-----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, RtyR7CZW37k6JbK74mApGpb2siG+ucRmQEmIfkaR0laGr5eUso6VA35jumAIOLVJ I0qLPRxjAaRzpqE3QWnjYQ== 0000950134-98-009824.txt : 19981222 0000950134-98-009824.hdr.sgml : 19981222 ACCESSION NUMBER: 0000950134-98-009824 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981221 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: SEC FILE NUMBER: 000-15277 FILM NUMBER: 98772932 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 FOR FISCAL YEAR END SEPTEMBER 30, 1998 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ______ COMMISSION FILE NUMBER: 0-15277 ------------------------- VERTEX COMMUNICATIONS CORPORATION (Exact name of Registrant as specified in its charter) TEXAS 75-1982974 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2600 N. LONGVIEW STREET, KILGORE, TEXAS 75662 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (903) 984-0555 ------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- None None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.10 PAR VALUE ------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of October 30, 1998, 5,099,878 shares of the Registrant's Common Stock, $.10 par value, were outstanding. The aggregate market value of the Registrant's Common Stock held by non-affiliates based on the closing sales price on October 30, 1998, as reported by The Nasdaq Stock Market (National Market System), was approximately $72,000,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended September 30, 1998, are incorporated by reference into Items 5, 6, 7, 7A, and 8 under Part II and Item 14 of Part IV hereof. Portions of the Registrant's definitive Proxy Statement to be filed in connection with the solicitation of proxies for its 1999 Annual Meeting of Shareholders are incorporated by reference into Items 10, 11, 12, and 13 under Part III hereof. =============================================================================== 2 VERTEX COMMUNICATIONS CORPORATION ANNUAL REPORT ON FORM 10-K For the Fiscal Year Ended September 30, 1998 =================================================== PART I ITEM 1. BUSINESS. GENERAL Vertex Communications Corporation (the "Registrant," the "Company" or "Vertex") designs, develops, manufactures, markets and supports an extensive line of precision products for satellite and deep space communications applications. These products include sophisticated earth station antennas ranging in size from 1.2 to 34 meters in diameter (which operate in various relevant frequency bands, including L-, C-, X-, Ku- and Ka-bands, and are available for commercial and military applications), integrated communications network systems, and optical and radio telescopes. The Company also manufactures state- of-the-art control systems designed to manage and monitor the operation, guidance, tracking and telemetry capabilities of communications network systems as well as individual antennas, related electronic components used to amplify radio frequency ("RF") signals, and precision waveguide components for application as component parts of communications systems. The Company also provides custom engineering, turnkey field installation, site testing and after-sale and maintenance services, and spare and replacement parts in support of its products. The Company's strategy is to provide a wide variety of precision satellite communications products compliant with state-of-the-art technology to satisfy an expanding range of customer and industry requirements. To accomplish its objectives, the Company engages in ongoing efforts to introduce, in a timely manner, products that are designed to meet applicable domestic and international specifications. The Company believes that it offers a more diverse line of products than any of its principal competitors. Due to the exacting design and engineering requirements necessary to produce satellite communications systems, subsystems and related products, quality control and precision engineering are central to the manufacturing process. The Company believes it has developed a reputation as a leader in quality control procedures which has enhanced its position in the marketplace. While the Company markets its products to systems integrators and end users who combine the Company's products with other communications equipment to form complete communications systems, Vertex also markets integrated communications network systems utilizing its own products. In the United States, Vertex markets its products through a direct sales force; while in international markets, the Company utilizes a direct sales force, supplemented by independent foreign sales representatives. Vertex's customers include the television broadcast industry, international telecommunications companies, communications common carriers, private communications networks, and government agencies, including certain agencies of the U. S. Government and various foreign governments. The Company was organized pursuant to Texas law in 1984. The Company's wholly-owned subsidiaries include: Vertex Satcom Systems, Inc. (formerly known as TIW Systems, Inc.), a Nevada corporation headquartered in Santa Clara, California; Vertex Antenna Systems, LLC (formerly a division of TIW Systems, Inc.), a Nevada limited liability company with its principal office in Santa Clara, California; Vertex Microwave Products, Inc. (formerly known as Gamma-f Corp.), a Nevada corporation headquartered in Torrance, California; Vertex Electronic Products, Inc. (formerly known as Maxtech, Inc.), a Pennsylvania corporation which is located in State College, Pennsylvania; Vertex Antennentechnik GmbH, a corporation organized pursuant to the laws of the Federal Republic of Germany, with its -1- 3 headquarters in Duisburg, Germany; Vertex Foreign Sales Corporation, organized pursuant to the laws of The Virgin Islands, with its office in St. Thomas, The Virgin Islands; and Vertex International, Ltd., formed under the laws of England. As used herein, the terms the "Registrant," the "Company," and "Vertex" refer to Vertex Communications Corporation and its wholly-owned subsidiaries, unless otherwise indicated. The Company's principal executive offices are located at 2600 North Longview Street, Kilgore, Texas 75662; its telephone number is (903) 984-0555; and its website on the Internet is: www.vertexcomm.com. SATELLITE COMMUNICATIONS EQUIPMENT INDUSTRY Market demand for transmission and reception capacity to support high-speed voice, video, and data communications has continued to generate significant demand for additional satellite communications network systems and related earth station equipment. Communications satellites, once placed in orbit above the earth, relay microwave radio signals from one or more earth stations to one or more other earth stations at various geographical locations. The primary function of an earth station is to transmit or receive a microwave radio signal via satellite in order to efficiently facilitate the telecommunications process. Telecommunication is the process of communication through electronic means such as radio, telegraph, television, and computer. Each earth station is interconnected to a local communications network which distributes and/or collects the desired information to or from the users of such information. A typical earth station consists of several components, including an antenna and associated electronic components, some of which amplify RF signals and others that control and manage the movement, monitoring and tracking capabilities of the antenna. A principal advantage of satellite communications systems over terrestrial communications systems is that once a satellite has been launched, the incremental cost of adding new transmission and reception points is limited to the cost of the earth station. With a terrestrial communications system, each transmission route must receive a right-of-way clearance and incur additional costs attendant to laying connecting cable or erecting microwave towers and repeater stations. As a result, a satellite communications system frequently offers advantages as a cost-effective medium for long-distance communications, as compared to the cost of a terrestrial communications system which is usually higher. Communications satellites use the L-band, C-band, X-band, Ku-band and Ka-band for transmission in the radio frequency spectrum. The Company designs and manufactures satellite communications network systems as well as individual earth station antennas that operate in each of these frequency bands. L-band antennas operate in the frequency band of one to two gigahertz and are primarily utilized by the maritime industry. C-band antennas are capable of receiving and transmitting information in the radio frequency band of four to six gigahertz. The C-band frequency spectrum is also used for terrestrial microwave transmissions. Due to the increasing use of the C-band frequency, the Ku-band frequency (12 to 14 gigahertz) has been reserved exclusively for satellite transmission by the Federal Communications Commission ("FCC") and an international agreement. Since wavelengths in the Ku-band are relatively short, they can be gathered and concentrated by a smaller antenna dish than is required with longer wavelength C-band transmissions. Accordingly, Ku-band transmission enables earth station vendors and voice, video, and data communications service providers to bring satellite communications directly to customers' facilities. Ka-band antennas are in the developmental stage and operate in the radio frequency band of 27 to 50 gigahertz. These emerging antennas will primarily be utilized for voice and data transmission. The X-band frequency spectrum (seven to eight gigahertz) is reserved for utilization in worldwide military satellite communications. -2- 4 THE VERTEX STRATEGY The Company's strategy is to provide a wide variety of advanced satellite communications products, including integrated communications network systems, precision earth station antennas, related control systems, associated electronic and electroformed components, and services to satisfy evolving customer requirements. The Company believes its proven products and expertise, experience in refining current products, and developing new products will enable it to expand distribution and gain market share. The Company believes this strategy has been, and will continue to be, successful because of the following key elements: TECHNICAL EXPERTISE. Vertex believes its technical expertise, together with its ability to comply with exacting engineering and design specifications, has contributed to its ability to increase sales. The ability of its engineering and design staff to respond rapidly to detailed customer requirements has enhanced the Company's competitive position. BROAD PRODUCT LINE. The Company's product strategy is to establish and maintain a prominent market share by emphasizing the development and distribution of a wide array of quality systems, subsystems and associated products. The Company believes its telecommunications products comprise one of the industry's broadest product lines. This extensive product line positions the Company to respond to a variety of customer requirements and to gain market share by expanding penetration into new and existing markets. SKILLED SALES FORCE. The Company's distribution strategy focuses on the needs of systems integrators and large end users that require a sales force possessing advanced technical knowledge and expertise. The Company believes its sales force is qualified to differentiate and promote the benefits of its products from those offered by competitors, to respond promptly to solve customers' communications problems, and to address customers' future communications requirements as their needs evolve and organizational functions change. INTERNATIONAL OPERATIONS. Continuing and emerging demands have created the need for substantial investment in telecommunications infrastructures in many international markets. The Company believes that significant opportunities exist in the market for satellite communications equipment and associated products outside of the United States. The Company adapts its product development, marketing and distribution strategies to comply with the unique requirements of specific international markets. While recent depressed economic developments in certain international markets indicate that the Company's international sales volume may suffer during the near term, the Company expects this trend to return to a more normal growth pattern as these economic conditions improve or stabilize by fiscal year 2000. ACQUISITIONS AND GROWTH. The Company expects that planned sales growth will be largely dependent on its ability to expand its existing plant facilities and increase personnel or to implement selected, strategic acquisitions which will complement existing business and enhance market share in the industry. PRODUCT DEVELOPMENT. The Company works closely with its customers to identify market needs and define product specifications early in the development process. This approach results in a thorough understanding of end user requirements prior to commencement of the design process and often positions the Company to develop and deliver new products or refinements of existing products in response to its customers' needs more rapidly than many of its competitors. The Company believes that the flexibility of its product designs and the capabilities of its engineering staff, combined with its adherence to superior quality control standards, have enabled it to be consistently among the first-to-market with competitive new products or innovative refinements of existing products. -3- 5 VERTEX PRODUCTS GENERAL. The Company designs, develops, manufactures and markets communications network systems and subsystems, including an extensive line of earth station antennas capable of operating in the commercial and military frequency bands from one to 30 gigahertz, which range in size from 1.2 to 34 meters in diameter, as well as the related electronic components used to control, manage and monitor the operation, guidance, tracking and telemetry capabilities of antennas. These products require exacting engineering skills and detailed standards or specifications as established by each customer, involving not only systems or product design, but the complete integration of other components acquired from the Company or other sources. The Company's products are utilized by its customers principally for telecommunications applications with certain products used in radio astronomy. The Company's operating divisions and subsidiaries include Vertex Antenna Products Division ("VAPD"), Vertex Satcom Systems, Inc. ("VSSI"), Vertex Antenna Systems, LLC ("VAS"), Vertex Microwave Products, Inc. ("VMPI"), Vertex Electronic Products, Inc. ("VEPI"), Vertex Control Systems Division ("VCSD"), Vertex Special Projects Division ("VSPD") and Vertex Antennentechnik GmbH ("VA"). These Vertex business units design, develop, manufacture and market the respective products described below. Vertex Antenna Products Division. VAPD, the Company's largest operating unit, designs, develops and manufactures RF satellite earth station antennas ranging in size from 1.2 to 34 meters in diameter, RF feed components, and related products with emphasis in the L-, S-, C-, X-, Ku- and Ka-band frequency ranges for applications in the domestic, international and military radio communications frequencies. VAPD also offers custom and unique research and development solutions for electrical, civil, structural and mechanical engineering-specific satellite communications projects. Vertex Satcom Systems, Inc. VSSI designs, manufactures and markets telecommunications network systems and related RF, intermediate frequency and baseband equipment used in satellite communications, including a complete line of satellite-based communications networking products which facilitate voice and data communications. These products include earth station telemetry tracking, command and monitoring ("TTC&M") equipment, frequency conversion products and digital communications products, including Time Division Multiple Access ("TDMA") and Single Channel Per Carrier ("SCPC") modems and voice and data channel processing equipment which provide multimedia transmission services via satellite. To address the most prominent evolving segment of the very small aperture terminal ("VSAT") market, VSSI has developed its FlexiDAMA ("Demand Assigned Multiple Access") communications network system, with sophisticated network management, switching and Global Positioning Satellite-based frequency and network coordination capabilities for applications in thin-route voice networks, medium- and high-capacity networks and low-rate video conferencing networks. The Company believes the combination of offering VSSI's TDMA, SCPC and DAMA modem technologies with broad signaling standard compatibility qualities provides a competitive advantage in marketing its network systems, which include comprehensive voice, data and video networking capabilities, to customers around the world. Vertex Antenna Systems, LLC. VAS designs, manufactures and markets large full-motion, steerable parabolic antenna systems, precision major path earth station antennas, associated equipment and related components utilized in satellite communications; deep space network systems; telemetry, tracking, command and monitoring of satellites; radar applications; and optical and radio telescopes for deep space communications. VAS also provides custom design support for special tracking systems, including design, testing and hardware for application in earth station antenna RF subsystems; and integrates customer- supplied baseband equipment with its products. -4- 6 Vertex Microwave Products, Inc. Through this subsidiary, the Company designs and manufactures precision microwave components for applications in the telecommunications, space and defense industries. VMPI's products include a variety of standard antenna feed components as well as custom designed and fabricated RF components. Additionally, a standard product line of filters, diplexers, ortho-mode transducers, polarizers, and RF feed subsystems addresses market requirements for S-band through Q-band frequencies. These products are sold directly to end users and suppliers who integrate such products with other components in telecommunications systems. The Company also utilizes these products as component parts of certain of its antenna products. Vertex Electronic Products, Inc. Through VEPI, the Company designs and manufactures a variety of solid-state power amplifiers (SSPAs), low-noise amplifiers (LNAs), line drivers, redundant amplifier systems and other related high-performance products used in telecommunications systems. Vertex Control Systems Division. This division of the Company designs and manufactures antenna positioning and tracking systems, antenna control systems, automatic de-ice systems, and uplink power control systems. Additionally, VCSD specializes in turnkey retrofit services, including the provision of products, technical engineering expertise, and on-site services required to modernize and enhance the usefulness of existing earth station installations and related assets. Vertex Antennentechnik GmbH. Through this subsidiary, headquartered in Duisburg, Germany, the Company designs and supplies products which complement its existing broad line of antenna products, such as precision antenna reflectors, multi-axis pedestals (antenna support structures), controller drive systems, radio telescopes, and optical telescopes. VA performs highly technical antenna engineering designs for applications in the academic institution, governmental, and radio telescope markets, and is a dominant supplier in Europe of superior quality RF antennas and radio telescopes. Additionally, VA , VAPD, and VAS frequently cooperate to combine the technical expertise of the three Vertex groups in the field of high-precision telescope equipment. Vertex Special Projects Division. This division of the Company is newly organized to enhance opportunities to adapt and utilize the Company's existing products and services primarily for applications pursuant to contracts with the U. S. Government or its agencies or as subcontractor for government-related projects. While there can be no assurance that VSPD will be successful, sales generated by this division are expected to partially offset the impact of declining foreign sales in fiscal 1999. CUSTOM ENGINEERING. The Company relies upon its engineering experience and expertise to provide its customers with custom-engineered products that are not otherwise readily available in the marketplace. Management believes this capability is a significant attribute that distinguishes the Company from its competitors. CUSTOMER SERVICES. In addition to the manufacture and supply of a broad line of telecommunications products, systems, subsystems and related products, the Company also offers a wide range of related services, including consulting; design and configuration; turnkey field installation; site testing and performance analysis; and after-sale maintenance services. MARKETING, SALES, AND CUSTOMERS MARKETING. The Company's marketing strategy is to offer a complete line of high-technology antenna and associated products, while also marketing certain complete communications systems. The Company believes that this approach enables Vertex to comply with its own communications systems requirements while also satisfying the needs of systems integrators (companies which sell complete communications systems, but do not manufacture antennas or the particular antenna or associated products needed) and end users (ultimate customers) who combine the antennas and associated products with other -5- 7 systems components to form complete communications systems. The Company markets and supports its products through a distribution system comprised of a direct sales force, supplemented in international markets by independent sales representatives. Vertex augments these sales methods by advertising certain products in trade magazines and by displaying certain products at trade shows. The marketing and sales activities of the Company focus on domestic and international markets for commercial, governmental, and military applications. Vertex's marketing plan contemplates sales growth through increasing market share and continued development of new markets for its products. SALES. The Company maintains a direct sales force in the United States and Germany, and a staffed sales office in Singapore. In addition to providing product and pricing information, Vertex's sales personnel provide customers and potential customers value-added solutions and detailed explanations of the benefits and advantages of the Company's products and services as compared to those of its competitors. The Company's sales force includes sales managers, engineers, sales representatives, and technical support personnel. The Company's worldwide marketing and sales efforts are directed and coordinated from its headquarters in Kilgore, Texas. The Company believes that the rapidly evolving international market will continue to be an important source of sales. The Company's international sales are comprised of products manufactured in the United States, Germany and Estonia, and services performed on-site by its engineers and technical support personnel. To enhance its foreign sales, the Company also engages the services of foreign independent sales representatives to supplement its direct sales force. These foreign sales representatives also offer products of other manufacturers which are complementary to, but not competitive with, the Company's products. Sales to foreign customers involving products or services originating in the United States are typically contracted for in U. S. dollars. Foreign sales of products