SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 2001
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-7928
COMTECH TELECOMMUNICATIONS CORP.
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2139466
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
105 Baylis Road
Melville, New York 11747
(Address of Principal Executive Offices)
Registrant's telephone number, including area code (631) 777-8900
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
Series A Junior Participating Cumulative Preferred
Stock par value $.10 per share
(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|
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, computed by reference to the closing sales
price as quoted on the Nasdaq National Market on October 12, 2001 was
approximately $105,580,000.
DOCUMENTS INCORPORATED BY REFERENCE.
Certain portions of the document listed below have been incorporated by
reference into the indicated Part of this Annual Report on Form 10-K:
Proxy Statement for Annual Meeting
of Shareholders to be held December 11, 2001 Part III
Note: As used in this Annual Report on Form 10-K, the terms "Comtech,"
"we" and "our company" mean Comtech Telecommunications Corp., Comtech's
subsidiaries and Comtech's predecessor corporation.
All shares and per share information has been adjusted to reflect the
three-for-two stock split that occurred in July 1999. See Comtech's Form 8-K
dated July 6, 1999.
PART I
ITEM 1. BUSINESS
Overview
We design, develop, produce and market sophisticated wireless
telecommunications transmission products and solid state high-power broadband
amplifiers for commercial and government purposes. Our telecommunications
products are used in point-to-point and point-to-multipoint telecommunications
transmission and reception applications such as satellite communications,
over-the-horizon microwave systems, and cable and broadcast television. Our
broadband amplifier products are used in communications, cellular and medical
instrumentation and defense systems.
We have expanded our business to offer satellite mobile data
communications services. In June 1999, this business won a contract from the
U.S. Army which, subject to government funding and deployment decisions,
provides for the purchase of up to $418.2 million in mobile terminal units and
global message communications services over an eight-year period. We believe our
mobile data communications products and services will afford the Company
important competitive advantages as we endeavor to expand this business with
other government agencies and into commercial markets.
Revenue growth over the past five years has been driven by the global
expansion of telecommunications services such as satellite systems, cable
television, cellular telephone systems, PCS telephony and the Internet. We meet
the high performance requirements of our customers by drawing upon proprietary
expertise in key microwave amplification and transmission technologies developed
over more than 34 years of operations.
A majority of our sales in fiscal 2001 were of products developed by us
within the last 5 years, including, for example, linear amplifiers sold to
cellular and PCS telephony system manufacturers for testing their systems'
amplifiers, and turbo codec modems sold to satellite systems integrators and
service providers for use in voice, data, video and fax transmission over
satellite. Our internally funded and customer funded research and development
expenses aggregated $11.8 million, $6.9 million and $3.8 million in fiscal 2001,
2000, and 1999 representing 8.7%, 10.4% and 10.0% of our net sales in those
fiscal years.
Telecommunications Industry Trends
The demand for telecommunications is increasing worldwide as emerging
economies seek to modernize their infrastructure and as increasingly
information-intensive markets introduce new telecommunications services. The
telecommunications industry has expanded rapidly over the last decade and is
forecasted to continue to expand despite the adverse impact in recent months of
a soft economy, due to the following major factors:
Deregulation and Privatization. Many developing countries that had
previously not committed significant resources to or placed a high priority on
developing and upgrading their communications systems are now doing so,
primarily through deregulation and privatization. A significant number of these
countries do not have the resources, or have large geographic areas or terrain
that make it difficult, to install extensive land-based networks on a
cost-effective basis. This provides an opportunity for satellite and other
wireless communications services systems to meet the requirement for
communications services in these countries.
Growing Demand for Data Communications Services. Factors contributing to
the growing demand for communications services include worldwide economic
development and the increasing globalization of commerce. Businesses have a
growing need for higher bandwidth services to communicate with their customers
and employees around the world and are increasingly reliant upon Internet and
multimedia applications. We expect demand for these kinds of higher bandwidth
services to grow in both developed and developing countries.
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Increasing Cost-Effectiveness. The relative cost-effectiveness of
satellite and other wireless telecommunications services is a major factor
driving the growth in areas with rapidly developing telecommunications
infrastructures. These developing infrastructures often cover large geographic
areas, where population concentrations that are separated by significant
distances require a technology whose cost and speed of implementation is
relatively insensitive to distance.
Technological Advances. Technological advances continue to increase the
capacity of telecommunications networks and reduce the overall cost of the
systems and the services they deliver. This increases the number of potential
end users for the services and expands the available market. We believe that
recent technological developments, such as bandwidth on demand and signal
processing methods, will continue to stimulate demand.
