-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NJPEto3/8PD0BpWjYCG8p6VyC5YdA5fnRyEZv2LzQb3xYK+DM4jPurG32QqQVlKH ziRN7zkTxuONlNoKPl6crg== 0000950134-96-006984.txt : 19961223 0000950134-96-006984.hdr.sgml : 19961223 ACCESSION NUMBER: 0000950134-96-006984 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961220 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERTEX COMMUNICATIONS CORP /TX/ CENTRAL INDEX KEY: 0000780416 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 751982974 STATE OF INCORPORATION: TX FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-15277 FILM NUMBER: 96683740 BUSINESS ADDRESS: STREET 1: 2600 N LONGVIEW ST STREET 2: PO BOX 1277 CITY: KILGORE STATE: TX ZIP: 75662 BUSINESS PHONE: 9039840555 10-K405 1 FORM 10-K FISCAL YEAR END - SEPTEMBER 30, 1996 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-K (MARK ONE) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ------------------- --------------------- COMMISSION FILE NUMBER: 0-15277 VERTEX COMMUNICATIONS CORPORATION (Exact name of Registrant as specified in its charter) TEXAS 75-1982974 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2600 N. LONGVIEW STREET, KILGORE, TEXAS 75662 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (903) 984-0555 -------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ---------------------- None None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.10 PAR VALUE (Title of Class) -------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of December 2, 1996, 4,442,056 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, 1996, as reported by The Nasdaq Stock Market (National Market System), was approximately $50,000,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended September 30, 1996, are incorporated by reference into Items 5, 6, 7, and 8 under Part II and Item 14 of Part IV hereof. Portions of the Registrant's definitive Proxy Statement to be filed in connection with the solicitation of proxies for its 1997 Annual Meeting of Shareholders are incorporated by reference into Items 10, 11, 12, and 13 under Part III hereof. 2 VERTEX COMMUNICATIONS CORPORATION ANNUAL REPORT ON FORM 10-K For the Fiscal Year Ended September 30, 1996 ============================================================ PART I ITEM 1. BUSINESS. GENERAL Vertex Communications Corporation (the "Registrant," the "Company," or "Vertex") designs, develops, and manufactures an extensive line of precision earth station antennas for satellite communications. The Company's antennas range in size from 1.2 to 34 meters in diameter and operate in all relevant commercial and military frequency bands, including C-band, X-band and Ku-band. The Company also manufactures antenna control systems that control the movement and tracking capabilities of antennas, related electronic components used to amplify radio frequency ("RF") signals, as well as precision microwave waveguide components for application as component parts of communications systems. To complement its antenna products, the Company also provides custom engineering, turnkey field installation, spare and replacement parts, site testing, and after-sale and maintenance services. The Company's strategy is to provide a wide variety of technologically advanced satellite communications earth station antenna products 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 antennas, 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 to end users who combine the Company's products with other communication 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: Gamma-f Corp., a Nevada corporation headquartered in Torrance, California; Vertex Antennentechnik GmbH, a corporation organized pursuant to the laws of the Federal Republic of Germany, with its headquarters in Duisburg, Germany; Vertex International, Ltd., formed under the laws of England, with its headquarters near London;Vertex Foreign Sales Corporation, organized pursuant to the laws of The Virgin Islands, with its office in St. Thomas, The Virgin Islands; and Maxtech, Inc., a Pennsylvania corporation which is located in State College, Pennsylvania. 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, and its telephone number is (903) 984-0555. -1- 3 EARTH STATION ANTENNA INDUSTRY An increase in demand for transmission and reception capacity to support high-speed voice, video, and data communications has resulted in significant demand for additional satellite and earth station equipment. Communications satellites, once placed in orbit above the earth, relay microwave radio signals from one or more earth stations to one or more other earth stations at various geographical locations. The primary function of an earth station is to transmit or receive a microwave radio signal via satellite in order to efficiently facilitate the telecommunications process. Telecommunication is the process of communication through electronic means such as radio, telegraph, television, and computer. Each earth station is interconnected to a local communications network which distributes and/or collects the desired information to or from the users of such information. A typical earth station consists of several components, including an antenna and associated electronic components, some of which amplify RF signals and others that control the movement 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 C-band, X-band and Ku-band for transmission in the radio frequency spectrum. The Company designs and manufactures satellite communications earth station antennas that operate in each of these frequency bands. 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. Therefore, Ku-band transmission enables earth station vendors and voice, video, and data communications service providers to bring satellite communications directly to customers' facilities. 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 earth station antennas and associated products to satisfy evolving customer requirements. The Company believes its experience in refining current products and developing new products will enable it to expand distribution and gain market share. The Company believes this strategy has been, and will continue to be, successful because of the following key elements: TECHNICAL EXPERTISE. Vertex believes its technical expertise, together with its ability to comply with exacting engineering and design specifications, has contributed to its ability to increase sales. The ability of its engineering and design staff to respond rapidly to detailed customer requirements has enhanced the Company's competitive position. BROAD PRODUCT LINE. The Company's product strategy is to establish and maintain a prominent market share by emphasizing the development and distribution of a wide array of quality products. The Company believes its telecommunications products comprise one of the industry's broadest product lines. This -2- 4 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. Emerging demand has created the need for substantial investment in telecommunications infrastructures in many international markets. The Company believes that a significant opportunity exists in the market for satellite earth station antennas 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. The Company expects its international sales volume will continue to grow. ACQUISITIONS AND GROWTH. The Company expects that planned sales growth will be largely dependent on its ability to expand its existing plant facilities and increase personnel or to implement selected, strategic acquisitions which will complement existing business and enhance market share in the industry. PRODUCT DEVELOPMENT. The Company works closely with its customers to identify market needs and define product specifications early in the development process. This approach results in a thorough understanding of end user requirements prior to commencement of the design process and often positions the Company to develop and deliver new products or refinements of existing products in response to its customers' needs more rapidly than many of its competitors. The Company believes that the flexibility of its product designs and the capabilities of its engineering staff, combined with its adherence to superior quality control standards, have enabled it to be consistently among the first-to-market with competitive new products or innovative refinements of existing products. VERTEX PRODUCTS EARTH STATION ANTENNAS AND ASSOCIATED PRODUCTS. The Company manufactures 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 the movement and tracking capabilities of antennas. These products require exacting engineering skills and detailed standards or specifications as established by each customer, involving not only antenna design, but the complete integration of other components acquired from the Company or other sources. Through its subsidiary, Gamma-f Corp., the Company designs and manufactures precision microwave waveguide components such as filters, diplexers, and radio frequency feed subsystems. 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. Through its subsidiary, Vertex Antennentechnik GmbH, 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. In January 1995, the Company acquired Maxtech, Inc. ("Maxtech") of State College, Pennsylvania. Maxtech designs and manufactures a variety of low noise amplifiers (LNAs), solid state power amplifiers -3- 5 (SSPAs), and other related high performance products used in telecommunications systems.This subsidiary's products have proven to be very complementary with Vertex's product line and are often integral component parts of a typical earth station communications system. This acquisition has been an important contributor to the Company's recent sales growth. The Company's products are utilized by its customers principally for telecommunications applications with certain products used in radio astronomy. 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 telecommunication antennas and related products, the Company also offers a wide range of related services, including consulting; design and configuration; turnkey field installation; site testing and performance analysis; and after-sale maintenance services. MARKETING, SALES, AND CUSTOMERS GENERAL. The Company's marketing strategy is to offer a complete line of high-technology antenna products, rather than to market complete communications systems. The Company believes that this approach enables Vertex to satisfy the needs of systems integrators (companies which sell complete communications systems, but do not manufacture antennas or the particular antenna needed). This approach also enables the Company to sell antenna products directly to 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 staffed sales offices in England and Singapore. In addition to providing product and pricing information, Vertex's sales personnel provide customers and potential customers value-added solutions and detailed explanations of the benefits and advantages of the Company's products and services as compared to those of its competitors. The Company's sales force includes sales managers, engineers, sales representatives, and technical support personnel. The Company's worldwide marketing and sales efforts are directed and coordinated from its headquarters in Kilgore, Texas. The Company believes that the rapidly evolving international market will continue to be an important source of sales. The Company's international sales are comprised of products manufactured in the United States and Germany, and services performed on-site by its engineers and technical support personnel. To enhance its foreign sales, the Company also engages the services of foreign independent sales representatives to supplement its direct sales force. These foreign sales representatives also offer products of other manufacturers which are complementary to, but not competitive with, the Company's products. Sales to foreign customers involving products or services originating in the United States are typically contracted for in U. S. dollars. Foreign sales of products or services originating in Germany are usually conducted in the German mark. International sales are subject to certain government controls and other risks, including export licensing, currency exchange rate fluctuations, political instability, trade restrictions, and changes in tariffs and freight rates. Should any of these factors prove onerous or change in a material -4- 6 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 19%, 16%, and 18% of total sales in fiscal 1996, 1995, and 1994, respectively. Sales in the Middle East were 10% of total sales in fiscal 1996. Sales in Asian countries were 18%, 28%, and 22% of total sales in fiscal 1996, 1995, and 1994, respectively. Export sales were 59%, 64%, and 63% of total sales in fiscal 1996, 1995, and 1994, respectively. CUSTOMERS. Typical users of the Company's products include the broadcast industry, international telecommunications companies, communications common carriers, universities, 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. In fiscal 1996, sales to GTE Corporation accounted for 12% of total sales. In fiscal 1995 and 1994, Satellite Transmission Systems, Inc. accounted for 16% and 19%, respectively, of total sales. No other customer accounted for as much as 10% of the Company's total sales in fiscal 1996, 1995, or 1994. 