or services originating in Germany are usually conducted in the German mark. International sales are subject to certain government controls and other risks, including export licensing, currency exchange rate fluctuations, political instability, trade restrictions, and changes in tariffs and freight rates. Should any of these factors prove onerous or change in a material unfavorable manner, the Company's delivery or completion of a sales contract could be adversely affected. To date, the Company has not experienced any material difficulties related to these factors. Sales in Western Europe were 14%, 14%, and 19%, of total sales in fiscal 1998, 1997, and 1996, respectively. Sales in the Middle East were 10% of total sales in fiscal 1996. Sales in Asian countries were 20%, 21%, and 18%, of total sales in fiscal 1998, 1997, and 1996, respectively. Export sales were 59%, 56%, and 59%, of total sales in fiscal 1998, 1997, and 1996, respectively. CUSTOMERS. Typical users of the Company's products include the broadcast industry, international telecommunications companies, communications common carriers, universities and academic institutions, private communications networks, and government agencies. The Company's customers include a number of major companies and government agencies throughout the world, including certain agencies of the U. S. Government and various foreign governments. The Company sells its products throughout the world to many customers. No single customer accounted for 10% or more of the Company's total sales in fiscal 1998 or fiscal 1997. Sales to GTE Corporation were 12% of total sales in fiscal 1996. The Company has been successful in recent years in diversifying its customer base by increasing its penetration of existing and emerging markets and developing new markets for its products. Sales growth during this period has been fueled, in part, by the Company's ability to secure new customers and to maintain relationships with existing customers. Due to large contracts which may occur from time -6- 8 to time, one or more different customers may represent a material part of the Company's total sales or unfilled backlog of orders in any given year or at any point in time. The Company believes that its relationships with its customers are excellent and that it will continue to be a major supplier of satellite communications equipment and associated products to its major customers. If required, the Company believes that it could maintain sales of its products at current levels to other customers if current relationships with major customers were interrupted. Although several of these relationships have existed for a number of years, there can be no assurance that such relationships will continue. The loss of any of such major customers could have a material adverse effect on the Company and its business. Vertex does not seek to maintain a specific level of sales to the various agencies of the U. S. Government, but rather targets certain types of projects where the Company's existing products and/or expertise will enable it to submit competitive bid proposals. Most of the Company's business with the U. S. Government is on a fixed-price basis. Contracts with the U. S. Government customarily include provisions which provide for cancellation at the convenience of the Government. In addition, upon cancellation by the Government, the Company could be entitled to reimbursement of costs incurred, plus a pro rata share of profit. The Company has never received a cancellation of a material Government contract and has no reason to anticipate any such cancellation. Products sold, characteristics, and business risks associated with U. S. Government business do not differ materially from those associated with sales of the Company's products to its commercial customers. CUSTOMER SUPPORT AND SERVICE. The Company services, repairs, and provides technical support for its products. Through its sales network and design and support services, the Company is constantly made aware of customers' needs and their use of its products and services. Accordingly, a superior level of continuing customer service and support is integral to the Company's objective of developing and maintaining long-term relationships with its customers. The majority of the Company's service and support activities are provided by its field engineering team, systems engineers, and sales and administrative support personnel, both on-site at the customer's location and by telephone. FOREIGN OPERATIONS The Company's foreign operations are conducted through its wholly-owned German subsidiary, Vertex Antennentechnik GmbH, located in Duisburg, Germany. Financial information relating to these foreign operations for the past three years is shown below:
(In thousands) 1998 1997 1996 ------ ------ ------ Sales to Unaffiliated Customers ............................. $9,403 $5,881 $3,918 Transfers between Geographic Areas .......................... -- 106 1,360 Operating Income (Loss) ..................................... 577 91 (306) Identifiable Assets .......................................... 5,933 4,034 3,703
The Company translates the financial statements of its German subsidiary from its functional currency, the German mark, into U. S. dollars in accordance with applicable financial accounting standards. Assets and liabilities are translated at the exchange rate in effect at each fiscal year end. Sales and expenses are translated at the weighted average exchange rate in effect for the period reported. Any resulting gains or losses are recorded in shareholders' equity and excluded from net income. MANUFACTURING AND ENGINEERING The Company's products are manufactured from standard components and parts that are either built by the Company or by other manufacturers pursuant to the Company's specifications. Vertex considers these components and related materials to be commercially available in sufficient volume in the -7- 9 industry and expects to experience no difficulty in obtaining any materials or components needed in its manufacturing activities. However, should any of these materials or components become unavailable for a significant period, the result could have an adverse effect on the Company's business. The Company's products require substantial engineering, design, and technical support. In addition, although many of the Company's products are standardized, custom engineering is frequently required to accomplish the product modifications necessary for a particular application or installation. The Company's engineering staff is also important to its research and development activities. The Company has been successful in attracting and retaining well-qualified engineering personnel and does not anticipate a shortage of qualified personnel in the future. The Company believes that its current manufacturing facilities provide adequate manufacturing space for the foreseeable future. See Item 2 - "Properties." PRODUCT DEVELOPMENT The Company's product research and development efforts are directed primarily toward development, design, engineering, and implementation activities rather than pure research. These activities are generally undertaken in response to specific customer requests or anticipated requirements of the U. S. Government for programs that have been identified by the Company. Funding for these activities is derived from internally generated sources and customers. For the years 1998, 1997, and 1996, the Company expended $5,968,000, $3,775,000, and $3,217,000, respectively, on research and development. Costs associated with product development work funded by customers are included in the Company's cost of sales and the related revenues are included in sales. The Company strives to continually upgrade its existing products and develop new products to meet changing customer requirements and to keep pace with evolving technology in the industry. COMPETITION The Company experiences substantial competition from a number of established companies which provide a broad range of products to the satellite communications equipment market, including Andrew Corporation, Radiation Systems, Inc., Nippon Electronic Company, and Scientific-Atlanta, Inc. Certain of these companies have substantially greater financial and personnel resources than those available to the Company. The Company's products may not be proprietary or patentable, and may be subject to duplication and exploitation by its competitors. Although many of these competitors offer satellite communications products which are among the types or sizes produced by the Company, the Company believes that no single competitor offers the diversity of satellite communications products produced by the Company. The Company believes that the most important competitive factors are technical performance, capabilities, product performance, dependable delivery, and price. Maintenance and service capabilities and manufacturing experience in the industry are also important factors to customers. Accordingly, the Company strives to price its products competitively while stressing its custom engineering and servicing capabilities based upon the years of experience and technical expertise of its personnel in designing and manufacturing satellite communications products and the Company's precision metal manufacturing methods. The Company believes that its expertise in custom engineering and its ability to meet customers' relatively short-lead time requirements provide it with a distinct competitive advantage. Due to competition in the industry where the Company competes, periodic advances in technology can be expected. Therefore, the Company's ability to maintain and improve in its existing markets and to enter new markets is partially dependent upon its ability to evaluate advances in technology and incorporate such advances where appropriate into its products in a timely and effective manner. -8- 10 INTELLECTUAL PROPERTY The Company holds patents for certain technologies, products and processes. The Company does not, however, consider patents important to its business, but instead relies principally upon innovative management, technical expertise, and marketing and managerial skills to develop, enhance, and market its products. The Company believes it is less dependent on the protection of proprietary product information than on its ability to timely and effectively develop, enhance, and market its products to maintain the competitiveness of its products with those of others. The Company protects its proprietary product information through reliance on a combination of trade secrets, copyrights, patents, and technical measures, the selective use of nondisclosure agreements with customers, suppliers, and industry partners, and by limiting access to sensitive information. The Company has no reason to believe that its products and proprietary rights infringe on the proprietary rights of any third parties. There can be no assurance, however, that the Company's protective measures will preclude competitors from developing products with features similar to its products or that third parties will not assert infringement claims in the future. BACKLOG AND SEASONALITY At October 30, 1998 and 1997, the Company's backlog of unfilled orders believed to be firm was approximately $74 million and $73 million, respectively. The backlog of unfilled orders at October 30, 1998, included approximately $15 million of contracts with the U. S. Government. As is customary, these contracts include provisions which allow for cancellation at the convenience of the Government or prime contractor. Upon exercise of these provisions, the Company would be entitled to reimbursement of costs incurred and a pro rata share of profit. The Company has never received a cancellation of a material government contract and believes no such event is threatened. The Company expects that a substantial portion of the October 30, 1998 backlog will be completed and delivered in fiscal year 1999. The levels of sales and net income of the Company fluctuate moderately on a quarterly basis. The variability in recent years has been demonstrated by typically higher sales and net income in the fiscal quarters ending in June and September of each fiscal year. The primary reason for this pattern is the need for customers to complete installations during warm weather months. The fiscal quarter ending in September can also be affected by the timing of sales to U. S. Government agencies. Other factors which have caused quarterly fluctuations in sales and net income include variability of shipments under large contracts and variations in product mix and in profitability of individual orders. The Company believes these aberrations may continue to have similar impact on future results of operations, but their timing and placement within particular quarterly periods on an ongoing basis cannot be predicted. Consequently, the Company believes it is more meaningful to focus on annual rather than interim results. In addition, due to the timing differences from year-to-year in the receipt of large nonrecurring sales contracts, year-to-year comparisons of backlog can be misleading and are not necessarily indicative of future revenues. ENVIRONMENTAL COMPLIANCE Due to the nature of the Company's products, it has not been materially affected to date by environmental laws. The Company does not anticipate its business will be materially affected by any current or expected environmental laws. -9- 11 GOVERNMENT REGULATION Although the Company is not directly regulated by any governmental agency, most of its United States customers, and the telecommunications industry in general, are subject to regulation by the Federal Communications Commission (the "FCC"). In recent years, FCC decisions permitting greater competition among common carriers have had a favorable impact on the Company. In addition, the FCC controls the allocation of transmission frequencies and the performance characteristics of earth station antennas. As a result of these controls, the Company's product design specifications must conform on an ongoing basis to meet FCC or other regulatory requirements. These regulations are not expected to adversely affect the operations of the Company. Outside the United States, where some of the customers of the Company have been government- owned and operated entities, changes in government economic policy and communications regulation have affected in the past, and may be expected to affect in the future, the volume of foreign business. However, the effect of regulation in countries other than the United States in which the Company does business has generally not been detrimental to the international activities of the Company taken as a whole and is not expected to be detrimental to such activities in the foreseeable future. EMPLOYEES As of October 30, 1998, the Company employed 837 full-time employees. None of the Company's employees is represented by a labor organization and the Company is not a party to any collective bargaining agreement. The Company has never had an employee strike or a work stoppage and considers its relations with its employees to be good. The Company has not experienced any difficulty in attracting and retaining qualified employees. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS From time to time, the Company may publish, verbally or in written form, forward-looking statements relating to such matters as anticipated sales levels, anticipated financial performance, business prospects, technological developments, new products, anticipated liquidity and capital requirements, the effects of year 2000 compliance requirements, research and development activities, the results of legal proceedings and similar matters. This Annual Report on Form 10-K (or any other periodic reporting documents required of the Company) may contain forward-looking statements reflecting the current views of the Company concerning potential future events or developments, including statements in this Item and below in Item 3 in "Legal Proceedings", in Item 7 in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Item 7A in "Quantitative and Qualitative Disclosures About Market Risk." Such statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which provide a "safe harbor" for such statements. These cautionary statements are being made pursuant to the applicable provisions of the cited securities laws and with the intention of obtaining the benefits of such "safe harbor" provisions. In order to comply with the terms of the "safe harbor", the Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance and that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. Although the Company believes that the expectations reflected in its forward-looking statements are reasonable, there can be no assurance that the actual results or developments anticipated by the Company will be realized, or if substantially realized, that such results or developments will have the expected effects on the Company's business operations. The risks and uncertainties which may effect the -10- 12 operations, performance, development, and results of the Company's business include, but are not limited to, the following: general economic conditions, including the impact of changing economic conditions (including, but not limited to, the continued weak economic conditions in certain international markets); fluctuation of foreign currency exchange rates; changes in capital spending plans of certain international customers; uncertainties inherent in international operations; uncertainties relating to customer plans and commitments; rapid or unexpected technological changes; product demand and industry capacity; product development; the highly competitive environment in which the Company operates; market acceptance of new products; manufacturing efficiencies; availability of certain raw materials; domestic and foreign government regulatory policies and spending; rising costs and availability of certain components; and reliance by the Company and its suppliers on software programs that may not be year 2000 compliant and year 2000 problems that may exist in products currently or historically sold to customers of the Company. The words "believe," "expect," "anticipate," "project," "plan" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. Subsequent written or oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this section and elsewhere in this Annual Report on Form 10-K. ITEM 2. PROPERTIES. The Company owns and maintains executive and administrative offices, manufacturing facilities, and a product testing site at its headquarters at 2600 North Longview Street, Kilgore, Texas, and owns or leases certain facilities at other locations. The following is a listing of the properties owned or leased by Vertex and its subsidiaries as of October 30, 1998.
APPROXIMATE AREA OWNED LOCATION PRINCIPAL USE IN SQUARE FEET OR LEASED - -------- ------------- ---------------- --------- Kilgore, Texas Executive, administrative, 231,000 on Owned in fee engineering, and manufacturing 55 acres of land Kilgore, Texas Manufacturing 33,000 on Owned in fee 1 acre of land Longview, Texas Administrative, engineering, and 30,000 Leased to October 1999 manufacturing Santa Clara, California Administrative, engineering, and 83,000 Leased to December 2003 manufacturing Torrance, California Administrative, engineering, and 37,000* Leased to June 2002 manufacturing Albuquerque, Administrative and manufacturing 27,000 on Owned in fee New Mexico 17 acres of land Chantilly, Virginia Fabrication 9,000 Leased to March 2001 Nepean, Ontario, Fabrication 5,000 Leased to February 2002 Canada State College, Administrative, engineering, and 20,000 Leased to March 2000 Pennsylvania manufacturing Duisburg, Germany Administrative and engineering 8,000 Leased to February 1999
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APPROXIMATE AREA OWNED LOCATION PRINCIPAL USE IN SQUARE FEET OR LEASED - -------- ------------- ---------------- --------- Singapore Administrative Less than 1,000 Leased to September 1999 Dallas, Texas Administrative and engineering 2,000 Leased to February 1999
- ------------------------------------ * Approximately 15,000 square feet of the total floor space is subleased to a third party. The Company believes its facilities are adequate and will be suitable to meet its requirements for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS. The Company is not a party to any legal proceedings which would have a material, adverse effect on the Company or its business and does not believe that any such legal proceedings are threatened. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Company, through solicitation of proxies or otherwise. -12- 14 PART II The information required by Items 5 through 8, inclusive, of this report is contained in the Registrant's Annual Report to Shareholders for its fiscal year ended September 30, 1998 (the "1998 Annual Report"), selected portions of which are incorporated herein by reference, as described below. With the exception of the material incorporated by reference herein, the 1998 Annual Report is not deemed filed as a part of this Annual Report on Form 10-K. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information appearing under the caption "Market for Common Stock" on page 28 of the 1998 Annual Report is hereby incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. The information appearing in the "Selected Financial Data" table on page 1 of the 1998 Annual Report is hereby incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information appearing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 13 through 16 of the 1998 Annual Report is hereby incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. While the Company's general policy is to sell its products and services originating in the United States in the U.S. dollar currency, the Company may, from time to time, be subject to certain market risks, including foreign currency exchange rate fluctuations relating to certain sales contracts with foreign customers where payment is made in foreign currency. In the normal course of business, the Company assesses these risks and has established policies and procedures to manage its exposure to fluctuations in foreign currency values. The Company's objective of managing its exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in earnings and cash flows associated with foreign currency exchange rates for certain selected contracts with foreign customers. Accordingly, the Company utilizes foreign currency forward contracts to hedge its exposure on firm commitments denominated in foreign currency. Additional information responsive to this item is contained under the subtitle "Financial Market Risks" of "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 14 through 15 of the 1998 Annual Report and is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Consolidated Financial Statements of Vertex Communications Corporation and Subsidiaries and Notes thereto, appearing on pages 17 through 27, inclusive, together with the Report of Arthur Andersen LLP, Independent Public Accountants, thereon, appearing on page 28 of the 1998 Annual Report, are hereby incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. -13- 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS The information regarding directors of the Registrant in response to Item 7 of Schedule 14A promulgated pursuant to the Exchange Act, which will appear in the Registrant's definitive Proxy Statement in connection with the solicitation of proxies for its 1999 Annual Meeting of Shareholders, is hereby incorporated herein by reference. EXECUTIVE OFFICERS The following table sets forth the names and ages of all executive officers of the Registrant, their respective positions and offices with the Registrant, and the period during which each has served as an executive officer.
