stock Exchange from March 31, 1999 through September 30, 1999.
<TABLE>
<CAPTION>
Quarter Ended High Low Quarter Ended High Low
- ------------------ ------- --------- ------------------ ------ ------
<S> <C> <C> <C> <C> <C>
September 30, 1999 $13-7/8 $10-15/16 September 30, 1998 $24 $18
July 2, 1999 16-1/2 11-15/16 July 3, 1998 26-5/8 21-1/4
April 1, 1999 18-3/8 14 April 3, 1998 26-5/8 24-1/4
January 1, 1999 20-1/2 13 January 2, 1998 26 23
</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 30,1999
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
AS OF OCTOBER 31, 1999
<PAGE> 2
EXHIBIT 21
VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES
AS OF OCTOBER 31, 1999
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 30,1999
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, File No. 333-53389 and File No. 333-81979 on Form S-8, and File No.
333-53391 on Form S-3.
Arthur Andersen LLP
Dallas, Texas
December 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENT FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 21,824
<SECURITIES> 0
<RECEIVABLES> 31,169
<ALLOWANCES> 950
<INVENTORY> 25,151
<CURRENT-ASSETS> 81,891
<PP&E> 33,753
<DEPRECIATION> 19,611
<TOTAL-ASSETS> 104,136
<CURRENT-LIABILITIES> 26,741
<BONDS> 0
0
0
<COMMON> 524
<OTHER-SE> 76,108
<TOTAL-LIABILITY-AND-EQUITY> 104,136
<SALES> 116,936
<TOTAL-REVENUES> 116,936
<CGS> 93,321
<TOTAL-COSTS> 125,784
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 118
<INCOME-PRETAX> (8,433)
<INCOME-TAX> (1,712)
<INCOME-CONTINUING> (6,721)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,721)
<EPS-BASIC> (1.32)
<EPS-DILUTED> (1.32)
</TABLE>