Product and Service Segments
We conduct our business through three decentralized but complementary
product and service segments: telecommunications transmission, RF microwave
amplifiers, and our mobile data communications services business. The segments
operate through individual operating units, each of which maintains its own
sales, marketing, product development and manufacturing functions. We believe
that this organizational structure allows the key personnel of each operating
unit to be more responsive to their particular markets and customers. Brief
descriptions of our business segments and operating units follow.
Telecommunications transmission -- modems, frequency up converters
and down converters, solid state high-power amplifiers, VSAT transceivers
and antennas for satellite ground station applications and adaptive modems
and microwave radios for over-the-horizon microwave communications
systems. Primary markets include satellite systems integrators and
communications service providers, defense contractors and oil companies.
Customers include, among others, Globecomm Systems, Hughes Network
Systems, IDB Worldcom, DirecTV, ATT Alascom, Northrop Grumman, BP Amoco
and Exxon.
RF microwave amplifiers -- solid state high-power broadband
amplifier products in the microwave and radio frequency (RF) spectrums for
a wide range of applications, including cellular and wireless
instrumentation, medical systems, jamming and identification friend or foe
(IFF) and other defense systems. Target markets are communications service
providers, cellular and PCS telephony system manufactures and defense
contractors. Customers include, among others, Motorola, Ericsson, Nokia
Telecommunications, Condor Systems, Siemens Medical Systems, Lucent
Technologies, Litton Systems, Raytheon, Lockheed Martin and the U.S.
government.
Mobile data communications services -- secure, real time two-way
messaging between mobile platforms, such as land vehicles, rail and
aircraft, or remotely placed fixed site sensors and user headquarters
through our Germantown, Maryland gateway satellite earth station. The
network employs leased satellite capacity to communicate between the
mobile platform and user headquarters via satellite, terrestrial and
Internet links. Depending upon the end-user's needs, our system can be
configured to provide a wide range of data applications, ranging from
simple location tracking to messaging, e-mail, broadcasting of
information, meter, gauge and other sensor monitoring.
We believe that the global expansion of telecommunications, particularly
in developing countries in Asia, South America, the Middle East and Europe,
represents a key opportunity for the continued growth of our telecommunications
business. Included as international sales are sales made to domestic companies
for inclusion in products which are sold to international customers. Sales for
use by international customers represented approximately 46.2%, 71.4% and 60.1%
of our net sales in fiscal years 2001, 2000 and 1999, respectively.
Our product designs are based on both analog and digital microwave
technologies. Digital microwave technology can significantly enhance performance
of telecommunications systems. We have invested significant resources in
developing our technological expertise, and work closely with customers and
potential customers to develop product lines in market niches where we believe
our expertise can enable us to become a leading supplier.
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Business Strategies
We manage our business with the following principal corporate strategies:
o Operate on a decentralized basis to maximize responsiveness to
customers.
o Continue product innovation through investment in research and
development.
o Capitalize on synergies among our business segments to secure
larger contracts.
o Pursue acquisitions and investments in complementary
businesses, technologies, products and services.
Specific operating strategies for our business segments include:
Telecommunications transmission.
o Continue broadening our line of satellite ground station
products to better serve our customers with a full line of
video, data and voice products.
o Enhance our existing products to serve rapidly developing
markets requiring higher speed and greater bandwidth, such as
emerging applications for wireless Internet access.
o Maintain our market leadership in over-the-horizon microwave
technologies by broadening applications and increasing product
performance.
RF microwave amplifiers.
o Continue to incorporate the latest advances in solid state
device electronics.
o Maintain our broadband technology in this product sector to
encourage system integrators and end users to outsource their
requirements rather than pursue this specialized field
in-house.
o Broaden our product line to include medical instrumentation.
o Combine high-power amplifiers and solid state switches for
advanced communications applications.
Mobile data communications services.
o Maximize the opportunities available to supply the Logistics
Command under the U.S. Army contract.
o Pursue identified opportunities to offer our products and
services to other government agencies.
o Penetrate the emerging markets for commercial uses,
particularly in the land mobile and remote sensing markets.
Important Developments
In June 1999, the U. S. Army awarded us a contract which, subject to
government funding and deployment decisions, provides for the purchase of up to
$418.2 million in mobile transceiver units and global data messaging
communication services over an eight-year period. Through July 31, 2001, we
received orders for $15.9 million under this contract, which can be terminated
by the U.S. Army at any time for its convenience. We cannot assure you that we
will receive any more such orders.