SERVED AS EXECUTIVE NAME AGE POSITION(S)* OFFICER SINCE ---- --- ----------- ------------- J. Rex Vardeman...................... 59 Chairman Of The Board, October, 1984 President, Chief Executive Officer And Director A. Don Branum........................ 61 Senior Vice President, Assistant October, 1984 Secretary And Director James D. Carter...................... 51 Vice President And Chief Financial October, 1984 Officer, Treasurer And Director Rein Luik ........................... 63 Vice President And Director Of The June, 1997 Company; And President, Vertex Electronics Group Joe A. Ylitalo....................... 52 Secretary And General Counsel January, 1997 William L. Anton..................... 60 Vice President December, 1984 H. Dean Bunnell...................... 51 Vice President Of The Company; And January, 1995 President And Chief Executive Officer, Vertex Electronic Products, Inc. Manfred Stupnik ..................... 55 Vice President Of The Company; And January, 1995 President, Vertex Microwave Products, Inc. Louis E. Becker 63 Vice President Of The Company; And October 1998 President, Vertex Antenna Systems, Llc
- ---------------------------------------- * All executive officers of the Registrant are elected annually by the Board of Directors and serve at the discretion of the Board. There are no family relationships between any director or executive officer of the Registrant and any other such person. -14- 16 The following information, as furnished by each of the persons named, relates to the business experience of each executive officer of the Registrant named above. J. Rex Vardeman is a co-founder of the Company and has served as Chairman Of The Board, President, Chief Executive Officer and a Director since its inception in October 1984. Prior to founding the Company, Mr. Vardeman served as Vice President of Harris Antenna Operations ("Harris Antenna Operations"), A unit of the Satellite Communications Division of Harris Corporation ("Harris"), until the acquisition in 1984 of The Harris Antenna Operations by the Company. In 1973, Mr. Vardeman co-founded Radio Mechanical Structures, Inc. ("RMS"), The predecessor to The Harris Antenna operations, and served as its Vice President and General Manager and a Director until the acquisition of RMS by Harris In 1977. For more than ten years prior thereto, he was employed by E-Systems, Inc., a major electronics company, in various engineering and management positions. A. Don Branum, a co-founder of the company, has served as Senior Vice President, assistant secretary, and a director since its inception in October 1984. He also served as Vice President/General Manager of the Company's Vertex Antenna Products Division from April 1994 to April 1998. Prior to joining the company, Mr. Branum served as Vice President of the Harris Antenna Operations, with responsibility for product marketing. Mr. Branum served as President of Dallas Telecommunications, Inc., A communications marketing and consulting firm which he founded from 1981 through 1984. From 1978 through 1981, Mr. Branum served as Vice President and General Manager of the Satellite Communications Division of Harris, of which the Harris Antenna Operations were a part. Mr. Branum was a co-founder of RMS in 1973 and served as its President and a director until its acquisition by Harris in 1977. James D. Carter has served the Company as Vice President and Chief Financial Officer, Treasurer, and a director since its inception in October 1984. Prior to joining the Company, Mr. Carter was employed by Harris as Controller of the Harris Antenna Operations since 1978. For more than six years prior thereto, Mr. Carter was employed by Harris in various accounting positions. Rein Luik has served as a director of the Company since August 1997 and as Vice President of the Company since June 1997, immediately following the acquisition of Vertex Satcom Systems, Inc. ("Vertex Satcom"), formerly TIW Systems, Inc., As a wholly-owned subsidiary of the Company. Dr. Luik, a co-founder of Vertex Satcom, has served as President since its inception in 1976 and has continued to serve in that position since its acquisition by the Company. Effective October 1998, Dr. Luik became President of the Vertex Electronics Group. Prior to founding Vertex Satcom, Dr. Luik was employed by the WDL Division of Aeronutronic Ford Corporation from 1962 to 1976, initially as an Engineer and subsequently as Manager of its Antenna Subsystems Engineering Department. Joe A. Ylitalo has served as Secretary and General Counsel of the Company since January 1997, prior to which time he was employed as General Counsel to the Company for more than five years. William L. Anton has served as Vice President of the Company since October 1984 and as Vice President - Marketing of Vertex Antenna Products division from September 1995 to October 1998. Mr. Anton previously served in the Position of Vice President - International Marketing from October 1987 until September 1995, and as Vice President - Operations from December 1984 through October 1987. From April 1984 through December 1984 and from August 1977 until April 1984, Mr. Anton served as Director of Operations and Program Director, respectively, of the Harris Antenna Operations. H. Dean Bunnell has served as Vice President of the Company since January 1995, immediately following the acquisition of Vertex Electronic Products, inc. ("Vepi"), formerly Maxtech, Inc., As a wholly-owned subsidiary of the Company. Mr. Bunnell is a co-founder of VEPI and has served as its President and Chief Executive Officer since its inception in 1989, and has continued to serve in such positions since the Company's acquisition of VEPI. -15- 17 Manfred Stupnik has served as Vice President of the Company since January 1995 and as President of Vertex Microwave Products, Inc. ("VMPI"), formerly Gamma-f Corp., A wholly-owned subsidiary of the Company, since 1991. Prior thereto, Mr. Stupnik held positions as Vice President of Operations and Vice President-Commercial Products during his 26 years of continuous tenure with VMPI. Louis E. Becker has served as Vice President of the Company since October 1998 and as President of Vertex Antenna Systems, LLC ("VAS"), formerly a Division of TIW SYSTEMS, INC., Since its organization in October 1998 following the acquisition of Vertex Satcom as a wholly-owned subsidiary of the Company. He was a co-founder of Vertex Satcom in 1976, and served continuously as its Executive Vice President until October 1998. Prior to 1976, he was employed by the WDL Division of Aeronutronic Ford Corporation, where he was responsible for managing the Structural/Mechanical Engineering Department. EMPLOYMENT AGREEMENTS J. Rex Vardeman, A. Don Branum, and James D. Carter, in their capacities as (i) Chairman of the Board, President and Chief Executive Officer, (ii) Senior Vice President and Assistant Secretary, and (iii) Vice President and Chief Financial Officer, and Treasurer, respectively, have each executed employment agreements with the Company. These employment agreements are each for three-year terms which automatically renew on a daily basis. Among other provisions, these agreements provide that, in consideration for remaining in the employ of the Company, each officer is entitled, subject to certain conditions, to receive benefits in the event of termination of employment under certain circumstances, including, among other reasons, a change of control of the Company. If such an officer is terminated for a reason other than (a) his death, disability or retirement, (b) for cause, or his voluntary termination other than for good reason, such officer would be entitled to receive from the Company, except as otherwise indicated below, a lump-sum severance payment equal to the sum of the following payments: (i) the officer's full base salary through the effective date of his termination at the rate then in effect, (ii) any authorized but unreimbursed business expenses and any vacation benefits which have accrued but are unpaid or unused as of the effective date of termination, (iii) any accrued but unpaid annual bonus compensation to the effective date of termination, but without accelerating the bonus payment date, (iv) an amount equal to three times the average aggregate direct annual compensation (salary and bonus) of the officer for the five fiscal years of the Company ended immediately prior to the effective date of his termination, and (v) in the event such officer is subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), resulting from any "excess parachute payment" received by such officer as described in Section 280G(b) of the Code, an amount sufficient to ensure that after payment of such excise tax, plus interest or penalties thereon, if any, as the result of such "excess parachute payment," such officer will retain free and clear of all claims, taxes, and impositions an amount equal to such excise tax, interest and penalties, if any, imposed upon the excess payment received. In the event that any such officer receives a parachute payment as a result of termination of employment, such officer would be deemed to receive an "excess parachute payment" if it equals or exceeds 300% of the officer's "base amount," generally the average annual compensation received by such officer over the five most recent tax years. The "excess parachute payment" is computed as that portion of the "parachute payment" which exceeds the "base amount." In addition, Rein Luik and Louis E. Becker, in their capacities as President of Vertex Electronics Group and Vertex Antenna Systems, LLC, respectively, entered into agreements effective as of June 11, 1997, which include the same provisions for a similar term as summarized above as related to their employment in such capacities. -16- 18 BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Registrant's directors and officers, and persons who own more than 10% of a registered class of the Registrant's equity securities, to file initial reports of ownership and reports of changes in ownership of the Registrant's securities with the Securities and Exchange Commission (the "Commission") on Forms 3, 4, or 5, as applicable. Such persons are required by regulations promulgated by the Commission pursuant to the Exchange Act to furnish the Registrant with copies of all such Section 16(a) report forms they file with the Commission. Based solely on its review of the copies of such report forms received by it with respect to fiscal year 1998, or written representations from certain reporting persons, the Registrant believes that all filing requirements applicable to its directors, officers, and persons who own more than 10% of a registered class of the Registrant's equity securities have been timely complied with in accordance with Section 16(a) of the Exchange Act. ITEM 11. EXECUTIVE COMPENSATION. The information regarding executive compensation in response to Item 8 of Schedule 14A which will appear in the Registrant's definitive Proxy Statement in connection with the solicitation of proxies for its 1999 Annual Meeting of Shareholders is hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information regarding security ownership of certain beneficial owners and management in response to Item 6 of Schedule 14A which will appear in the Registrant's definitive Proxy Statement in connection with the solicitation of proxies for its 1999 Annual Meeting of Shareholders is hereby incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information regarding certain relationships and related transactions in response to Item 7 of Schedule 14A which will appear in the Registrant's definitive Proxy Statement in connection with the solicitation of proxies for its 1999 Annual Meeting of Shareholders is hereby incorporated herein by reference. -17- 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
PAGE IN 1998 (a)1. CONSOLIDATED FINANCIAL STATEMENTS. ANNUAL REPORT ------------- Report of Independent Public Accountants.................................................... 28 Consolidated Income Statements For the years ended September 30, 1998, 1997, and 1996..................................................................... 17 Consolidated Balance Sheets As of September 30, 1998 and 1997........................................................ 18 Consolidated Statements of Cash Flows For the years ended September 30, 1998, 1997, and 1996..................................................................... 19 Consolidated Statements of Shareholders' Equity For the years ended September 30, 1998, 1997, and 1996..................................................................... 20 Notes to Consolidated Financial Statements.................................................. 21 2. FINANCIAL STATEMENT SCHEDULES. PAGE NO. -------- Report of Independent Public Accountants on Schedule....................................... S-1 SCHEDULE -------- II - Valuation and Qualifying Accounts..................................................S-2
All other schedules are omitted because they are either not required or not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. (b) REPORTS ON FORM 8-K. The Registrant did not file any reports on Form 8-K during the last quarter of the period covered by this report, and none was required. -18- 20 (c) EXHIBITS. The following Exhibits are filed herewith pursuant to Item 601 of Regulation S-K or are incorporated herein by reference to previous filings noted, as applicable:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 3.1 ....... Restated Articles of Incorporation of the Registrant, as amended by Articles of Amendment No. 1 and No. 2 thereto, filed as Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 (File No. 333-53391). 3.2 ....... Bylaws of the Registrant, as amended by Amendments No. 1 and No. 2 thereto, filed as Exhibit 4.2 to the Registrant's Registration Statement on Form S-3 (File No. 333-53391). 10.1 ....... Savings/Profit Sharing Plan of the Registrant, as amended and restated, effective as of June 1, 1991 filed as Exhibit 10-A to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1991 (File No. 0-15277). 10.2 ....... Stock Option Plan for Key Employees of the Registrant filed as Exhibit A to the Registrant's definitive Proxy Statement in connection with the solicitation of proxies for its 1987 Annual Meeting of Shareholders (File No. 0-15277). 10.3 ....... First Amendment to the Stock Option Plan for Key Employees filed as Exhibit 10- E to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1988 (File No. 0-15277). 10.4 ....... Second Amendment to the Stock Option Plan for Key Employees - Filed as Exhibit A to the Registrant's definitive Proxy Statement in connection with the solicitation of proxies for its 1992 Annual Meeting of Shareholders (File No. 0- 15277). 10.5 ....... 1995 Stock Compensation Plan of the Registrant filed as Exhibit A to the Registrant's definitive Proxy Statement in connection with the solicitation of proxies for its 1995 Annual Meeting of Shareholders (File No. 0-15277). 10.6 ....... Outside Directors Stock Option Plan of the Registrant filed as Exhibit B to the Registrant's definitive Proxy Statement in connection with the solicitation of proxies for its 1987 Annual Meeting of Shareholders (File No. 0-15277). 10.7 ....... Executive Employment Agreement, dated November 10, 1994, by and between the Registrant and J. Rex Vardeman, Chairman of the Board, President and Chief Executive Officer of the Registrant, filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (File No. 0- 15277). 10.8 ....... Executive Employment Agreement, dated November 10, 1994, by and between the Registrant and A. Don Branum, Senior Vice President of the Registrant, filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (File No. 0-15277). 10.9 ....... Executive Employment Agreement, dated November 10, 1994, by and between the Registrant and James D. Carter, Vice President - Finance and Treasurer of the Registrant, filed as Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (File No. 0-15277).
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 10.10 ....... Executive Employment Agreements, dated June 11, 1997, by and between TIW Systems, Inc., a wholly-owned subsidiary of the Registrant, and Rein Luik, President of TIW Systems, Inc. and a Vice President of the Registrant, and Louis E. Becker, Vice President of TIW Systems, Inc. and a Vice President of the Registrant, filed as Exhibits to the Registrant's Current Report on Form 8-K/A dated June 26, 1997 (Date of Earliest Event Reported: May 9, 1997; File No. 0-15277). 10.11 ....... Indemnification Agreement, dated October 26, 1994, by and between the Registrant and J. Rex Vardeman; and schedule of other officers and directors of the Registrant, each of whom has entered into a similar agreement with the Registrant, filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (File No. 0-15277). 10.12 ....... Management Incentive Compensation Plan of the Registrant, as amended and restated effective October 1, 1995, filed as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 (File No. 0-15277). 10.13 ....... Management Incentive Compensation Plan for Divisions of the Registrant, as amended and restated effective October 1, 1995, filed as Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 (File No. 0-15277). 10.14 ....... Management Incentive Compensation Plan of Gamma-f Corp., a wholly-owned subsidiary of the Registrant, as amended and restated effective October 1, 1995, filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 (File No. 0-15277). 10.15 ....... Management Incentive Compensation Plan of Maxtech, Inc., a wholly-owned subsidiary of the Registrant, as amended and restated effective October 1, 1995, filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 (File No. 0-15277). 10.16 ....... Employee Profit Sharing Bonus Plan of the Registrant, as amended and restated effective October 1, 1996, filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1996 (File No. 0-15277). 10.17 ....... Employee Profit Sharing Bonus Plan of Gamma-f Corp., a wholly-owned subsidiary of the Registrant, as amended and restated effective as of October 1, 1996, filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1996 (File No. 0-15277). 10.18 ....... Management Incentive Compensation Plan of TIW Systems, Inc., a wholly-owned subsidiary of the Registrant, effective as of October 1, 1997, filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 (File No. 0-15277). 10.19 ....... Management Incentive Compensation Plan of Vertex-New Mexico, Inc., a wholly- owned subsidiary of TIW Systems, Inc., effective as of October 1, 1997, filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 (File No. 0-15277). 10.20 ....... Employee Profit Sharing Bonus Plan of Maxtech, Inc., a wholly-owned subsidiary of the Registrant, effective as of October 1, 1997, filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 (File No. 0-15277).