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 earth station products to its major customers. If required, the Company believes that it could maintain sales of its products at current levels to other customers if current relationships with major customers were interrupted. Although several of these relationships have existed for a number of years, there can be no assurance that such relationships will continue. The loss of any of such major customers could have a material adverse effect on the Company and its business. Vertex does not seek to maintain a specific level of sales to the various agencies of the U. S. Government, but rather targets certain types of projects where the Company's existing products and/or expertise will enable it to submit competitive bid proposals. Most of the Company's business with the U. S. Government is on a fixed-price basis. Contracts with the U. S. Government customarily include provisions which provide for cancellation at the convenience of the Government. In addition, upon cancellation by the Government, the Company could be entitled to reimbursement of costs incurred, plus a pro rata share of profit. The Company has never received a cancellation of a material Government contract and has no reason to anticipate any such cancellation. Products sold, characteristics, and business risks associated with U. S. Government business do not differ materially from those associated with sales of the Company's products to its commercial customers. CUSTOMER SUPPORT AND SERVICE. The Company services, repairs, and provides technical support for its products. Through its sales network and design and support services, the Company is constantly made aware of customers' needs and their use of its products and services. Accordingly, a superior level of continuing customer service and support is integral to the Company's objective of developing and maintaining long-term relationships with its customers. The majority of the Company's service and support activities are provided by its field engineering team, systems engineers, and sales and administrative support personnel, both on-site at the customer's location and by telephone. -5- 7 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:
(In thousands) 1996 1995 1994 ---- ---- ---- Sales to Unaffiliated Customers . . . . . . . . . . . . $3,918 $3,724 $5,922 Transfers between Geographic Areas . . . . . . . . . . . 1,360 889 1,059 Operating Income (Loss) . . . . . . . . . . . . . . . . (306) (263) 1,186 Identifiable Assets . . . . . . . . . . . . . . . . . . . 3,703 2,366 4,002
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 antenna 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, from time to time, customers. For the years 1996, 1995, and 1994, the Company expended $3,217,000, $2,165,000, and $2,637,000, respectively, on research and development. Costs associated with product development work funded by customers are included in the Company's cost of sales and the related revenues are included in sales. The Company strives to continually upgrade its existing products and develop new products to meet changing customer requirements and to keep pace with evolving technology in the industry. COMPETITION The Company experiences substantial competition from a number of established companies which provide a broad range of products to the satellite communications earth station antenna market, including Andrew Corporation, Comsat RSI SatCom Technologies, and Scientific-Atlanta, Inc. Certain of these -6- 8 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 antenna products which are among the types or sizes produced by the Company, the Company believes that no single competitor offers the diversity of antenna 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 a customer. 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 antenna 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 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 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 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 third parties will not assert infringement claims in the future. BACKLOG AND SEASONALITY At October 31, 1996 and 1995, the Company's backlog of unfilled orders believed to be firm was approximately $41 million and $44 million, respectively. The backlog of unfilled orders at October 31, 1996, included approximately $1.5 million of contracts with the U. S. Government. As is customary, these contracts include provisions which allow for cancellation at the convenience of the Government or prime contractor. Upon exercise of these provisions, the Company would be entitled to reimbursement of costs incurred and a pro rata share of profit. The Company has never received a cancellation of a material government contract and believes no such event is threatened. The Company expects that a substantial portion of the October 31, 1996 backlog will be completed and delivered in fiscal year 1997. 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 -7- 9 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 antenna 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, 1996, the Company employed approximately 625 full-time employees. None of the Company's employees is represented by a labor organization and the Company is not a party to any collective bargaining agreement. The Company has never had an employee strike or a work stoppage and considers its relations with its employees to be good. The Company has not experienced any difficulty in attracting and retaining qualified employees. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides for forward-looking statements. Certain information in Items 1, 2, 3, 7, and 8 of this Annual Report on Form 10-K includes information that is forward-looking, such as the Company's anticipated sales levels, its anticipated liquidity and capital requirements and the results of legal proceedings. The matters referred to in forward-looking statements could be affected by the risks and uncertainties involved in the Company's business. These risks and uncertainties include, but are not limited to, the effect of economic and market conditions, unpredictable reductions in funding for government defense expenditures, and the risks associated with international sales, including restrictions, export license requirements, tariff regulations, and other United States and foreign risks described above in this Item under "Marketing, Sales and Customers," "Manufacturing and Engineering," "Competition," "Intellectual Property," "Backlog and Seasonality," and Government Regulation" and below in Item 3 in "Legal Proceedings" and in Item 7 in "Management's Discussion and Analysis of Financial Condition and Results of -8- 10 Operations." Subsequent written and 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 paragraph and elsewhere in this Annual Report on Form 10-K. ITEM 2. PROPERTIES. The Company owns and maintains executive and administrative offices, manufacturing facilities, and a product testing site at its headquarters at 2600 N. Longview Street, Kilgore, Texas. The following is a listing of the properties owned or leased by Vertex and its subsidiaries as of October 31, 1996.
Approximate Area Owned Location Principal Use in Square Feet or Leased -------- ------------- ---------------------- --------- Kilgore, Texas Executive, administrative, 231,000 on Owned in fee engineering, manufacturing, 55 acres of land and testing Longview, Texas Administrative, engineering, and 30,000 Leased to October manufacturing 1997 Torrance, Administrative, engineering, and 37,000* Leased to California manufacturing June 1997 State College, Administrative, engineering, and 18,000 Leased to March Pennsylvania manufacturing 1998 Duisburg, Germany Administrative and engineering 4,000 Leased to February 1997 Surrey, England Administrative 1,000 Leased to January 1997 Singapore Administrative Less than 1,000 Leased to December 1996
- -------------------------------- * 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. -9- 11 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, 1996 (the "1996 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 1996 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 24 of the 1996 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 1996 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 14 and 15 of the 1996 Annual Report is hereby incorporated herein 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 16 through 23, inclusive, together with the Report of Arthur Andersen LLP, Independent Public Accountants, thereon, appearing on page 24 of the 1996 Annual Report, are hereby incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. -10- 12 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS The information regarding directors of the Registrant in response to Item 7 of Schedule 14A promulgated pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), which will appear in the Registrant's definitive Proxy Statement in connection with the solicitation of proxies for its 1997 Annual Meeting of Shareholders, is hereby incorporated herein by reference. EXECUTIVE OFFICERS The following table sets forth the names and ages of all executive officers of the Registrant, their respective positions and offices with the Registrant, and the period during which each has served as an executive officer.
SERVED AS EXECUTIVE NAME AGE POSITION(S)(1) OFFICER SINCE ---- --- ----------- ------------- J. Rex Vardeman . . . . . . . . . 57 Chairman of the Board, October, 1984 President, Chief Executive Officer and Director A. Don Branum . . . . . . . . . . 59 Senior Vice President, Assistant October, 1984 Secretary and Director of the Company; and Vice President/General Manager, Vertex Antenna Division James D. Carter . . . . . . . . . 49 Vice President-Finance, October, 1984 Treasurer and Director Bill R. Womble(2) . . . . . . . . 58 Secretary and Director October, 1984 William L. Anton . . . . . . . . 58 Vice President of the Company; and December, 1984 Vice President - Marketing, Vertex Antenna Division H. Dean Bunnell . . . . . . . . . 49 Vice President of the Company; and January, 1995 President and Chief Executive Officer, Maxtech, Inc. Manfred Stupnik . . . . . . . . 54 Vice President of the Company; and January, 1995 President, Gamma-f Corp.