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On February 17, 2000, we completed a public offering of our common stock
in which we sold 2,300,000 shares at an offering price of $17.50 per share. On
February 29, 2000, the underwriter exercised its over-allotment option to
purchase an additional 345,000 shares. The net proceeds of the offering and
exercise of the over-allotment option was approximately $42.4 million.
In July 2000, we acquired the business of EF Data, the satellite
communications division of Adaptive Broadband Corporation for approximately
$54.2 million in cash. The acquisition is being accounted for under the
"purchase method" of accounting. Accordingly, we allocated the purchase price to
the assets purchased and the liabilities assumed based upon the estimated fair
values at the date of the acquisition. The excess of the purchase price over the
fair values of the net assets acquired was approximately $26.8 million, of which
$10.2 million was allocated to in-process research and development and was
expensed as of the acquisition date, $7.5 million was valued as purchased
technology, $3.6 million was valued as other purchased intangibles and $5.5
million has been recorded as goodwill. Forty million dollars of the purchase
price was supplied through institutional secured borrowings bearing interest at
9.25% due in installments through 2005, and the balance from internal company
funds. We combined this operation with our existing Arizona satellite
communications operations included in our telecommunications transmissions
segment.
In April 2001, we acquired certain assets and product lines of MPD
Technologies, Inc. for $12.7 million. The acquisition was accounted for under
the "purchase method" of accounting. Accordingly, we have recorded the assets
purchased and the liabilities assumed based upon the estimated fair values at
the date of acquisition. The excess of the purchase price over the fair values
of the net assets acquired was approximately $9.7 million, of which $1.8 million
has been allocated to customer base, $1.8 million has been allocated to existing
technology and $6.1 million has been allocated to goodwill. The purchase price
was financed through $10 million of institutional secured borrowings and the
balance from internal company funds. The secured borrowing bears an interest
rate of 8.5% and requires interest only payments through June 2005 at which time
the entire principal is due. We combined this operation with our Comtech PST
Corp. operation in our RF microwave amplifiers segment.
Telecommunications Transmission Business Segment
The demand for telecommunications is increasing worldwide as emerging
economies seek to modernize their infrastructure and as increasingly
information-intensive markets introduce new telecommunications services. The
telecommunications industry has expanded rapidly during the last decade due to
technological advances and deregulation. Advances in technology have lowered
per-unit communications costs, increased product reliability and encouraged a
proliferation of new and enhanced communications products and services.
In making procurement decisions, customers for telecommunications
transmission equipment must weigh the relative costs and advantages of the six
presently available transmission technologies: copper cable, fiber optic cable,
high frequency radio systems, wireless microwave systems, over-the-horizon
microwave systems and satellite systems. Rarely is a complete communications
network or system based solely on one of these technologies. Transmission of
information can be routed through a combination of technologies, each employed
where most cost-effective. Our products are used in systems employing satellite,
over-the-horizon microwave, terrestrial line-of-sight microwave and wireless
technologies.
Copper Cable, the traditional transmission medium most familiar to
customers, is being replaced and supplemented by the other media,
particularly for high-volume broadband and long distance
transmissions where it has substantial capacity, cost and
reliability limitations.
Fiber Optic Cable is best suited to high-volume broadband,
point-to-point, short or long distance links where its
advantages-capacity, quality and security-justify the long lead-time
and high cost to equip and install a network.
High frequency (HF) radio systems employ long wavelengths which are
propagated beyond line-of-sight distances either by surface waves
traveling along the earth's perimeter or by skywave reflection of
the transmitted waves off different layers of the ionosphere. This
mode of transmission is very limited in capacity.
Wireless and line-of-sight microwave communications systems
generally used for point-to-point communications, employ signals
with extremely short wavelengths which travel only in line-of-sight
paths over relatively short distances, generally under 30 miles, can
be quickly and easily
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installed, require relatively low initial capital investment and
provide broadband capacity which can be upgraded and expanded over
time.
Over-the-horizon microwave communication systems transmit signals
over distances from 30 to 600 miles by reflection of the transmitted
signals off the troposphere, an atmospheric layer located
approximately seven miles above the earth's surface. Such systems
offer a high level of reliability and security, are limited in
capacity but are used for transmission over unfriendly terrain.