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 10.21 ....... Employee Profit Sharing Bonus Plan of Vertex-New Mexico, Inc., a wholly-owned subsidiary of TIW Systems, Inc., effective as of October 1, 1997, filed as Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 (File No. 0-15277). 10.22 ....... Revolving Credit Loan Agreement and related Promissory Note, each dated June 11, 1997, by and between Bank One, Texas, National Association and the Registrant, filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 (File No. 0-15277). 10.23* ....... Second Amendment to Loan Agreement, dated September 15, 1998, by and between the Registrant and Bank One, Texas, National Association. 10.24* ....... First Amendment to the Savings/Profit Sharing Plan of the Registrant, as amended and restated, effective as of October 1, 1998. 10.25* ....... Management Incentive Compensation Plan of the Registrant, its Subsidiaries and its Divisions, as amended and restated, effective as of October 1, 1998. 10.26* ....... Employee Profit Sharing Bonus Plan of the Registrant, its Subsidiaries and its Divisions, as amended and restated, effective as of October 1, 1998. 13* ....... Annual Report to Shareholders of the Registrant for the year ended September 30, 1998, to the extent specified in Parts II, III and IV hereof. 21* ....... Subsidiaries of the Registrant. 23* ....... Consent of Independent Public Accountants. 27* ....... Financial Data Schedule.
- --------------------------- *Filed herewith. -21- 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: December 21, 1998 Vertex Communications Corporation (Registrant) By: /s/ J. REX VARDEMAN ------------------------------------ J. Rex Vardeman Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ------ /s/ J. REX VARDEMAN Chairman of the Board, December 21, 1998 - ---------------------------------------- President, Chief J. Rex Vardeman Executive Officer (Principal Executive Officer) and Director /s/ A. DON BRANUM Director December 21, 1998 - ---------------------------------------- A. Don Branum /s/ JAMES D. CARTER Vice President and December 21, 1998 - ---------------------------------------- Chief Financial Officer James D. Carter (Principal Financial and Accounting Officer), Treasurer and Director /s/ BILL R. WOMBLE Director December 21, 1998 - ---------------------------------------- Bill R. Womble /s/ DONALD E. HEITZMAN, SR. Director December 21, 1998 - ---------------------------------------- Donald E. Heitzman, Sr.
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/s/ JOHN G. FARMER Director December 21, 1998 - ---------------------------------------- John G. Farmer /s/ REIN LUIK Director December 21, 1998 - ---------------------------------------- Rein Luik
-23- 25 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To the Shareholders of Vertex Communications Corporation: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in Vertex Communications Corporation's 1998 annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated October 23, 1998. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The supplemental schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Dallas, Texas October 23, 1998 S-1 26 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 9/30/98 $ 1,254 $ (159) $ -- $ 198 (1) $ 897 Year Ended 9/30/97 268 210 805(4) 29 (1) 1,254 Year Ended 9/30/96 241 35 -- 8 (1) 268 ALLOWANCE FOR INVENTORY OBSOLESCENCE Year Ended 9/30/98 $ 1,453 $ (18) $ -- $ 178 (2) $ 1,257 Year Ended 9/30/97 771 449 518(4) 285 (2) 1,453 Year Ended 9/30/96 417 536 -- 182 (2) 771 ALLOWANCE FOR WARRANTY CLAIMS Year Ended 9/30/98 $1,052 $ 1,327 $ -- $ 1,036 (3) $ 1,343 Year Ended 9/30/97 530 761 200(4) 439 (3) 1,052 Year Ended 9/30/96 591 343 -- 404 (3) 530
- --------------------------- (1) Doubtful accounts written off, less recoveries. (2) Disposal of obsolete inventory. (3) Warranty claims processed. (4) Beginning balance of allowance account balance brought forward from acquisition of TIW Systems, Inc. S-2 27 INDEX OF EXHIBITS
Number DESCRIPTION - ------ ----------- 10.23 Second Amendment to Loan Agreement, dated September 15, 1998, by and between the Registrant and Bank One, Texas, National Association. 10.24 First Amendment to the Savings/Profit Sharing Plan of the Registrant, as amended and restated, effective as of October 1, 1998. 10.25 Management Incentive Compensation Plan of the Registrant, its Subsidiaries and its Divisions, as amended and restated, effective as of October 1, 1998. 10.26 Employee Profit Sharing Bonus Plan of the Registrant, its Subsidiaries and its Divisions, as amended and restated, effective as of October 1, 1998. 13 Annual Report to Shareholders of the Registrant for the year ended September 30, 1998, to the extent specified in Parts II, III and IV hereof. 21 Subsidiaries of the Registrant. 23 Consent of Independent Public Accountants. 27 Financial Data Schedule.
EX-10.23 2 2ND AMENDMENT TO LOAN AGREEMENT DATED 9/15/98 1 ================================================================================ VERTEX COMMUNICATIONS CORPORATION EXHIBIT 10.23 TO ANNUAL REPORT ON FORM 10-K For Fiscal Year ended September 30,1998 SECOND AMENDMENT TO LOAN AGREEMENT BY AND BETWEEN VERTEX COMMUNICATIONS CORPORATION AND BANK ONE, TEXAS, NATIONAL ASSOCIATION ================================================================================ 2 EXHIBIT 10.23 SECOND AMENDMENT TO LOAN AGREEMENT THIS SECOND AMENDMENT TO LOAN AGREEMENT (this "Amendment") is entered into as of September 15, 1998, by and between VERTEX COMMUNICATIONS CORPORATION ("Borrower") and BANK ONE, TEXAS, NATIONAL ASSOCIATION ("Bank"). WHEREAS, Borrower and Bank entered into that certain Loan Agreement dated as of June 11, 1997 (as amended by First Amendment, the "Loan Agreement"); and WHEREAS, the Loan Agreement currently governs, inter alia, Borrower's Revolving Line of Credit in the maximum amount of $15,000,000.00 as currently evidenced by that certain promissory note dated June 11, 1997 payable by Borrower to the order of Bank in the stated principal amount of $15,000,000.00 (the "Note"); and WHEREAS, the Loan Agreement, the Note and all other documents evidencing, securing, governing and/or pertaining to the Note are hereinafter referred to collectively as the "Loan Documents"; and WHEREAS, the parties hereto now desire to modify the Loan Agreement as hereinafter provided; NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties, and agreements contained herein, and for other valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I Definitions Section 1.01 The terms used in this Amendment to the extent not otherwise defined herein shall have the same meanings as in the Loan Agreement. ARTICLE II Amendment Section 2.01 Effective as of the date hereof, the term "Termination Date" in Subparagraph "1.a." of the Loan Agreement is hereby amended to be June 11, 2000. SECOND AMENDMENT TO LOAN AGREEMENT - Page 1 3 EXHIBIT 10.23 ARTICLE III Note 3.01 Contemporaneously with the execution hereof, Borrower agrees to execute and deliver to Bank a promissory note (the "Renewal Note") in the stated principal amount of $15,000,000.00, in form and substance satisfactory to Bank, in renewal and extension of the Note. ARTICLE IV Representations, Warranties, Ratification and Reaffirmation Section 4.01 Borrower hereby represents and warrants that: (i) the representations and warranties contained in the Loan Agreement are true and correct on and as of the date hereof as though made on and as of the date hereof, (ii) no event has occurred and is continuing that constitutes an Event of Default or would constitute an Event of Default but for the requirement of notice or lapse of time or both, and (iii) there are no claims or offsets against, or defenses or counterclaims to, the Note, the indebtedness evidenced thereby or the liens securing same (including without limitation, any defenses or offsets resulting from or arising out of breach of contract or duty, the amount of interest charged, collected or received on the Note heretofore, or breach of any commitments or promises of any type). Section 4.02 The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Loan Agreement, but except as expressly modified and superseded by this Amendment, the terms and provisions of the Loan Agreement are ratified and confirmed and shall continue in full force and effect, Borrower hereby agreeing that the Loan Agreement and the other Loan Documents are and shall continue to be outstanding, validly existing and enforceable in accordance with their respective terms. ARTICLE V Miscellaneous Section 5.01 Each of the Loan Documents is hereby amended so that any reference in the Loan Documents to the Loan Agreement shall mean a reference to the Loan Agreement as amended hereby. Section 5.02 This Amendment may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 5.03 This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. SECOND AMENDMENT TO LOAN AGREEMENT - Page 2 4 EXHIBIT 10.23 EXECUTED as of the date first above written. BORROWER: VERTEX COMMUNICATIONS CORPORATION By: -------------------------- ----------------------------- Name: -------------------------- --------------------------- Title: -------------------------- -------------------------- BANK: BANK ONE, TEXAS, NATIONAL ASSOCIATION By: -------------------------- ----------------------------- Name: -------------------------- --------------------------- Title: -------------------------- -------------------------- SECOND AMENDMENT TO LOAN AGREEMENT - Page 3 EX-10.24 3 1ST AMENDMENT TO THE SAVINGS PROFIT SHARING PLAN 1 ================================================================================ VERTEX COMMUNICATIONS CORPORATION EXHIBIT 10.24 TO ANNUAL REPORT ON FORM 10-K For Fiscal Year ended September 30,1998 FIRST AMENDMENT TO THE SAVINGS/PROFIT SHARING PLAN OF VERTEX COMMUNICATIONS CORPORATION ================================================================================ 2 EXHIBIT 10.24 FIRST AMENDMENT TO THE VERTEX COMMUNICATIONS CORPORATION SAVINGS/PROFIT-SHARING PLAN This First Amendment to the Vertex Communications Corporation Savings/Profit-Sharing Plan (hereinafter referred to as the "Plan") is hereby executed and adopted on this 17th day of September, 1998, by Vertex Communications Corporation (hereinafter referred to as the "Employer"). W I T N E S S E T H WHEREAS, the Employer has heretofore maintained and administered the Plan and related Trust, in a manner intended to ensure that the Plan continues to qualify under Sections 401(a) and 501(a) of the Internal Revenue Code of 1986; and WHEREAS, pursuant to the terms of the Plan, the Employer reserved the right to amend the Plan; and WHEREAS, the Employer desires to amend various provisions of the Plan to be effective October 1, 1998; and NOW THEREFORE, in consideration of the premises and mutual covenants contained herein the Employer hereby amends the Plan, notwithstanding any other provision of the Plan to the contrary as follows: I. Section II.F. of the Adoption Agreement is hereby amended and hereinafter reads as follows: "F. Service with companies or employers unrelated to the Employer, shall not be considered for purposes of crediting Service for eligibility and vesting under the Plan, except however, for purposes of determining eligibility and vesting under the Plan, Service with an entity that becomes an Affiliate of the Employer through an acquisition, shall be determined as of the date an Employee of such Affiliate first performed one (1) Hour of Service with such Affiliate." II. Section III.A. of the Adoption Agreement is hereby amended and hereinafter reads as follows: "A. Salary Deposit Contributions: 1. For any Plan Year, the amount specified in a Salary Deposit Agreement shall be between 0% and 15% of Compensation. 2. Salary Deposit Agreements may be modified or stopped each October 1 and April 1." III. Section C1. Is after C. and before D. under Section III. of the Adoption Agreement and hereinafter reads as follows: VERTEX COMMUNICATIONS CORPORATION FIRST AMENDMENT TO SAVINGS/PROFIT SHARING PLAN PAGE 1 3 EXHIBIT 10.24 "C1. Maximum Salary Deposit Contributions Matched: 1. The amount of Employer Matching, if any, shall be the greater of: $1 for $1 up to $800; or 50% of Salary Deposit Contributions up to 6% of Plan Year Compensation. 2. Each location of the Employer may receive a different Employer Matching Contribution amount." IV. In all other respects, the Plan is hereby ratified and affirmed Vertex Communications Corporation By: /s/ J. D. Carter --------------------------------- Title: Vice President and CFO VERTEX COMMUNICATIONS CORPORATION FIRST AMENDMENT TO SAVINGS/PROFIT SHARING PLAN PAGE 2 EX-10.25 4 MANAGEMENT INCENTIVE COMPENSATION PLAN 1 ================================================================================ VERTEX COMMUNICATIONS CORPORATION EXHIBIT 10.25 TO ANNUAL REPORT ON FORM 10-K For Fiscal Year ended September 30,1998 MANAGEMENT INCENTIVE COMPENSATION PLAN OF VERTEX COMMUNICATIONS CORPORATION, ITS SUBSIDIARIES AND ITS DIVISIONS, AS AMENDED AND RESTATED ================================================================================ 2 EXHIBIT 10.25 MANAGEMENT INCENTIVE COMPENSATION PLAN OF VERTEX COMMUNICATIONS CORPORATION (AS AMENDED AND RESTATED EFFECTIVE OCTOBER 1, 1998) 1. PURPOSE OF PLAN. This Management Incentive Compensation Plan is intended to attract and retain key employees of outstanding competence and to promote the growth and development of the Company by providing incentive compensation as a reward to those officers, managers, and other key employees of the Company or a Business Unit (as hereinafter defined) who contribute by their ability, industry, productivity, and ingenuity to the management, development, and successful operations of the Company. 2. DEFINITIONS. For purposes of the Plan, the following terms shall have the ascribed meanings unless otherwise clearly apparent from the context: "Annual Operating Plan" (AOP) - shall mean the projected plan of operations of the Company or each of its Business Units, as applicable, as approved by the Board of Directors for a designated Fiscal Year. "Annual Performance Objectives" - shall mean the financial objectives of the Company or each Business Unit, respectively, which the Compensation Committee shall promulgate and define as applicable for each Fiscal Year relative to various degrees of achievement of Awards under the Plan at various levels of Net Income After Tax achieved by the Company for such Fiscal Year and various levels of Pretax Income for each Business Unit, respectively, for such Fiscal Year and such other measurements of financial accomplishment of the Company and each respective Business Unit as it shall in its sole discretion authorize and approve as conditions precedent to full realization by Participants of Awards under the Plan, which Annual Performance Objectives shall be communicated annually to all Participants in the Plan. "Award" - shall mean a cash distribution to be made to a Participant for a Fiscal Year as determined in accordance with the provisions of the Plan. "Board of Directors" - shall mean the Board of Directors of Vertex Communications Corporation. VERTEX COMMUNICATIONS CORPORATION MANAGEMENT INCENTIVE COMPENSATION PLAN PAGE 1 3 EXHIBIT 10.25 "Business Unit" - shall mean any Subsidiary, Division, or Group of the Company to which this Plan shall hereafter become applicable by action of the Board of Directors or as otherwise required by applicable law. "Company" - shall mean Vertex Communications Corporation. "Compensation Committee" - shall mean the Compensation Committee of the Board of Directors. "Division" - shall mean any Division of the Company, including Vertex Antenna Products Division, Vertex Control Systems Division, Vertex Special Projects Division, and any other Division of the Company to which this Plan may hereafter become applicable by action of the Board of Directors. "Employee" - shall mean a person who is in the regular full-time employment of the Company or one of its Business Units as determined by the personnel policies and practices of the Company or Business Unit, respectively. "Fiscal Year" - shall mean the taxable year of the Company and its Business Units, as applicable, ending September 30. "Group" - shall mean any separate Group within the Company that is not defined as a Division or Subsidiary, including Vertex Antenna Group, Vertex Antenna Group Marketing, Vertex Business Development Group, Vertex Electronics Group, and any other Group to which this Plan may hereafter become applicable by action of the Board of Directors. "Net Income After Tax" - shall mean for each Fiscal Year the net income of the Company after federal and state taxes determined in accordance with generally accepted accounting principles consistently applied and as approved by the independent public accountants who have examined the financial accounts and records of the Company for such Fiscal Year; provided, however, that any such determination of the Net Income After Tax shall be adjusted to include the effect of the amount of any Award paid or to be paid to a Participant pursuant to the Plan. VERTEX COMMUNICATIONS CORPORATION MANAGEMENT INCENTIVE COMPENSATION PLAN PAGE 2 4 EXHIBIT 10.25 "Participant" - shall mean any Employee who is eligible to receive an Award during a Fiscal Year, as designated and approved for such Fiscal Year by the Compensation Committee. "Plan" - shall mean the Management Incentive Compensation Plan of the Company and its Business Units, as amended and restated, effective as of October 1, 1998. "Pretax Income" - shall mean for each Fiscal Year the net income of each Business Unit, as applicable, before federal and state taxes determined in accordance with generally accepted accounting principles consistently applied and as approved by the independent public accountants who have examined the financial accounts and records of the Company and each of its Business Units for such Fiscal Year; provided, however, that such Pretax Income determination shall be adjusted to include the effect of the amount of any Award paid or to be paid to a Participant pursuant to the Plan. "Projected Net Income After Tax" - shall mean for each Fiscal Year the level of Net Income After Tax projected and approved by the Board of Directors to be achieved by the Company for such Fiscal Year pursuant to the Annual Operating Plan for such Fiscal Year. "Projected Pretax Income" - shall mean for each Fiscal Year the level of Pretax Income projected and approved by the Board of Directors to be achieved by each Business Unit, respectively, for such Fiscal Year pursuant to the Annual Operating Plan as related to the appropriate Business Group for such Fiscal Year. "Subsidiary" - shall mean any Subsidiary of Vertex Communications Corporation, including Vertex Microwave Products, Inc., Vertex Electronic Products, Inc., Vertex-New Mexico, Inc.; Vertex Satcom Systems, Inc., Vertex Antenna Systems, L.L.C., Vertex Antennentechnik, GmbH, or any other Subsidiary which may hereafter adopt the Plan. "Target Bonus Fund" - shall mean the target fund established from time to time by the Board of Directors to fund the payment of the Awards for a designated Fiscal Year hereunder. VERTEX COMMUNICATIONS CORPORATION MANAGEMENT INCENTIVE COMPENSATION PLAN PAGE 3 5 EXHIBIT 10.25 3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Compensation Committee appointed by the Board of Directors. The Compensation Committee shall consist of not less than two (2) members of the Board of Directors. The Board of Directors may from time to time appoint members of the Compensation Committee in substitution for or in addition to members previously appointed and may fill vacancies, however caused, in the Compensation Committee. The Compensation Committee shall select one of its members as its Chairman and shall hold its meetings at such times and places as it shall deem advisable. A majority of the members of the Compensation Committee shall constitute a quorum. All action of the Compensation Committee shall be taken by a majority of its members. Any action may be taken by written instrument signed by a majority of the members, and any action so taken shall be deemed fully as effective as if it had been taken by a vote of the majority of the members at the meeting duly called and held. The Compensation Committee may appoint a Secretary, shall keep minutes of its meetings, and shall make such rules and regulations for the conduct of its business as it shall deem advisable. The Compensation Committee shall have the sole authority and power, subject to the express provisions and limitations of the Plan, to construe the Plan and to adopt, prescribe, amend, and rescind rules and regulations relating to the Plan, and to make all determinations necessary or advisable for administering the Plan. No member of the Board of Directors or the Compensation Committee shall be liable for any action or determination made in good faith with respect to the Plan. All determinations, decisions, and directions made or given by the Board of Directors or the Compensation Committee under the Plan shall be final and conclusive. The decision of the Board of Directors or the Compensation Committee on any question concerning or involving the interpretation or administration of the Plan shall be final and conclusive, and no provision of the Plan shall be deemed to give any Employee, his/her legal representative or assigns, any right to participate in the Plan, except to VERTEX COMMUNICATIONS CORPORATION MANAGEMENT INCENTIVE COMPENSATION PLAN PAGE 4 6 EXHIBIT 10.25 such extent, if any, as the Compensation Committee may have determined or approved pursuant to the provisions of the Plan. 4. PARTICIPATION IN THE PLAN. During the existence of the Plan, the Compensation Committee shall designate for each Fiscal Year the Employees eligible to participate in the Plan for such Fiscal Year. The Compensation Committee shall give consideration to the recommendations and suggestions submitted to it by officers, managers, and department heads of the Company and its respective Business Units with respect to Employees who are mainly responsible in an executive, administrative, professional, technical, or advisory capacity for the management of the operations of the Company or its respective Business Units. 