- --------------------------------- (1) All executive officers of the Registrant are elected annually by the Board of Directors and serve at the discretion of the Board. There are no family relationships between any director or executive officer of the Registrant and any other such person. (2) Mr. Womble is not an employee of the Registrant. -11- 13 The following information, as furnished by each of the persons named, relates to the business experience of each executive officer of the Registrant named above. J. Rex Vardeman is a co-founder of the Company and has served as Chairman of the Board, President, Chief Executive Officer and a director since its inception in October 1984. Prior to founding the Company, Mr. Vardeman served as Vice President of Harris Antenna Operations ("Harris Antenna Operations"), a unit of the Satellite Communications Division of Harris Corporation ("Harris"), until the acquisition in 1984 of the Harris Antenna Operations by the Company. In 1973, Mr. Vardeman co-founded Radio Mechanical Structures, Inc. ("RMS"), the predecessor to the Harris Antenna Operations, and served as its Vice President and General Manager and a director until the acquisition of RMS by Harris in 1977. For more than ten years prior thereto, he was employed by E-Systems, Inc., a major electronics company, in various engineering and management positions. A. Don Branum, a co-founder of the Company, has served as Senior Vice President, Assistant Secretary, and a director since its inception in October 1984 and as Vice President/General Manager of the Company's Vertex Antenna Division since April 1994. 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 - Finance and 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 Secretary and a director of the Company since October 1984. He has been continuously engaged in the private practice of law since 1963 and is a shareholder of the firm of Thompson & Knight, P.C. (attorneys), Dallas, Texas. Mr. Womble is not an employee of the Company. William L. Anton has served as Vice President of the Company since October 1984 and as Vice President - Marketing of Vertex Antenna Division since September 1995. Prior to appointment to his current positions, Mr. Anton previously served in the position of Vice President - International Marketing since 1987 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 Maxtech, Inc. ("Maxtech") as a wholly-owned subsidiary of the Company. Mr. Bunnell is a co-founder of Maxtech 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 Maxtech. Manfred Stupnik has served as Vice President of the Company since January 1995 and as President of 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 25 years of continuous tenure with Gamma-f Corp. -12- 14 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 (iii) Vice President - Finance and Treasurer of the Company, 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." COMPLIANCE WITH SECTION 16 OF THE EXCHANGE ACT Section 16(a) of the Exchange Act requires the Registrant's directors and officers, and persons who own more than 10% of a registered class of the Registrant's equity securities, to file initial reports of ownership and reports of changes in ownership of the Registrant's securities with the Securities and Exchange Commission (the "Commission") on Forms 3, 4, or 5, as applicable. Such persons are required by regulations promulgated by the Commission pursuant to the Exchange Act to furnish the Registrant with copies of all such Section 16(a) report forms they file with the Commission. Based solely on its review of the copies of such report forms received by it with respect to fiscal year 1996, or written representations from certain reporting persons, the Registrant believes that all filing requirements applicable to its directors, officers, and persons who own more than 10% of a registered class of the Registrant's equity securities have been timely complied with in accordance with Section 16(a) of the Exchange Act. -13- 15 ITEM 11. EXECUTIVE COMPENSATION. The information regarding executive compensation in response to Item 8 of Schedule 14A which will appear in the Registrant's definitive Proxy Statement in connection with the solicitation of proxies for its 1997 Annual Meeting of Shareholders is hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information regarding security ownership of certain beneficial owners and management in response to Item 6 of Schedule 14A which will appear in the Registrant's definitive Proxy Statement in connection with the solicitation of proxies for its 1997 Annual Meeting of Shareholders is hereby incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information regarding certain relationships and related transactions in response to Item 7 of Schedule 14A which will appear in the Registrant's definitive Proxy Statement in connection with the solicitation of proxies for its 1997 Annual Meeting of Shareholders is hereby incorporated herein by reference. -14- 16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. PAGE IN 1996 (a)1. CONSOLIDATED FINANCIAL STATEMENTS. ANNUAL REPORT ------------- Report of Independent Public Accountants . . . . . . . . . 24 Consolidated Statements of Income For the years ended September 30, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . 16 Consolidated Balance Sheets As of September 30, 1996 and 1995 . . . . . . . . . . . 17 Consolidated Statements of Cash Flows For the years ended September 30, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . 18 Consolidated Statements of Shareholders' Equity For the years ended September 30, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . 19 Notes to Consolidated Financial Statements . . . . . . . . 20 2. FINANCIAL STATEMENT SCHEDULES. PAGE NO. -------- Report of Independent Public Accountants on Schedule . . . S-1 SCHEDULE -------- II - Valuation and Qualifying Accounts . . . . . . . . S-2 All other schedules are omitted because they are either not required or not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. (b) REPORTS ON FORM 8-K. The Registrant did not file any reports on Form 8-K during the last quarter of the period covered by this report, and none was required. -15- 17 (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: EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 3.1 . . Restated Articles of Incorporation of the Registrant filed as Exhibit 3-A to the Registrant's Statement on Form S-18 (File No. 33-1094-FW). 3.2 . . Bylaws of the Registrant filed as Exhibit 3-B to the Registrant's Registration Statement on Form S-18 (File No. 33-1094-FW). 3.3 . . Articles of Amendment to the Restated Articles of Incorporation of the Registrant filed as Exhibit 3-C to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1988 (File No. 0-15277). 3.4 . . Articles of Amendment to the Restated Articles of Incorporation, as amended, of the Registrant. 3.5 . . First Amendment to the Bylaws of the Registrant filed as Exhibit 3-D to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1988 (File No. 0-15277). 3.6 . . Second Amendment to the Bylaws of the Registrant adopted October 29, 1991 filed as Exhibit 3-E to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1991 (File No. 0-15277). 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 . . Management Incentive Compensation Plan of the Registrant filed as Exhibit 10-F to the Registrant's Registration Statement on Form S-18 (File No. 33-1094-FW). 10.7 . . Qualified Employee Stock Purchase Plan of the Registrant filed as Exhibit 10-G to the Registrant's Registration Statement on Form S-18 (File No. 33-1094-FW). -16- 18 EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 10.8 . . 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). 10.9 . . 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. 10.10 . . Executive Employment Agreement, dated November 10, 1994, by and between the Registrant and A.Don Branum, Senior Vice President of the Registrant. 10.11 . . Executive Employment Agreement, dated November 10, 1994, by and between the Registrant and James D. Carter, Vice President - Finance and Treasurer of the Registrant. 10.12 . . Management Incentive Compensation Plan of the Registrant, as amended and restated effective October 1, 1995. 10.13 . . Management Incentive Compensation Plan for Divisions of the Registrant, as amended and restated effective October 1, 1995. 10.14 . . Management Incentive Compensation Plan of Gamma-f Corp., a wholly-owned subsidiary of the Registrant, as amended and restated effective October 1, 1995. 10.15 . . Management Incentive Compensation Plan of Maxtech, Inc., a wholly-owned subsidiary of the Registrant, as amended and restated effective October 1, 1995. 10.16* . . Employee Profit Sharing Bonus Plan of the Registrant, as amended and restated effective October 1, 1996. 10.17* . . Employee Profit Sharing Bonus Plan of Gamma-f Corp., a wholly-owned subsidiary of the Registrant, as amended and restated effective as of October 1, 1996. 10.18 . . 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. 11* . . Computation of Net Income Per Share. 13* . . Annual Report to Shareholders of the Registrant for the year ended September 30, 1996, to the extent specified in Parts II, III and IV hereof. 22* . . Subsidiaries of the Registrant. 24* . . Consent of Independent Public Accountants. 27* . . Financial Data Schedule. *Filed herewith. - --------------------------- -17- 19 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 20, 1996 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.
SIGNATURE TITLE DATE --------- ----- ---- /s/ J. REX VARDEMAN Chairman of the Board, December 20, 1996 - ----------------------------- President, Chief J. Rex Vardeman Executive Officer (Principal Executive Officer) and Director /s/ A. DON BRANUM Director December 20, 1996 - ----------------------------- A. Don Branum /s/ JAMES D. CARTER Vice President - Finance December 20, 1996 - ----------------------------- (Principal Financial and James D. Carter Accounting Officer), Treasurer and Director /s/ BILL R. WOMBLE Director December 20, 1996 - ----------------------------- Bill R. Womble /s/ DONALD E. HEITZMAN, SR. Director December 20, 1996 - ----------------------------- Donald E. Heitzman, Sr.
-18- 20 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 1996 annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated October 25, 1996. 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 25, 1996 S-1 21 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES (In thousands) SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS --------------------------- BALANCE AT CHARGES TO CHARGES TO BALANCE BEGINNING COST AND OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ----------- ---------- ---------- ---------- ---------- --------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Year Ended 9/30/96 $241 $ 35 $ -- $ (8)(1) $268 Year Ended 9/30/95 263 (22) -- -- 241 Year Ended 9/30/94 263 60 -- 60(1) 263 ALLOWANCE FOR INVENTORY OBSOLESCENCE Year Ended 9/30/96 $417 $536 $ -- $182(2) $771 Year Ended 9/30/95 451 (34) -- -- 417 Year Ended 9/30/94 330 121 -- -- 451 ALLOWANCE FOR WARRANTY CLAIMS Year Ended 9/30/96 $591 $343 $ -- $404(3) $530 Year Ended 9/30/95 460 303 -- 172(3) 591 Year Ended 9/30/94 433 310 -- 283(3) 460
- ---------------------------- (1) Doubtful accounts written off, less recoveries. (2) Disposal of obsolete inventory. (3) Warranty claims processed. S-2 22 INDEX OF EXHIBITS
Number DESCRIPTION - ------ ----------------------------------------------------------------- 10.16 Employee Profit Sharing Bonus Plan of the Registrant, as amended and restated effective October 1, 1996. 10.17 Employee Profit Sharing Bonus Plan of Gamma-f Corp., a wholly-owned subsidiary of the Registrant, as amended and restated effective as of October 1, 1996. 11 Computation of Net Income Per Share. 13 Annual Report to Shareholders of the Registrant for the year ended September 30, 1996, to the extent specified in Parts II, III and IV hereof. 22 Subsidiaries of the Registrant. 24 Consent of Independent Public Accountants. 27 Financial Data Schedule