Satellite communications systems have grown and diversified in
response to demand for efficient broadband and accurate long
distance voice and video communication and digital information
exchange. In a satellite communications system, information is
relayed to and from microwave transmitting and receiving stations on
the ground by means of a low earth orbit (LEO), medium earth orbit
(MEO), or geostationary earth orbit (GEO) satellites, which are
generally placed in an orbit from 600 to 22,300 miles above the
earth's equator. Satellite communications systems are particularly
useful where long-range, broadband high capacity and high quality
point-to-point or point-to-multipoint communication transmission is
desirable. As few as three GEO satellites can provide global
communications coverage. These systems, which use microwave
technology, are well suited for rapid introduction of long distance
service in remote areas or where communication alternatives are
unavailable, such as mobile, shipboard or defense applications.
Our Comtech EF Data Corp. operating unit, located in Tempe, Arizona,
designs and manufactures equipment used in commercial and defense satellite
communications. The equipment includes modems, frequency up converters and down
converters, solid state power amplifiers and satellite VSAT transceivers, which
combine our frequency converters with solid state, high-power amplifiers. These
products comprise a broad range of receiving and transmitting equipment offering
a variety of state-of-the-art technical capabilities with respect to
performance, complexity and value. Our turbo codec modem product line offers
significantly improved performance, power and bandwidth performance over
traditional systems. This operating unit is a combination and integration of our
Comtech Communications Corp. subsidiary with our newly acquired EF Data product
line. The acquisition of EF Data's business expanded Comtech's growing
telecommunications capabilities and enhanced Comtech's product offerings,
distribution reach and market presence. Additionally, it enabled Comtech to
enter the growing satellite networking solution business.
Our Comtech Systems, Inc. operating unit, located in Orlando, Florida, has
a product line consisting primarily of equipment for over-the-horizon microwave
systems and networks. It has a turnkey capability that ranges from system and
network planning through equipment and system training and operation and
maintenance programs. It also supplies satellite telecommunications systems by
combining its products with equipment manufactured by our other operating units
and third parties. Comtech Systems, Inc. markets its products and services to
oil and gas companies and other commercial users, foreign defense commands and
system prime contractors. We believe that Comtech Systems, Inc.'s products,
which employ adaptive modem digital transmission technology, offer high-speed
data (8 mbs) benefits over the traditional analog and digital (2 mbs)
over-the-horizon microwave products offered by its sole competitor.
Our Comtech Antenna Systems, Inc. operating unit, located in St. Cloud,
Florida, designs, manufactures, and markets a wide variety of fiberglass and
aluminum antennas for over-the-horizon microwave and satellite communication
applications, including distributed network programming, cable and broadcast
television and radio as well as other forms of information and entertainment
distribution. Comtech Antenna Systems, Inc. designs antennas for specific types
of telecommunications systems and, typically, sells standardized products to
independent distributors, prime contractors and end-user customers. Comtech
Antenna Systems, Inc.'s antenna product line includes fixed and mobile antenna
systems and specialized multi-beam satellite antenna systems that are capable of
receiving signals simultaneously from many independent satellites located up to
60 degrees apart.
RF Microwave Amplifier Business Segment
Amplifiers reproduce signals with greater power, current or voltage
amplitude. Indispensable in the world of signal processing, amplifiers can be as
tiny as a microchip for a hearing aid or as massive as a multi-story building
for transmitting radio signals to submerged submarines or to outer space.
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In telecommunications, solid state high-power amplifiers are used to
amplify signals for radiation from transmitting antennas in satellite or other
wireless telecommunications systems. They are also used to amplify signals in
defense, radar and electronic jamming systems. In the laboratory, solid state,
high-power amplifiers are used to test the performance of high power microwave
and wireless electronic system components used in cellular and PCS networks.
Solid state, high-power amplifiers are also used in electromagnetic
compatibility and susceptibility testing. The proliferation of electronic
systems in products such as automobiles, computers, wireless telephones, radios,
televisions, medical equipment, aircraft and other products has led to
increasingly serious problems with electromagnetic interference. Manufacturers,
therefore, test these electronic systems for electromagnetic compatibility and
susceptibility using broadband high-power RF microwave amplifiers such as those
we manufacture. For example, such testing may be used to determine whether the
various electronic systems in a commercial aircraft are likely to be affected by
the use of laptop computers, wireless telephones or video games by passengers in
flight.
