-----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, BHyT+JgTiSBSk7ZsVnlkpIWU7GRLwR+o3kd/hESwS1k3Nq2zgRHf85bfuEybFfqZ F5MfY48Y4OdCb1LHUi0arw== 0000950134-99-011353.txt : 19991223 0000950134-99-011353.hdr.sgml : 19991223 ACCESSION NUMBER: 0000950134-99-011353 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991222 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: 001-14899 FILM NUMBER: 99778857 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, 1999 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, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO _________ COMMISSION FILE NUMBER: 0-15277 ------------------- VERTEX COMMUNICATIONS CORPORATION (Exact name of Registrant as specified in its charter) TEXAS 75-1982974 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2600 N. LONGVIEW STREET, KILGORE, TEXAS 75662 (Address of principal executive offices) (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 ------------------- ------------------- COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE --------------- (Title of Class) --------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of December 2, 1999, 5,116,314 shares of the Registrant's Common Stock, $.10 par value, were outstanding. The aggregate market value of the Registrant's Common Stock held by non-affiliates based on the closing sales price on December 2, 1999, as reported by the New York Stock Exchange, was approximately $90,000,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended September 30, 1999, are incorporated by reference into Items 5, 6, 7, 7A, and 8 under Part II and Item 14 of Part IV hereof. ================================================================================ 2 VERTEX COMMUNICATIONS CORPORATION ANNUAL REPORT ON FORM 10-K For the Fiscal Year Ended September 30, 1999 ==================================================== PART I ITEM 1. BUSINESS. GENERAL Vertex Communications Corporation (the "Registrant," the "Company," or "Vertex") designs, develops, manufactures, markets, and supports an extensive line of precision products for satellite and deep space communications applications. These products include sophisticated earth station antennas ranging in size from 1.2 to 34 meters in diameter (which operate in various relevant frequency bands, including L-, C-, X-, Ku-, and Ka-bands, and are available for commercial and military applications), communications network products, and optical and radio telescopes. The Company also manufactures state-of-the-art control systems designed to manage and monitor the operation, guidance, tracking, and telemetry capabilities of communications network systems as well as individual antennas, related electronic components used to amplify radio frequency ("RF") signals, and precision waveguide components for application as component parts of communications systems. The Company also provides custom engineering, turnkey field installation, site testing and after-sale and maintenance services, and spare and replacement parts in support of its products. The Company's strategy is to provide a wide variety of precision satellite communications products compliant with state-of-the-art technology to satisfy an expanding range of customer and industry requirements. To accomplish its objectives, the Company engages in ongoing efforts to introduce, in a timely manner, products that are designed to meet applicable domestic and international specifications. The Company believes that it offers a more diverse line of products than any of its principal competitors. Due to the exacting design and engineering requirements necessary to produce satellite communications systems, subsystems and related products, quality control and precision engineering are central to the manufacturing process. The Company believes it has developed a reputation as a leader in quality control procedures which has enhanced its position in the marketplace. The Company markets its products to systems integrators and end users who combine the Company's products with other communications equipment to form complete communications systems. In the United States, Vertex markets its products through a direct sales force; while in international markets, the Company utilizes a direct sales force, supplemented by independent foreign sales representatives. Vertex's customers include the television broadcast industry, international telecommunications companies, communications common carriers, private communications networks, and government agencies, including certain agencies of the U. S. Government and various foreign governments. The Company was organized pursuant to Texas law in 1984. The Company's wholly-owned subsidiaries include: Vertex Satcom Systems, Inc. (formerly known as TIW Systems, Inc.), a Nevada corporation headquartered in Santa Clara, California; Vertex Antenna Systems, LLC (formerly a division of TIW Systems, Inc.), a Nevada limited liability company with its principal office in Santa Clara, California; Vertex Microwave Products, Inc. (formerly known as Gamma-f Corp.), a Nevada corporation headquartered in Torrance, California; Vertex Electronic Products, Inc. (formerly known as Maxtech, Inc.), a Pennsylvania corporation which is located in State College, Pennsylvania; Vertex Antennentechnik GmbH, a corporation organized pursuant to the laws of the Federal Republic of Germany, with its headquarters in Duisburg, Germany; Vertex Foreign Sales Corporation, organized pursuant to the laws of The Virgin Islands, with its office in St. Thomas, The Virgin Islands; and Vertex International, Ltd., formed under the laws of England. As used herein, the terms the "Registrant," the "Company," and "Vertex" refer to Vertex Communications Corporation and its wholly-owned subsidiaries, unless otherwise indicated. The Company's principal executive offices are located at 2600 North Longview Street, Kilgore, Texas 75662; its telephone number is (903) 984-0555; and its website on the Internet is: www.vertexcomm.com. -1- 3 SATELLITE COMMUNICATIONS EQUIPMENT INDUSTRY Market demand for transmission and reception capacity to support high-speed voice, video, and data communications has continued to generate significant demand for additional satellite communications network systems and related earth station equipment. Communications satellites, once placed in orbit above the earth, relay microwave radio signals from one or more earth stations to one or more other earth stations at various geographical locations. The primary function of an earth station is to transmit or receive a microwave radio signal via satellite to efficiently facilitate the telecommunications process. Telecommunication is the process of communication through electronic means such as radio, telegraph, television, and computer. Each earth station is interconnected to a local communications network which distributes and/or collects the desired information to or from the users of such information. A typical earth station consists of several components, including an antenna and associated electronic components, some of which amplify RF signals and others that control and manage the movement, monitoring, and tracking capabilities of the antenna. A principal advantage of satellite communications systems over terrestrial communications systems is that once a satellite has been launched, the incremental cost of adding new transmission and reception points is limited to the cost of the earth station. With a terrestrial communications system, each transmission route must receive a right-of-way clearance and incur additional costs attendant to laying connecting cable or erecting microwave towers and repeater stations. As a result, a satellite communications system frequently offers advantages as a cost-effective medium for long-distance communications, as compared to the cost of a terrestrial communications system which is usually higher. Communications satellites use the L-band, C-band, X-band, Ku-band, and Ka-band for transmission in the radio frequency spectrum. The Company designs and manufactures satellite communications network systems as well as individual earth station antennas that operate in each of these frequency bands. L-band antennas operate in the frequency band of one to two gigahertz and are primarily utilized by the maritime industry. C-band antennas are capable of receiving and transmitting information in the radio frequency band of four to six gigahertz. The C-band frequency spectrum is also used for terrestrial microwave transmissions. Due to the increasing use of the C-band frequency, the Ku-band frequency (12 to 14 gigahertz) has been reserved exclusively for satellite transmission by the Federal Communications Commission ("FCC") and an international agreement. Since wavelengths in the Ku-band are relatively short, they can be gathered and concentrated by a smaller antenna dish than is required with longer wavelength C-band transmissions. Accordingly, Ku-band transmission enables earth station vendors and voice, video, and data communications service providers to bring satellite communications directly to customers' facilities. Ka-band antennas are in the developmental stage and operate in the radio frequency band of 27 to 50 gigahertz. These emerging antennas will primarily be utilized for voice and data transmission. The X-band frequency spectrum (seven to eight gigahertz) is reserved for utilization in worldwide military satellite communications. THE VERTEX STRATEGY The Company's strategy is to provide a wide variety of advanced satellite communications products, including integrated communications network products, precision earth station antennas, related control systems, associated electronic and electroformed components, and services to satisfy evolving customer requirements. The Company believes its proven products and expertise, experience in refining current products, and developing new products will enable it to expand distribution and gain market share. The Company believes this strategy has been, and will continue to be, successful because of the following key elements: TECHNICAL EXPERTISE. Vertex believes its technical expertise, together with its ability to comply with exacting engineering and design specifications, has contributed to its ability to increase sales. The ability of its engineering and design staff to respond rapidly to detailed customer requirements has enhanced the Company's competitive position. -2- 4 BROAD PRODUCT LINE. The Company's product strategy is to establish and maintain a prominent market share by emphasizing the development and distribution of a wide array of quality systems, subsystems and associated products. The Company believes its telecommunications products comprise one of the industry's broadest product lines. This extensive product line positions the Company to respond to a variety of customer requirements and to gain market share by expanding penetration into new and existing markets. SKILLED SALES FORCE. The Company's distribution strategy focuses on the needs of systems integrators and large end users that require a sales force possessing advanced technical knowledge and expertise. The Company believes its sales force is qualified to differentiate and promote the benefits of its products from those offered by competitors, to respond promptly to solve customers' communications problems, and to address customers' future communications requirements as their needs evolve and organizational functions change. INTERNATIONAL OPERATIONS. Continuing and emerging demands have created the need for substantial investment in telecommunications infrastructures in many international markets. The Company believes that significant opportunities exist in the market for satellite communications equipment and associated products outside of the United States. The Company adapts its product development, marketing, and distribution strategies to comply with the unique requirements of specific international markets. While recent depressed economic developments in certain international markets indicate that the Company's international sales volume may suffer during the near term, the Company expects this trend to return to a more normal growth pattern as these economic conditions continue to improve in fiscal year 2000 and beyond. ACQUISITIONS AND GROWTH. The Company's growth over the past five years was primarily made possible by the realization of certain strategic acquisitions of existing businesses and the expansion of manufacturing plant facilities. In November 1999, the Company entered into a merger agreement under which the Company would be acquired pursuant to the agreement. See "Recent Developments" for additional information. PRODUCT DEVELOPMENT. The Company works closely with its customers to identify market needs and define product specifications early in the development process. This approach results in a thorough understanding of end user requirements prior to commencement of the design process and often positions the Company to develop and deliver new products or refinements of existing products in response to its customers' needs more rapidly than many of its competitors. The Company believes that the flexibility of its product designs and the capabilities of its engineering staff, combined with its adherence to superior quality control standards, have enabled it to be consistently among the first-to-market with competitive new products or innovative refinements of existing products. VERTEX PRODUCTS GENERAL. The Company designs, develops, manufactures, and markets products used in communications network systems and subsystems, including an extensive line of earth station antennas capable of operating in the commercial and military frequency bands from one to 30 gigahertz, which range in size from 1.2 to 34 meters in diameter, as well as the related electronic components used to control, manage, and monitor the operation, guidance, tracking, and telemetry capabilities of antennas. These products require exacting engineering skills and detailed standards or specifications as established by each customer, involving not only systems or product design, but the complete integration of other components acquired from the Company or other sources. The Company's products are utilized by its customers principally for telecommunications applications with certain products used in radio astronomy. The Company's operations are conducted through two separate complementary business segments. The Company formed the two segments based upon the nature of and the differences between the products and services supplied. These business segments design, develop, manufacture, and market the respective products described below. The Antenna segment provides earth station antennas, multi-axis pedestals, precision antenna control and tracking products, and related microwave components. The -3- 5 Electronics segment provides solid-state electronic power amplifiers, radio frequency conversion products, and digital communications electronics products. The Antenna business segment includes Vertex Antenna Products Division ("VAPD"), Vertex Antenna Systems, LLC ("VAS"), Vertex Microwave Products, Inc. ("VMPI"), Vertex Control Systems Division ("VCSD"), Vertex Special Projects Division ("VSPD"), and Vertex Antennentechnik GmbH ("VA"). The Electronics business segment consists of Vertex Electronic Products, Inc. ("VEPI") and Vertex Satcom Systems, Inc. ("Vertex Satcom"). ANTENNA SEGMENT. The Antenna segment of the Company includes the following business units. Vertex Antenna Products Division. VAPD, the Company's largest operating unit, designs, develops and manufactures RF satellite earth station antennas ranging in size from 1.2 to 34 meters in diameter, RF feed components, and related products with emphasis in the L-, S-, C-, X-, Ku-, and Ka-band frequency ranges for applications in the domestic, international and military radio communications frequencies. VAPD also offers custom and unique research and development solutions for electrical, civil, structural, and mechanical engineering-specific satellite communications projects. Vertex Antenna Systems, LLC. VAS designs, manufactures, and markets large full-motion, steerable parabolic antenna systems, precision major path earth station antennas, associated equipment and related components utilized in satellite communications; deep space network systems; telemetry, tracking, command and monitoring of satellites; radar applications; and optical and radio telescopes for deep space communications. VAS also provides custom design support for special tracking systems, including design, testing, and hardware for application in earth station antenna RF subsystems; and integrates customer-supplied baseband equipment with its products. Vertex Microwave Products, Inc. Through this subsidiary, the Company designs and manufactures precision microwave components for applications in the telecommunications, space, and defense industries. VMPI's products include a variety of standard antenna feed components as well as custom designed and fabricated RF components. Additionally, a standard product line of filters, diplexers, ortho-mode transducers, polarizers, and RF feed subsystems addresses market requirements for S-band through Q-band frequencies. These products are sold directly to end users and suppliers who integrate such products with other components in telecommunications systems. The Company also utilizes these products as component parts of certain of its antenna products. Vertex Control Systems Division. This division of the Company designs and manufactures antenna positioning and tracking systems, antenna control systems, automatic de-ice systems, and uplink power control systems. Additionally, VCSD specializes in turnkey retrofit services, including the provision of products, technical engineering expertise, and on-site services required to modernize and enhance the usefulness of existing earth station installations and related assets. Vertex Antennentechnik GmbH. Through this subsidiary, headquartered in Duisburg, Germany, the Company designs and supplies products which complement its existing broad line of antenna products, such as precision antenna reflectors, multi-axis pedestals (antenna support structures), controller drive systems, radio telescopes, and optical telescopes. VA performs highly technical antenna engineering designs for applications in the academic institution, governmental, and radio telescope markets, and is a dominant supplier in Europe of superior quality RF antennas and radio telescopes. Additionally, VA, VAPD, and VAS frequently cooperate to combine the technical expertise of the three Vertex groups in the field of high-precision telescope equipment. Vertex Special Projects Division. This division adapts and utilizes the Company's existing products and services primarily for applications pursuant to contracts with the U. S. Government or its agencies or as subcontractor for government-related projects. While there can be no assurance that VSPD will continue to be successful, sales generated by this division are expected to partially offset the impact of declining foreign sales in fiscal 2000. -4- 6 ELECTRONICS SEGMENT. The Company's Electronics segment includes the following business units. Vertex Electronic Products, Inc. Through VEPI, the Company designs and manufactures a variety of solid-state power amplifiers (SSPAs), low-noise amplifiers (LNAs), line drivers, redundant amplifier systems, and other related high-performance electronic products used in telecommunications systems. Vertex Satcom Systems, Inc. To address the most prominent evolving segment of the very small aperture terminal ("VSAT") market, Vertex Satcom has developed its FlexiDAMA ("Demand Assigned Multiple Access") communications network system, with sophisticated network management, switching and Global Positioning Satellite-based frequency and network coordination capabilities for applications in thin-route voice networks, medium- and high-capacity networks, and low-rate video conferencing networks. Vertex Satcom's DAMA modem technologies with broad signaling standard compatibility qualities are designed to provide a competitive advantage in certain markets for its network systems, which include comprehensive voice, data, and video networking capabilities, to customers around the world. In the third quarter of fiscal 1999, the Company decided to abandon ongoing efforts to sell its voice and data single channel processing equipment for network telecommunications applications which utilizes Time Division Multiple Access technology. The Company experienced intense competition in marketing this product line and consequently, was unable to sustain volume sufficient to support the necessary investment. The decision to exit this product line was based upon the Company's inability to sell these products profitability and the realization that future prospects were not acceptable. Refer to Note 13 of Notes to Consolidated Financial Statements for further information. Total sales contributed by each business segment for each of the last three fiscal years are shown in Note 10 of Notes to Consolidated Financial Statements. CUSTOM ENGINEERING. The Company relies upon its engineering experience and expertise to provide its customers with custom-engineered products that are not otherwise readily available in the marketplace. Management believes this capability is a significant attribute that distinguishes the Company from its competitors. CUSTOMER SERVICES. In addition to the manufacture and supply of a broad line of telecommunications products, systems, subsystems and related products, the Company also offers a wide range of related services, including consulting; design and configuration; turnkey field installation; site testing and performance analysis; and after-sale maintenance services which are normally tailored to the products provided by each business