EX-10.16 2 EMPLOYEE PROFIT SHARING BONUS PLAN 1 EXHIBIT 10.16 EMPLOYEE PROFIT SHARING BONUS PLAN OF VERTEX COMMUNICATIONS CORPORATION (AS AMENDED AND RESTATED EFFECTIVE OCTOBER 1, 1996) 2 Exhibit 10.16 EMPLOYEE PROFIT SHARING BONUS PLAN OF VERTEX COMMUNICATIONS CORPORATION (AS AMENDED AND RESTATED EFFECTIVE OCTOBER 1, 1996) 1. PURPOSE OF PLAN. The Employee Profit Sharing Bonus Plan is intended to promote the growth and development of the Company by providing bonus compensation as a reward to those employees who contribute by their ability, industry, and longevity to the growth, development, and profitability of the Company. 2. DEFINITIONS. For purposes of the Plan, the following terms shall have the ascribed meanings unless otherwise clearly apparent from the context: "Annual Operating Plan" (AOP) - shall mean the projected plan of operations of the Company or each of its Divisions, as applicable, as approved by the Board of Directors for a designated Fiscal Year. "Applicable Management Incentive Plan" - shall mean the Management Incentive Plan established for the organization in which the Participant works during the fiscal year. "Board of Directors" - shall mean the Board of Directors of Vertex Communications Corporation. "Bonus" - shall mean a cash distribution to be made to a Participant for a Fiscal Year as determined in accordance with the provisions of the Plan. "Bonus Fund" - shall mean the targeted amount established each Fiscal Year for the Company and each of its Divisions by the Board of Directors to fund the payment of the Bonuses for such Fiscal Year hereunder. "Bonus Share" - shall mean the share of the Bonus Fund allotted to each Participant in accordance with the provisions of the Plan. "Company" - shall mean Vertex Communications Corporation. 3 "Compensation Committee" - shall mean the Compensation Committee of the Board of Directors. "Division" - shall mean any Division of the Company, including Vertex Antenna Division, Vertex Control Systems Division, and Vertex Integrated Satellite Antenna Technology Division, and any other Division of the Company to which this Plan shall hereafter become applicable by action of the Board of Directors.. "Employee" - shall mean a person who is in the regular full-time employment of the Company or a Division as determined by the personnel policies and practices of the Company or such Division for the entire Fiscal Year applicable to the Plan, except, however, any such person who is an officer or director of the Company or a participant pursuant to the Management Incentive Compensation Plan of the Company or a Division thereof for such Fiscal Year. "Fiscal Year" - shall mean the taxable year of the Company or its Divisions, as applicable, ending September 30. "Participant" - shall mean any employee who is eligible to receive a Bonus during the Fiscal Year. "Plan" - shall mean the Employee Profit Sharing Bonus Plan of the Company and its Divisions as amended and restated effective as of October 1, 1996. "Pretax Income" - shall mean for each Fiscal Year the net incomes of the Company or such Division, as applicable, before federal and state taxes determined in accordance with generally accepted accounting principles consistently applied and as approved by the independent public accountants who have examined the financial accounts and records of the Company and each of its Divisions for such Fiscal Year; provided, however, that such Pretax Income determination shall be adjusted to include the effect of the amount of any Bonus paid or to be paid to a Participant pursuant to the Plan. 4 "Projected Pretax Income" - shall mean for each Fiscal Year the level of Pretax Income projected and approved by the Board of Directors to be achieved by the Company and each of its Divisions, respectively, for such Fiscal Year pursuant to the Annual Operating Plan as related to the Company or its appropriate Divisions, as applicable, for such Fiscal Year. 3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Compensation Committee appointed by the Board of Directors. The Compensation Committee shall consist of not less than two (2) members of the Board of Directors. The Board of Directors may from time to time appoint members of the Compensation Committee in substitution for or in addition to members previously appointed and may fill vacancies, however caused, in the Compensation Committee. The Compensation Committee shall select one of its members as its Chairman and shall hold its meetings at such times and places as it shall deem advisable. A majority of the members of the Compensation Committee shall constitute a quorum. All action of the Compensation Committee shall be taken by a majority of its members. Any action may be taken by written instrument signed by a majority of the members, and any action so taken shall be deemed fully as effective as if it had been taken by a vote of the majority of the members at the meeting duly called and held. The Compensation Committee may appoint a Secretary, shall keep minutes of its meetings, and shall make such rules and regulations for the conduct of its business as it shall deem advisable. The Compensation Committee shall have the sole authority and power, subject to the express provisions and limitations of the Plan, to construe the Plan and to adopt, prescribe, amend, and rescind rules and regulations relating to the Plan, and to make all determinations necessary or advisable for administering the Plan. No member of the Board of Directors or the Compensation Committee shall be liable for any action or determination made in good faith with respect to the Plan. 5 All determinations, decisions, and directions made or given by the Board of Directors or the Compensation Committee under the Plan shall be final and conclusive. The decision of the Board of Directors or the Compensation Committee on any question concerning or involving the interpretation or administration of the Plan shall be final and conclusive, and no provision of the Plan shall be deemed to give any Employee, his/her legal representative or assigns, any right to participate in the Plan, except to such extent, if any, as the Compensation Committee may have determined or approved pursuant to the provisions of the Plan. 4. PARTICIPATION IN THE PLAN. All Employees in the regular employ of the Company or a Division as of the beginning of each Fiscal Year (October 1) are eligible to participate in the Plan. 5. DETERMINATION OF THE BONUS FUND. Prior to the commencement of each Fiscal Year, the Board of Directors shall determine the Projected Pretax Income of the Company and each Division, respectively, for such Fiscal Year and the amount of the Bonus Share of each Participant in and to the Bonus Fund for such Fiscal Year, subject to the terms of the Plan. Within thirty (30) days thereafter, the Compensation Committee shall determine the Bonus Share of the Bonus Fund to be allocated to each Participant for such Fiscal Year pursuant to the following procedures: Step One: The aggregate number of years of employment service of each Participant with the Company or the Division, as applicable, shall be multiplied by the hourly rate of compensation of each such Participant on October 1 of such Fiscal Year. Step Two: The mathematical products thus determined in Step One above for all Participants employed by the Company or Division, as applicable, shall be aggregate in a total sum. 6 Step Three: The quotient (expressed as a percentage) obtained by dividing the amount determined in Step One above as to each Participant by the aggregate amount determined in Step Two above shall constitute the Bonus Share of each respective Participant in and to the Bonus Fund for such Fiscal Year. Step Four: The amount of the Bonus Share of each Participant (expressed in dollars) in and to the Bonus Fund for each Fiscal Year shall be determined by multiplying the bonus Fund for such Fiscal Year applicable to the Company or Division, as appropriate, by the quotient obtained in Step Three above as to such Participant. The Compensation Committee shall notify each Participant in the Plan of his/her Bonus Share for such Fiscal Year as soon as practical after the projected amount thereof has been determined in accordance with the provisions of the Plan. 6. AWARD OF BONUS COMPENSATION. Within sixty (60) days after completion of the Company's Fiscal Year, the Compensation Committee shall determine the amount of the Bonus to be paid to each Participant for such Fiscal Year. The final pre-tax or net income, as applicable, utilized to calculate the bonus share for each participant shall be determined using the same method used for the Applicable Management Incentive Plan. 7. FORFEITURE OF INCENTIVE COMPENSATION. A Participant shall be entitled to and shall receive the full amount of his/her Bonus for a Fiscal Year, provided such Participant remains in the full-time employ of the Company or the Division, as applicable, for such entire Fiscal Year. A Participant whose employment is terminated for any reason shall forfeit his/her participation in the Plan and shall not be entitled to any Bonus for such Fiscal Year. Notwithstanding the preceding, in the event of the death, retirement, permanent disability, or any extended absence of a Participant, the Compensation Committee shall have the power and authority to determine whether an award should 7 be paid to such Participant for such Fiscal Year. The determination of the Compensation Committee in the exercise of such power and authority in its sole discretion shall be final and binding upon each Participant and anyone claiming by or through such Participant. 8. AMENDMENT OR TERMINATION. The Board of Directors may, from time to time, amend, modify, change, suspend, or terminate, in whole or in part, any or all of the provisions of the Plan, except that: (a) No amendment, modification, change, suspension, or termination may affect any right of any Participant to receive a Bonus made to him/her prior to the effective date of such amendment, modification, change, suspension, or termination; and, (b) No amendment, modification, or change may withdraw the obligation and right of interpretation and administration of the Plan from the Compensation Committee. 9. NO RIGHT TO EMPLOYMENT. Nothing in the Plan shall be deemed to give any Employee or his/her legal representative or assigns, or any other person or entity claiming under or though him/her, any contract or other right to participate in the benefits of the Plan other than as expressly set forth herein. Nothing in the Plan shall be construed as constituting a commitment, guarantee, agreement, or understanding of any kind or nature that the Company or any Division will continue to employ any individual (whether or not an Employee or a Participant); nor shall the Plan affect in any way the right of the Company or its Divisions to terminate the employment of any individual (whether or not an Employee or a Participant) at any time. 10. INDEMNIFICATION OF COMPENSATION COMMITTEE. In addition to such other rights of indemnification as they may have as members of the Board of Directors or as members of the Compensation Committee, the members of the Compensation Committee shall be indemnified by the Company against the reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit, or proceedings, or in connection with any appeal 8 thereof, to which they or any of them may be party by reason of any action taken or failure to act under or in connection with the Plan, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit, or proceedings, except in relation to matters as to which it shall be adjudged in such action, suit, or proceedings that such Compensation Committee member is liable for negligence or misconduct in the performance of his/her duties, provided that within thirty (30) days after institution of any such action, suit, or proceedings a Compensation Committee member shall in writing offer the Company the opportunity, at its own expense, to pursue and defend the same. 11. EFFECTIVE DATE AND TERM. This Plan (as hereby amended and restated) supersedes all prior employee profit sharing bonus plans of the Company or a respective Division, and shall be effective commencing as of October 1, 1996, and shall remain in effect until terminated by the Board of Directors. Executed this 27th day of September, 1996. VERTEX COMMUNICATIONS CORPORATION By: /s/ J. REX VARDEMAN J. REX VARDEMAN, President ATTEST: By: /s/ BILL R. WOMBLE BILL R. WOMBLE, Secretary EX-10.17 3 EMPLOYEE PROFIT SHARING BONUS PLAN (GAMMA F) 1 EXHIBIT 10.17 EMPLOYEE PROFIT SHARING BONUS PLAN OF GAMMA-F CORP. (AS AMENDED AND RESTATED EFFECTIVE OCTOBER 1, 1996) 2 Exhibit 10.17 EMPLOYEE PROFIT SHARING BONUS PLAN OF GAMMA-F CORP. (AS AMENDED AND RESTATED EFFECTIVE OCTOBER 1, 1996) 1. PURPOSE OF PLAN. The Employee Profit Sharing Bonus Plan is intended to promote the growth and development of the Company by providing bonus compensation as a reward to those employees who contribute by their ability, industry, and longevity to the growth, development, and profitability of the Company. 2. DEFINITIONS. For purposes of the Plan, the following terms shall have the ascribed meanings unless otherwise clearly apparent from the context: "Annual Operating Plan" (AOP) - shall mean the projected plans of operations of the Company as approved by the Board of Directors for a designated Fiscal Year. "Board of Directors" - shall mean the Board of Directors of Vertex Communications Corporation, the corporate parent of the Company, unless otherwise clearly indicated. "Bonus" - shall mean a cash distribution to be made to a Participant for a Fiscal Year as determined in accordance with the provisions of the Plan. "Bonus Fund" - shall mean the targeted amount established each Fiscal Year by the Board of Directors to fund the payment of the Bonuses for such Fiscal Year hereunder. "Bonus Share" - shall mean the share of the Bonus Fund allotted to each Participant in accordance with the provisions of the Plan. "Company" - shall mean Gamma-f Corp., a Subsidiary of Vertex Communications Corporation. "Compensation Committee" - shall mean the Compensation Committee of the Board of Directors. 