5. DETERMINATION OF INCENTIVE COMPENSATION. Prior to the commencement of each Fiscal Year, the Board of Directors shall determine the Target Bonus Fund that will be available for payment of Awards for such Fiscal Year, subject to the achievement and satisfaction of certain Annual Performance Objectives by the Company and its Business Units, respectively, for such Fiscal Year. Within thirty (30) days thereafter, the Compensation Committee in its discretion shall determine the amount of the targeted Award for each of the Participants in the Plan for such Fiscal Year by determining the share of the Target Bonus Fund that each Participant will be eligible to receive for such Fiscal Year, subject to the terms of the Plan, including without limitation, compliance and satisfaction by the Company and each Business Unit, respectively, with the Annual Performance Objectives established by the Compensation Committee for such Fiscal Year and set forth in comprehensive written memoranda to the Participants of the Plan for such Fiscal Year. The payment schedule will be delineated annually by the Compensation Committee in a memorandum from the Chairman of the Compensation Committee as soon as practical after the determination thereof. Each Participant shall be notified of his/her selection to participate in the Plan and the share of such Participant in and to the Target Bonus Fund for such Fiscal Year, including the Annual Performance Objectives applicable for such Fiscal Year. VERTEX COMMUNICATIONS CORPORATION MANAGEMENT INCENTIVE COMPENSATION PLAN PAGE 5 7 EXHIBIT 10.25 6. AWARD OF INCENTIVE COMPENSATION. Within forty-five (45) days after completion of the Company's Fiscal Year, the Compensation Committee shall determine the amount of the Award to be paid to each Participant for such Fiscal Year. The amount of the Award of each Participant for each Fiscal Year shall be determined by measuring (i) the actual Net Income After Tax achieved for such Fiscal Year by the Company and actual Pretax Income achieved by each respective Business Unit compared to the Projected Net Income After Tax for the Company and Projected Pretax Income for each Business Unit, respectively, as reflected in the applicable Annual Operating Plan for such Fiscal Year and (ii) the degree of accomplishment by the Company and its Business Units, respectively, of the Annual Performance Objectives for such Fiscal Year set forth in the comprehensive memoranda to Plan Participants referred to in Section 5 hereof as related to the projected objectives contained in the applicable Annual Operating Plan for such Fiscal Year. The amount of each Award thus determined shall be distributed by the Company to the Participants as soon as practical after the determination thereof. Unless the Participant has filed with the Company or applicable Business Unit written instructions to the contrary, any Award payable with respect to a deceased Participant shall be paid to such Participant's surviving spouse, if any; otherwise, such Award shall be paid to such Participant's estate. 7. ELIGIBILITY FOR INCENTIVE COMPENSATION; PRORATION FOR LEAVES OF ABSENCE. An Employee shall be eligible for and shall receive the full amount of his/her Award for a Fiscal Year, provided such Employee remains in the continuous, active employment of the Company or Business Unit, as applicable, for such entire Fiscal Year. A Participant who has taken one or more authorized leaves of absence lasting, in the aggregate, for four or more weeks during the Fiscal Year will receive a prorated share of his/her Award reflecting the time away from work. An Employee whose employment terminates for any reason before the end of the Fiscal Year is not eligible for participation in the Plan, and shall not be entitled to any Award for such Fiscal Year. Notwithstanding the preceding, in the event of termination of employment before the end of the Fiscal Year by reason of the retirement of a Participant pursuant to the terms of an VERTEX COMMUNICATIONS CORPORATION MANAGEMENT INCENTIVE COMPENSATION PLAN PAGE 6 8 EXHIBIT 10.25 applicable retirement or savings plan, or the death of such Employee, the Compensation Committee shall have the power and authority to determine whether an Award should be paid to such Employee for such Fiscal Year. The determination of the Compensation Committee in the exercise of such power and authority in its sole discretion shall be final and binding upon each Employee and anyone claiming by or through such Employee. 8. AMENDMENT OR TERMINATION. The Board of Directors may, from time to time, amend, modify, change, suspend, or terminate, in whole or in part, any or all of the provisions of the Plan, except that: (a) No amendment, modification, change, suspension, or termination may affect any right of any Participant to receive Awards made to such Participant prior to the effective date of such amendment, modification, change, suspension, or termination; and, (b) No amendment, modification, or change may withdraw the obligation and right of interpretation and administration of the Plan from the Compensation Committee. 9. NO RIGHT TO EMPLOYMENT. Nothing in the Plan shall be deemed to give any Employee or his/her legal representative or assigns, or any other person or entity claiming under or though the Employee, any contract or other right to participate in the benefits of the Plan other than as expressly set forth herein. Nothing in the Plan shall be construed as constituting a commitment, guarantee, agreement, or understanding of any kind or nature that the Company or any of its Business Units will continue to employ any individual (whether or not an Employee or a Participant); nor shall the Plan affect in any way the right of the Company or any Business Unit, as applicable, to terminate the employment of any individual (whether or not an Employee or a Participant) at any time. 10. INDEMNIFICATION OF COMPENSATION COMMITTEE. In addition to such other rights of indemnification as they may have as members of the Board of Directors or as members of the Compensation Committee, the members of the Compensation Committee shall be indemnified by the VERTEX COMMUNICATIONS CORPORATION MANAGEMENT INCENTIVE COMPENSATION PLAN PAGE 7 9 EXHIBIT 10.25 Company against the reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit, or proceedings, or in connection with any appeal thereof, to which they or any of them may be party by reason of any action taken or failure to act under or in connection with the Plan, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit, or proceedings, except in relation to matters as to which it shall be adjudged in such action, suit, or proceedings that such Compensation Committee member is liable for negligence or misconduct in the performance of his/her duties, provided that within thirty (30) days after institution of any such action, suit, or proceedings a Compensation Committee member shall in writing offer the Company the opportunity, at its own expense, to pursue and defend the same. 11. ADOPTION BY BUSINESS UNITS. This Plan may be adopted by each Business Unit, as appropriate, by such action as is required to effectively approve the application of the Plan to such Business Unit. 12. EFFECTIVE DATE AND TERM. This Plan (as hereby amended and restated) supersedes all prior management incentive compensation plans applicable to the Company or any of its Business Units, effective as of October 1, 1998, and shall remain in effect until terminated or otherwise amended or modified by the Company. Executed this 19th day of October, 1998, effective, however, as of October 1, 1998. VERTEX COMMUNICATIONS CORPORATION MANAGEMENT INCENTIVE COMPENSATION PLAN PAGE 8 10 EXHIBIT 10.25 VERTEX COMMUNICATIONS CORPORATION By: /s/ J. Rex Vardeman ------------------------------ J. REX VARDEMAN, President ATTEST: By: /s/ Joe A. Ylitalo ---------------------------- JOE A. YLITALO, Secretary VERTEX COMMUNICATIONS CORPORATION MANAGEMENT INCENTIVE COMPENSATION PLAN PAGE 9 EX-10.26 5 EMPLOYEE PROFIT SHARING BONUS PLAN 1 ================================================================================ VERTEX COMMUNICATIONS CORPORATION EXHIBIT 10.26 TO ANNUAL REPORT ON FORM 10-K For Fiscal Year ended September 30,1998 FIRST AMENDMENT TO THE SAVINGS/PROFIT SHARING PLAN OF VERTEX COMMUNICATIONS CORPORATION, AS AMENDED AND RESTATED ================================================================================ 2 EXHIBIT 10.26 EMPLOYEE PROFIT SHARING BONUS PLAN OF VERTEX COMMUNICATIONS CORPORATION (AS AMENDED AND RESTATED EFFECTIVE OCTOBER 1, 1998) 1. PURPOSE OF PLAN. The Employee Profit Sharing Bonus Plan is intended to promote the growth and development of the Company by providing bonus compensation as a reward to those employees of the Company or a Business Unit (as hereinafter defined) who contribute by their ability, industry, productivity, and longevity to the growth, development, and profitability of the Company. 2. DEFINITIONS. For purposes of the Plan, the following terms shall have the ascribed meanings unless otherwise clearly apparent from the context: "Annual Operating Plan" (AOP) - shall mean the projected plan of operations of the Company or each of its Business Units, as applicable, as approved by the Board of Directors for a designated Fiscal Year. "Annual Performance Objectives" - shall mean the financial objectives of the Company or each Business Unit, respectively, which the Compensation Committee shall promulgate and define as applicable for each Fiscal Year relative to various degrees of achievement of Bonuses under the Plan at various levels of Net Income After Tax achieved by the Company for such Fiscal Year and various levels of Pretax Income for each Business Unit, respectively, for such Fiscal Year and such other measurements of financial accomplishment by each respective Business Unit as it shall in its sole discretion authorize and approve as conditions precedent to realization by Participants of Bonuses under the Plan, which Annual Performance Objectives shall be communicated annually to all Participants in the Plan. "Board of Directors" - shall mean the Board of Directors of Vertex Communications Corporation. "Bonus" - shall mean a cash distribution to be made to a Participant for a Fiscal Year as determined in accordance with the provisions of the Plan. "Bonus Fund" - shall mean the targeted amount established each Fiscal Year for the Company VERTEX COMMUNICATIONS CORPORATION EMPLOYEE PROFIT SHARING BONUS PLAN PAGE 1 3 EXHIBIT 10.26 or each Business Unit, as applicable, by the Board of Directors to fund the payment of the Bonuses for such Fiscal Year hereunder. "Bonus Share" - shall mean the share of the Bonus Fund allotted to each Participant in accordance with the provisions of the Plan. "Business Unit" - shall mean any Subsidiary, Division, or Group of the Company to which this Plan may hereafter become applicable by action of the Board of Directors or as otherwise required by applicable law. "Company" - shall mean Vertex Communications Corporation. "Compensation Committee" - shall mean the Compensation Committee of the Board of Directors. "Division" - shall mean any Division of the Company, including Vertex Antenna Products Division, Vertex Control Systems Division, Vertex Special Projects Division, and any other Division of the Company to which this Plan may hereafter become applicable by action of the Board of Directors. "Employee" - shall mean a person who is in the regular full-time employment of the Company or one of its Business Units as determined by the personnel policies and practices of the Company or Business Unit, respectively, except, however, any such person who is an officer or director of the Company or a participant pursuant to the Management Incentive Compensation Plan of the Company or applicable Business Unit thereof for such Fiscal Year. "Fiscal Year" - shall mean the taxable year of the Company and its Business Units, as applicable, ending September 30. "Group" - shall mean any separate Group within the Company that is not defined as a Division or Subsidiary, including Vertex Antenna Group, Vertex Antenna Group Marketing, Vertex Business Development Group, Vertex Electronics Group, and any other Group to which this Plan may hereafter become applicable by action of the Board of Directors. VERTEX COMMUNICATIONS CORPORATION EMPLOYEE PROFIT SHARING BONUS PLAN PAGE 2 4 EXHIBIT 10.26 "Management Incentive Compensation Plan" - shall mean the Management Incentive Compensation Plan of the Company, as applicable to the Company or Business Unit in which the Participant is eligible to participate during the Fiscal Year. "Net Income After Tax" - shall mean for each Fiscal Year the net income of the Company after federal and state taxes determined in accordance with generally accepted accounting principles consistently applied and as approved by the independent public accountants who have examined the financial accounts and records of the Company for such Fiscal Year; provided, however, that any such determination of the Net Income After Tax shall be adjusted to include the effect of the amount of any Bonus paid or to be paid to a Participant pursuant to the Plan. "Participant" - shall mean any Employee who is eligible to receive a Bonus during the Fiscal Year. "Plan" - shall mean the Employee Profit Sharing Bonus Plan of the Company and its Business Units, as amended and restated effective, as of October 1, 1998. "Pretax Income" - shall mean for each Fiscal Year the net income of each Business Unit, as applicable, before federal and state taxes determined in accordance with generally accepted accounting principles consistently applied and as approved by the independent public accountants who have examined the financial accounts and records of the Company and each of its Business Units for such Fiscal Year; provided, however, that such Pretax Income determination shall be adjusted to include the effect of the amount of any Bonus paid or to be paid to a Participant pursuant to the Plan. "Projected Net Income After Tax" - shall mean for each Fiscal Year the level of Net Income After Tax projected and approved by the Board of Directors to be achieved by the Company for such Fiscal Year pursuant to the Annual Operating Plan for such Fiscal Year. "Projected Pretax Income" - shall mean for each Fiscal Year the level of Pretax Income projected and approved by the Board of Directors to be achieved by each Business Unit, respectively, for VERTEX COMMUNICATIONS CORPORATION EMPLOYEE PROFIT SHARING BONUS PLAN PAGE 3 5 EXHIBIT 10.26 such Fiscal Year pursuant to the Annual Operating Plan as related to the appropriate Business Unit, as applicable, for such Fiscal Year. "Subsidiary" - shall mean any Subsidiary of Vertex Communications Corporation, including Vertex Microwave Products, Inc., Vertex Electronic Products, Inc., Vertex-New Mexico, Inc., Vertex Satcom Systems, Inc., Vertex Antenna Systems, L.L.C., or any other Subsidiary which may hereafter adopt the Plan. 3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Compensation Committee appointed by the Board of Directors. The Compensation Committee shall consist of not less than two (2) members of the Board of Directors. The Board of Directors may from time to time appoint members of the Compensation Committee in substitution for or in addition to members previously appointed and may fill vacancies, however caused, in the Compensation Committee. The Compensation Committee shall select one of its members as its Chairman and shall hold its meetings at such times and places, as it shall deem advisable. A majority of the members of the Compensation Committee shall constitute a quorum. All action of the Compensation Committee shall be taken by a majority of its members. Any action may be taken by written instrument signed by a majority of the members, and any action so taken shall be deemed fully as effective as if it had been taken by a vote of the majority of the members at the meeting duly called and held. The Compensation Committee may appoint a Secretary, shall keep minutes of its meetings, and shall make such rules and regulations for the conduct of its business as it shall deem advisable. The Compensation Committee shall have the sole authority and power, subject to the express provisions and limitations of the Plan, to construe the Plan and to adopt, prescribe, amend, and rescind rules and regulations relating to the Plan, and to make all determinations necessary or advisable for administering the Plan. No member of the Board of Directors or the Compensation Committee shall be liable for any action or determination made in good faith with respect to the Plan. VERTEX COMMUNICATIONS CORPORATION EMPLOYEE PROFIT SHARING BONUS PLAN PAGE 4 6 EXHIBIT 10.26 All determinations, decisions, and directions made or given by the Board of Directors or the Compensation Committee under the Plan shall be final and conclusive. The decision of the Board of Directors or the Compensation Committee on any question concerning or involving the interpretation or administration of the Plan shall be final and conclusive, and no provision of the Plan shall be deemed to give any Employee, his/her legal representative or assigns, any right to participate in the Plan, except to such extent, if any, as the Compensation Committee may have determined or approved pursuant to the provisions of the Plan. 4. PARTICIPATION IN THE PLAN. All Employees in the regular full-time employ of the Company or one of its Business Units as of the beginning of each Fiscal Year (October 1) are eligible to participate in the Plan. 5. DETERMINATION OF THE BONUS FUND. Prior to the commencement of each Fiscal Year, the Board of Directors shall determine the Projected After Tax Income for the Company and the Projected Pretax Income of each Business Unit, respectively, for such Fiscal Year and the amount of the targeted Bonus Fund that will be available for payment of Bonuses for such Fiscal Year, subject to the achievement and satisfaction of certain Annual Performance Objectives by the Company and its Business Units, respectively, for such Fiscal Year. Within thirty (30) days thereafter, the Compensation Committee in its discretion shall determine the targeted Bonus Share of the Bonus Fund to be allocated to each Participant for such Fiscal Year subject to the terms of the Plan, including, without limitation, compliance and satisfaction by the Company and each respective Business Unit, with Annual Performance Objectives established by the Compensation Committee for such Fiscal Year. The Compensation Committee shall make such determinations pursuant to the following procedures: Step One: The aggregate number of years of employment service of each Participant with the Company or Business Unit, as applicable, shall be multiplied by the hourly rate of compensation of each such Participant on October 1 of such Fiscal Year. VERTEX COMMUNICATIONS CORPORATION EMPLOYEE PROFIT SHARING BONUS PLAN PAGE 5 7 EXHIBIT 10.26 Step Two: The mathematical products thus determined in Step One above for all Participants employed by the Company or Business Unit, as applicable, shall be aggregate in a total sum. Step Three: The quotient (expressed as a percentage) obtained by dividing the amount determined in Step One above as to each Participant by the aggregate amount determined in Step Two above shall constitute the Bonus Share of each respective Participant in and to the Bonus Fund for such Fiscal Year. Step Four: The amount of the Bonus Share of each Participant (expressed in dollars) in and to the Bonus Fund for each Fiscal Year shall be determined by multiplying the Bonus Fund for such Fiscal Year applicable to the Company or Business Unit, as appropriate, by the quotient obtained in Step Three above as to such Participant. Each Participant in the Plan shall be notified of his/her Bonus Share for such Fiscal Year as soon as practical after the projected amount thereof has been determined in accordance with the provisions of the Plan. 6. AWARD OF BONUS COMPENSATION. Within sixty (60) days after completion of the Company's Fiscal Year, the Compensation Committee shall determine the amount of the Bonus to be paid to each Participant for such Fiscal Year. The final pre-tax or net income, as applicable, utilized to calculate the Bonus Share for each Participant shall be determined using the same method used pursuant to the Management Incentive Compensation Plan. 7. ELIGIBILITY FOR INCENTIVE COMPENSATION; PRORATION FOR LEAVES OF ABSENCE. An Employee shall be eligible for and shall receive the full amount of his/her Bonus for a Fiscal Year, provided such Employee remains in the continuous, active employment of the Company or Business Unit, as applicable, for such VERTEX COMMUNICATIONS CORPORATION EMPLOYEE PROFIT SHARING BONUS PLAN PAGE 6 8 EXHIBIT 10.26 entire Fiscal Year. A Participant who has taken one or more authorized leaves of absence lasting, in the aggregate, for four or more weeks during the Fiscal Year will receive a prorated share of his/her Bonus reflecting the time away from work. An Employee whose employment terminates for any reason before the end of the Fiscal Year is not eligible for participation in the Plan, and shall not be entitled to any Bonus for such Fiscal Year. Notwithstanding the preceding, in the event of termination of employment before the end of the Fiscal Year by reason of the retirement of an otherwise eligible Employee pursuant to the terms of an applicable retirement or savings plan, or the death of such Employee, the Compensation Committee shall have the power and authority to determine whether a Bonus should be paid to such Employee for such Fiscal Year. The determination of the Compensation Committee in the exercise of such power and authority in its sole discretion shall be final and binding upon each such Employee and anyone claiming by or through such Employee. 