We believe our Comtech PST Corp. operating unit, located in Melville, New
York, is one of a small number of companies designing, developing, manufacturing
and marketing broadband high-power large signal amplifiers in the microwave and
RF spectrums. Our recent acquisition of assets and product lines from MPD
Technologies, Inc. discussed above, further expands our product offerings in
this segment for applications, including wireless and air-to-ground satellite
telecommunications, medical oncology systems, instrumentation and defense
systems. Comtech PST Corp. sells its products to domestic and foreign commercial
users, government agencies and prime contractors. We believe it is an innovative
supplier of these amplifiers and related processing equipment.
Mobile Data Communications Services Business Segment
The demand for mobile data communications services and products has
increased dramatically in recent years for both government and commercial
applications. This demand has been driven by advances in digital technology
coupled with the need to better locate, track, manage, monitor and communicate
with mobile and fixed assets. The transmission of information may be done over
various systems, i.e., terrestrial, cellular or satellite, depending on the most
cost-effective approach to meet the application's requirements.
We are continuing to develop and market a Web-enabled, satellite-based
mobile data communications system for the land mobile, remote sensing, utility,
aviation and maritime markets. Applications include asset location and tracking,
two-way mobile messaging, e-mail and automated reading of sensors, including
meters and gauges. Through our satellite earth station gateway in Germantown,
Maryland, we can route signals to and from mobile or fixed, remote terminals via
leased satellite capacity. Customers can access their messages or data through
an Internet or terrestrial connection to their headquarters' Web sites.
While the service is satellite-based, we do not own satellites. Worldwide
coverage is available today, and multiple system coverage is available in many
regions as well. Satellite capacity, as required, can be leased for our data
communications services, which represents a significant advantage in
consideration of the increasingly competitive environment for sale or lease of
satellite capacity. As a result, we believe that our data services costs will be
among the lowest in the industry, and ongoing product development efforts will
enable us to maintain this competitive advantage.
In early 1999, Comtech Mobile Datacom Corp. led a multi-company team in
competing for the U.S. Army's Movement Tracking System, a system to be deployed
by the U.S. Army for global use in tracking its assets and communicating by
message in real time with these vehicles from fixed and mobile command centers.
The contract was awarded to Comtech Mobile Datacom Corp. in June 1999. The
contract allows for purchases of up to $418.2 million of equipment and services
over an eight-year period, and is also open to other government agencies to
procure their tracking and messaging requirements. While the U.S. Army and other
government agency business is expected to become a major source of our growth in
the near term, we intend to expand our customer base for mobile data
communications services and products into commercial markets. The system, which
will be used by the U.S. Army, can be made immediately available for use as a
commercial system. Through July 31, 2001, we have received orders for $15.9
million under this contract, which can be terminated by the U.S. Army at any
time for its convenience.
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Sales, Marketing and Customer Support
Our international sales (including sales to prime contractors'
international customers) from all three business segments represented
approximately 46.2%, 71.4%, and 60.1% of total net sales in fiscal 2001, 2000
and 1999, respectively. We expect that international sales will remain a
substantial portion of our total sales for the foreseeable future.
Domestic commercial sales represented approximately 30.7%, 19.8% and 24.3%
of our total net sales in fiscal 2001, 2000 and 1999, respectively. The balance
of our sales were to U.S. government departments or agencies and represented
23.1%, 8.8% and 15.6% of our total net sales in fiscal 2001, 2000 and 1999,
respectively.
There were no customers in fiscal 2001, which constituted 10% or more of
our total net sales. Sales to one customer, a major U.S. aerospace prime
contractor, represented 43.1%, and 27.0% of our total net sales for fiscal 2000
and 1999, respectively. A substantial portion of our sales are derived from a
relatively small number of large customer contracts.
Each of our operating units conducts its own sales and marketing efforts.
In some instances, our operating units may bundle other units' products. Sales
and marketing strategies vary with particular markets served and include direct
sales through sales, marketing and engineering personnel, sales through
independent representatives, value-added resellers or a combination of the
foregoing. Our operating units enter into sales distribution agreements for
certain products with distributors. Unlike sales representatives, who merely
find customers on a commission basis, some of our distributors purchase products
from us for resale. We intend to continue to expand domestic and international
marketing efforts through independent sales representatives, distributors and
value-added resellers.
Our management, technical and marketing personnel establish and maintain
relationships with customers. Our strategy includes a commitment to provide
ongoing customer support for our systems and equipment. This support involves
providing direct access to engineering staff or trained technical
representatives to resolve technical or operational problems.