segment. MARKETING, SALES, AND CUSTOMERS MARKETING. The Company's marketing strategy is to offer a complete line of high-technology antenna and associated products, while also marketing certain complete communications systems. The Company believes that this approach enables Vertex to comply with its own communications systems requirements while also satisfying the needs of systems integrators (companies which sell complete communications systems, but do not manufacture antennas or the particular antenna or associated products needed) and end users (ultimate customers) who combine the antennas and associated products with other systems components to form complete communications systems. The Company markets and supports its products through a distribution system comprised of a direct sales force, supplemented in international markets by independent sales representatives. Vertex augments these sales methods by advertising certain products in trade magazines and by displaying certain products at trade shows. The marketing and sales activities of the Company focus on domestic and international markets for commercial, governmental, and military applications. Vertex's marketing plan contemplates sales growth through increasing market share and continued development of new markets for its products. SALES. The Company maintains a direct sales force in the United States and Germany, and a staffed sales office in Singapore. In addition to providing product and pricing information, Vertex's sales personnel provide customers and potential customers value-added solutions and detailed explanations of the -5- 7 benefits and advantages of the Company's products and services as compared to those of its competitors. The Company's sales force includes sales managers, engineers, sales representatives, and technical support personnel. Each business segment maintains separate sales and marketing staff, and the Company also maintains a corporate sales and marketing staff. The Company's worldwide marketing and sales efforts are directed and coordinated from its headquarters in Kilgore, Texas. The Company believes that the rapidly evolving international market will continue to be an important source of sales. The Company's international sales are comprised of products manufactured in the United States, Germany, and Estonia, and installation, testing, and certain engineering services are performed on-site by its engineers and technical support personnel. To enhance its foreign sales, the Company also engages the services of foreign independent sales representatives to supplement its direct sales force. These foreign sales representatives also offer products of other manufacturers which are complementary to, but not competitive with, the Company's products. Sales to foreign customers involving products or services originating in the United States are typically contracted for in U. S. dollars. Foreign sales of products or services originating in Germany are usually conducted in the German mark. International sales are subject to certain government controls and other risks, including export licensing, currency exchange rate fluctuations, political instability, trade restrictions, and changes in tariffs and freight rates. Should any of these factors prove onerous or change in a material unfavorable manner, the Company's delivery or completion of a sales contract could be adversely affected. To date, the Company has not experienced any material difficulties related to these factors. Sales in Western Europe were 20%, 14%, and 14%, of total sales in fiscal 1999, 1998, and 1997, respectively. Sales in Asian countries were 16%, 20%, and 21%, of total sales in fiscal 1999, 1998, and 1997, respectively. CUSTOMERS. Typical users of the Company's products include the broadcast industry, international telecommunications companies, communications common carriers, universities and academic institutions, private communications networks, and government agencies. The Company's customers include a number of major companies and government agencies throughout the world, including certain agencies of the U. S. Government and various foreign governments. The Company sells its products throughout the world to many customers. No single customer accounted for 10% or more of the Company's total sales in any of the past three fiscal years. In general, both business segments sell products and services to the same types of customers. The Company has been successful in recent years in diversifying its customer base by increasing its penetration of existing and emerging markets and developing new markets for its products. Sales growth during this period has been fueled, in part, by the Company's ability to secure new customers and to maintain relationships with existing customers. Due to large contracts which may occur from time to time, one or more different customers may represent a material part of the Company's total sales or unfilled backlog of orders in any given year or at any point in time. The Company believes that its relationships with its customers are excellent and that it will continue to be a major supplier of satellite communications equipment and associated products to its major customers. If required, the Company believes that it could maintain sales of its products at current levels to other customers if current relationships with major customers were interrupted. Although several of these relationships have existed for a number of years, there can be no assurance that such relationships will continue. The loss of any of such major customers could have a material adverse effect on the Company and its business. Vertex does not seek to maintain a specific level of sales to the various agencies of the U. S. Government, but rather targets certain types of projects where the Company's existing products and/or expertise will enable it to submit competitive bid proposals. Most of the Company's business with the U. S. Government is on a fixed-price basis. Contracts with the U. S. Government customarily include provisions which provide for cancellation at the convenience of the Government. In addition, upon cancellation by the Government, the Company could be entitled to reimbursement of costs incurred, plus a pro rata share of profit. The Company has never received a cancellation of a material Government contract and has no reason to -6- 8 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) 1999 1998 1997 ---- ---- ---- Sales to Unaffiliated Customers ............... $10,287 $9,403 $5,881 Identifiable Assets ............................ 7,239 5,993 4,034
The Company translates the financial statements of its German subsidiary from its functional currency, the German mark, into U. S. dollars in accordance with applicable financial accounting standards. Assets and liabilities are translated at the exchange rate in effect at each fiscal year end. Sales and expenses are translated at the weighted average exchange rate in effect for the period reported. Any resulting gains or losses are recorded in shareholders' equity and excluded from net income. MANUFACTURING AND ENGINEERING The Company's products are manufactured from standard components and parts that are either built by the Company or by other manufacturers pursuant to the Company's specifications. Vertex considers these components and related materials to be commercially available in sufficient volume in the industry and expects to experience no difficulty in obtaining any materials or components needed in its manufacturing activities. However, should any of these materials or components become unavailable for a significant period, the result could have an adverse effect on the Company's business. The Company's products require substantial engineering, design, and technical support. In addition, although many of the Company's products are standardized, custom engineering is frequently required to accomplish the product modifications necessary for a particular application or installation. The Company's engineering staff is also important to its research and development activities. The Company has been successful in attracting and retaining well-qualified engineering personnel and does not anticipate a shortage of qualified personnel in the future. The Company believes that its current manufacturing facilities provide adequate manufacturing space for the foreseeable future. See Item 2 - "Properties." PRODUCT DEVELOPMENT The Company's product research and development efforts are directed primarily toward development, design, engineering, and implementation activities rather than pure research. These activities are generally undertaken in response to specific customer requests or anticipated requirements of the U. S. Government for programs that have been identified by the Company. Funding for these activities is derived from internally generated sources and customers. For the fiscal years 1999, 1998, and 1997, the Company expended $6,600,000, $5,968,000, and $3,775,000, respectively, on research and development. Costs -7- 9 associated with product development work funded by customers are included in the Company's cost of sales and the related revenues are included in sales. The Company strives to continually upgrade its existing products and develop new products to meet changing customer requirements and to keep pace with evolving technology in the industry. COMPETITION The Company experiences substantial competition from a number of established companies which provide a broad range of products to the satellite communications equipment market, including Andrew Corporation, Radiation Systems, Inc., Nippon Electronic Company, and Scientific-Atlanta, Inc. Certain of these companies have substantially greater financial and personnel resources than those available to the Company. The Company's products may not be proprietary or patentable, and may be subject to duplication and exploitation by its competitors. Although many of these competitors offer satellite communications products which are among the types or sizes produced by the Company, the Company believes that no single competitor offers the diversity of satellite communications products produced by the Company. The Company believes that the most important competitive factors are technical performance, capabilities, product performance, dependable delivery, and price. Maintenance and service capabilities and manufacturing experience in the industry are also important factors to customers. Accordingly, the Company strives to price its products competitively while stressing its custom engineering and servicing capabilities based upon the years of experience and technical expertise of its personnel in designing and manufacturing satellite communications products and the Company's precision metal manufacturing methods. The Company believes that its expertise in custom engineering and its ability to meet customers' relatively short-lead time requirements provide it with a distinct competitive advantage. Due to competition in the industry where the Company competes, periodic advances in technology can be expected. Therefore, the Company's ability to maintain and improve in its existing markets and to enter new markets is partially dependent upon its ability to evaluate advances in technology and incorporate such advances where appropriate into its products in a timely and effective manner. INTELLECTUAL PROPERTY The Company holds patents for certain technologies, products, and processes. The Company does not, however, consider patents important to its business, but instead relies principally upon innovative management, technical expertise, and marketing and managerial skills to develop, enhance, and market its products. The Company believes it is less dependent on the protection of proprietary product information than on its ability to timely and effectively develop, enhance, and market its products to maintain the competitiveness of its products with those of others. The Company protects its proprietary product information through reliance on a combination of trade secrets, copyrights, patents, and technical measures, the selective use of nondisclosure agreements with customers, suppliers, and industry partners, and by limiting access to sensitive information. The Company has no reason to believe that its products and proprietary rights infringe on the proprietary rights of any third parties. There can be no assurance, however, that the Company's protective measures will preclude competitors from developing products with features similar to its products or that third parties will not assert infringement claims in the future. BACKLOG AND SEASONALITY At October 31, 1999 and 1998, the Company's backlog of unfilled orders believed to be firm was approximately $91.4 million and $74.0 million, respectively. The backlog of unfilled orders at October 31, 1999, included approximately $9.6 million of contracts with the U. S. Government. As is customary, these contracts include provisions which allow for cancellation at the convenience of the Government or prime contractor. Upon exercise of these provisions, the Company would be entitled to reimbursement of costs incurred and a pro rata share of profit. The Company has never received a cancellation of a material -8- 10 government contract and believes no such event is threatened. The Company expects that a substantial portion of the October 31, 1999 backlog will be completed and delivered in fiscal year 2000. The levels of sales and net income of the Company fluctuate moderately on a quarterly basis. The variability in recent years has been demonstrated by typically higher sales and net income in the fiscal quarters ending in June and September of each fiscal year. The primary reason for this pattern is the need for customers to complete installations during warm weather months. The fiscal quarter ending in September can also be affected by the timing of sales to U. S. Government agencies. Other factors which have caused quarterly fluctuations in sales and net income include variability of shipments under large contracts and variations in product mix and in profitability of individual orders. The Company believes these aberrations may continue to have similar impact on future results of operations, but their timing and placement within particular quarterly periods on an ongoing basis cannot be predicted. Consequently, the Company believes it is more meaningful to focus on annual rather than interim results. In addition, due to the timing differences from year-to-year in the receipt of large nonrecurring sales contracts, year-to-year comparisons of backlog can be misleading and are not necessarily indicative of future revenues. ENVIRONMENTAL COMPLIANCE Due to the nature of the Company's products, it has not been materially affected to date by environmental laws. The Company does not anticipate its business will be materially affected by any current or expected environmental laws. GOVERNMENT REGULATION Although the Company is not directly regulated by any governmental agency, most of its United States customers, and the telecommunications industry in general, are subject to regulation by the Federal Communications Commission (the "FCC"). In recent years, FCC decisions permitting greater competition among common carriers have had a favorable impact on the Company. In addition, the FCC controls the allocation of transmission frequencies and the performance characteristics of earth station antennas. As a result of these controls, the Company's product design specifications must conform on an ongoing basis to meet FCC or other regulatory requirements. These regulations are not expected to adversely affect the operations of the Company. Outside the United States, where some of the customers of the Company have been government- owned and operated entities, changes in government economic policy and communications regulation have affected in the past, and may be expected to affect in the future, the volume of foreign business. However, the effect of regulation in countries other than the United States in which the Company does business has generally not been detrimental to the international activities of the Company taken as a whole and is not expected to be detrimental to such activities in the foreseeable future. EMPLOYEES As of October 31, 1999, the Company employed 803 full-time employees. None of the Company's employees is represented by a labor organization and the Company is not a party to any collective bargaining agreement. The Company has never had an employee strike or a work stoppage and considers its relations with its employees to be good. The Company has not experienced any difficulty in attracting and retaining qualified employees. RECENT DEVELOPMENTS On November 11, 1999, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Tripoint Global Communications Inc. ("Tripoint") pursuant to which Signal Acquisition Corporation, a wholly-owned subsidiary of Tripoint, commenced a cash tender offer to purchase all of the outstanding shares of the Company's Common Stock for a cash price of $22.00 per share. The offer is -9- 11 conditioned upon, among other things, regulatory approvals and the tender of at least a majority of the shares outstanding on a fully diluted basis. The Merger Agreement provides that following the consummation of the offer, Signal Acquisition Corporation will be merged with and into the Company and any shares not purchased in the offer (other than those held by dissenting shareholders or by the Company, Tripoint, or any subsidiary of the Company or Tripoint) will be converted into the right to receive $22.00 per share in cash. The Company has received a civil investigative demand from the Antitrust Division of the Department of Justice seeking additional information and documents relating to the offer. In addition, Tripoint received a second request from the Antitrust Division seeking similar information and documents. The second request has the effect of extending the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act until 10 calendar days after compliance with the request. The offer was initially scheduled to expire on December 16, 1999, but because the second request has the effect of extending the waiting period past that date, Tripoint extended the expiration date of the offer to January 14, 2000. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS From time to time, the Company may publish, verbally or in written form, forward-looking statements relating to such matters as anticipated sales levels, anticipated financial performance, business prospects, technological developments, new products, anticipated liquidity and capital requirements, the effects of year 2000 compliance requirements, research and development activities, the results of legal proceedings and similar matters. This Annual Report on Form 10-K (or any other periodic reporting documents required of the Company) may contain forward-looking statements reflecting the current views of the Company concerning potential future events or developments, including statements in this Item and below in Item 3 in "Legal Proceedings", in Item 7 in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Item 7A in "Quantitative and Qualitative Disclosures About Market Risk." Such statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which provide a "safe harbor" for such statements. These cautionary statements are being made pursuant to the applicable provisions of the cited securities laws and with the intention of obtaining the benefits of such "safe harbor" provisions. In order to comply with the terms of the "safe harbor", the Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance and that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. Although the Company believes that the expectations reflected in its forward-looking statements are reasonable, there can be no assurance that the actual results or developments anticipated by the Company will be realized, or if substantially realized, that such results or developments will have the expected effects on the Company's business operations. The risks and uncertainties which may effect the operations, performance, development, and results of the Company's business include, but are not limited to, the following: general economic conditions, including the impact of changing economic conditions (including, but not limited to, the continued weak economic conditions in certain international markets); fluctuation of foreign currency exchange rates; changes in capital spending plans of certain international customers; uncertainties inherent in international operations; uncertainties relating to customer plans and commitments; rapid or unexpected technological changes; product demand and industry capacity; product development; the highly competitive environment in which the Company operates; market acceptance of new products; manufacturing efficiencies; availability of certain raw materials; domestic and foreign government regulatory policies and spending; rising costs and availability of certain components; and reliance by the Company and its suppliers on software programs that may not be year 2000 compliant and year 2000 problems that may exist in products currently or historically sold to customers of the Company. The words "believe," "expect," "anticipate," "project," "plan," and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. Subsequent written or oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this section and elsewhere in this Annual Report on Form 10-K. -10- 12 ITEM 2. PROPERTIES. The Company owns and maintains executive and administrative offices, manufacturing facilities, and a product testing site at its headquarters at 2600 North Longview Street, Kilgore, Texas, and owns or leases certain facilities at other locations. The following is a listing of the properties owned or leased by Vertex and its subsidiaries as of October 31, 1999.