3 "Employee" - shall mean any person in the regular full-time employment of the Company as determined by the personnel policies and practices of the Company for the entire Fiscal Year applicable to the Plan, except, however, any such person who is an officer or director of the Company or a participant pursuant to the Management Incentive Compensation Plan of the Company for such Fiscal Year. "Fiscal Year" - shall mean the taxable year of the Company ending September 30. "Participant" - shall mean any Employee who is eligible to receive a Bonus during the Fiscal Year. "Plan" - shall mean the Employee Profit Sharing Bonus Plan of the Company, as amended and restated effective as of October 1, 1996. "Pretax Income" - shall mean for each Fiscal Year the net income of the Company before federal and state taxes determined in accordance with generally accepted accounting principles consistently applied and as approved by the independent public accountants who have examined the financial accounts and records of the Company for such Fiscal Year; provided, however, that such Pretax Income determination shall be adjusted to include the effect of the amount of any Bonus paid or to be paid to a Participant pursuant to the Plan. "Projected Pretax Income" - shall mean for each Fiscal Year the level of Pretax Income projected and approved by the Board of Directors to be achieved by the Company for such Fiscal Year pursuant to the Annual Operating Plan for such Fiscal Year. 3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Compensation Committee appointed by the Board of Directors. The Compensation Committee shall consist of not less than two (2) members of the Board of Directors. The Board of Directors may from time to time appoint members of the Compensation Committee in substitution for or in addition to members previously appointed and may fill vacancies, however caused, in the Compensation Committee. The 4 Compensation Committee shall select one of its members as its Chairman and shall hold its meetings at such times and places as it shall deem advisable. A majority of the members of the Compensation Committee shall constitute a quorum. All action of the Compensation Committee shall be taken by a majority of its members. Any action may be taken by written instrument signed by a majority of the members, and any action so taken shall be deemed fully as effective as if it had been taken by a vote of the majority of the members at the meeting duly called and held. The Compensation Committee may appoint a Secretary, shall keep minutes of its meetings, and shall make such rules and regulations for the conduct of its business as it shall deem advisable. The Compensation Committee shall have the sole authority and power, subject to the express provisions and limitations of the Plan, to construe the Plan and to adopt, prescribe, amend, and rescind rules and regulations relating to the Plan, and to make all determinations necessary or advisable for administering the Plan. No member of the Board of Directors or the Compensation Committee shall be liable for any action or determination made in good faith with respect to the Plan. All determinations, decisions, and directions made or given by the Board of Directors or the Compensation Committee under the Plan shall be final and conclusive. The decision of the Board of Directors or the Compensation Committee on any question concerning or involving the interpretation or administration of the Plan shall be final and conclusive, and no provision of the Plan shall be deemed to give any Employee, his/her legal representative or assigns, any right to participate in the Plan, except to such extent, if any, as the Compensation Committee may have determined or approved pursuant to the provisions of the Plan. 4. PARTICIPATION IN THE PLAN. All Employees in the regular employ of the Company as of the beginning of each Fiscal Year (October 1) are eligible to participate in the Plan. 5 5. DETERMINATION OF THE BONUS FUND. Prior to the commencement of each Fiscal Year, the Board of Directors shall determine the Projected Pretax Income of the Company for such Fiscal Year and the amount of the Bonus Share of each Participant in and to the Bonus Fund for such Fiscal Year, subject to the terms of the plan. Within thirty (30) days thereafter, the Compensation Committee shall determine the Bonus Share of the Bonus Fund to be allocated to each Participant for such Fiscal Year pursuant to the following procedures: Step One: The aggregate number of years of employment service of each Participant with the Company shall be multiplied by the hourly rate of compensation of each such Participant on October 1 of such year. Step Two: The mathematical products thus determined in Step One above for all Participants shall be aggregate in a total sum. Step Three: The quotient (expressed as a percentage) obtained by dividing the amount determined in Step One above as to each Participant by the aggregate amount determined in Step Two above shall constitute the Bonus Share of each respective Participant in and to the Bonus Fund for such Fiscal Year. Step Four: The amount of the Bonus Share of each Participant (expressed in dollars) in and to the Bonus Fund for each Fiscal Year shall be determined by multiplying the Bonus Fund for such Fiscal Year by the quotient obtained in Step Three above as to such Participant. 6 The Compensation Committee shall notify each Participant in the Plan of his/her Bonus Share for each Fiscal Year as soon as practical after the projected amount thereof has been determined in accordance with the provisions of the Plan. 6. AWARD OF BONUS COMPENSATION. Within sixty (60) days after completion of the Company's Fiscal Year, the Compensation Committee shall determine the amount of the Bonus to be paid to each Participant for such Fiscal Year. The final pre-tax or net income, as applicable, utilized to calculate the bonus share for each participant shall be determined using the same method as for the Gamma-f Corp. Management Incentive Compensation Plan. 7. FORFEITURE OF INCENTIVE COMPENSATION. A Participant shall be entitled to and shall receive the full amount of his/her Bonus for a Fiscal Year, provided such Participant remains in the full-time employ of the Company for such entire Fiscal Year. A Participant whose employment is terminated for any reason shall forfeit his/her participation in the Plan and shall not be entitled to any Bonus for such Fiscal Year. Notwithstanding the preceding, in the event of the death, retirement, permanent disability, or any extended absence of a Participant, the Compensation Committee shall have the power and the authority to determine whether a Bonus should be paid to such Participant for such Fiscal Year. The determination of the Compensation Committee in the exercise of such power and authority in its sole discretion shall be final and binding upon each Participant and anyone claiming by or through such Participant. 8. AMENDMENT OR TERMINATION. The Board of Directors of the Company may, from time to time, amend, modify, change, suspend, or terminate, in whole or in part, any or all of the provisions of the Plan, except that: 7 (a) No amendment, modification, change, suspension, or termination may affect any right of any Participant to receive a Bonus made to him/her prior to the effective date of such amendment, modification, change, suspension, or termination; and, (b) No amendment, modification, or change may withdraw the obligation and right of interpretation and administration of the Plan from the Compensation Committee. 9. NO RIGHT TO EMPLOYMENT. Nothing in the Plan shall be deemed to give any Employee or his/her legal representative or assigns, or any other person or entity claiming under or though him/her, any contract or other right to participate in the benefits of the Plan other than as expressly set forth herein. Nothing in the Plan shall be construed as constituting a commitment, guarantee, agreement, or understanding of any kind or nature that the Company will continue to employ any individual (whether or not an Employee or a Participant); nor shall the Plan affect in any way the right of the Company to terminate the employment of any individual (whether or not an Employee or a Participant) at any time. 10. INDEMNIFICATION OF COMPENSATION COMMITTEE. In addition to such other rights of indemnification as they may have as members of the Board of Directors or as members of the Compensation Committee, the members of the Compensation Committee shall be indemnified by the Company against the reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit, or proceedings, or in connection with any appeal thereof, to which they or any of them may be party by reason of any action taken or failure to act under or in connection with the Plan, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit, or proceedings, except in relation to matters as to which it shall be adjudged in such action, suit, or proceedings that such Compensation 8 Committee member is liable for negligence or misconduct in the performance of his/her duties, provided that within thirty (30) days after institution of any such action, suit, or proceedings a Compensation Committee member shall in writing offer the Company the opportunity, at its own expense, to pursue and defend the same. 11. EFFECTIVE DATE AND TERM. This Plan (as hereby amended and restated) supersedes all prior employee profit sharing bonus plans of the Company, and shall be effective commencing as of October 1, 1996, and shall remain in effect until terminated by the Board of Directors of the Company. Executed this 27th day of September, 1996. GAMMA-f CORP. By:/s/ J. Rex Vardeman J. REX VARDEMAN, Chairman of the Board ATTEST: By:/s/ Joe A. Ylitalo JOE A. YLITALO, Secretary EX-11 4 COMPUTATION OF NET INCOME PER SHARE 1 EXHIBIT 11 COMPUTATION OF NET INCOME PER SHARE 2 EXHIBIT 11 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES COMPUTATION OF NET INCOME PER SHARE (In thousands, except per share data)
For the year ended September 30, --------------------------------- 1996 1995 1994 --------------------------------- PRIMARY - ------- Weighted average number of shares outstanding during the period 4,434 4,454 4,610 Assume exercise of warrants and options at beginning of the period or issue date 526 459 274 Shares assumed to be repurchased under treasury stock method (356) (332) (155) ------ ------ ------- TOTAL 4,604 4,581 4,729 ====== ====== ======= Net Income $6,100 $5,195 $ 4,625 ====== ====== ======= PRIMARY NET INCOME PER SHARE $ 1.32 $ 1.13 $ .98 ====== ====== ======= FULLY DILUTED - ------------- Weighted average number of shares outstanding during the period 4,434 4,454 4,610 Assume exercise of warrants and options at beginning of the period or issue date 526 459 274 Shares assumed to be repurchased under treasury stock method (348) (283) (155) ------ ------ ------- TOTAL 4,612 4,630 4,729 ====== ====== ======= Net Income $6,100 $5,195 $ 4,625 ====== ====== ======= FULLY DILUTED NET INCOME PER SHARE $ 1.32 $ 1.12 $ .98 ====== ====== =======
EX-13 5 ANNUAL REPORT 1 EXHIBIT 13 ANNUAL REPORT TO SHAREHOLDERS 2 Exhibit 13 Annual Report to Shareholders (pages incorporated by reference) SELECTED FINANCIAL DATA Vertex Communications Corporation and Subsidiaries
Year Ended September 30, 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Sales $77,525 $65,024 $56,549 $53,869 $48,768 Costs and expenses 69,491 58,547 50,880 48,564 44,585 Income before income taxes 8,551 7,015 6,294 5,601 4,282 Net income 6,100 5,195 4,625 4,001 2,902 Earnings per share 1.32 1.12 .98 .94 .84 Working capital $39,484 $33,396 $36,035 $32,937 $13,503 Long-term debt 875 1,312 -- -- -- Total assets 71,974 63,854 58,457 52,381 30,755 Total liabilities 16,500 14,168 11,272 10,060 9,650 Total shareholders' equity 55,474 49,686 47,185 42,321 21,105 Orders booked $74,770 $79,132 $55,226 $58,476 $44,306 Backlog of unfilled orders 41,381 44,136 30,028 31,351 26,744