8. AMENDMENT OR TERMINATION. The Board of Directors may, from time to time, amend, modify, change, suspend, or terminate, in whole or in part, any or all of the provisions of the Plan, except that: (a) No amendment, modification, change, suspension, or termination may affect any right of any Participant to receive a Bonus made to him/her prior to the effective date of such amendment, modification, change, suspension, or termination; and, (b) No amendment, modification, or change may withdraw the obligation and right of interpretation and administration of the Plan from the Compensation Committee. 9. NO RIGHT TO EMPLOYMENT. Nothing in the Plan shall be deemed to give any Employee or his/her legal representative or assigns, or any other person or entity claiming under or though him/her, any contract or other right to participate in the benefits of the Plan other than as expressly set forth herein. Nothing in the Plan shall be construed as constituting a commitment, guarantee, agreement, or understanding of any kind or nature that the Company or any of its Business Units will continue to employ any individual (whether VERTEX COMMUNICATIONS CORPORATION EMPLOYEE PROFIT SHARING BONUS PLAN PAGE 7 9 EXHIBIT 10.26 or not an Employee or a Participant); nor shall the Plan affect in any way the right of the Company or its Business Units to terminate the employment of any individual (whether or not an Employee or a Participant) at any time. 10. INDEMNIFICATION OF COMPENSATION COMMITTEE. In addition to such other rights of indemnification as they may have as members of the Board of Directors or as members of the Compensation Committee, the members of the Compensation Committee shall be indemnified by the Company against the reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit, or proceedings, or in connection with any appeal thereof, to which they or any of them may be party by reason of any action taken or failure to act under or in connection with the Plan, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit, or proceedings, except in relation to matters as to which it shall be adjudged in such action, suit, or proceedings that such Compensation Committee member is liable for negligence or misconduct in the performance of his/her duties, provided that within thirty (30) days after institution of any such action, suit, or proceedings a Compensation Committee member shall in writing offer the Company the opportunity, at its own expense, to pursue and defend the same. 11. ADOPTION BY BUSINESS UNITS. This Plan may be adopted by each Business Unit, as appropriate, by such action as is required to approve the application of the Plan to such Business Unit. 12. EFFECTIVE DATE AND TERM. This Plan (as hereby amended and restated) supersedes all prior employee profit sharing bonus plans of the Company or any of its Business Units, effective as of October 1, 1998, and shall remain in effect until terminated or otherwise amended or modified by the Company. Executed this 17th day of October, 1998, effective, however, as of October 1, 1998. VERTEX COMMUNICATIONS CORPORATION EMPLOYEE PROFIT SHARING BONUS PLAN PAGE 8 10 EXHIBIT 10.26 VERTEX COMMUNICATIONS CORPORATION By: /s/ J. Rex Vardeman ---------------------------------- J. REX VARDEMAN, President ATTEST: By: /s/ Joe A. Ylitalo -------------------------------- Joe A. Ylitalo, Secretary VERTEX COMMUNICATIONS CORPORATION EMPLOYEE PROFIT SHARING BONUS PLAN PAGE 9 EX-13 6 ANNUAL REPORT TO SHAREHOLDERS OF THE REGISTRANT 1 =============================================================================== VERTEX COMMUNICATIONS CORPORATION EXHIBIT 13 TO ANNUAL REPORT ON FORM 10-K For Fiscal Year ended September 30,1998 ANNUAL REPORT TO SHAREHOLDERS =============================================================================== 2 EXHIBIT 13 Selected Financial Data Vertex Communications Corporation and Subsidiaries
Year Ended September 30, 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (In thousands, except per share amounts) Sales $130,017 $ 92,433 $ 77,525 $ 65,024 $ 56,549 Costs and expenses 116,571 82,602 69,491 58,547 50,880 Income before income taxes 13,798 10,350 8,551 7,015 6,294 Net income 10,086 7,175 6,100 5,195 4,625 Diluted earnings per share 1.90 1.47 1.32 1.12 .98 -------- -------- -------- -------- -------- Working capital $ 56,018 $ 45,584 $ 39,484 $ 33,396 $ 36,035 Long-term debt 59 988 875 1,312 -- Total assets 110,771 100,493 71,974 63,854 58,457 Total liabilities 26,561 27,003 16,500 14,168 11,272 Total shareholders' equity 84,210 73,490 55,474 49,686 47,185 -------- -------- -------- -------- -------- Orders booked $132,338 $122,702 $ 74,770 $ 79,132 $ 55,226 Backlog of unfilled orders 73,971 71,650 41,381 44,136 30,028 -------- -------- -------- -------- --------
No cash dividends have been declared or paid 3 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION GENERAL Over the past several years, a significant portion of the Company's business has relied on its ability to design and deliver products for commercial applications and, from time to time, products used for military/defense purposes outside the United States. Export sales have accounted for more than half of the Company's revenues in each of the last three fiscal years. While the Company concluded fiscal 1998 with a favorable backlog of unfilled orders, current events around the globe are causing customers to delay orders and, in some cases, cancel projects that provide for the Company's sales. In the fourth quarter of fiscal 1998 and during the first quarter of fiscal 1999, bid-proposal activity and incoming orders have declined from expected levels. Management believes this slowdown is attributable to the current financial instability and depressed economic conditions in several foreign countries, particularly certain Asian and European countries. Based upon these factors, management expects the Company's revenues and corresponding profits in fiscal 1999 to experience a decline in growth rates below the levels of recent years until international markets stabilize. The current slowdown is expected to be short-term in duration and international product demand should return to more normal levels by fiscal year 2000. The Company recently organized a new U.S. operating division whose primary purpose is to obtain certain government-related contracts by utilizing and adapting the Company's existing products and capabilities. While there can be no assurance that this division will be successful, the sales it generates are expected to partially offset the impact of declining foreign sales in the near future. RESULTS OF OPERATIONS FISCAL 1998 COMPARED TO FISCAL 1997 Record consolidated sales in fiscal 1998 of $130.0 million increased by $37.6 million, or 40.7 percent compared to sales of $92.4 million in fiscal 1997. This sales increase was primarily attributable to the acquisition of TIW Systems, Inc. (TIW) in June of 1997. (TIW was restructured in early fiscal 1999 into two entities, Vertex Satcom Systems, Inc. and Vertex Antenna Systems, LLC.) Cost of sales expressed as a percentage of sales of 71.4 percent in fiscal 1998 remained essentially unchanged compared to 71.2 percent in fiscal 1997. Research and development spending was $6.0 million in fiscal 1998, or $2.2 million (58.1 percent) greater than in fiscal 1997, mainly due to the acquisition of TIW and, to a lesser extent, certain developmental work on a small antenna product line. Marketing expenses of $6.9 million in fiscal 1998 increased by $1.9 million, or 36.9 percent, compared to $5.1 million in fiscal 1997, due to the inclusion of TIW operating results in all of fiscal 1998 (fiscal 1997 consolidated operating results reflect the inclusion of TIW since the date of acquisition) and increased staffing levels. General and administrative expenses increased by $2.9 million, or 36.6 percent, in fiscal 1998 over fiscal 1997, primarily as a result of the acquisition of TIW. The effective tax rate for fiscal 1998 of 26.9 percent was lower than the prescribed statutory tax rates primarily due to tax incentive benefits available from export sales and research and development tax credits. 4 EXHIBIT 13 Net income in fiscal 1998 was a record $10.1 million or $1.90 per share, an increase of 40.6 percent more than the $7.2 million or $1.47 per share achieved in fiscal 1997, due primarily to increased sales volume and despite increased spending discussed above. The Company's backlog of unfilled orders was a record $74.0 million at September 30, 1998, an increase of 3.2 percent over the $71.7 million at the 1997 year end, of which a major portion is scheduled for shipment in fiscal 1999. FISCAL 1997 COMPARED TO FISCAL 1996 Consolidated sales of $92.4 million in fiscal 1997 increased by 19.2 percent as compared to sales of $77.5 million in fiscal 1996. The Company acquired TIW effective June 11, 1997. TIW's sales (included in consolidated sales since acquisition date) accounted for approximately 75 percent of this sales increase and the balance of the increase was due to increased product demand. Cost of sales expressed as a percentage of sales declined from 73.4 percent in fiscal 1996 to 71.2 percent in fiscal 1997. This cost reduction was largely attributable to increased sales volume of higher margin solid-state amplifiers and standard product antennas, while sales of lower margin low-noise amplifiers declined. Research and development expenditures were $3.8 million in fiscal 1997 and $3.2 million in fiscal 1996, or $.6 million (17.3 percent) greater, due to inclusion of TIW's operating results since the effective date of its acquisition. Spending for marketing the Company's products of $5.1 million in fiscal 1997 increased by $.8 million, or 19.2 percent, from the prior year mainly due to the addition of TIW's marketing spending of $.7 million. General and administrative expenses of $8.0 million in fiscal 1997 increased by $2.9 million or 55.9 percent over the prior year. The addition of TIW's expenses of $1.2 million and increased staffing levels were the primary factors contributing to this increase. Investment income of $.7 million in fiscal 1997 remained essentially the same as the $.6 million earned in fiscal 1996. However, the Company's cash available for investment purposes declined significantly in the fourth quarter of fiscal 1997 due to the TIW acquisition. The effective tax rate for fiscal 1997 of 30.7 percent was lower than the prescribed statutory tax rates primarily due to research and development credits, tax incentives available from export shipments, and non-taxable investment income. Net income in fiscal 1997 increased 17.6 percent to $7.2 million or $1.47 per share, compared to $6.1 million or $1.32 per share for fiscal 1996. The Company's backlog of unfilled orders was $71.7 million at September 30, 1997, compared to $41.4 million at the 1996 year end. FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION GENERAL The Company's future operating results and financial condition may be affected by various trends and factors including the following: general economic conditions, including the impact of changing economic conditions; fluctuation of foreign currency exchange rates; changes in capital expenditure plans of certain international customers; rapid or unexpected technological changes; product demand and industry capacity; product development; competition; market acceptance of new products; manufacturing efficiencies; availability of 5 EXHIBIT 13 certain raw materials; domestic and foreign government regulations and spending; and rising costs and availability of certain components. In addition, the Company's future operating results and financial condition may be affected by the size and timing of individual orders booked, which may also cause fluctuations in quarterly operating results. Due to the factors noted above, the Company's future earnings and stock price may be subject to some fluctuation, particularly on a quarterly basis. Past business trends should not be used to anticipate future trends and historical performance should not be considered as a reliable indicator of future performance. Additionally, any shortfall in revenue or earnings from the levels anticipated by securities analysts could have an immediate and significant effect on the trading price of the Company's common stock in any given period. INFLATION Generally, inflationary trends do not materially impact the Company's operations. However, because the Company's sales contracts are usually negotiated on a fixed-priced basis prior to actual purchase of certain raw materials and purchased parts, rapid unforeseen price increases in any of these items could adversely affect profit margins for short periods. The Company has not experienced a material adverse effect over the past five years from inflation because of the relatively low rates of inflation experienced in the United States and Germany over this period of time, and none is currently anticipated for the foreseeable future. FINANCIAL MARKET RISKS The Company maintains two foreign sales offices and operates a foreign subsidiary which are subject to the effects of fluctuations in foreign currency exchange rates. The sales offices are located in England and Singapore. Should the British pound currency or the Singapore dollar currency as related to the U.S. dollar turn materially unfavorable, the Company's marketing expenses could increase accordingly. The Company's operations located in Duisburg, Germany involve a complete operating entity. Daily operations (sales, costs and expenses, and income taxes) are conducted in its functional currency, the German mark. Should this currency as related to the U.S. dollar change in a material adverse manner, consolidated results of operations could be materially impacted. In addition, to the extent taxable income is generated by the German operations, the consolidated effective tax rate may be unfavorably impacted. The German statutory tax rate is approximately 50 percent compared to the present U.S. statutory tax rate of 34 percent on taxable income up to $10 million. The Company's general policy is to sell products manufactured or supplied by its domestic operations in the U.S. dollar currency. Products supplied by its German operations are sold in its functional currency. The Company has one sales contract that will be performed by a domestic subsidiary where payment will be made in the European Currency Unit. The Company has in place a forward exchange hedge contract equal to approximately U.S. $.7 million. The hedge contract should minimize exposure to an unfavorable foreign currency rate change. Should the exchange rate between the two currencies suffer an adverse change of 10 percent, the effect on net income would not be material. The Company has not suffered any material losses or adverse effects due to fluctuations in the currency exchange rate in the British pound, the Singapore dollar, or the German mark relative to the U.S. dollar. 6 LIQUIDITY AND CAPITAL RESOURCES EXHIBIT 13 Cash flows from operating activities over the past three years totaled $21.7 million, reflecting strong net income of $23.4 million, before the effect of depreciation and amortization, but partially offset by increased accounts receivable and inventories. The fiscal 1998 year-end balances in accounts receivable and inventories, compared to the prior year-end balances, increased by 9.1 percent and 13.8 percent, respectively, as a result of the 40.7 percent increase in sales achieved in fiscal 1998. Cash of $9.0 million was invested during the last three years in new fixed asset additions. A major portion of these expenditures was made at the Company's manufacturing facility in Kilgore, Texas. In June 1997, the Company acquired TIW for approximately $7.9 million in cash and 574,349 shares of Vertex's common stock in a purchase transaction. In fiscal 1998, the Company paid in full a $.5 million bank note associated with the TIWacquisition that was scheduled to mature in November 2000. In fiscal 1997, financing activities included a $1.1 million bank loan through the Company's German subsidiary to satisfy its working capital needs. Terms of the loan call for repayment in 24 equal monthly installments. In fiscal 1997, cash of $7.1 million was used to pay down debt assumed in the acquisition of TIW. During the three-year period ended September 30, 1998, cash of $1.5 million was used to pay debt incurred in the 1995 acquisition of Maxtech, Inc. (now known as Vertex Electronic Products, Inc.). In June 1998, the Company adopted a plan to repurchase up to a maximum of 500,000 shares of its common stock through open market and private transactions. Shares acquired under this repurchase plan will be used to satisfy stock option plan requirements and possibly future acquisitions, although no such transaction is currently contemplated. As of September 30, 1998, 6,500 shares of stock have been purchased in the public market under this repurchase plan. In fiscal 1996, the Company purchased 26,600 shares of its common stock under a similar stock repurchase plan. Cash of $1.4 million was generated during the past three fiscal years by sales of the Company's stock pursuant to stock-based compensation plans (refer to Note 5 of Notes to Consolidated Financial Statements for further information). The Company's bank credit facilities include a 2.5 million German mark credit line and an unsecured domestic credit line of $20 million, consisting of $10 million for working capital advances and $10 million to support stand-by letters of credit. The German credit facility had an unpaid balance of 249,000 German marks ($150,000 U.S. dollars) at September 30, 1998 and bears interest at the rate of 4.7 percent per annum. The domestic credit facility bears interest on advances at LIBOR plus 1.5 percent and credit line fees are .25 percent annually for the unused portion. As of September 30, 1998 and 1997, no principal advances were outstanding under this domestic credit facility and issued and outstanding letters of credit totaled $4,476,000 and $272,000, respectively. Management believes that forecasted cash flows, combined with the Company's strong financial condition and available credit lines, will be sufficient to fund operations for the foreseeable