APPROXIMATE AREA OWNED LOCATION PRINCIPAL USE IN SQUARE FEET OR LEASED - -------- ------------- ---------------- --------- Kilgore, Texas Executive, administrative, 231,000 on Owned in fee engineering, and 55 acres of land manufacturing Kilgore, Texas Manufacturing 33,000 on Owned in fee 1 acre of land Longview, Texas Administrative, engineering, and 30,000 Leased to February 2003 manufacturing Santa Clara, California Administrative, engineering, and 83,000 Leased to December 2003 manufacturing Torrance, California Administrative, engineering, and 37,000* Leased to June 2002 manufacturing Albuquerque, Administrative and manufacturing 27,000 on Owned in fee New Mexico 17 acres of land Chantilly, Virginia Fabrication 9,000 Leased to March 2001 Nepean, Ontario, Fabrication 5,000 Leased to February 2002 Canada State College, Administrative, engineering, and 20,000 Leased to March 2005 Pennsylvania manufacturing Duisburg, Germany Administrative and engineering 8,000 Leased to February 2000 Singapore Administrative Less than 1,000 Leased to September 2000 Dallas, Texas Administrative and engineering 8,000 Leased to May 2004
- -------------------------------- *Approximately 15,000 square feet of the total floor space is subleased to a third party. The Company believes its facilities are adequate and will be suitable to meet its requirements for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS. The Company is not a party to any legal proceedings which would have a material, adverse effect on the Company or its business and does not believe that any such legal proceedings are threatened. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Company, through solicitation of proxies or otherwise. -11- 13 PART II The information required by Items 5 through 8, inclusive, of this report is contained in the Registrant's Annual Report to Shareholders for its fiscal year ended September 30, 1999 (the "1999 Annual Report"), selected portions of which are incorporated herein by reference, as described below. With the exception of the material incorporated by reference herein, the 1999 Annual Report is not deemed filed as a part of this Annual Report on Form 10-K. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information appearing under the caption "Market for Common Stock" on page 28 of the 1999 Annual Report is hereby incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. The information appearing in the "Selected Financial Data" table on page 1 of the 1999 Annual Report is hereby incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information appearing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 11 through 16 of the 1999 Annual Report is hereby incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. While the Company's general policy is to sell its products and services originating in the United States in the U.S. dollar currency, the Company may, from time to time, be subject to certain market risks, including foreign currency exchange rate fluctuations relating to certain sales contracts with foreign customers where payment is made in foreign currency. In the normal course of business, the Company assesses these risks and has established policies and procedures to manage its exposure to fluctuations in foreign currency values. The Company's objective of managing its exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in earnings and cash flows associated with foreign currency exchange rates for certain selected contracts with foreign customers. Accordingly, the Company utilizes foreign currency forward contracts to hedge its exposure on firm commitments denominated in foreign currency. Additional information responsive to this item is contained under the subtitle "Financial Market Risks" of "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 13 of the 1999 Annual Report and is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Consolidated Financial Statements of Vertex Communications Corporation and Subsidiaries and Notes thereto, appearing on pages 17 through 27, inclusive, together with the Report of Arthur Andersen LLP, Independent Public Accountants, thereon, appearing on page 28 of the 1999 Annual Report, are hereby incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. -12- 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS AND EXECUTIVE OFFICERS The names of current directors and executive officers of the Company, their ages, and certain other information about them (based upon information provided by such persons) are set forth below.
DIRECTOR AND/OR NAME OF DIRECTOR EXECUTIVE AND/OR EXECUTIVE OFFICER AGE POSITION(S)* OFFICER SINCE ------------------------ --- ------------ ------------- J. Rex Vardeman(1)(2)............ 60 Chairman of the Board, 1984 President, Chief Executive Officer and Director of the Company A. Don Branum(2)................. 62 Senior Vice President, Assistant 1984 Secretary and Director of the Company James D. Carter(2)............... 53 Vice President and Chief Financial 1984 Officer, Treasurer and Director of the Company Bill R. Womble(1)(3)............. 61 Director of the Company 1984 Donald E. Heitzman, Sr.(1)(3).... 74 Director of the Company 1992 John G. Farmer(3)................ 52 Director of the Company 1997 Rein Luik ....................... 63 Vice President and Director of the 1997 Company; and President, Vertex Electronics Group Joe A. Ylitalo................... 53 Secretary and General Counsel 1997 of the Company William L. Anton................. 61 Vice President of the Company 1984 H. Dean Bunnell.................. 52 Vice President of the Company; and 1995 President and Chief Executive Officer, Vertex Electronic Products, Inc. Manfred Stupnik ................. 57 Vice President of the Company; and 1995 President, Vertex Microwave Products, Inc. Louis E. Becker.................. 65 Vice President of the Company; and 1998 President, Vertex Antenna Systems, LLC
- ------------------------------------------ (1) Member of the Compensation Committee (2) Member of the Stock Option Committee of the Outside Directors Stock Option Plan (3) Member of the Audit Committee * All executive officers of the Company are elected annually by the Board of Directors and serve at the discretion of the Board. All directors of the Company hold office until the next ensuing annual meeting of shareholders and until their respective successors are duly elected and qualified. There are no family relationships between any director or executive officer of the Company and any other such person. -13- 15 J. Rex Vardeman is a co-founder of the Company and has served as Chairman of the Board, President, Chief Executive Officer and a director since its inception in October 1984. Prior to founding the Company, Mr. Vardeman served as Vice President of Harris Antenna Operations ("Harris Antenna Operations"), a unit of the Satellite Communications Division of Harris Corporation ("Harris"), until the acquisition in 1984 of the Harris Antenna Operations by the Company. In 1973, Mr. Vardeman co-founded Radio Mechanical Structures, Inc. ("RMS"), the predecessor to the Harris Antenna Operations, and served as its Vice President and General Manager and a director until the acquisition of RMS by Harris in 1977. For more than ten years prior thereto, he was employed by E-Systems, Inc., a major electronics company, in various engineering and management positions. A. Don Branum, a co-founder of the Company, has served as Senior Vice President, Assistant Secretary, and a director since its inception in October 1984. He also served as Vice President/General Manager of the Company's Vertex Antenna Products Division from April 1994 to April 1998. Prior to joining the Company, Mr. Branum served as Vice President of the Harris Antenna Operations, with responsibility for product marketing. Mr. Branum served as President of Dallas Telecommunications, Inc., a communications marketing and consulting firm which he founded from 1981 through 1984. From 1978 through 1981, Mr. Branum served as Vice President and General Manager of the Satellite Communications Division of Harris, of which the Harris Antenna Operations were a part. Mr. Branum was a co-founder of RMS in 1973 and served as its President and a director until its acquisition by Harris in 1977. James D. Carter has served the Company as Vice President and Chief Financial Officer, Treasurer, and a director since its inception in October 1984. Prior to joining the Company, Mr. Carter was employed by Harris as Controller of the Harris Antenna Operations since 1978. For more than six years prior thereto, Mr. Carter was employed by Harris in various accounting positions. Bill R. Womble has served as a director of the Company since October 1984. He has been continuously engaged in the private practice of law since 1963 and is a senior partner in the firm of Thompson & Knight L.L.P. (attorneys), in Dallas, Texas. Mr. Womble holds no other directorships. Donald E. Heitzman, Sr. has served as a director of the Company since September 1992. Mr. Heitzman is President of International & Defense Consultants, of Dallas, Texas, a private consulting firm which he founded in May 1992. He was previously employed by Electrospace Systems, Inc. (telecommunications systems), as Senior Vice President of International Business Development for more than five years. Mr. Heitzman holds no other directorships. John G. Farmer has served as a director of the Company since August 1997. Mr. Farmer is Co-Managing Partner of Stratford Capital Partners, L.P., a Dallas-based small business investment company (SBIC) founded in 1995 and affiliated with the investment firm of Hicks, Muse, Tate & Furst, Inc., Dallas, Texas. Prior to joining Stratford Capital Partners, Mr. Farmer served as Senior Vice President and Regional Manager for GE Capital's Corporate Finance Group from 1990 through 1994. From 1975 to 1990, Mr. Farmer served in a variety of senior management positions at MBank Dallas, N.A. ("MBank"), including Chairman, Chief Executive Officer, and a director of MVenture Corp. (MBank's wholly-owned subsidiary and SBIC) from 1985 until his departure from MBank in 1990. Mr. Farmer also serves as a director of Hollywood Theater Holdings, Inc. (movie entertainment centers). Rein Luik has served as a director of the Company since August 1997 and as Vice President of the Company since June 1997, immediately following the acquisition of Vertex Satcom Systems, Inc. ("Vertex Satcom"), formerly TIW Systems, Inc., as a wholly-owned subsidiary of the Company. Dr. Luik, a co-founder of Vertex Satcom, has served as President since its inception in 1976 and has continued to serve in that position since its acquisition by the Company. Effective October 1998, Dr. Luik became President of the Vertex Electronics Group. Prior to founding Vertex Satcom, Dr. Luik was employed by the WDL Division of Aeronutronic Ford Corporation from 1962 to 1976, initially as an engineer and subsequently as Manager of its Antenna Subsystems Engineering Department. Joe A. Ylitalo has served as Secretary and General Counsel of the Company since January 1997. Prior to January 1997, Mr. Ylitalo was employed as General Counsel to the Company for more than five years. -14- 16 William L. Anton has served as Vice President of the Company since October 1984 and as Vice President - Marketing of Vertex Antenna Products Division from September 1995 to October 1998. Mr. Anton previously served in the position of Vice President - International Marketing from October 1987 until September 1995, and as Vice President - Operations from December 1984 through October 1987. From April 1984 through December 1984 and from August 1977 until April 1984, Mr. Anton served as Director of Operations and Program Director, respectively, of the Harris Antenna Operations. H. Dean Bunnell has served as Vice President of the Company since January 1995, immediately following the acquisition of Vertex Electronic Products, Inc. ("VEPI"), formerly Maxtech, Inc., as a wholly-owned subsidiary of the Company. Mr. Bunnell is a co-founder of VEPI and has served as its President and Chief Executive Officer since its inception in 1989, and has continued to serve in such positions since the Company's acquisition of VEPI. Manfred Stupnik has served as Vice President of the Company since January 1995 and as President of Vertex Microwave Products, Inc. ("VMPI"), formerly Gamma-f Corp., a wholly-owned subsidiary of the Company, since 1991. Prior thereto, Mr. Stupnik held positions as Vice President of Operations and Vice President-Commercial Products during his 26 years of continuous tenure with VMPI. Louis E. Becker has served as Vice President of the Company since October 1998 and as President of Vertex Antenna Systems, LLC ("VAS"), formerly a division of TIW Systems, Inc., since its organization in October 1998 following the acquisition of Vertex Satcom as a wholly-owned subsidiary of the Company. He was a co-founder of Vertex Satcom in 1976, and served continuously as its Executive Vice President until October 1998. Prior to 1976, he was employed by the WDL Division of Aeronutronic Ford Corporation, where he was responsible for managing the Structural/Mechanical Engineering Department. BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's directors and officers, and persons who own more than 10% of a registered class of the Company's equity securities, to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission (the "SEC"). Such persons are required by SEC regulation promulgated pursuant to the Exchange Act to furnish the Company with copies of all Section 16(a) report forms they file with the SEC. Based solely on its review of the copies of such report forms received by it with respect to fiscal year 1999, or written representations from certain reporting persons, the Company believes that all filing requirements applicable to its directors, officers and persons who own more than 10% of a registered class of the Company's equity securities have been timely complied with in accordance with Section 16(a) of the Exchange Act. ITEM 11. EXECUTIVE COMPENSATION AND OTHER TRANSACTIONS. SUMMARY COMPENSATION INFORMATION The following table sets forth certain information regarding all cash compensation paid or to be paid by the Company or any of its subsidiaries, as well as other compensation paid or accrued, during the fiscal years indicated, to the Company's Chief Executive Officer and each of the Company's four other most highly compensated executive officers (the "Named Executive Officers") for such respective periods in all capacities in which they served. -15- 17 SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------------------------ --------------------------------- AWARDS PAYOUTS ---------- -------- RESTRICTED SECURITIES ALL OTHER OTHER ANNUAL STOCK UNDERLYING LTIP COMPEN- FISCAL COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS SATION NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(3) ($)(1) ($) (#) ($) ($)(2) - --------------------------- ---- --------- ----------- ------------ ---------- ------------- -------- ---------- J. Rex Vardeman............. 1999 $275,000 $ 10,000 -- -- 25,000(4) -- $ 4,800 Chairman of the Board, 1998 250,000 105,000 -- -- -- -- 800 President, and Chief 1997 225,000 92,000 -- -- -- -- 800 Executive Officer A. Don Branum............... 1999 190,000 8,500 -- -- 25,000(4) -- 4,800 Senior Vice President 1998 185,000 87,000 -- -- -- -- 800 1997 175,000 37,000 -- -- -- -- 800 James D. Carter............. 1999 175,000 7,500 -- -- 25,000(4) -- 4,800 Vice President and Chief 1998 165,000 76,000 -- -- -- -- 800 Financial Officer, and 1997 145,000 61,000 -- -- -- -- 800 Treasurer Rein Luik(5)................ 1999 215,000 -- -- -- -- -- 4,800 Vice President; 1998 210,000 49,000 -- -- -- -- 15,497(6) President, Vertex 1997 275,000 -- -- -- -- -- 15,041(6) Electronics Group Louis E. Becker(7).......... 1999 165,000 21,000 -- -- -- -- 4,800 Vice President; 1998 160,000 30,000 -- -- -- -- 9,692(8) President, Vertex 1997 170,000 -- -- -- -- -- 12,750(8) Antenna Systems, LLC