No cash dividends have been declared or paid 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Over the past several years, a majority of the Company's product sales and services has been generated outside the United States. Specifically, Vertex's foreign sales have been significant in the Middle Eastern countries, Asia, and Western Europe. Management believes this trend is a result of the continuing efforts of local industries and governments who are enhancing or adding to their telecommunications capabilities. The Company has implemented certain strategic decisions for purposes of maintaining and increasing its global market share. In 1993, Vertex acquired the Antenna Group of Krupp Industrietechnik of Germany and opened a foreign sales office in England. In 1995, the Company acquired Maxtech, whose products are complementary to Vertex's existing earth station antenna products. In 1996, the Company opened a foreign sales office in Singapore to better serve the vast and emerging Asian market. From a product standpoint, certain products have been designed to meet or exceed specifications peculiar to those found in several foreign countries. In addition, efforts are presently underway to develop new products such as Intelsat type-tested antennas that will be sold overseas. Management believes future sales of products and services will follow a similar pattern that has been experienced where foreign revenues provide the Company with a large portion of its business. However, since the Company's products are generally high-value products, sales in any particular geographic region may fluctuate significantly when comparing the results of one accounting period to another as major projects are completed in any given year and may not be replaced by a similar sized project in a comparable year. Fiscal 1996 Compared to Fiscal 1995 1996 was the eighth consecutive year of record sales and record net income. Consolidated sales of $77.5 million in 1996 increased by 19.2 percent over 1995's sales of $65.0 million. A large portion of this increase in sales can be traced to revenues derived from GTE Telecom's 34-meter antenna project which was begun in late 1995 and inclusion of Maxtech's revenues for the full year of 1996. Cost of sales as a percent of sales improved to 73.4 percent in 1996 compared to 74.3 percent one year earlier. This cost reduction was mainly due to production efficiency improvements realized at the Company's manufacturing facilities at Kilgore, Texas. Research and development costs increased by 48.6 percent to $3.2 million over the 1995 level due primarily to the development work on the Company's 9.3-meter antenna and new product design efforts in the small aperture antenna product line. Marketing expenses of $4.2 million increased by $.7 million, primarily as a result of the start-up of two new operating divisions. General and administrative expenses increased by $.6 million or 13.1 percent over the 1995 spending level, reflecting the presence of the two new divisions. The effective tax rate of 28.7 percent was lower than the prescribed statutory tax rates mainly due to the benefit received from export revenues and the effect of nontaxable investment income. Net income in 1996 was $6.1 million or $1.32 per share compared to $5.2 million or $1.12 per share for the prior year. The Company's backlog of unfilled orders was $41.4 million at September 30, 1996, compared to $44.1 million at the 1995 year end. 4 Fiscal 1995 Compared to Fiscal 1994 The Company completed the acquisition of Maxtech, Inc. (Maxtech) of State College, Pennsylvania in January 1995 for a cash purchase price of approximately $5.5 million (see Note 4 for additional information regarding purchase price). Maxtech is engaged in the design, manufacture, and distribution of precision radio frequency and microwave telecommunications components and subsystems, with particular emphasis on earth station antennas and point-to-point radio applications. Maxtech's operating results are included in the Company's Consolidated Financial Statements as of January 1, 1995. Consolidated sales were $65.0 million in 1995 compared to $56.5 million in 1994 for an increase of $8.5 million or 15 percent. The increase in sales was principally due to the Maxtech acquisition and increased international sales. Within international sales, Western Europe sales were 16 percent and 18 percent of total sales in 1995 and 1994, respectively. The Company believes sales in these two geographic regions were a significant portion of total sales because of the factors discussed above. Cost of sales as a percent of sales was 74.3 percent in 1995 compared to 74.6 percent in 1994. Although the Company adhered to a strict cost control program, competitive pricing pressures precluded meaningful improvement in this financial measurement. Research and development spending of $2.2 million in 1995 decreased by 17.9 percent from $2.6 million in 1994 as certain successful product development projects were completed in 1994 and absent from 1995 spending. Marketing expenditures increased 26.8 percent from $2.8 million in 1994 to $3.6 million in 1995, primarily as a result of the Maxtech acquisition. General and administrative expenses were $4.5 million in 1995 compared to $3.3 million in 1994. This increase of $1.3 million or 39.5 percent was due to the inclusion of Maxtech's operating results since January 1995 and reassignment of certain personnel. The effective tax rate of 25.9 percent was lower than the prescribed statutory rates in 1995 mainly due to tax incentives available from export shipments and certain investment income that was nontaxable. Net income of $5.2 million increased by 12.3 percent or $.6 million over 1994 because of the aforementioned factors. The Company ended fiscal 1995 with a record order backlog of $44.1 million compared to $30.0 million one year earlier. FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION General The Company's future operating results and financial condition may be affected by various trends and factors including general economic conditions, 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, fluctuation in foreign exchange rates, and rising costs for components or unavailability of components. In addition, the Company's future operating results and its size 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. 5 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. Currency Exchange Rates 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. If this currency as related to the U.S. dollar should change in a material adverse manner, consolidated results of operations could be materially impacted. In addition, to the extent taxable income is generated by the German operations, the consolidated effective tax rate can be unfavorably impacted. The German statutory tax rate is approximately 50 percent compared to the present U.S. statutory tax rate of 34 percent on taxable income up to $10 million. The Company has not suffered any material losses or adverse effects due to currency rate changes in the British pound, the Singapore dollar, or the German mark relative to the U.S. dollar. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities over the past three years totaled $10.9 million. The primary favorable contributors were strong net income, the positive effect of depreciation and amortization, and higher payables and accrued liabilities. These factors were partially offset by significant increases in accounts receivable and inventories which were necessary to support higher sales volume. Net cash used in investing activities was comprised of $8.2 million of capital asset additions during the past three fiscal years and $5.5 million for the Maxtech acquisition. A major portion of the capital assets expenditures were related to the Company's Kilgore, Texas manufacturing facility in order to expand production capacity. Cash was used in financing activities to repurchase 252,500 shares of the Company's common stock in fiscal 1995 for $3.2 million, or an average price of $12.62 per share. In fiscal 1996, $.4 million was used to repurchase 26,600 shares of the Company's common stock at an average price of $16.39 per share and $.4 million was paid on the debt associated with the Maxtech acquisition. Cash was provided during the last three fiscal years of $.7 million from exercise of stock options pursuant to the Company's stock option plans. Cash and cash equivalents increased by $2.5 million during fiscal 1996 to end the year with a balance of $17.4 million. The Company intends to continue investing in product research and development and to 6 expand manufacturing facilities consistent with business conditions. As of September 30, 1996, the Company has no material commitments for capital expenditures. Management believes the Company's financial condition is excellent and is not aware of any demands which are likely to affect liquidity in an adverse manner in the foreseeable future. The Company does not maintain a credit line facility because of its projected cash flows and present favorable financial condition. 7 Vertex Communications Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME
Year Ended September 30, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ (In thousands, except per share amounts) SALES $ 77,525 $ 65,024 $ 56,549 COSTS AND EXPENSES: Cost of sales 56,911 48,287 42,185 Research and development 3,217 2,165 2,637 Marketing 4,236 3,560 2,808 General and administrative 5,127 4,535 3,250 - ------------------------------------------------------------------------------------------------------------ 69,491 58,547 50,880 - ------------------------------------------------------------------------------------------------------------ Operating income 8,034 6,477 5,669 OTHER INCOME (EXPENSE): Income from investments 632 633 625 Interest expense (115) (95) -- - ------------------------------------------------------------------------------------------------------------ Income before income taxes and effect of accounting change 8,551 7,015 6,294 PROVISION FOR INCOME TAXES 2,451 1,820 1,734 Income before effect of accounting change 6,100 5,195 4,560 Cumulative effect of accounting change -- -- 65 - ------------------------------------------------------------------------------------------------------------ NET INCOME $6,100 $5,195 $4,625 - ------------------------------------------------------------------------------------------------------------ EARNINGS PER SHARE: Earnings before effect of accounting change $1.32 $1.12 $.97 Cumulative effect of accounting change -- -- .01 - ------------------------------------------------------------------------------------------------------------ $1.32 $1.12 $.98 ============================================================================================================ AVERAGE SHARES AND EQUIVALENT SHARES OUTSTANDING 4,612 4,630 4,729 ============================================================================================================
See Notes to Consolidated Financial Statements 8 Vertex Communications Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS
As of September 30, 1996 1995 - ------------------------------------------------------------------------------------------------------------ (In thousands, except share amounts) ASSETS Current assets: Cash and cash equivalents $ 17,396 $ 14,870 Accounts receivable, less allowance for doubtful accounts of $268 and $241 21,136 16,295 Inventories 15,626 14,324 - ------------------------------------------------------------------------------------------------------------ 54,158 45,489 - ------------------------------------------------------------------------------------------------------------ Property and equipment: Land 418 418 Buildings and improvements 7,235 6,925 Equipment 14,966 12,538 Construction in progress 328 917 Less: accumulated depreciation (10,520) (8,400) - ------------------------------------------------------------------------------------------------------------- 12,427 12,398 - ------------------------------------------------------------------------------------------------------------ Goodwill, net of accumulated amortization of $632 and $268 4,785 5,149 Other assets, less accumulated amortization of $912 and $694 604 818 - ------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 71,974 $ 63,854 ============================================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,615 $ 2,679 Accrued liabilities: Accrued compensation 3,024 1,876 Other 4,017 5,062 Customers' advances 1,737 2,015 Income taxes payable 1,230 -- Deferred income taxes 51 461 - ------------------------------------------------------------------------------------------------------------ 14,674 12,093 - ------------------------------------------------------------------------------------------------------------ Acquisition indebtedness 875 1,312 Deferred income taxes 951 763 Commitments and contingencies (Note 12) Shareholders' equity: Common stock, $.10 par value, 20,000,000 shares authorized, 4,661,402 issued 466 466 Capital in excess of par value 24,806 24,963 Retained earnings 32,858 26,758 Treasury stock, at cost, 222,346 shares and 230,146 shares (2,733 ) (2,700) Translation adjustment 77 199 - ------------------------------------------------------------------------------------------------------------ 55,474 49,686 - ------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 71,974 $ 63,854 ============================================================================================================