future. The Company is not aware of any demands that are likely to affect liquidity in an adverse manner. YEAR 2000 COMPLIANCE The Company is assessing and correcting the potential impact of the problem with computer software programs, operating systems, and equipment containing computer processing chips that are unable to properly interpret the upcoming calendar year 2000 and beyond. As this problem pertains to internal concerns, this process has involved identification, review, and updating or replacing, as necessary, in-house systems and equipment, 7 EXHIBIT 13 beginning with the most significant through the least important. The costs associated with this effort have not been material and additional costs not yet incurred are expected to be immaterial to the Company. Management believes that the Company's significant systems and equipment that can be affected by improperly recognizing the date of year 2000 and beyond are capable of operating properly and are year 2000 date compliant. A substantial portion of the Company's products sold over the past years and those products currently being offered for sale are earth station antennas which include drive motors, feed assemblies, and other mechanical components. The function of these products is not directly affected by the changing of a calendar date. Certain other of the Company's products, such as antenna controllers, operate by the use of embedded software and vendor-supplied electronic components that may be date sensitive. The majority of these products were designed so that the calendar date changing to 2000 and beyond will not hinder or affect their performance. There are, however, a limited number of products sold in prior years that could be affected by the year 2000 problem. The Company is in the process of contacting such customers and now offers an upgrade package to properly recognize the date and remedy the problem. In order to ascertain the full potential impact, the Company plans to distribute, collect, and evaluate questionnaires to certain customers, suppliers, and other third parties whose lack of readiness as related to year 2000 compliance could have a material adverse effect on the Company or its products. Until this effort is substantially complete, the Company will be unable to completely assess its year 2000 risks. The Company has, however, begun to develop a year 2000 contingency plan and expects it to be completed and ready for implementation by the end of the second quarter of fiscal 1999. The foregoing discussion regarding year 2000 compliance, the Company's assessment, and the Company's state of readiness represent management's best estimate as to the reasonable steps it has taken and should take to achieve year 2000 compliance and minimize or eliminate possible related disruptions to operations. However, there can be no assurance that management's assessment of the risks and potential problems are accurate, or that its actions and planned actions will timely resolve the problems inherent with year 2000 compliance. Therefore, the Company cannot be assured that the year 2000 problem will not materially affect operations or perhaps expose the Company to third-party liability. Certain of the preceding statements related to year 2000 compliance issues are forward-looking and actual results could vary significantly from the Company's planned and anticipated results. The Company is relying on analyses and recommendations of informed employees and third parties in making the above forward-looking statements, which may prove to be inadequate or incomplete. 8 EXHIBIT 13 CONSOLIDATED INCOME STATEMENTS Vertex Communications Corporation and Subsidiaries
Year Ended September 30, 1998 1997 1996 ---------- ---------- ---------- (In thousands, except per share amounts) SALES $ 130,017 $ 92,433 $ 77,525 COSTS AND EXPENSES: Cost of sales 92,772 65,785 56,911 Research and development 5,968 3,775 3,217 Marketing 6,915 5,050 4,236 General and administrative 10,916 7,992 5,127 ---------- ---------- ---------- 116,571 82,602 69,491 ---------- ---------- ---------- Operating income 13,446 9,831 8,034 ---------- ---------- ---------- OTHER INCOME (EXPENSE): Income from investments 459 686 632 Interest expense (107) (167) (115) ---------- ---------- ---------- Income before income taxes 13,798 10,350 8,551 ---------- ---------- ---------- PROVISION FOR INCOME TAXES 3,712 3,175 2,451 ---------- ---------- ---------- NET INCOME $ 10,086 $ 7,175 $ 6,100 ========== ========== ========== EARNINGS PER SHARE Basic $ 1.98 $ 1.54 $ 1.38 Diluted 1.90 1.47 1.32 ========== ========== ========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING Basic 5,105 4,645 4,434 Diluted 5,308 4,878 4,612 ========== ========== ==========
See Notes to Consolidated Financial Statements 9 EXHIBIT 13 CONSOLIDATED BALANCE SHEETS Vertex Communications Corporation and Subsidiaries
As of September 30, 1998 1997 ---------- ---------- (In thousands, except share amounts) ASSETS Current assets: Cash and cash equivalents $ 11,239 $ 5,407 Accounts receivable, less allowance for doubtful accounts of $897 and $1,254 39,239 35,977 Inventories 30,946 27,198 Income tax receivable -- 1,130 Deferred income taxes 270 784 ---------- ---------- 81,694 70,496 Property and equipment: Land 558 558 Buildings and improvements 9,161 8,554 Equipment 21,543 19,315 Construction in progress 771 804 Less: accumulated depreciation (16,560) (13,004) ---------- ---------- 15,473 16,227 Goodwill, net of accumulated amortization of $2,063 and $1,134 12,744 12,794 Other assets, less accumulated amortization of $1,036 and $975 860 976 ---------- ---------- TOTAL ASSETS $ 110,771 $ 100,493 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,987 $ 7,413 Accrued liabilities 15,729 13,278 Customers' advances 3,286 3,139 Current portion of long-term debt 674 1,082 ---------- ---------- 25,676 24,912 Long-term debt 59 988 Deferred income taxes 826 1,103 Commitments and contingencies (Note 12) Shareholders' equity: Common stock, $.10 par value, 20,000,000 shares authorized, 5,235,751 shares issued 524 524 Capital in excess of par value 35,030 35,107 Retained earnings 50,119 40,033 Treasury stock, at cost, 118,073 shares and 148,813 shares (1,491) (1,828)
10 EXHIBIT 13
Translation adjustment 28 (346) ---------- ---------- 84,210 73,490 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 110,771 $ 100,493 ========== ==========
See Notes to Consolidated Financial Statements 11 EXHIBIT 13 CONSOLIDATED STATEMENTS OF CASH FLOWS Vertex Communications Corporation and Subsidiaries
Year Ended September 30, 1998 1997 1996 -------- -------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 10,086 $ 7,175 $ 6,100 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,546 3,109 2,728 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (3,262) (612) (4,841) Inventories (3,748) (4,888) (1,302) Other assets 55 750 (30) Accounts payable and accrued liabilities 784 682 2,039 Customers' advances 147 1,402 (278) Income taxes, net 729 (710) 1,008 -------- -------- -------- Net cash provided by operating activities 9,337 6,908 5,424 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (2,802) (4,088) (2,149) Acquisition, net of cash acquired (Note 4) -- (8,043) -- -------- -------- -------- Net cash used in investing activities (2,802) (12,131) (2,149) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt -- 1,137 -- Repayment of long-term debt (1,337) (8,216) (437) Purchase of treasury stock 121) -- (436) Proceeds from exercise of stock options 381 736 246 Other 346 (370) (95) -------- -------- -------- Net cash used in financing activities (731) (6,713) (722) -------- -------- -------- Effect of exchange rate changes on cash 28 (53) (27) Net increase (decrease) in cash and cash equivalents 5,832 (11,989) 2,526 Cash and cash equivalents at beginning of year 5,407 17,396 14,870 -------- -------- -------- Cash and cash equivalents at end of year $ 11,239 $ 5,407 $ 17,396 ======== ======== ========
12 EXHIBIT 13
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 185 $ 203 $ 35 Income taxes, net of refunds 2,706 3,787 1,443 ========= ========= =========
See Notes to Consolidated Financial Statements 13 EXHIBIT 13 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Vertex Communications Corporation and Subsidiaries
Capital in Common Excess of Retained Treasury Translation Stock Par Value Earnings Stock Adjustment Total -------- -------- -------- -------- -------- -------- (In thousands, except share amounts) Balance at September 30, 1995 $ 466 $ 24,963 $ 26,758 $ (2,700) $ 199 $ 49,686 -------- -------- -------- -------- -------- -------- Exercise of stock options (34,400 shares) -- (157) -- 403 -- 246 Purchase of treasury stock (26,600 shares) -- -- -- (436) -- (436) Translation adjustment -- -- -- -- (122) (122) Net income -- -- 6,100 -- -- 6,100 -------- -------- -------- -------- -------- -------- 1996 $ 466 $ 24,806 $ 32,858 $ (2,733) $ 77 $ 55,474 -------- -------- -------- -------- -------- -------- Acquisition of TIWSystems, Inc. (Note 4) (574,349 shares) 58 10,470 -- -- -- 10,528 Exercise of stock options (73,533 shares) -- (169) -- 905 -- 736 Translation adjustment -- -- -- -- (423) (423) Net income -- -- 7,175 -- -- 7,175 -------- -------- -------- -------- -------- -------- 1997 $ 524 $ 35,107 $ 40,033 $ (1,828) $ (346) $ 73,490 -------- -------- -------- -------- -------- -------- Exercise of stock options (37,240 shares) -- (77) -- 458 -- 381 Purchase of treasury stock (6,500 shares) -- -- -- (121) -- (121) Translation adjustment -- -- -- -- 374 374 Net income -- -- 10,086 -- -- 10,086 -------- -------- -------- -------- -------- -------- 1998 $ 524 $ 35,030 $ 50,119 $ (1,491) $ 28 $ 84,210 ======== ======== ======== ======== ======== ========
See Notes to Consolidated Financial Statements 14 EXHIBIT 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Vertex Communications Corporation and Subsidiaries September 30, 1998 The Company is engaged in the engineering, design, manufacture, and field installation of satellite communications earth station products, with antenna sizes ranging from 1.2 meters to 34 meters in diameters, and which operate in the domestic, international, and military radio frequencies. 1. SUMMARY OF ACCOUNTING PRACTICES PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all significant intercompany transactions. MANAGEMENT ESTIMATES. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make assumptions and estimates that affect certain reported amounts of assets, liabilities, revenues, and expenses at the date of the consolidated financial statements. Actual results could differ from those estimates. These estimates mainly involve the reported amounts of accounts receivable and inventory reserves, income tax provisions, expected costs to complete sales contracts accounted for under the percentage of completion method, warranty provisions, and useful lives of property and equipment. RECOGNITION OF REVENUES, COSTS AND EXPENSES. Revenues from sales other than long-term contracts are recognized when the earnings process has been completed. The earnings process is considered complete upon product shipment or upon completion and storage of the product, if shipment is delayed at the customer's request and related payment has been received. Service revenues are recorded when the services are rendered. Sales contracts which extend beyond one year are accounted for using the percentage of completion method. Under this method, revenues are recognized based upon costs incurred compared to total costs expected. Continual revisions of estimated total contract costs are made during the life of the contracts based on the best information available and may result in current period adjustments to contract revenues previously reported. Revenues include contract costs and related profits. Amounts billed in excess of contract costs and related profits are included in current liabilities and were $4,988,000 and $3,449,000 at September 30, 1998 and 1997, respectively. Unbilled costs and related profits included in accounts receivable at September 30, 1998 and 1997 were $14,252,000 and $14,696,000, respectively. These amounts are billed according to specific contract terms and should be collected within one year. Sales recognized on long-term contracts and the related cost of sales were as follows:
(In thousands) 1998 1997 1996 ------- ------- ------- Sales $51,426 $28,356 $14,099 Cost of Sales 39,619 23,640 13,138 ======= ======= =======
RESEARCH AND DEVELOPMENT. Company-funded research and development expenditures are expensed as incurred, including costs relating to patents or rights which may result from such expenditures. Costs generated by research and development work funded by customers are expensed as cost of sales in the period when the related revenues are recorded. Revenues are recorded in the period in which the customer-funded work is completed. The Company has no obligation to repay any funds provided by customers regardless of the outcome of research and development work. 15 EXHIBIT 13 CASH EQUIVALENTS. The Company considers cash equivalents to be liquid investments with original maturities of three months or less. INVENTORIES. Inventories are valued at the lower of cost or market and include the cost of raw materials, labor, plant overhead, and purchased parts. Cost is determined using the first-in, first-out method. The components of inventory consisted of the following:
(In thousands) 1998 1997 ------- ------- Raw materials $ 8,638 $ 8,844 Work-in-process 15,427 13,626 Finished goods 6,881 4,728 ------- ------- $30,946 $27,198 ======= =======
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost and are depreciated over their estimated useful lives using the straight-line method. The estimated useful lives of buildings are 25 years and equipment are 3 to 7 years. Expenditures for maintenance and repairs are charged to expense when incurred; betterments and major renewals are capitalized. GOODWILL. Goodwill represents the excess of purchase price over the fair market value of net assets acquired. Goodwill is being amortized on a straight-line basis over 15 years. The Company periodically reviews the carrying value of this intangible asset and will make any necessary adjustment if the related facts and circumstances suggest that its carrying value is impaired or is not recoverable. This policy is consistent with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of", which the Company adopted in October 1995. EARNINGS PER SHARE. Effective October 1, 1997 the Company adopted SFAS No. 128, "Earnings Per Share" and all prior periods have been restated to conform with the requirements of this pronouncement. Basic earnings per share were computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share were computed by dividing net income by the sum of the weighted average number of shares outstanding and the number of equivalent shares assumed outstanding under the Company's stock-based compensation plans. The number of equivalent shares assumed outstanding were 203,000, 233,000, and 178,000 in fiscal 1998, 1997, and 1996, respectively. CONCENTRATION OF CREDIT RISK. The Company sells its products to its customers under various payment terms such as: cash in advance, irrevocable letter of credit, and open account. These customers can generally be classified as governmental agencies, communications concerns, or other commercial entities. Management believes no significant credit risk exists as of September 30, 1998. RECLASSIFICATIONS. Certain prior year amounts have been reclassified in order to conform with the current year presentation. 16 EXHIBIT 13 STOCK-BASED COMPENSATION. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" requires certain disclosures for stock-based compensation awards and permits companies to continue to follow the intrinsic value method of accounting as prescribed by APB No. 25, "Accounting for Stock Issued to Employees". Accordingly, the Company follows APB No. 25 to account for its stock-based compensation awards. NEW ACCOUNTING STANDARDS. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and No. 131, "Disclosure About Segments of an Enterprise and Related Information". SFAS No. 130 establishes standards for reporting and the display of "comprehensive income" which is the total of net income and all other nonowner changes in equity. SFAS No. 131 establishes standards for the way that a public enterprise reports certain information about its operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. The Company will adopt these new standards in fiscal 1999. Implementation is not expected to have a material effect on the Company's financial statements. 2. ACCRUED LIABILITIES Accrued liabilities were comprised of the following:
(In thousands) 1998 1997 ------- ------- Accrued compensation $ 4,302 $ 3,606 Income taxes payable 691 1,329 Warranty 1,343 1,052 Amounts billed in excess of costs 4,988 3,449 Employee benefit costs 613 705 Taxes other than income 1,008 684 Other 2,784 2,453 ------- ------- $15,729 $13,278 ======= =======
3. FOREIGN OPERATIONS Financial information relating to the Company's foreign operations is shown below: 17 EXHIBIT 13
(In thousands) 1998 1997 1996 ------- ------- ------- Sales to unaffiliated customers $ 9,403 $ 5,881 $ 3,918 Transfers between geographic areas -- 106 1,360 Operating income (loss) 577 91 (306) Identifiable assets 5,933 4,034 3,703
The Company translates the financial statements of its German subsidiary from its functional currency, the German mark, into U.S. dollars in accordance with the Financial Accounting Standards Board SFAS No. 52. Assets and liabilities are translated at the exchange rate in effect at each fiscal year end, and sales and expenses are translated at the weighted average exchange rate in effect for the period reported upon. Any resulting gains or losses are recorded in shareholders' equity and excluded from net income. 4. ACQUISITION Effective June 11, 1997, the Company acquired all of the outstanding common stock of TIW Systems, Inc. (TIW), a California corporation engaged in design and manufacture of products principally used in the satellite communications industry, for cash of $7.9 million, 574,349 shares of the Company's common stock and $500,000 of direct acquisition costs. The acquisition was accounted for under the purchase method of accounting. The excess of purchase price over the fair value of assets acquired of $8.5 million is being amortized over 15 years using the straight-line method. The purchase price was allocated on the basis of the estimated fair value of the assets acquired and liabilities assumed as follows:
(In thousands) -------------- ASSETS ACQUIRED Fair value of tangible assets acquired $ 25,641 Goodwill 8,512 PURCHASE CONSIDERATION Cash paid to selling shareholders (7,893) Fair value of Vertex's stock exchanged (10,528) -------- Liabilities assumed $ 15,732 ========
TIW's results of operations are included in the Company's consolidated financial statements since the effective date of acquisition. The following unaudited pro forma information presents the consolidated results of operations as if the effective date of the acquisition occurred on the beginning of each of the periods presented after giving effect to certain adjustments which include amortization of goodwill, reduction of investment income, issuance of common stock, and the related tax effects. The pro forma information does not purport to be indicative of the results that would have been obtained if the acquisition had been effected as of the dates indicated above or that may be obtained in the future. 18 EXHIBIT 13
(In thousands, except per share amounts) 1997 1996 -------- -------- Sales $115,563 $118,857 Net income 5,333 4,076 Diluted earnings per share 1.01 .79
5. STOCK-BASED COMPENSATION PLANS Pursuant to the Company's stock option plans, options to purchase its common stock were granted to certain officers, directors, and key employees. These plans provide for granting of options at a price not less than fair market value of the stock on the date of grant. Options issued vest over a five-year period with one-fifth of the options becoming exercisable one year after grant, on a cumulative basis, and expire seven to ten years after grant. At September 30, 1998, 214,000 options remained available for grant. At September 30, 1998, 1997, and 1996, options to purchase 299,060, 217,766, and 190,420 shares, respectively, were vested and could be exercised. The outstanding stock options at September 30, 1998 had a weighted average remaining contractual life of six years with option prices ranging from $7.38 to $25.38 per share. As of September 30, 1998, 1997, and 1996, the weighted average exercise price of the exercisable options at those dates was $12.42, $9.92, and $10.10, respectively.