- -------------------------- (1) Includes incentive bonus payments earned for services rendered to the Company or a subsidiary in the year indicated that were paid in the following year. (2) Excludes certain incidental perquisites, the total of which did not exceed the lesser of $50,000 or 10% of the cash compensation for any named individual. (3) Except as noted in footnotes (6) and (8) below, the amounts reflected in this column consist of the annual employer matching payments to the Company's qualified Savings/Profit Sharing Plan. (4) Incentive stock options to acquire shares of Common Stock pursuant to the Company's 1995 Stock Compensation Plan. (5) Information included in the Summary Compensation Table as to Dr. Luik's 1997 salary compensation (i) represents compensation for services to Vertex Satcom Systems, Inc. ("Vertex Satcom"), formerly known as TIW Systems, Inc. ("TIW"), a wholly-owned subsidiary of the Company, and since June 11, 1997, as Vice President of the Company, and (ii) reflects the annualized amount of such compensation as if he had been employed in such capacities for the entire fiscal year. Dr. Luik actually earned and was paid salary compensation of $84,800 from the effective date of the Company's acquisition of Vertex Satcom, June 11, 1997, until the end of the 1997 fiscal year. (6) Includes the fiscal year 1997 and 1998 respective employer contributions of (i) $4,750 and $4,846 to Vertex Satcom's qualified 401(k) Plan and (ii) $10,291 and $10,651 to Vertex Satcom's qualified Money Purchase Pension Plan for the benefit of Dr. Luik. (7) Information included in this Summary Compensation Table as to Mr. Becker's 1997 salary compensation (i) represents compensation for services to Vertex Antenna Systems, LLC ("VAS"), formerly a division of Vertex Satcom, and since June 11, 1997, as Vice President of the Company, and (ii) reflects the annualized amount of such compensation as if he had been employed in such capacities for the entire fiscal year. Mr. Becker actually earned and was paid salary compensation of $52,500 from the effective date of the Company's acquisition of Vertex Satcom, June 11, 1997, until the end of the 1997 fiscal year. -16- 18 (8) Includes the fiscal year 1997 and 1998 respective employer contributions of (i) $4,750 and $3,692 to VAS's qualified 401(k) Plan and (ii) $8,000 and $6,000 to VAS's qualified Money Purchase Pension Plan for the benefit of Mr. Becker. OPTION GRANTS DURING FISCAL YEAR 1999 The following table provides information related to options to acquire shares of Common Stock granted to the Named Executive Officers of the Company during fiscal year 1999. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS --------------------------- POTENTIAL REALIZABLE VALUE NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES SECURITIES OPTIONS OF STOCK PRICE UNDERLYING GRANTED TO APPRECIATION OPTIONS EMPLOYEES EXERCISE FOR OPTION TERM(1) GRANTED IN FISCAL PRICE EXPIRATION ---------------------- NAME (#)(2) YEAR ($/SH)(3) DATE 5% 10% - ---- --------- ----------- --------- ---------- -------- -------- J. Rex Vardeman........... 10,000 3.2% $ 14.875 10/13/08 $ 93,548 $237,069 15,000 4.8% 12.4375 8/02/09 117,328 297,333 A. Don Branum............. 10,000 3.2% 14.875 10/13/08 93,548 237,069 15,000 4.8% 12.4375 8/02/09 117,328 297,333 James D. Carter........... 10,000 3.2% 14.875 10/13/08 93,548 237,069 15,000 4.8% 12.4375 8/02/09 117,328 297,333 Rein Luik................. -- -- -- -- -- -- Louis E. Becker........... -- -- -- -- -- --
- ----------------------- (1) The potential realizable value illustrates the value that may be realized upon exercise of the option immediately prior to the expiration of its term, assuming the specified compounded rates of appreciation of the Company's Common Stock over the term of the option. These values do not take into account provisions of the option providing for termination of the option following termination of employment, transferability or vesting over five years. (2) Incentive stock options to acquire shares of Common Stock granted pursuant to the Company's 1995 Stock Compensation Plan for a term of ten years from the date of grant. The options vest and are initially exercisable with respect to 20% of the shares covered thereby on each anniversary date thereof in 2000 through 2004, are nontransferable and are subject to termination under conditions upon death, disability and cessation of employment of the optionee. (3) The exercise price per share of the option was equal to 100% of the fair market value of the Common Stock per share on the date of grant. 1999 OPTION EXERCISES AND FISCAL YEAR END HOLDINGS The following table sets forth information with respect to options exercised by the Named Executive Officers of the Company during fiscal year 1999 and the number and value of unexercised options and SARs held at fiscal year end. -17- 19 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
VALUE OF UNEXERCISED NUMBER OF SECURITIES IN-THE-MONEY UNDERLYING UNEXERCISED OPTIONS/SARS OPTIONS/SARS AT FY-END(#) AT FY-END ($)(*) -------------------------- -------------------------- SHARES ACQUIRED VALUE NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------- --------------- ------------ ----------- ------------- ----------- ------------- J. Rex Vardeman....... -- -- 35,000 30,000 $17,813 $0 A. Don Branum......... -- -- 35,000 30,000 17,813 0 James D. Carter....... -- -- 30,000 30,000 11,875 0 Rein Luik............. -- -- -- -- 0 0 Louis E. Becker....... -- -- -- -- 0 0
- ------------ * The closing price for the Company's Common Stock as reported by New York Stock Exchange on September 30, 1999, was $11.1875 per share. The indicated value is calculated on the basis of the difference between the option exercise price per share and $11.1875, multiplied by the number of shares of Common Stock underlying each option. COMPENSATION OF DIRECTORS The Company has adopted a policy whereby all Outside Directors (non-employees) receive directors' fees of $1,000 for each meeting of the Board attended (exclusive of telephonic meetings) and for each meeting of a committee of the Board attended (exclusive of committee meetings held on the same day as Board meetings). No director who is an employee of the Company receives any fees for services as a director or member of any committee of the Board. All directors are reimbursed for reasonable travel and out-of-pocket expenses incurred in connection with attendance at meetings of the Board or of committees of the Board. In addition, the Company has adopted the Outside Directors Plan whereby stock option grants have been made from time to time on an irregular basis to reward director performance and to encourage those qualifying directors of the Company who are not employees to participate in the Company's long-term success. Pursuant to this plan, the Company has previously granted non-qualified stock in fiscal year 1993 to Messrs. Womble and Heitzman to purchase 5,000 shares of Common Stock each at the exercise price of $10 per share, in fiscal year 1995 for an additional 5,000 shares of Common Stock each at an exercise price of $12 per share, and in fiscal year 1998 for an additional 5,000 shares of Common Stock each at an exercise price of $17 per share. To date, Messrs. Heitzman and Womble have exercised their 1993 options of 5,000 shares each, and Mr. Womble has also exercised his 1995 option of 5,000 shares. In fiscal year 1998, the Company also adopted the Non-Employee Directors Stock Option Plan, whereby stock option grants may be made from time to time on an irregular basis to reward director performance and to encourage those qualifying directors to participate in the Company's success. Pursuant to this plan, in fiscal year 1998, the Company granted non-qualified stock options to Messrs. Womble, Heitzman, and Farmer in the amount of 5,000 shares, 5,000 shares, and 10,000 shares, respectively, at an exercise price of $25 per share. During fiscal year 1999, these 1998 options were modified to amend the exercise price to $16.4375 per share. In addition, in fiscal year 1999, the Company granted non-qualified stock options to Messrs. Womble, Heitzman, and Farmer in the amount of 5,000 shares, 4,000 shares, and 3,000 shares, respectively, at an exercise price of $12.4375 per share. To date, none of these options has been exercised. -18- 20 EMPLOYMENT AGREEMENTS J. Rex Vardeman, A. Don Branum, and James D. Carter, in their capacities as (i) Chairman of the Board, President and Chief Executive Officer, (ii) Senior Vice President and Assistant Secretary, and (iii) Vice President and Chief Financial Officer and Treasurer, respectively, have each executed employment agreements with the Company. These employment agreements are each for three-year terms which automatically renew on a daily basis. Among other provisions, these agreements provide that, in consideration for remaining in the employ of the Company, each officer is entitled, subject to certain conditions, to receive benefits in the event of termination of employment under certain circumstances, including, among other reasons, a Change of Control of the Company. If such an officer is terminated for a reason other than (a) his death, disability or retirement, (b) for cause, or (c) his voluntary termination other than for good reason, such officer would be entitled to receive from the Company, except as otherwise indicated below, a lump-sum severance payment equal to the sum of the following payments: (i) the officer's full base salary through the effective date of his termination at the rate then in effect, (ii) any authorized but unreimbursed business expenses and any vacation benefits which have accrued but are unpaid or unused as of the effective date of termination, (iii) any accrued but unpaid annual bonus compensation to the effective date of termination, but without accelerating the bonus payment date, (iv) an amount equal to three times the average aggregate direct annual compensation (salary and bonus) of the officer for the five fiscal years of the Company ended immediately prior to the effective date of his termination, and (v) in the event such officer is subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), resulting from any "excess parachute payment" received by such officer as described in Section 280G(b) of the Code, an amount sufficient to ensure that after payment of such excise tax, plus interest or penalties thereon, if any, as the result of such "excess parachute payment," such officer will retain free and clear of all claims, taxes, and impositions an amount equal to such excise tax, interest and penalties, if any, imposed upon the excess payment received. In the event that any such officer receives a parachute payment as a result of termination of employment, such officer would be deemed to receive an "excess parachute payment" if it equals or exceeds 300% of the officer's "base amount," generally the average annual compensation received by such officer over the five most recent tax years. The "excess parachute payment" is computed as that portion of the "parachute payment" which exceeds the "base amount." If the merger agreement with Tripoint is consummated, a change in control of the Company will occur. See "Recent Developments" above for further information. In addition, Rein Luik and Louis E. Becker, each in his capacity as President and Vice President, respectively, of TIW, entered into an agreement, effective as of June 11, 1997, which includes the same provisions for a similar term as summarized above as related to his employment in such capacity with TIW or its successors. Certain key employees of the Company have executed proprietary information protection agreements acknowledging that all their discoveries made while an employee of the Company will be the property of the Company and that they will not disclose trade secrets or other confidential information of the Company to others. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal year 1999, the members of the Compensation Committee were responsible for determining executive compensation and made decisions related to stock option grants to certain officers other than executive officers. J. Rex Vardeman, Chairman of the Board, President and Chief Executive Officer, serves as Chairman of the Compensation Committee and participated in deliberations concerning executive officer compensation. No member or nominee for election as a member of the Board or any Committee of the Board has an interlocking relationship with the board (or member of such board) or any committee (or member of such committee) of a board of any other company. -19- 21 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS The following table sets forth information regarding the beneficial ownership of shares of the Common Stock of the Company as of December 2, 1999, by (i) each person known by the Company to own more than 5% of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) the Company's Chief Executive Officer, (iv) each of the Company's four other most highly compensated executive officers for fiscal year 1999, and (v) the directors and executive officers of the Company as a group. The persons and entities named in the table have sole voting and investment power with respect to all such shares owned by them, unless otherwise indicated.