See Notes to Consolidated Financial Statements 9 Vertex Communications Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,100 $ 5,195 $ 4,625 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,728 2,391 1,650 Cumulative effect of change in accounting for income taxes -- -- (65) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (4,841) 746 (5,529) Inventories (1,302) (3,404) (1,274) Prepaid income taxes -- 668 (668) Other assets (30) (224) 332 Accounts payable and accrued liabilities 2,039 (882) 2,054 Customers' advances (278) 829 (1,216) Income taxes payable and deferred 1,008 (210) 639 Other liabilities -- -- (200) - ------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 5,424 5,109 348 - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (2,149) (2,488) (3,571) Acquisition of Maxtech, Inc. -- (5,524) -- - ------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (2,149) (8,012) (3,571) - ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock (436) (3,186) -- Proceeds from exercise of stock options 246 220 186 Payment on acquisition indebtedness (437) -- -- Other (95) 126 -- - ------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities (722) (2,840) 186 - ------------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash (27) 86 27 Net increase (decrease) in cash and cash equivalents 2,526 (5,657) (3,010) Cash and cash equivalents at beginning of year 14,870 20,527 23,537 - ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $17,396 $14,870 $20,527 ============================================================================================================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 35 $ -- $ -- Income taxes 1,443 1,174 1,855 ============================================================================================================
See Notes to Consolidated Financial Statements 10 Vertex Communications Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Capital in Common Excess of Retained Treasury Translation Stock Par Value Earnings Stock Adjustment Total - -------------------------------------------------------------------------------------------------------------------- (In thousands, except share amounts) Balance at September 30, 1993 $ 466 $25,181 $16,938 $(264) $ -- $42,321 - ---------------------------------------------------------------------------------------------------------------------- Exercise of stock options (53,000 shares) -- 31 -- 155 -- 186 Translation adjustment -- -- -- -- 53 53 Net income -- -- 4,625 -- -- 4,625 - ---------------------------------------------------------------------------------------------------------------------- 1994 $ 466 $25,212 $21,563 $(109) $ 53 $47,185 - ---------------------------------------------------------------------------------------------------------------------- Exercise of stock options (60,100 shares) -- (375) -- 595 -- 220 Purchase of treasury stock (252,500 shares) -- -- -- (3,186) -- (3,186) Tax benefit related to stock options exercised by employees -- 126 -- -- -- 126 Translation adjustment -- -- -- -- 146 146 Net income -- -- 5,195 -- -- 5,195 - ---------------------------------------------------------------------------------------------------------------------- 1995 $ 466 $24,963 $26,758 $(2,700) $ 199 $49,686 - ---------------------------------------------------------------------------------------------------------------------- Exercise of stock options (34,200 shares) -- (157) -- 403 -- 246 Purchase of treasury stock (26,600 shares) -- -- -- (436) -- (436) Translation adjustment -- -- -- -- (122) (122) Net income -- -- 6,100 -- -- 6,100 - ---------------------------------------------------------------------------------------------------------------------- 1996 $ 466 $24,806 $32,858 $(2,733) $ 77 $55,474 ======================================================================================================================
See Notes to Consolidated Financial Statements 11 Vertex Communications Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 The Company is engaged in the engineering, design, manufacture, and field installation of satellite communications earth station products, with antenna sizes ranging from 1.2 meters to 34 meters in diameters, and which operate in the domestic, international, and military radio frequencies. 1. SUMMARY OF ACCOUNTING PRACTICES PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all significant intercompany transactions. Management Estimates. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make assumptions and estimates that affect certain reported amounts of assets, liabilities, revenues, and expenses at the date of the consolidated financial statements. Actual results could differ from those estimates. These estimates mainly involve the reported amounts of accounts receivable and inventory reserves, income tax provisions, expected costs to complete sales contracts accounted for under the percentage of completion method, warranty provisions, and useful lives of property and equipment. RECOGNITION OF REVENUES, COSTS AND EXPENSES. Revenues from sales other than long-term construction contracts are recognized when the earnings process has been completed. The earnings process is considered complete upon shipment or upon completion and storage of the equipment, if shipment is delayed at the customer's request. 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 $764,000 and $1,791,000 at September 30, 1996 and 1995, respectively. Unbilled costs and related profits included in accounts receivable at September 30, 1996 and 1995 were $2,870,000 and $468,000, respectively. Sales recognized on long-term construction contracts and the related cost of sales were as follows:
(In thousands) 1996 1995 1994 ----------------------------------------- Sales $ 14,099 $ 11,484 $ 15,670 Cost of Sales 13,138 10,126 13,233
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 12 period in which the customer-funded work is completed. The Company has no obligation to repay any funds provided by customers regardless of the outcome of research and development work. 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:
(In thousands) 1996 1995 ----------------------- Raw materials $ 5,854 $ 4,476 Work-in-process 7,979 8,661 Finished goods 1,793 1,187 ----------------------- $ 15,626 $14,324 =======================
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost and are depreciated over their estimated useful lives using the straight-line method. The estimated useful lives of buildings are 25 years and equipment are 5 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. Non-Cash Transaction. As part of the acquisition of Maxtech, Inc. in fiscal 1995, the Company assumed certain liabilities as follows:
(In thousands) Maxtech, Inc. --------------- Fair value of assets acquired $ 8,683 Cash paid (5,524) ------- Liabilities assumed $ 3,159 =======
EARNINGS PER SHARE. Earnings per share have been computed based upon the weighted average number of shares of common stock outstanding and the dilutive common stock equivalents assumed outstanding. 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, 1996. RECLASSIFICATIONS. Certain prior year amounts have been reclassified in order to conform with the current year presentation. 13 NEW ACCOUNTING STANDARDS. In October 1995, effective for the Company's fiscal 1997 consolidated financial statements, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which defines a fair value based method of accounting for stock-based compensation. This new standard allows an entity to continue to measure compensation cost for its stock compensation plan(s) using the intrinsic value based method of accounting prescribed by Accounting Principles Board No. 25 (APB 25), "Accounting for Stock Issued to Employees." The Company intends to account for its stock option plans according to APB 25 and to provide pro forma disclosure of the fair value based method prescribed under SFAS 123. In March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," was issued by the Financial Accounting Standards Board and adopted by the Company in October 1995. This statement requires the Company to review its long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The effect of adopting this statement was not material to the Company as of September 30, 1996. 2. ACCRUED LIABILITIES - OTHER Accrued Liabilities - Other were comprised of the following:
(In thousands) 1996 1995 ------------------------ Current portion of acquisition indebtedness $ 438 $ 438 Warranty 530 591 Amounts billed in excess of costs 764 1,791 Employee benefit costs 533 585 Taxes other than income 590 456 Other 1,162 1,201 ------- ------- $ 4,017 $ 5,062 ======= =======
3. FOREIGN OPERATIONS Financial information relating to the Company's foreign operations is shown below:
(In thousands) 1996 1995 1994 ------------------------------------- Sales to unaffiliated customers $3,918 $3,724 $5,922 Transfers between geographic areas 1,360 889 1,059 Operating income (loss) (306) (263) 1,186 Identifiable assets 3,703 2,366 4,002
The Company translates the financial statements of its German subsidiary from its functional currency, the German mark, into U.S. dollars in accordance with the Financial Accounting Standards Board SFAS No. 52. Assets and liabilities are translated at the exchange rate in effect at each fiscal year end, and sales and expenses are translated at the weighted average exchange rate in effect for the period reported upon. Any resulting gains or losses are recorded in shareholders' equity and excluded from net income. 14 4. ACQUISITION On January 25, 1995 (effective January 1, 1995), the Company acquired all of the outstanding common stock of Maxtech, Inc. for cash paid at closing of $4,049,000, four-year unsecured promissory notes in the aggregate principal sum of $1,750,000, payable to former shareholders, all except one, who were employed by the Company as of September 30, 1996, and direct acquisition costs incurred of approximately $150,000. An additional sum of $1,650,000 was paid at closing to pay off certain promissory notes of Maxtech to an unrelated third party. The Maxtech acquisition was accounted for under the purchase method and, accordingly, the assets acquired and liabilities assumed were recorded at their fair values on the acquisition date. The excess purchase price over the assets acquired was approximately $5,417,000. In connection with the purchase of Maxtech, contingent consideration is due for the amount equal to 50 percent of the net pre-tax income above $3,500,000 that Maxtech earns for the cumulative period of three years and nine months ending September 30, 1998, not to exceed $2,250,000. Maxtech's results of operations have been included in the Company's consolidated financial statements from the effective date of the acquisition. Below are the unaudited pro forma results of operations as if Maxtech had been acquired on October 1, 1993.
(In thousands) 1995 1994 ---------------------- Sales $66,390 $62,831 Net Income 5,004 4,733 Earnings Per Share 1.08 1.00
5. SHAREHOLDERS' EQUITY STOCK OPTION PLAN FOR KEY EMPLOYEES. The Company had a Stock Option Plan for Key Employees, which provided for the granting of options to purchase the Company's common stock to certain officers and key employees. Five hundred fifty thousand (550,000) shares of common stock were reserved for issuance under this plan. The options are initially exercisable in equal pro rata increments over a five-year period beginning one year after the grant date and extend for terms of seven years. This plan expired in fiscal 1996 and options can no longer be issued. The following is a summary of the transactions under this plan for the years ended September 30, 1996, 1995, and 1994:
Number of options Option Price --------------------------------------------- Per Share 1996 1995 1994 ---------------------------------------------------------------------- Balance outstanding Oct. 1 $ 2.00-$15.00 209,500 271,600 308,600 Granted $10.00-$15.00 -- -- 20,000 Cancelled $ 8.13-$15.00 (3,200) (2,000) (4,000) Exercised $ 2.00-$10.00 (32,000) (60,100) (53,000) ------------------------------------------------------------------- Balance outstanding Sept. 30 $ 3.00-$14.50 174,300 209,500 271,600 Exercisable Sept. 30 $ 4.00-$14.50 112,100 101,400 111,600 ------------------------------------------------------------------- Available for grant Sept. 30 -- 25,000 23,000 ============================================================================================
15 OUTSIDE DIRECTORS STOCK OPTION PLAN. The Company has an Outside Directors Stock Option Plan whereby an outside director (any director not otherwise employed by the Company) may be granted options to purchase the Company's common stock. The maximum number of shares which may be covered by options granted to any single director each year is 7,500, and the option price must equal at least 100 percent of fair market value at the date of grant. Seventy-five thousand (75,000) shares of common stock have been reserved for this plan. Once granted, the options expire in ten years. Following is a table which summarizes the transactions under this plan for the years ended September 30, 1996, 1995 and 1994.