Options Weighted Average Exercise Price ---------- ------------------------------- Outstanding at 10/1/95 537,500 $ 10.61 Granted 50,000 15.25 Exercised (34,400) 7.14 Cancelled (22,600) 13.54 ---------- ---------- Outstanding at 9/30/96 530,500 11.06 Granted 35,000 19.79 Exercised (73,533) 10.02 Cancelled (28,200) 12.74 ---------- ---------- Outstanding at 9/30/97 463,767 12.10 Granted 30,000 24.67 Exercised (37,240) 10.22 Cancelled (5,400) 13.08 ---------- ---------- Outstanding at 9/30/98 451,127 13.08 ========== ==========
As discussed in Note 1, the Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123) "Accounting for Stock-Based Compensation". Under SFAS 123, the fair value of stock-based compensation grants was calculated for the above discussed plans based on 19 EXHIBIT 13 the fair value at grant date for awards made since October 1, 1995 by using the Black-Scholes option-pricing model with certain assumptions. The assumptions used were as follows:
1998 1997 1996 ------- ------- ------- Risk free interest rate 5.89% 5.77% 5.77% Expected term 4 years 4 years 4 years Expected volatility 32% 38% 38% Dividend yield 0 0 0
The weighted-average fair value of options granted under these plans in fiscal 1998, 1997, and 1996 was $8.52, $7.50, and $5.78, respectively. Based upon the foregoing factors, had the computed fair value of the options granted in fiscal 1998, 1997, and 1996 been amortized to expense, pro forma net income for those years would not have been materially different from actual net income reported. 6. LONG-TERM DEBT AND CREDIT LINES In December 1996, the Company borrowed 2 million German marks under a 2.5 million mark bank credit line through its German subsidiary. The debt is being repaid in 24 equal monthly installments plus accrued interest charged at 4.7 percent per annum. The Company maintains unsecured bank lines of credit for $20 million which include a $10 million sub-limit for issuance of stand-by letters of credit. The credit lines require the Company to maintain certain financial ratios. Principal advances bear interest at LIBOR plus 1.5 percent and unused credit line fees are .25 percent annually. As of September 30, 1998 and 1997, no principal advances were outstanding and issued stand-by letters of credit totaled $4,476,000 and $272,000, respectively. As part of the purchase price of Maxtech, Inc. in 1995, the Company incurred four-year unsecured promissory notes in aggregate principal sum of $1,750,000. The notes are payable annually in four equal principal payments, including accrued interest at 7.92 percent per annum with the initial payment beginning October 1, 1995. Long-term debt as of September 30, 1998 and 1997 was as follows:
1998 1997 -------- ---------- Installment loan payable to bank in monthly installments of $50,000 (83,000 German marks) $150,000 $ 717,000 Promissory notes payable to Maxtech selling shareholders due October 1, 1997 and October 1, 1998 plus accrued interest 302,000 604,000 Bank note payable -- 495,000 Capital lease obligations (see note 12) 281,000 254,000 -------- ---------- 733,000 2,070,000 Less current maturities 674,000 1,082,000 -------- ---------- $ 59,000 $ 988,000 ======== ==========
20 EXHIBIT 13 7. INCOME TAXES The Company utilizes the asset and liability method of accounting for income taxes. Deferred income taxes are a result of certain income and expense items recognized in different periods for financial reporting and tax reporting purposes. The differences between the prescribed statutory income tax rates and the Company's effective income tax rates were as follows:
1998 1997 1996 -------- -------- -------- Federal statutory rate 34.0% 34.0% 34.0% State income taxes, net of federal benefit .9 1.4 -- Effect of nontaxable investment income (.2) (1.2) (1.6) Benefit from nontaxable FSC income (5.6) (3.4) (3.5) Tax benefit from increased R&D activity (1.2) (1.8) (.3) Foreign tax adjustment .8 .4 (.4) Other, net (1.8) 1.3 .5 -------- -------- -------- 26.9% 30.7% 28.7% ======== ======== ========
Income (loss) before income taxes from foreign operations was $578,000, $63,000, and ($406,000) in fiscal 1998, 1997, and 1996, respectively. Income before income taxes from domestic operations was $13,220,000, $10,287,000, and $8,957,000 in fiscal 1998, 1997, and 1996, respectively. The provision for income taxes consists of the following significant components: 21 EXHIBIT 13
(In thousands) 1998 1997 1996 ------- ------- ------- Current: Federal $ 2,789 $ 3,066 $ 2,632 Foreign 416 33 36 State 270 220 5 ------- ------- ------- Total Current 3,475 3,319 2,673 ------- ------- ------- Total Deferred 237 (144) (222) ------- ------- ------- Total provision for income taxes $ 3,712 $ 3,175 $ 2,451 ======= ======= =======
The table below shows the components of deferred income taxes:
(In thousands) 1998 1997 1996 -------- -------- -------- Deferred tax assets: Accrued liabilities and reserves $ 1,825 $ 1,940 $ 1,073 Other 41 293 309 -------- -------- -------- Deferred tax liabilities: Property and equipment (826) (896) (827) Revenue recognition differences (1,596) (1,449) (1,433) Other -- (207) (124) -------- -------- -------- Net deferred tax liability $ (556) $ (319) $ (1,002) ======== ======== ========
8. EMPLOYEE BENEFIT PLANS The Company sponsors a defined contribution retirement plan which covers a majority of its domestic employees. Contributions to the plan are discretionary as determined by the Board of Directors. The Company's contributions to the plan for fiscal years 1998, 1997, and 1996 were $510,000, $290,000, and $184,000, respectively. The Company has an employee stock bonus plan that was formed by TIW in 1989 as an employee stock ownership plan for the benefit of eligible employees. No contributions were made to the plan by the Company since the acquisition of TIW and the plan continues to maintain assets belonging to those eligible employees in accordance with plan guidelines. The Company is not required nor does it intend to make future contributions to the plan. The Company has certain cash incentive compensation plans which are based upon actual results of operations compared to planned results. The Management Incentive Compensation Plans' participants are key employees and officers, but not outside directors. Compensation under these plans was $1,927,000, $1,066,000, and $1,295,000 for fiscal 1998, 1997, and 1996, respectively. The Employee Profit Sharing Bonus Plans' participants 22 EXHIBIT 13 include a majority of the Company's employees except participants in a management incentive compensation plan. Compensation under these plans was $185,000, $238,000, and $280,000 for fiscal 1998, 1997, and 1996, respectively. 9. RELATED PARTY TRANSACTIONS A shareholder and member of the Board of Directors is a shareholder in a firm retained by the Company for legal counsel. The Company paid fees to his firm during the years ended September 30, 1998, 1997, and 1996 of $446,000, $541,000, and $121,000, respectively. 10. SALES AND INDUSTRY SEGMENT INFORMATION No single customer accounted for 10 percent or more of total sales in fiscal 1998 or fiscal 1997. Sales to one customer were 12 percent of total sales in fiscal 1996. Export sales were 59 percent, 56 percent, and 59 percent in fiscal 1998, 1997, and 1996, respectively, of total sales. Sales in Western Europe were 14 percent, 14 percent, and 19 percent, of total sales in fiscal 1998, 1997, and 1996, respectively. Sales in the Middle East were 10 percent of total sales in fiscal 1996. Sales in Asian countries were 20 percent, 21 percent, and 18 percent of total sales in fiscal 1998, 1997, and 1996, respectively. The Company operates primarily in a single industry segment, as a manufacturer and supplier of microwave antennas and related equipment. 11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts) 1998 Fiscal Quarters First Second Third Fourth -------- -------- -------- -------- Sales $ 30,779 $ 31,500 $ 35,603 $ 32,135 Gross Profit 9,119 9,554 9,726 8,846 Net Income 2,353 2,447 2,607 2,679 Diluted Earnings Per Share .44 .46 .49 .51 -------- -------- -------- -------- 1997 Fiscal Quarters First Second Third Fourth -------- -------- -------- -------- Sales $ 19,680 $ 20,436 $ 23,266 29,051 Gross Profit 5,391 5,934 6,626 8,697 Net Income 1,525 1,694 1,861 2,095 Diluted Earnings Per Share .33 .36 .38 .40 -------- -------- -------- --------
23 EXHIBIT 13 12. COMMITMENTS AND CONTINGENCIES The Company rents certain equipment and facilities under operating leases. Rent expense under these leases for fiscal 1998, 1997, and 1996 was $1,231,000, $767,000, and $641,000, respectively. Certain items of equipment are subject to capital leases. As of September 30, 1998, $698,000 ($321,000 net) of such leased equipment was included in property and equipment. Below are the future payments due under these lease obligations and the amounts of rental income due to be received under subleases as of September 30, 1998.
Operating Capital Fiscal Year Leases Leases ---------- ---------- 1999 $1,233,000 $ 236,000 2000 1,028,000 21,000 2001 921,000 21,000 2002 823,000 21,000 2003 721,000 10,000 Thereafter 396,000 0 ---------- ---------- $5,122,000 $ 309,000 ---------- ---------- Less: Sublease income 262,000 -- Amount representing interest -- 28,000 ---------- ---------- $4,860,000 $ 281,000 ========== ==========
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. 24 EXHIBIT 13 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Vertex Communications Corporation: We have audited the accompanying consolidated balance sheets of Vertex Communications Corporation (a Texas Corporation) and subsidiaries as of September 30, 1998 and 1997, and the related consolidated statements of income, cash flows, and shareholders' equity for each of the three years in the period ended September 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vertex Communications Corporation and subsidiaries as of September 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. Arthur Andersen LLP Dallas, Texas October 23, 1998 25 EXHIBIT 13 MARKET FOR COMMON STOCK The Company's common stock is traded on The Nasdaq Stock Market (National Market System) under the symbol VTEX. At December 4, 1998, there were approximately 2,000 holders of record of Vertex's common stock. The table below sets forth, for the periods indicated, the high and low sales prices of the Company's common stock, as reported by The Nasdaq Stock Market.
Quarter Ended High Low Quarter Ended High Low - ------------- ---- --- ------------- ---- --- September 30, 1998 $24 $18 September 30, 1997 $26 1/4 $24 1/8 July 3, 1998 26 5/8 21 1/2 June 30, 1997 27 1/4 20 7/8 April 3, 1998 26 5/8 24 1/4 March 28, 1997 23 1/2 19 3/4 January 2, 1998 26 23 December 27, 1997 18 3/4 16 1/4
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-21 7 SUBSIDIARIES OF THE REGISTRANT 1 ================================================================================ VERTEX COMMUNICATIONS CORPORATION EXHIBIT 21 TO ANNUAL REPORT ON FORM 10-K For Fiscal Year ended September 30,1998 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES ================================================================================ 2 EXHIBIT 21 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES AS OF OCTOBER 30, 1998 Vertex Communications Foreign Sales Corporation 100% - Owned Subsidiary Incorporated in the United States Virgin Islands Vertex Microwave Products, Inc. (formerly Gamma-f Corp.) 100% - Owned Subsidiary Incorporated in the State of Nevada Vertex Antennentechnik GmbH 100% - Owned Subsidiary Incorporated in the Federal Republic of Germany Vertex International, Ltd. 100% - Owned Subsidiary Incorporated in England Vertex Antenna Systems, LLC (formerly a division of TIW Systems, Inc.) 100% - Owned Subsidiary Incorporated in the State of Nevada Vertex Electronic Products, Inc. (formerly Maxtech, Inc.) 100% - Owned Subsidiary Incorporated in the State of Pennsylvania Vertex Satcom Systems, Inc. (formerly TIW Systems, Inc.) 100% - Owned Subsidiary Incorporated in the State of Nevada EX-23 8 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 ================================================================================ VERTEX COMMUNICATIONS CORPORATION EXHIBIT 23 TO ANNUAL REPORT ON FORM 10-K For Fiscal Year ended September 30,1998 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ================================================================================ 2 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in or incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements File No. 33-27012 and File No. 333-53389 on Form S-8, and File No. 333-53391 on Form S-3. Arthur Andersen LLP Dallas, Texas December 21, 1998 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT. 1,000 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 11,239 0 40,136 897 30,946 81,694 32,033 16,560 110,771 25,676 0 0 0 524 83,686 110,771 130,017 130,017 92,772 92,772 23,799 0 107 13,798 3,712 10,086 0 0 0 10,086 1.98 1.90
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