AMOUNT AND NATURE OF PERCENT NAME OF BENEFICIAL OWNER OR GROUP(1) BENEFICIAL OWNERSHIP OF CLASS ------------------------------------ -------------------- -------- Fidelity Management & Research Company .......... 511,000 10.0% Ryback Management Corporation ................... 333,000 6.5 EQSF Advisers, Inc. ............................. 306,900 6.0 J. Rex Vardeman(2) .............................. 199,570 3.9 James D. Carter(2) .............................. 103,833 2.0 A. Don Branum(2) ................................ 89,000 1.7 Rein Luik(3) .................................... 71,710 1.4 Bill R. Womble (2) .............................. 30,550 * Donald E. Heitzman, Sr. (2) ..................... 24,000 * John G. Farmer(2) ............................... 13,000 * Louis E. Becker(4) .............................. 2,835 * All directors and executive officers as a group (12 persons) (5) .................. 695,561 13.0
- ----------------- * Represents beneficial ownership of less than 1% of the outstanding shares of Common Stock. (1) The addresses of the persons or entities shown in the foregoing table who are beneficial owners of more than 5% of the Common Stock are as follows: Fidelity Management & Research Company, 82 Devonshire Street, Boston, Massachusetts 02109; Ryback Management Corporation, 7711 Carondelet Avenue, Box 16900, St. Louis, Missouri 63105; and EQSF Advisers, Inc., 767 Third Avenue, New York, New York 10017. (2) Includes 42,000, 37,000, 42,000, 15,000, 19,000, and 13,000 shares as to which beneficial ownership could be acquired by Messrs. Vardeman, Carter, Branum, Womble, Heitzman, and Farmer, respectively, within sixty days of December 2, 1999, upon the exercise of outstanding options. (3) Includes 2,080 shares held of record by the TIW Systems, Inc. Stock Bonus Trust (the "Trust") for the account of Dr. Luik, as to which shares Dr. Luik shares voting and investment powers pursuant to the terms of the Trust. (4) Represents shares held of record by the Trust for the account of Louis E. Becker, as to which shares Mr. Becker shares voting and investment powers pursuant to the terms of the Trust. (5) Includes an aggregate of 226,333 shares as to which beneficial ownership could be acquired by all such persons within sixty days of December 2, 1999, upon the exercise of outstanding options. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Board of Directors of the Company has adopted a policy that transactions between the Company, its officers, directors, principal shareholders, and affiliates be conducted on terms at least as favorable to the Company as those which could be obtained from independent parties. The Company has entered into certain indemnification agreements with each of its directors and executive officers to provide the maximum indemnification allowed pursuant to its articles of incorporation, bylaws, and applicable law. Bill R. Womble, a director of the Company, is a partner of Thompson & Knight L.L.P., a law firm headquartered in Dallas, Texas, that has been retained by the Company as its outside counsel. -20- 22 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
PAGE IN 1999 (a)1. CONSOLIDATED FINANCIAL STATEMENTS. ANNUAL REPORT ------------- Report of Independent Public Accountants........................ 28 Consolidated Income Statements For the years ended September 30, 1999, 1998, and 1997......................................... 17 Consolidated Balance Sheets As of September 30, 1999 and 1998............................ 18 Consolidated Statements of Cash Flows For the years ended September 30, 1999, 1998, and 1997......................................... 19 Consolidated Statements of Shareholders' Equity For the years ended September 30, 1999, 1998 and 1997.......................................... 20 Notes to Consolidated Financial Statements...................... 21 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. On July 9, 1999, the Company filed a current report on Form 8-K under item 5 regarding the Company's press release dated July 2, 1999 titled "Vertex Communications Corporation Announces Restructuring." See Note 13 of Notes to Consolidated Financial Statements. -21- 23 (c) EXHIBITS. The following Exhibits are filed herewith pursuant to Item 601 of Regulation S-K or are incorporated herein by reference to previous filings noted, as applicable:
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).
-22- 24
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 -- Revolving Credit Loan Agreement and related Promissory Note, each dated June 11, 1997, by and between Bank One, Texas, National Association and the Registrant, filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 (File No. 0-15277). 10.13 -- Second Amendment to Loan Agreement, dated September 15, 1998, by and between the Registrant and Bank One, Texas, National Association, filed as Exhibit No. 10.23 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 (File No. 0-15277). 10.14 -- First Amendment to the Savings/Profit Sharing Plan of the Registrant, as amended and restated, effective as of October 1, 1998, filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 (File No. 0-15277). 10.15 -- Management Incentive Compensation Plan of the Registrant, its Subsidiaries and its Divisions, as amended and restated, effective as of October 1, 1998, filed as Exhibit No. 10.25 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 (File No. 0-15277). 10.16 -- Employee Profit Sharing Bonus Plan of the Registrant, its Subsidiaries and its Divisions, as amended and restated, effective as of October 1, 1998, filed as Exhibit No. 10.26 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 (File No. 0-15277). 13* -- Annual Report to Shareholders of the Registrant for the year ended September 30, 1999, to the extent specified in Parts II and IV hereof. 21* -- Subsidiaries of the Registrant. 23* -- Consent of Independent Public Accountants. 27* -- Financial Data Schedule.
- ----------------- * Filed herewith. -23- 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: December 22, 1999 Vertex Communications Corporation (Registrant) By: /s/ J. REX VARDEMAN ------------------------------ J. Rex Vardeman Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ J. REX VARDEMAN Chairman of the Board, December 22, 1999 - --------------------------- President, Chief J. Rex Vardeman Executive Officer (Principal Executive Officer) and Director /s/ A. DON BRANUM Director December 22, 1999 - --------------------------- A. Don Branum /s/ JAMES D. CARTER Vice President and December 22, 1999 - --------------------------- Chief Financial Officer James D. Carter (Principal Financial and Accounting Officer), Treasurer and Director /s/ BILL R. WOMBLE Director December 22, 1999 - --------------------------- Bill R. Womble /s/ DONALD E. HEITZMAN, SR. Director December 22, 1999 - --------------------------- Donald E. Heitzman, Sr. /s/ JOHN G. FARMER Director December 22, 1999 - --------------------------- John G. Farmer /s/ REIN LUIK Director December 22, 1999 - --------------------------- Rein Luik
-24- 26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To the Shareholders of Vertex Communications Corporation: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in Vertex Communications Corporation's 1999 annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated October 26, 1999. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The supplemental schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Dallas, Texas October 26, 1999 S-1 27 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 9/30/99 $ 897 $ 90 $ -- $ 37 (1) $ 950 Year Ended 9/30/98 1,254 (159) -- 198 (1) 897 Year Ended 9/30/97 268 210 805(4) 29 (1) 1,254 ALLOWANCE FOR INVENTORY OBSOLESCENCE Year Ended 9/30/99 $ 1,257 $ 1,716 $ -- $ 445 (2) $ 2,528 Year Ended 9/30/98 1,453 (18) -- 178 (2) 1,257 Year Ended 9/30/97 771 449 518(4) 285 (2) 1,453 ALLOWANCE FOR WARRANTY CLAIMS Year Ended 9/30/99 $ 1,343 $ 2.312 $ -- $ 1,239 (3) $ 2,416 Year Ended 9/30/98 1,052 1,327 -- 1,036 (3) 1,343 Year Ended 9/30/97 530 761 200(4) 439 (3) 1,052
- ----------------- (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 28 INDEX OF EXHIBITS
NUMBER DESCRIPTION - ------ ----------- 13 Annual Report to Shareholders of the Registrant for the year ended September 30, 1999, to the extent specified in Parts II and IV hereof. 21 Subsidiaries of the Registrant. 23 Consent of Independent Public Accountants. 27 Financial Data Schedule.
EX-13 2 ANNUAL REPORT TO SHAREHOLDERS 1 VERTEX COMMUNICATIONS CORPORATION EXHIBIT 13 TO ANNUAL REPORT ON FORM 10-K For Fiscal Year ended September 30,1999 ANNUAL REPORT TO SHAREHOLDERS 2 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 SELECTED FINANCIAL DATA
Year Ended September 30, 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (In thousands, except per share amounts) Sales $ 116,936 $ 130,017 $ 92,433 $ 77,525 $ 65,024 Costs and expenses 125,784 116,571 82,602 69,491 58,547 Income (loss) before income taxes (8,433) 13,798 10,350 8,551 7,015 Net income (loss) (6,721) 10,086 7,175 6,100 5,195 Diluted earnings (loss)per share (1.32) 1.90 1.47 1.32 1.12 --------- --------- --------- --------- --------- Working capital $ 55,414 $ 56,018 $ 45,584 $ 39,484 $ 33,396 Long-term debt 44 59 988 875 1,312 Total assets 103,131 110,771 100,493 71,974 63,854 Total liabilities 26,499 26,561 27,003 16,500 14,168 Total shareholders' equity 76,632 84,210 73,490 55,474 49,686 --------- --------- --------- --------- --------- Orders booked $ 132,556 $ 132,338 $ 122,702 $ 74,770 $ 79,132 Backlog of unfilled orders 89,589 73,971 71,650 41,381 44,136 --------- --------- --------- --------- ---------
No cash dividends have been declared or paid 3 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company operates in two business segments-Antenna and Electronics. The Antenna business segment provides customers with earth station antennas and related products while the Electronics business segment supplies customers with solid-state power amplifiers, radio frequency conversion products, and digital communications electronic products. In fiscal 1997, the Company acquired TIW Systems, Inc. (TIW). Subsequent to the acquisition, management divided TIW into two separate business units-Vertex Satcom Systems, Inc. (Vertex Satcom) and Vertex Antenna Systems, LLC (VAS)-that would operate within each separate business segment. Vertex Satcom is engaged in providing electronic networking products and VAS provides customers with full-motion earth station antennas and related antenna products. In the third quarter of fiscal 1999, management announced its intentions to abandon ongoing efforts to offer certain antenna components and electronic single-channel processing equipment which utilizes Time Division Multiple Access technology due to the Company's inability to sell these products at a profit and unacceptable future prospects. As a result, the Company recorded a special charge of $9.5 million, consisting of Vertex Satcom goodwill impairment of $4.8 million and the write-off of obsolete inventory and other costs associated with the decision to exit the networking systems business. In the fourth quarter of fiscal 1999, the Company recorded an additional $1 million reserve for inventory believed to be obsolete. RESULTS OF OPERATIONS FISCAL 1999 COMPARED TO FISCAL 1998 Consolidated sales of $116.9 million in fiscal 1999 declined by $13.1 million, or 10.1 percent, compared to sales of $130 million in fiscal 1998 primarily due to lower foreign sales and substantially lower sales of electronic networking products. A large part of the sales reduction was attributable to the Company's Electronics segment where its external sales in fiscal 1999 were $9.2 million, or 30.6 percent, less than fiscal 1998's external sales. Lower fiscal 1999 sales in this segment were mainly a result of intense competition and lack of customers' acceptance of products offered by our Vertex Satcom unit. Sales in the Antenna segment declined by $3.9 million, or 3.9 percent, from fiscal 1998 sales due to receipt of certain large nonrecurring orders late in fiscal 1999 that are scheduled for shipment in fiscal 2000. Cost of sales expressed as a percent of sales increased from 71.4 percent in fiscal 1998 to 79.8 percent in fiscal 1999. Approximately half of the cost increase was due to the special charge of $5.7 million for obsolete inventory, while the remainder of the cost increase was due to sales price reductions resulting from competitive pricing pressures in the marketplace. Research and development spending of $6.6 million in fiscal 1999 increased by $.6 million, or 10.6 percent, over the comparable prior year's spending due to increased product development. The Company has developed three sizes of bolt-together antennas designed to eliminate the need for field optical alignment with resulting lower cost to the customer. The Company's 9.3-meter, 6.3-meter and 4.8-meter antenna designs are completed and orders are being 4 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 received for these products. The Company is developing a wideband feed system specifically designed for use with the next generation satellites. Marketing expenses were $10.5 million in fiscal 1999 compared to $6.9 million in fiscal 1998. The $3.6 million, or 51.8 percent, increase in spending was principally caused by management reassigning certain engineering personnel to marketing functions and the addition of new employees. Higher advertising costs and increased travel also contributed to the incremental increase in marketing expenses in fiscal 1999. General and administrative expenses in fiscal 1999 of $10.6 million decreased by 3.2 percent from the prior year $10.9 million as a result of lower cash incentive compensation paid to certain employees. In fiscal 1999, the Company recorded a $4.8 million charge as impairment of goodwill because management concluded that the carrying value of goodwill associated with Vertex Satcom was not recoverable. In fiscal 1999, the Company recognized an income tax benefit due to the loss generated by operations. The differences between the effective tax rate and statutory tax rate were mainly a result of goodwill impairment and amortization which is not deductible, and higher foreign tax rates which were partially offset by the favorable effect from tax incentives available from export shipments. The Company concluded fiscal 1999 with a net loss of $6.7 million compared to net income of $10.1 million in fiscal 1998. The loss was caused by the above factors, inclusive of $10.5 million of special charges. The Company ended fiscal 1999 with an unfilled order backlog of $89.6 million, an increase of 21.1 percent from order backlog of $74 million one year earlier. Management is encouraged by the level and content of the current order backlog and believes that the Company's profit margins should show modest improvement in future periods. The Company believes that its consistent investment in the development of Ka- and Ku-band products should yield favorable future results in terms of added market share and enhanced profitability. FISCAL 1998 COMPARED TO FISCAL 1997 Record consolidated sales in fiscal 1998 of $130 million increased by $37.6 million, or 40.7 percent, compared to sales of $92.4 million in fiscal 1997. The sales increase, in total and within each business segment, was primarily attributable to the acquisition of TIW in June of 1997. (TIW was reorganized in early fiscal 1999 into two entities, Vertex Satcom and VAS.) Cost of sales expressed as a percentage of sales of 71.4 percent in fiscal 1998 remained essentially unchanged when compared to 71.2 percent in fiscal 1997. Research and development spending was $6 million in fiscal 1998, or $2.2 million (58.1 percent) greater than in fiscal 1997, mainly due to the acquisition of TIW and, to a lesser extent, certain developmental work on a small antenna product line. Marketing expenses of $6.9 million in fiscal 