Option Price Number of options Per Share 1996 1995 1994 ------------------------------------------------------------------ Balance outstanding Oct. 1 $10.00 19,000 9,000 9,000 Granted $12.00 -- 10,000 -- Exercised $10.00 1,000 -- -- ---------------------------------------- Balance outstanding Sept. 30 $10.00-$12.00 18,000 19,000 9,000 Exercisable Sept. 30 $10.00-$12.00 18,000 19,000 9,000 ---------------------------------------- Available for Grant Sept. 30 40,000 40,000 50,000 =============================================================================================
1995 STOCK COMPENSATION PLAN. In 1995, the Company adopted "The 1995 Stock Compensation Plan" for key employees and advisors. This plan allows the Company to grant options to purchase the Company's stock and stock appreciation rights to officers, key employees, and advisors at an option price equal to market value on the date of grant (110 percent in the case of an option holder who owns more than 10 percent of the combined voting power of the Company's common stock). The options are initially exercisable in equal pro rata portions over a five-year period beginning one year after the grant date and extend for terms of ten years. The plan allows for a total of five hundred thousand (500,000) options to be granted. Following is a summary of the activity under the plan since its inception:
Number of options Option Price --------------------------- Per Share 1996 1995 ---------------------------------------------------------------- Balance outstanding Oct. 1 $12.00-$12.25 309,000 -- Granted $12.00-$15.25 50,000 309,000 Cancelled $12.00-$15.25 (19,400) -- Exercised $12.00 (1,400) -- --------------------------- Balance outstanding Sept. 30 $12.00-$15.25 338,200 309,000 Exercisable Sept. 30 $12.00-$12.25 60,320 -- ----------------------------- Available for Grant Sept. 30 160,400 191,000 =========================================================================================
16 6. ACQUISITION INDEBTEDNESS As part of the purchase price of Maxtech, Inc., the Company incurred four-year unsecured promissory notes in aggregate principal sum of $1,750,000. The notes are payable annually in four equal principal payments, including accrued interest at 7.92 percent per annum with the initial payment due and paid October 1, 1995. 7. INCOME TAXES The Company adopted Financial Accounting Standards Board Statement No. 109 "Accounting for Income Taxes" effective October 1, 1993. This Standard required the Company to change accounting for income taxes from the deferral method to the liability method for financial reporting. The adoption of SFAS No. 109 resulted in a one-time cumulative benefit in fiscal 1994 of $65,000 or $.01 per share with a corresponding reduction in deferred income taxes. The differences between the prescribed statutory income tax rates and the Company's effective income tax rates were as follows:
1996 1995 1994 --------------------------------------------------------- Federal statutory rate 34.0% 34.0% 34.0% State income taxes -- 2.1 .5 Effect of nontaxable investment income (1.6) (2.6) (2.8) Benefit from nontaxable FSC income (3.5) (4.6) (4.0) Tax benefit from increased R&D activity (.3) (1.9) (3.4) Foreign tax adjustment (.4) (.6) 2.7 Other, net .5 (.5) .6 -------------------------------------------------------- 28.7% 25.9% 27.6% ========================================================
Income (loss) before income taxes from foreign operations was ($406,000), ($400,000), and $1,200,000 in fiscal 1996, 1995, and 1994, respectively. Income before income taxes from domestic operations was $8,957,000, $7,415,000, and $5,094,000 in fiscal 1996, 1995, and 1994, respectively. Income before income taxes from domestic operations was $8,957,000, $7,415,000, and $5,094,000 in fiscal 1996, 1995, and 1994, respectively. The provision for income taxes consists of the following significant components:
(In thousands) 1996 1995 1994 ------------------------------------------------------------ Current: Federal $2,632 $1,661 $ 877 Foreign 36 224 153 State 5 145 20 ------------------------------------------------------------ Total Current 2,673 2,030 1,050 Deferred: Federal 17 214 296 Foreign (239) (424) 388 ------------------------------------------------------------ Total Deferred (222) (210) 684 ------------------------------------------------------------ Total provision for income taxes $2,451 $1,820 $1,734 ============================================================
17 Deferred income taxes are a result of certain income and expenses being recognized in different periods for financial reporting and tax reporting purposes. Below is a table which shows the components of deferred income taxes:
(In thousands) 1996 1995 Deferred tax assets: Accrued liabilities and reserves $ 1,073 $ 647 Other 309 29 --------------------------------- Deferred tax liabilities: Property and equipment (827) (782) Revenue recognition differences (1,433) (888) Other (124) (230) ----------------------------------- Net deferred tax liability $ (1,002) $(1,224) ==================================
8. EMPLOYEE BENEFIT PLANS The Company has a 401(k) plan which covers substantially all domestic employees. This plan allows for employees and the Company to make contributions. The Company's contributions to the plan for fiscal years 1996, 1995, and 1994 were $184,000, $228,000, and $223,000, respectively. The Company has certain cash incentive compensation plans which are based upon results of annual operations compared to planned results. The Management Incentive Compensation Plans' participants are key employees and officers, but not outside directors. Compensation under these plans was $1,295,000, $275,000, and $787,000 for fiscal 1996, 1995, and 1994, respectively. The Employee Profit Sharing Bonus Plans' participants include substantially all employees except participants in a management incentive compensation plan. Compensation under these plans was $280,000, $168,000, and $232,000, for fiscal 1996, 1995, and 1994, 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, 1996, 1995, and 1994 of $121,000, $315,000, and $186,000, respectively. 18 10. SALES AND INDUSTRY SEGMENT INFORMATION Sales to one customer were 16 percent, and 19 percent, of total sales in fiscal 1995 and 1994, respectively. In fiscal 1996, sales to another customer accounted for 12 percent of total sales. Export sales were 59 percent, 64 percent, and 63 percent, in fiscal 1996, 1995, and 1994, respectively, of total sales. Sales in Western Europe were 19 percent, 16 percent, and 18 percent, of total sales in fiscal 1996, 1995, and 1994, respectively. Sales in the Middle East were 10 percent of total sales in fiscal 1996. Sales in Asian countries were 18 percent, 28 percent, and 22 percent of total sales in fiscal 1996, 1995, and 1994, respectively. The Company operates primarily in a single industry segment, as a manufacturer and supplier of microwave antennas and related equipment. 11. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
(In thousands, except per share amounts) 1996 Fiscal Quarters First Second Third Fourth ------------------------------------------------------- Sales $18,964 $19,233 $19,109 $20,219 Gross Profit 4,981 5,315 5,112 5,206 Net Income 1,393 1,460 1,584 1,663 Earnings Per Share .30 .32 .34 .36
1995 Fiscal Quarters First Second Third Fourth -------------------------------------------------------- Sales $14,707 $16,258 $15,934 $18,125 Gross Profit 3,679 4,529 4,348 4,181 Net Income 1,225 1,268 1,245 1,457 Earnings Per Share .26 .28 .28 .30
12. COMMITMENTS AND CONTINGENCIES The Company rents certain equipment and facilities under operating leases. Rent expense under these leases for fiscal 1996, 1995, and 1994 was $641,000, $380,000, and $268,000, respectively. 19 Below are the future rent payments due under these lease obligations and the amounts of rental income due to be received under subleases as of September 30, 1996.
Fiscal Year Rent Expense Payments Due - ------------ ------------------------- 1997 347,000 1998 64,000 1999 13,000 2000 6,000 ---------- $ 430,000 Less: Sublease Income 85,000 ---------- $ 345,000 ==========
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. 20 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, 1996 and 1995, and the related consolidated statements of income, cash flows, and shareholders' equity for each of the three years in the period ended September 30, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. As explained in Note 7 to the Financial Statements, effective October 1, 1993, the Company changed its method of accounting for income taxes. Arthur Andersen LLP Dallas, Texas October 25, 1996 MARKET FOR COMMON STOCK The Company's common stock is traded on The Nasdaq Stock Market (National Market System) under the symbol VTEX. At December 2, 1996, there were approximately 1,500 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.
Quarter Ended High Low Quarter Ended High Low - ------------------------------------------------------------------------------------------------ September 30, 1996 $19 1/4 $16 3/4 September 30, 1995 $19 1/4 $13 1/4 June 29, 1996 19 15 1/4 June 30, 1995 14 1/2 13 March 29, 1996 18 1/2 15 1/2 March 31, 1995 14 1/8 12 December 29, 1995 17 3/4 14 3/4 December 30, 1994 14 1/4 10 5/8
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. EX-22 6 SUBSIDIARIES 1 EXHIBIT 22 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES 2 EXHIBIT 22 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES AS OF SEPTEMBER 30, 1996 Vertex Communications Foreign Sales Corporation 100% - Owned Subsidiary Incorporated in the United States Virgin Islands 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 Maxtech, Inc. 100% - Owned Subsidiary Incorporated in the State of Pennsylvania EX-24 7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 24 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 2 EXHIBIT 24 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report by reference into this Form 10-K and into the Company's previously filed Registration Statement File No. 33-27012 on Form S-8. Arthur Andersen LLP Dallas, Texas December 18, 1996 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 1996. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS SEP-30-1996 OCT-01-1995 SEP-30-1996 17,396 0 21,404 268 15,626 54,158 22,947 10,520 71,974 14,674 0 466 0 0 55,008 71,974 77,525 77,525 56,911 56,911 12,580 0 115 8,551 2,451 6,100 0 0 0 6,100 1.32 1.32
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