1998 increased by $1.9 million, or 36.9 percent, compared to $5.1 million in fiscal 1997, due to the inclusion of TIW operating results in all of fiscal 1998 (fiscal 1997 consolidated operating results reflect the inclusion of TIW since the date of acquisition) and increased staffing levels. General and administrative expenses increased by 5 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 $2.9 million, or 36.6 percent, in fiscal 1998 over fiscal 1997, primarily as a result of the acquisition of TIW. The effective tax rate for fiscal 1998 of 26.9 percent was lower than the prescribed statutory tax rates primarily due to tax incentive benefits available from export sales and research and development tax credits. Net income in fiscal 1998 was a record $10.1 million or $1.90 per share, an increase of 40.6 percent more than the $7.2 million or $1.47 per share achieved in fiscal 1997, due primarily to increased sales volume and despite increased spending discussed above. The Company's backlog of unfilled orders was $74 million at September 30, 1998, an increase of 3.2 percent over the $71.7 million at the 1997 year end. FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION GENERAL The Company's future operating results and financial condition may be affected by various trends and factors including the following: general economic conditions, including the impact of changing economic conditions; fluctuation of foreign currency exchange rates; changes in capital expenditure plans of certain international customers; rapid or unexpected technological changes; product demand and industry capacity; product development; competition; market acceptance of new products; manufacturing efficiencies; availability of certain raw materials; domestic and foreign government regulations and spending; and rising costs and availability of certain components. In addition, the Company's future operating results and financial condition may be affected by the size and timing of individual orders booked, which may also cause fluctuations in quarterly operating results. Due to the factors noted above, the Company's future earnings and stock price may be subject to some fluctuation, particularly on a quarterly basis. Past business trends should not be used to anticipate future trends and historical performance should not be considered as a reliable indicator of future performance. Additionally, any shortfall in revenue or earnings from the levels anticipated by securities analysts could have an immediate and significant effect on the trading price of the Company's common stock in any given period. INFLATION Generally, inflationary trends do not materially impact the Company's operations. However, because the Company's sales contracts are usually negotiated on a fixed-priced basis prior to actual purchase of certain raw materials and purchased parts, rapid unforeseen price increases in any of these items could adversely affect profit margins for short periods. The Company has not experienced a material adverse effect over the past five years from inflation because of the relatively low rates of inflation experienced in the United States and Germany over this period of time, and none is currently anticipated for the foreseeable future. 6 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 FINANCIAL MARKET RISKS The Company maintains two foreign sales offices and operates a foreign subsidiary which are subject to the effects of fluctuations in foreign currency exchange rates. The sales offices are located in England and Singapore. Should the British pound currency or the Singapore dollar currency, as related to the U.S. dollar, turn materially unfavorable, the Company's marketing expenses could increase accordingly. The Company's operations located in Duisburg, Germany involve a complete operating entity. Daily operations (sales, costs and expenses, and income taxes) are conducted in its functional currency, the German mark. Should this currency, as related to the U.S. dollar, change in a material adverse manner, consolidated results of operations could be materially impacted. In addition, to the extent taxable income is generated by the German operations, the consolidated effective tax rate may be unfavorably impacted. The German statutory tax rate is approximately 50 percent compared to the present U.S. statutory tax rate of 34 percent on taxable income up to $10 million. The Company's general policy is to sell products manufactured or supplied by its domestic operations in the U.S. dollar currency. Products supplied by its German operations are sold in its functional currency. The Company has one sales contract that will be performed by a domestic subsidiary where payment will be made in the European Currency Unit. As of September 30, 1999, the Company has in place a forward exchange hedge contract equal to approximately U.S. $.3 million. The hedge contract should minimize exposure to an unfavorable foreign currency rate change. Should the exchange rate between the two currencies suffer an adverse change of 10 percent, the effect on net income would not be material. The Company has not suffered any material losses or adverse effects due to fluctuations in the currency exchange rate in the British pound, the Singapore dollar, or the German mark relative to the U.S. dollar. LIQUIDITY AND CAPITAL RESOURCES Operating activities in fiscal 1999 provided $15 million of cash mainly due to substantial decreases in accounts receivable, inventories, and the positive effect of the add-back of depreciation and amortization. Cash flow was negatively impacted by both the net loss of $6.7 million and net change in the income tax accounts of $4 million. The levels of inventories and accounts receivable from the end of fiscal 1999, compared to the end of fiscal 1998, decreased by approximately 19 percent and 23 percent, respectively. The decline in inventories was caused by lower stocking levels required to support lower sales volume, write-off of obsolete inventory during the third quarter restructuring, and inclusion of a $1 million obsolete inventory provision related to the planned sale or closure of Vertex Satcom. Accounts receivable were lower as a result of lower sales volume in fiscal 1999, compared to the prior year, and favorable collections of customer accounts. Operating activities in fiscal 1998 and 1997 generated $16.2 million primarily because of strong net income of $17.3 million and the favorable effect of depreciation and amortization of $7.7 million, which were partially offset by increased inventories and accounts receivable totaling $12.5 million. Cash of $9 million was invested during the last three years in fixed asset additions. A major portion of these expenditures was made at the Company's manufacturing facility in Kilgore, Texas. In June 1997, the Company acquired TIW for approximately $7.9 million in cash and 574,349 shares of Vertex common stock in a purchase transaction. 7 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 The Company used $2.2 million of cash in the three years ended September 30, 1999 to pay debt incurred in the 1995 acquisition of Vertex Electronic Products, Inc. (formerly known as Maxtech, Inc.). Cash of $1.3 million was used in fiscal 1999 and 1998 to repurchase the Company's common stock in the public markets pursuant to a stock repurchase plan approved by the Board of Directors. In fiscal 1998, the Company paid in full a $.5 million bank note associated with the TIW acquisition that was scheduled to mature in November 2000. In fiscal 1997, financing activities included a $1.1 million bank loan through the Company's German subsidiary to satisfy its working capital needs. The loan was repaid in 24 equal monthly installments. In fiscal 1997, cash of $7.1 million was used to pay down debt assumed in the acquisition of TIW. Cash of $1.7 million was generated during the past three fiscal years by sales of the Company's stock pursuant to stock-based compensation plans (refer to Note 5 of Notes to Consolidated Financial Statements for further information). The Company's bank credit facilities include a .5 million German mark credit line and an unsecured domestic credit line of $20 million, consisting of $10 million for working capital advances and $10 million to support stand-by letters of credit. The domestic credit facility bears interest on advances at LIBOR plus 1.5 percent and credit line fees are .25 percent annually for the unused portion. As of September 30, 1999 and 1998, no principal advances were outstanding under the Company's credit facilities and issued and outstanding letters of credit totaled $4,648,000 and $4,476,000, respectively. Management believes that forecasted cash flows, combined with the Company's strong financial condition and available credit lines, will be sufficient to fund operations for the foreseeable future. The Company is not aware of any demands that are likely to affect liquidity in an adverse manner. As of September 30, 1999, the Company had no material commitments outstanding for capital expenditures. YEAR 2000 COMPLIANCE The Company is assessing and correcting the potential impact of the problem with computer software programs, operating systems, and equipment containing computer processing chips that are unable to properly interpret the upcoming calendar year 2000 and beyond. As this problem pertains to internal concerns, this process has involved identification, review, and updating or replacing, as necessary, in-house systems and equipment, beginning with the most significant through the least important. The costs associated with this effort have not been material and additional costs not yet incurred are expected to be immaterial to the Company. Management believes that the Company's significant systems and equipment that can be affected by improperly recognizing the date of year 2000 and beyond are capable of operating properly and are year 2000 date compliant. A substantial portion of the Company's products sold over the past years and those products currently being offered for sale are earth station antennas which include drive motors, feed assemblies, and other mechanical and electronic components. The function of these products is not directly affected by the changing of a calendar date. Certain other of the Company's products, such as antenna controllers, operate by the use of embedded software and vendor-supplied electronic components that may be date sensitive. 8 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 The majority of these products were designed so that the calendar date changing to 2000 and beyond will not hinder or affect their performance. There are, however, a limited number of products sold in prior years that could be affected by the year 2000 problem. The Company has been and is in the process of contacting such customers and now offers an upgrade package to properly recognize the date and remedy the problem. The Company has sent questionnaires to certain third parties whose lack of readiness could have an adverse material effect on the Company or its products. Management has been collecting and evaluating the questionnaire responses. Based upon those responses received to date, respondents assert that they are year 2000 compliant or they believe they will be timely compliant. The Company continues to receive and evaluate third party responses and follow-up with those third parties who have not responded. Management has been and is currently expending efforts towards developing a contingency plan which contemplates temporary measures to alleviate disruption from year 2000 related failures, either from internal or from external sources. Central to development of a contingency plan is the identification of significant risks and related potential impact from year 2000 perceived failures. The Company has not yet identified any such significant risks and consequently has not developed a comprehensive year 2000 contingency plan. In addition, management does not believe it is possible to ascertain all aspects of the year 2000 problem that may affect the Company, including those related to efforts or readiness of customers, suppliers, or other third parties. Management, however, is committed to pursuing reasonable means to minimize the Company's exposure. Should the Company identify a significant risk related to a year 2000 predicted failure, management intends to develop a contingency plan in order to eliminate or minimize the effect on the Company. The foregoing discussion regarding year 2000 compliance represents management's best estimate regarding the Company's state of readiness and the reasonable steps it has taken and should take to achieve year 2000 compliance in order to minimize or eliminate possible related disruptions to operations. However, there can be no assurance that management's assessment of the risks and potential problems are accurate, or that its actions and planned actions will timely resolve the problems inherent with year 2000 compliance. Therefore, management cannot be assured that the year 2000 problem will not materially affect operations or perhaps expose the Company to third party liability. Certain of the preceding statements related to year 2000 compliance issues are forward-looking and actual results could vary significantly from the Company's planned or anticipated results. The Company is relying on analysis and recommendations from informed employees and third parties in making the above forward-looking statements, which may prove to be inadequate or incomplete. SUBSEQUENT EVENT On November 12, 1999, the Company announced that it had entered into a definitive merger agreement with TriPoint Global Communications, Inc. (TriPoint) of Gastonia, North Carolina. Under the agreement, TriPoint will acquire the Company for $22.00 per share or aggregate consideration of approximately $128 million. Pursuant to the agreement, on November 18, 1999, TriPoint initiated a cash tender offer for all of the Company's outstanding common stock, including outstanding stock options, which is expected to be followed by a second-step merger with the Company. There can be no assurances that Tripoint's tender offer for the Company's outstanding shares will be successful or that the merger will be consummated. The consummation of the merger agreement is dependent upon, among other conditions, certain government regulatory clearances. Assuming these required regulatory clearances are received, the 9 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 Company anticipates the acquisition will be completed in February, 2000. If the merger agreement is terminated by the Company under certain circumstances specified in the agreement, the Company would be obligated to pay a termination fee of $3.8 million. Management does not expect to terminate the agreement, therefore no provision has been made in the Company's financial statements related to the termination fee. 10 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 CONSOLIDATED INCOME STATEMENTS
Year Ended September 30, 1999 1998 1997 --------- --------- --------- (In thousands, except per share amounts) SALES $ 116,936 $ 130,017 $ 92,433 COSTS AND EXPENSES: Cost of sales 93,321 92,772 65,785 Research and development 6,600 5,968 3,775 Marketing 10,496 6,915 5,050 General and administrative 10,567 10,916 7,992 Impairment of goodwill 4,800 -- -- --------- --------- --------- 125,784 116,571 82,602 --------- --------- --------- Operating income (loss) (8,848) 13,446 9,831 OTHER INCOME (EXPENSE): Income from investments 533 459 686 Interest expense (118) (107) (167) --------- --------- --------- Income (loss) before income taxes (8,433) 13,798 10,350 PROVISION (BENEFIT) FOR INCOME TAXES (1,712) 3,712 3,175 --------- --------- --------- NET INCOME (LOSS) $ (6,721) $ 10,086 $ 7,175 ========= ========= ========= EARNINGS (LOSS)PER SHARE Basic $ (1.32) $ 1.98 $ 1.54 Diluted (1.32) 1.90 1.47 ========= ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING Basic 5,096 5,105 4,645 Diluted 5,096 5,308 4,878 ========= ========= =========
See Notes to Consolidated Financial Statements 11 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13
CONSOLIDATED BALANCE SHEETS As of September 30, 1999 1998 --------- --------- (In thousands, except share amounts) ASSETS Current assets: Cash and cash equivalents $ 21,824 $ 11,239 Accounts receivable, less allowance for doubtful accounts of $950 and $897 30,219 39,239 Inventories 25,151 30,946 Income tax receivable 2,993 -- Deferred income taxes 1,704 270 --------- --------- 81,891 81,694 --------- --------- Property and equipment: Land 558 558 Buildings and improvements 9,135 9,161 Equipment 23,577 21,543 Construction in progress 483 771 Less: accumulated depreciation (19,611) (16,560) --------- --------- 14,142 15,473 --------- --------- Goodwill, net of accumulated amortization of $7,775 and $2,063 7,032 12,744 Other assets 1,071 860 --------- --------- TOTAL ASSETS $ 104,136 $ 110,771 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,421 $ 5,987 Accrued liabilities 18,322 15,729 Customers' advances 3,981 3,286 Current portion of long-term debt 17 674 --------- --------- 26,741 25,676 --------- --------- Long-term debt 44 59 Deferred income taxes 719 826 Commitments and contingencies (Note 12) Shareholders' equity: Common stock, $.10 par value, 20,000,000 shares authorized, 5,235,751 shares issued 524 524 Capital in excess of par value 34,780 35,030 Retained earnings 43,398 50,119 Treasury stock, at cost, 119,437 and 118,073 shares in 1999 and 1998, respectively (1,704) (1,491) Translation adjustment (366) 28 --------- --------- 76,632 84,210 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 104,136 $ 110,771 ========= =========
See Notes to Consolidated Financial Statements 12 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30, 1999 1998 1997 -------- -------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (6,721) $ 10,086 $ 7,175 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization, and goodwill impairment 8,998 4,546 3,109 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable 9,020 (3,262) (612) Inventories 5,795 (3,748) (4,888) Other assets (211) 55 750 Accounts payable and accrued liabilities 1,328 784 682 Customers' advances 695 147 1,402 Income taxes, net (3,956) 729 (710) -------- -------- -------- Net cash provided by operating activities 14,948 9,337 6,908 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (2,115) (2,802) (4,088) Acquisition, net of cash acquired (Note 4) -- -- (8,043) -------- -------- -------- Net cash used in investing activities (2,115) (2,802) (12,131) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt -- -- 1,137 Repayment of long-term debt (370) (764) (7,779) Payment for business purchased in fiscal 1995 (1,181) (573) (437) Purchase of treasury stock (1,136) (121) -- Proceeds from exercise of stock options 540 381 736 Other 41 346 (370) -------- -------- -------- Net cash used in financing activities (2,106) (731) (6,713) -------- -------- -------- Effect of exchange rate changes on cash (142) 28 (53) Net increase (decrease) in cash and cash equivalents 10,585 5,832 (11,989) Cash and cash equivalents at beginning of year 11,239 5,407 17,396 -------- -------- -------- Cash and cash equivalents at end of year $ 21,824 $ 11,239 $ 5,407 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 196 $ 185 $ 203 Income taxes, net of refunds 1,317 2,706 3,787 ======== ======== ========
See Notes to Consolidated Financial Statements 13 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Capital in Compre- Common Excess of Retained Treasury Translation hensive Stock Par Value Earnings Stock Adjustment Total Income -------- ---------- -------- -------- ----------- -------- -------- (In thousands, except share amounts) Balance at September 30, 1996 $ 466 $ 24,806 $ 32,858 $ (2,733) $ 77 $ 55,474 ========= ======== ======== ======== ======== ======== ======== Acquisition of TIWSystems, Inc. (Note 4) (574,349 shares) 58 10,470 -- -- -- 10,528 -- Exercise of stock options (73,533 shares) -- (169) -- 905 -- 736 -- Translation adjustment -- -- -- -- (423) (423) $ (423) Net income -- -- 7,175 -- -- 7,175 7,175 -------- Comprehensive Income $ 6,752 -------- -------- -------- -------- -------- -------- -------- 1997 $ 524 $ 35,107 $ 40,033 $ (1,828) $ (346) $ 73,490 ========= ======== ======== ======== ======== ======== ======== Exercise of stock options (37,240 shares) -- (77) -- 458 -- 381 -- Purchase of treasury stock (6,500 shares) -- -- -- (121) -- (121) -- Translation adjustment -- -- -- -- 374 374 374 Net income -- -- 10,086 -- -- 10,086 10,086 -------- Comprehensive Income $ 10,460 -------- -------- -------- -------- -------- -------- -------- 1998 $ 524 $ 35,030 $ 50,119 $ (1,491) $ 28 $ 84,210 ========= ======== ======== ======== ======== ======== ======== Exercise of stock options (57,000 shares) -- (267) -- 807 -- 540 -- Employee stock bonus (8,170 shares) -- 17 -- 116 -- 133 -- Purchase of treasury stock (66,534 shares) -- -- -- (1,136) -- (1,136) -- Translation adjustment -- -- -- -- (394) (394) $ (394) Net income -- -- (6,721) -- -- (6,721) (6,721) -------- Comprehensive Income $ (7,115) -------- -------- -------- -------- -------- -------- -------- 1999 $ 524 $ 34,780 $ 43,398 $ (1,704) $ (366) $ 76,632 ========= ======== ======== ======== ======== ======== ========
See Notes to Consolidated Financial Statements 14 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999 The Company is engaged in the engineering, design, manufacture, and field installation of satellite communications earth station products, with antenna sizes ranging from 1.2 meters to 34 meters in diameter, which operate in the domestic, international, and military radio frequencies. The Company also provides a wide variety of electronic components used in various telecommunications applications. 1. SUMMARY OF ACCOUNTING PRACTICES PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all significant intercompany transactions. MANAGEMENT ESTIMATES. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make assumptions and estimates that affect certain reported amounts of assets, liabilities, revenues, and expenses at the date of the consolidated financial statements. Actual results could differ from those estimates. These estimates mainly involve the reported amounts of accounts receivable and inventory reserves, income tax provisions, expected costs to complete sales contracts accounted for under the percentage of completion method, warranty provisions, and useful lives of property and equipment. RECOGNITION OF REVENUES, COSTS, AND EXPENSES. Revenues from sales other than long-term contracts are recognized when the earnings process has been completed. The earnings process is considered complete upon product shipment or upon completion and storage of the product, if shipment is delayed at the customer's request and related payment has been received. Service revenues are recorded when the services are rendered. Sales contracts which extend beyond one year are accounted for using the percentage of completion method. Under this method, revenues are recognized based upon costs incurred compared to total costs expected. Continual revisions of estimated total contract costs are made during the life of the contracts based on the best information available and may result in current period adjustments to contract revenues previously reported. Revenues include contract costs and related profits. Amounts billed in excess of contract costs and related profits are included in current liabilities and were $7,053,000 and $4,988,000 at September 30, 1999 and 1998, respectively. Unbilled costs and related profits included in accounts receivable at September 30, 1999 and 1998 were $12,411,000 and $14,252,000, respectively. These amounts are billed according to specific contract terms and should be collected within one year. Sales recognized on long-term contracts and the related cost of sales were as follows:
(In thousands) 1999 1998 1997 ------- ------- ------- Sales $52,136 $51,426 $28,356 Cost of Sales 41,349 39,619 23,640
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 15 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 customer-funded work is completed. The Company has no obligation to repay any funds provided by customers regardless of the outcome of research and development work. CASH EQUIVALENTS. The Company considers cash equivalents to be liquid investments with original maturities of three months or less. Inventories. Inventories are valued at the lower of cost or market and include the cost of raw materials, labor, plant overhead, and purchased parts. Cost is determined using the first-in, first-out method. The components of inventory consisted of the following:
(In thousands) 1999 1998 ------- ------- Raw materials $ 7,110 $ 8,638 Work-in-process 13,651 15,427 Finished goods 4,390 6,881 ------- ------- $25,151 $30,946 ======= =======
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost and are depreciated over their estimated useful lives using the straight-line method. The estimated useful lives of buildings are 25 years and equipment ranges from 3 to 7 years. Expenditures for maintenance and repairs are charged to expense when incurred; betterments and major renewals are capitalized. GOODWILL. Goodwill represents the excess of purchase price over the fair market value of net assets acquired. Goodwill is being amortized on a straight-line basis over 15 years. The Company periodically reviews the carrying value of this intangible asset and will make any necessary adjustment if the related facts and circumstances suggest that its carrying value is impaired or is not recoverable. EARNINGS (LOSS) PER SHARE. Basic earnings per share were computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share were computed by dividing net income by the sum of the weighted average number of shares outstanding and the number of equivalent shares assumed outstanding under the Company's stock-based compensation plans. The number of equivalent shares assumed outstanding was 203,000 and 233,000 in fiscal 1998 and 1997, respectively. No equivalent shares were assumed outstanding in fiscal 1999 because the effect on loss per share would be anti-dilutive. CONCENTRATION OF CREDIT RISK. The Company sells its products to its customers under various payment terms such as: cash in advance, irrevocable letter of credit, and open account. These customers can generally be classified as governmental agencies, communications concerns, or other commercial entities. Management believes no significant credit risk exists as of September 30, 1999. RECLASSIFICATIONS. Certain prior year amounts have been reclassified in order to conform with the current year presentation. STOCK-BASED COMPENSATION. Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," requires certain disclosures for stock-based compensation awards and permits companies to continue to follow the intrinsic value method of accounting as prescribed by APB No. 25, "Accounting for Stock Issued to Employees." Accordingly, the Company follows APB No. 25 to account for its stock-based compensation awards. 16 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 NEW ACCOUNTING STANDARDS. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," and No. 131 (SFAS 131), "Disclosure About Segments of an Enterprise and Related Information." SFAS 130 establishes standards for reporting and the display of "comprehensive income" which is the total of net income and all other nonowner changes in equity. The Company adopted this standard in October 1998. SFAS 131 establishes standards for the way that a public enterprise reports certain information about its operating segments in annual financial statements. The Company adopted this new standard in September 1999. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which will be effective for the Company's fiscal year 2001. Adoption of this new standard will not have a material effect on the Company's financial statements. 2. ACCRUED LIABILITIES Accrued liabilities were comprised of the following:
(In thousands) 1999 1998 ------- ------- Accrued compensation $ 4,211 $ 4,302 Warranty 2,416 1,343 Amounts billed in excess of costs 7,053 4,988 Employee benefit costs 797 613 Taxes other than income 566 1,008 Other 3,279 3,475 ------- ------- $18,322 $15,729 ======= =======
3. FOREIGN OPERATIONS Financial information relating to the Company's foreign operations is shown below:
(In thousands) 1999 1998 1997 ------- ------- ------- Sales to unaffiliated customers $10,287 $ 9,403 $ 5,881 Identifiable assets 7,239 5,933 4,034 ======= ======= =======
Sales are attributed to geographic areas based on the location of the assets producing such revenues. The Company translates the financial statements of its German subsidiary from its functional currency, the German mark, into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52. Assets and liabilities are translated at the exchange rate in effect at each fiscal year end, and sales and expenses are translated at the weighted average exchange rate in effect for the period reported upon. Any resulting gains or losses are recorded in shareholders' equity and excluded from net income. 17 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 Sales in Western Europe were 20 percent, 14 percent, and 14 percent of total sales in fiscal 1999, 1998, and 1997, respectively. Sales in Asian countries were 16 percent, 20 percent, and 21 percent of total sales in fiscal 1999, 1998, and 1997, respectively. 4. ACQUISITION Effective June 11, 1997, the Company acquired all of the outstanding common stock of TIW Systems, Inc. (TIW), a California corporation engaged in design and manufacture of products principally used in the satellite communications industry, for cash of $7.9 million, 574,349 shares of the Company's common stock and $500,000 of direct acquisition costs. The acquisition was accounted for under the purchase method of accounting. The excess of purchase price over the fair value of assets acquired of $8.5 million is being amortized over 15 years using the straight-line method. The purchase price was allocated on the basis of the estimated fair value of the assets acquired and liabilities assumed as follows:
(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 fiscal 1997 after giving effect to certain adjustments which include amortization of goodwill, reduction of investment income, issuance of common stock, and the related tax effects. The pro forma information does not purport to be indicative of the results that would have been obtained if the acquisition had been effected as of the date indicated above or that may be obtained in the future.
(In thousands, except per share amounts) 1997 -------- Sales $115,563 Net income 5,333 Diluted earnings per share 1.01
5. STOCK-BASED COMPENSATION PLANS Pursuant to the Company's stock option plans, options to purchase its common stock were granted to certain officers, directors, and key employees. These plans provide for granting of options at a price not less than fair market value of the stock on the date of grant. Options issued vest over a five-year period with one-fifth of the options becoming exercisable one year after grant, on a cumulative basis, and expire seven to ten years after grant. At September 30, 1999, 401,800 options remained available for grant. 18 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 At September 30, 1999, 1998, and 1997, options to purchase 304,193, 299,060, and 217,766 shares, respectively, were vested and could be exercised. The outstanding stock options at September 30, 1999 had a weighted average remaining contractual life of six years with option prices ranging from $10.00 to $25.38 per share. As of September 30, 1999, 1998, and 1997, the weighted average exercise price of the exercisable options at those dates was $13.13, $12.42, and $9.92, respectively.
Weighted Average Options Exercise Price -------- ---------------- Outstanding at 10/1/96 530,500 $11.06 Granted 35,000 19.79 Exercised (73,533) 10.02 Cancelled (28,200) 12.74 -------- ------ Outstanding at 9/30/97 463,767 12.10 Granted 30,000 24.67 Exercised (37,240) 10.22 Cancelled (5,400) 13.08 -------- ------ Outstanding at 9/30/98 451,127 13.08 Granted 324,000 13.66 Exercised (57,000) 9.49 Cancelled (15,400) 14.95 -------- ------ Outstanding at 9/30/99 702,727 $13.60 ======== ======
As discussed in Note 1, the Company has adopted the disclosure only provisions of SFAS 123, "Accounting for Stock-Based Compensation." Under SFAS 123, the fair value of stock-based compensation grants was calculated for the above discussed plans based on the fair value at grant date for awards made since October 1, 1995 by using the Black-Scholes option-pricing model with certain assumptions. The assumptions used were as follows:
1999 1998 1997 ------- ------- ------- Risk free interest rate 5.89% 5.89% 5.77% Expected term 4 years 4 years 4 years Expected volatility 32% 32% 38% Dividend yield 0 0 0
The weighted-average fair value of options granted under these plans in fiscal 1999, 1998, and 1997 was $4.72, $8.52, and $7.50, respectively. Based upon the foregoing factors, had the computed fair value of the options granted in fiscal 1999, 1998, and 1997 been amortized to expense, pro forma net income (loss) for those years would have been ($7,007,000), $10,014,000, and $7,138,000, respectively, and earnings (loss) per share would have been ($1.38), $1.89, and $1.46, respectively. 19 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 6. LONG-TERM DEBT AND CREDIT LINES In December 1996, the Company borrowed 2 million German marks through its German subsidiary. The debt was repaid in 24 equal monthly installments plus accrued interest charged at 4.7 percent per annum. As of September 30, 1999, this available German credit line was 500,000 marks or approximately $270,000. The Company maintains unsecured bank lines of credit for $20 million which include a $10 million sub-limit for issuance of stand-by letters of credit. The credit lines require the Company to maintain certain financial ratios. Principal advances bear interest at LIBOR plus 1.5 percent and unused credit line fees are .25 percent annually. As of September 30, 1999 and 1998, no principal advances were outstanding and issued stand-by letters of credit totaled $4,648,000 and $4,476,000, respectively. As part of the purchase price of Maxtech, Inc. in 1995, the Company incurred four-year unsecured promissory notes in the aggregate principal sum of $1,750,000. The notes were payable annually in four equal principal payments, including accrued interest at 7.92 percent per annum with the initial payment beginning October 1, 1995. Long-term debt as of September 30, 1999 and 1998 was as follows:
1999 1998 -------- -------- Installment loan payable to bank in monthly installments of $50,000 (83,000 German marks) $ -0- $150,000 Promissory notes payable to Maxtech selling shareholders due October 1, 1998 plus accrued interest -0- 302,000 Capital lease obligations (see note 12) 61,000 281,000 -------- -------- 61,000 733,000 Less current maturities 17,000 674,000 -------- -------- $ 44,000 $ 59,000 ======== ========
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: 20 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13
1999 1998 1997 ------ ------ ------ Federal statutory rate (34.0)% 34.0% 34.0% State income taxes, net of federal benefit .6 .9 1.4 Effect of nontaxable investment income (.7) (.2) (1.2) Benefit from nontaxable FSC income (8.9) (5.6) (3.4) Tax benefit from increased R&D activity (1.8) (1.2) (1.8) Foreign tax adjustment 3.3 .8 .4 Effect of non-deductible goodwill 21.2 1.3 .3 Other, net -0- (2.2) 1.0 ------ ------ ------ (20.3)% 26.9% 30.7% ====== ====== ======
Income before income taxes from foreign operations was $1,383,000, $578,000, and $63,000, in fiscal 1999, 1998, and 1997, respectively. Income (loss) before income taxes from domestic operations was $(9,816,000), $13,220,000, and $10,287,000 in fiscal 1999, 1998, and 1997, respectively. The provision (benefit) for income taxes consists of the following significant components:
(In thousands) 1999 1998 1997 ------- ------- ------- Current: Federal $(1,197) $ 2,789 $ 3,066 Foreign 976 416 33 State 50 270 220 ------- ------- ------- Total Current (171) 3,475 3,319 Total Deferred (1,541) 237 (144) ------- ------- ------- Total provision (benefit) for income taxes $(1,712) $ 3,712 $ 3,175 ======= ======= =======
The table below shows the components of deferred income taxes:
(In thousands) 1999 1998 1997 ------- ------- ------- Deferred tax assets: Accrued liabilities and Reserves $ 2,540 $ 1,825 $ 1,940 Other 30 41 293 Deferred tax liabilities: Property and equipment (719) (826) (896) Revenue recognition differences (866) (1,596) (1,449) Other -- -- (207) ------- ------- ------- Net deferred tax asset (liability) $ 985 $ (556) $ (319) ======= ======= =======
21 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 8. EMPLOYEE BENEFIT PLANS The Company sponsors a defined contribution retirement plan which covers a majority of its domestic employees. Contributions to the plan are discretionary as determined by the Board of Directors. The Company's contributions to the plan for fiscal years 1999, 1998, and 1997 were $551,000, $510,000, and $290,000, respectively. The Company has an employee stock bonus plan that was formed by TIW in 1989 as an employee stock ownership plan for the benefit of eligible employees. No contributions were made to the plan by the Company since the acquisition of TIW and the plan continues to maintain assets belonging to those eligible employees in accordance with plan guidelines. The Company is not required nor does it intend to make future contributions to the plan. The Company has certain cash incentive compensation plans which are based upon actual results of operations compared to planned results. The Management Incentive Compensation Plan's participants are key employees and officers, but not outside directors. Compensation under this plan was $840,000, $1,927,000, and $1,066,000 for fiscal 1999, 1998, and 1997, respectively. The Employee Profit Sharing Bonus Plan's participants include a majority of the Company's employees, except participants in the Management Incentive Compensation Plan. Compensation under this plan was $313,000, $185,000, and $238,000 for fiscal 1999, 1998, and 1997, respectively. 9. RELATED PARTY TRANSACTIONS A shareholder and member of the Board of Directors is a shareholder in a firm retained by the Company for legal counsel. The Company paid fees to his firm during the years ended September 30, 1999, 1998, and 1997 of $418,000, $446,000, and $541,000, respectively. 10. SALES AND INDUSTRY SEGMENT INFORMATION The Company has segregated its business into two operating business segments based primarily upon the nature of and the differences between the products and services supplied. The Antenna segment provides earth station antennas, multi-axis pedestals, precision antenna control and tracking products, and related microwave components. The Electronics segment provides solid-state electronic power amplifiers, radio frequency conversion products, and digital communications electronic products. Both segments provide products and services from various locations to customers throughout the world. The chief executive officer regularly measures and evaluates the performance of each segment separately. The Company rewards employees of each business segment separately with cash incentives through certain benefit plans based upon actual income before tax results achieved as compared to planned results within each business segment. The Company maintains a corporate administrative staff and a corporate marketing staff. The accounting policies in both business segments are the same as described in Note 1, Summary of Accounting Policies. Corporate expenses in fiscal 1999 include impairment of goodwill of $4.8 million. Corporate assets consisted of cash and goodwill net of accumulated amortization. Corporate losses are a result of goodwill amortization, corporate marketing expenses and corporate administration. Business segment information for the past three years is shown below. 22 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 FISCAL 1999
(In thousands) Antenna Electronics Consolidated Segment Segment Corporate Eliminations Total --------- ----------- --------- ------------ ------------ Sales - external $ 96,125 $ 20,811 $ -- $ -- $ 116,936 Sales - inter-segment 722 2,878 -- (3,600) -0- Income from investments 171 30 332 -- 533 Interest expense 43 15 60 -- 118 Income (loss) before income tax 9,237 (4,766) (12,017) (887) (8,433) Depreciation and amortization 2,804 482 5,712 -- 8,998 Purchase of property and equipment 1,444 671 -- -- 2,115 Total assets 61,296 14,540 28,300 -- 104,136
FISCAL 1998
Antenna Electronics Consolidated Segment Segment Corporate Eliminations Total -------- -------- --------- ------------ ------------ Sales - external $100,009 $ 30,008 $ -- $ -- $130,017 Sales - inter-segment 203 1,779 -- (1,982) -0- Income from investments 120 38 301 -- 459 Interest expense 41 11 55 -- 107 Income (loss) before income tax 14,377 2,356 (2,858) (77) 13,798 Depreciation and amortization 2,905 712 929 -- 4,546 Purchase of property and equipment 2,503 299 -- -- 2,802 Total assets 68,109 21,596 21,066 -- 110,771
FISCAL 1997
Antenna Electronics Consolidated Segment Segment Corporate Eliminations Total -------- ----------- --------- ------------ ------------ Sales - external $ 75,403 $ 17,030 $ -- $ -- $ 92,433 Sales - inter-segment 3 1,455 -- (1,458) -0- Income from investments 172 7 507 -- 686 Interest expense 60 14 93 -- 167 Income (loss) before income tax 10,142 2,597 (1,978) (411) 10,350 Depreciation and amortization 2,246 361 502 -- 3,109 Purchase of property and equipment 3,326 762 -- -- 4,088 Total assets 77,597 5,872 17,024 -- 100,493
No single customer accounted for 10 percent or more of total sales in any of the past three fiscal years. 23 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts) 1999 Fiscal Quarters First Second Third Fourth -------- -------- -------- -------- Sales $ 32,005 $ 30,926 $ 25,563 $ 28,442 Gross Profit 9,511 8,682 529(1) 4,893 Net Income (Loss) 2,321 1,295 (9,026)(2) (1,311) Basic Earnings (Loss) Per Share .46 .25 (1.77) (.26) Diluted Earnings (Loss) Per Share .44 .25 (1.77) (.26)
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 Basic Earnings Per Share .46 .48 .51 .53 Diluted Earnings Per Share .44 .46 .49 .51
(1) Includes $4.7 million restructuring charge related to inventory write-off, warranty costs, and write-off of non-performing assets. (2) Includes $4.7 million restructuring charge discussed above and $4.8 million charge for impairment of goodwill. Refer to Note 13 for additional information. 12. COMMITMENTS AND CONTINGENCIES The Company rents certain equipment and facilities under operating leases. Rent expense under these leases for fiscal 1999, 1998, and 1997 was $1,321,000, $1,231,000, and $767,000, respectively. Certain items of equipment are subject to capital leases. As of September 30, 1999, $79,000 ($62,000 net) of such leased equipment was included in property and equipment. Below are the future payments due under these lease obligations and the amounts of rental income due to be received under subleases as of September 30, 1999.
Operating Capital Fiscal Year Leases Leases ---------- ---------- 2000 $1,397,000 $ 21,000 2001 1,266,000 21,000 2002 1,164,000 21,000 2003 534,000 9,000 2004 312,000 0 Thereafter 325,000 0 ---------- ---------- $4,998,000 $ 72,000 Less: Sublease income 175,000 -- Amount representing interest -- 11,000 ---------- ---------- $4,823,000 $ 61,000 ========== ==========
24 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 The Company indemnifies its directors and officers, but does not maintain directors' and officers' liability insurance. No claims against directors or officers have been asserted. 13. RESTRUCTURING In the third quarter of fiscal 1999, the Company announced plans to abandon its networking products technology business line and redirect certain related resources. As a result of this decision, the Company recorded a special charge of $9.5 million. The charge involved $4.8 million of goodwill impairment and $2.5 million for write-off of obsolete inventory related to networking products. The balance of the special charge or $2.2 million consisted of slow-moving inventory, warranty costs, and non-performing fixed assets. Of the $9.5 million total charge, $4.7 million was recorded in cost of sales. As of September 30, 1999, approximately $.3 million of the $9.5 million charge remained accrued on the Company's books. 14. SUBSEQUENT EVENT (UNAUDITED) On November 12, 1999, the Company announced it had entered into a definitive merger agreement whereby TriPoint Global Communications, Inc. (Tripoint) of Gastonia, North Carolina, would acquire the Company for $22.00 per share or aggregate consideration of approximately $128 million. Pursuant to the agreement, TriPoint initiated a tender offer for all of the Company's outstanding shares, including outstanding stock options. The merger agreement is dependent upon, among other conditions, clearance under the Hart-Scott-Rodino Antitrust Act. Assuming the receipt of required regulatory approvals, the Company anticipates the acquisition will be completed in February 2000. If the merger agreement is terminated by the Company under certain circumstances specified in the agreement, the Company could be obligated to pay a termination fee of $3.8 million. The Company has not provided an accrual for any amount related to this termination fee as management believes its likelihood is remote. There are no assurances that Tripoint's tender offer for the Company's outstanding shares will be successful or that the merger will be consummated. 25 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS OF VERTEX COMMUNICATIONS CORPORATION: We have audited the accompanying consolidated balance sheets of Vertex Communications Corporation (a Texas Corporation) and subsidiaries as of September 30, 1999 and 1998, and the related consolidated statements of income, cash flows, and shareholders' equity for each of the three years in the period ended September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vertex Communications Corporation and subsidiaries as of September 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, in conformity with generally accepted accounting principles. Arthur Andersen LLP Dallas, Texas October 26, 1999 (except with respect to the matter discussed in Note 14, as to which the date is November 12, 1999) 26 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 13 MARKET FOR COMMON STOCK The Company's common stock is traded on the New York Stock Exchange under the symbol VTX. At December 2, 1999, there were approximately 2,600 holders of record of Vertex's common stock. The table below sets forth, for the periods indicated, the high and low sales prices of the Company's common stock, as reported by The Nasdaq Stock Market through January 1, 1999, and the New York Stock Exchange from March 31, 1999 through September 30, 1999.
Quarter Ended High Low Quarter Ended High Low - ------------------ ------- --------- ------------------ ------ ------ September 30, 1999 $13-7/8 $10-15/16 September 30, 1998 $24 $18 July 2, 1999 16-1/2 11-15/16 July 3, 1998 26-5/8 21-1/4 April 1, 1999 18-3/8 14 April 3, 1998 26-5/8 24-1/4 January 1, 1999 20-1/2 13 January 2, 1998 26 23
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 3 SUBSIDIARIES OF THE REGISTRANT 1 VERTEX COMMUNICATIONS CORPORATION EXHIBIT 21 TO ANNUAL REPORT ON FORM 10-K For Fiscal Year ended September 30,1999 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES AS OF OCTOBER 31, 1999 2 EXHIBIT 21 VERTEX COMMUNICATIONS CORPORATION AND SUBSIDIARIES AS OF OCTOBER 31, 1999 Vertex Communications Foreign Sales Corporation 100% - Owned Subsidiary Incorporated in the United States Virgin Islands Vertex Microwave Products, Inc. (formerly Gamma-f Corp.) 100% - Owned Subsidiary Incorporated in the State of Nevada Vertex Antennentechnik GmbH 100% - Owned Subsidiary Incorporated in the Federal Republic of Germany Vertex International, Ltd. 100% - Owned Subsidiary Incorporated in England Vertex Antenna Systems, LLC (formerly a division of TIW Systems, Inc.) 100% - Owned Subsidiary Incorporated in the State of Nevada Vertex Electronic Products, Inc. (formerly Maxtech, Inc.) 100% - Owned Subsidiary Incorporated in the State of Pennsylvania Vertex Satcom Systems, Inc. (formerly TIW Systems, Inc.) 100% - Owned Subsidiary Incorporated in the State of Nevada EX-23 4 CONSENT OF ARTHUR ANDERSEN LLP 1 VERTEX COMMUNICATIONS CORPORATION EXHIBIT 23 TO ANNUAL REPORT ON FORM 10-K For Fiscal Year ended September 30,1999 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 2 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in or incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements File No. 33-27012, File No. 333-53389 and File No. 333-81979 on Form S-8, and File No. 333-53391 on Form S-3. Arthur Andersen LLP Dallas, Texas December 22, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENT FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 12-MOS SEP-30-1999 SEP-30-1999 21,824 0 31,169 950 25,151 81,891 33,753 19,611 104,136 26,741 0 0 0 524 76,108 104,136 116,936 116,936 93,321 125,784 0 0 118 (8,433) (1,712) (6,721) 0 0 0 (6,721) (1.32) (1.32)
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