Backlog
Our backlog as of July 31, 2001 and 2000 was approximately $50.1 million
and $50.5 million, respectively. We expect that a substantial majority of the
backlog as of July 31, 2001 will be recognized as sales during fiscal 2002. We
received payments with respect to progress billings and advance payments
aggregating approximately $2.1 million as of July 31, 2001 in connection with
orders included in the backlog at that date. At July 31, 2001 approximately
23.4% of that backlog consisted of U.S. government contracts, subcontracts and
government funded programs, approximately 49.7% consisted of orders for use by
foreign customers (including sales to prime contractors' international
customers) and approximately 26.9% consisted of orders for use by domestic
commercial customers.
Our backlog consists solely of orders believed to be firm. In the case of
contracts with departments or agencies of the U.S. government, including our
Mobile Datacom contract discussed above, orders are only included in backlog to
the extent funding has been obtained for such orders. All of the contracts in
our backlog are subject to cancellation at the convenience of the customer or
for default in the event that we are unable to perform under the contract.
Variations in backlog from time to time are attributable, in part, to the
timing of our preparation and submission of contract proposals, the timing of
contract awards and the delivery schedules on specific contracts. As a result,
we believe our backlog at any point in the fiscal year is not necessarily
indicative of the total sales anticipated for any particular future period. Our
Comtech Antenna and Comtech EF Data businesses operate under short lead times
and usually generate sales out of inventory, as is also the case for a
significant portion of our Comtech PST amplifier business.
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Manufacturing and Service
Our manufacturing operations consist principally of the assembly and
testing of electronic products we design and build from purchased fabricated
parts, printed circuits and electronic components and, in the case of antennas,
the casting of fiberglass antennas. We employ formal quality management programs
and other training programs, including International Standards Organization's
(ISO 9000) quality procedure registration programs. Our Comtech PST Corp.,
Comtech Systems, Inc. and Comtech EF Data Corp. operating units have been
qualified for ISO 9001.
Our ability to deliver products to customers on a timely basis is
dependent, in part, upon the availability and timely delivery by subcontractors
and suppliers of the components and subsystems that we use in manufacturing our
products. Electronic components and raw materials used in our products are
generally obtained from independent suppliers. Some components are standard
items and are available from a number of suppliers. Others are manufactured to
our specifications by subcontractors. We obtain certain components and
subsystems from a single source or a limited number of sources. We believe that
most components and equipment are available from existing or alternative
suppliers and subcontractors. A significant interruption in the delivery of such
items could have a material adverse effect on our business and results of
operations.
Research and Development
The technology used in our products is subject to rapid development and
frequent change. Our business position is in large part contingent upon the
continuous refinement of our scientific and engineering expertise and the
development, either through research and development or acquisitions, of new or
enhanced products and technologies.
A majority of our sales in fiscal 2001 were of products developed by us
within the past five years, including, for example, linear amplifiers sold to
cellular and PCS telephony system manufacturers for testing their systems'
amplifiers and turbo codec modems sold to satellite systems integrators and
service providers for use in high performance voice, data, video and fax
transmission.
Our aggregate research and development expenditures (internal and customer
funded) were 8.7%, 10.4% and 10.0% of total net sales in fiscal 2001, 2000 and
1999 respectively. We reported internal research and development expenses of
$10.2 million, $2.6 million and $2.0 million in fiscal 2001, 2000 and 1999
respectively, representing 7.5%, 4.0% and 5.3% of total net sales, respectively,
for these periods. A portion of our research and development efforts relates to
the adaptation of our basic technology to specialized customer requirements and
is recoverable under such contracts, and such expenditures are not included in
our research and development expenses for financial reporting purposes. During
fiscal 2001, 2000 and 1999, we were reimbursed by customers for such activities
in the amounts of $1.7 million, $4.3 million and $1.8 million, respectively.
Patents and Licenses
Although we own or hold licenses for a number of patents, patents and
licenses have been of substantially less significance in our business than our
scientific and engineering know-how, production techniques, the timely
application of our technology and the design, development and marketing
capabilities of our personnel. We rely on the laws of unfair competition,
restrictions in licensing agreements and confidentiality agreements to protect
such knowledge and techniques.
Competition
Our product businesses are highly competitive and characterized by rapid
technological change. In addition, the number of potential customers for our
products is limited. Our growth and financial condition depend, among other
things, on our ability to keep pace with such changes and developments and to
respond to the sophisticated requirements of an increasing variety of electronic
equipment users. Many of our competitors are substantially larger, have
significantly greater financial, marketing, research and development,
technological and operating resources and broader product lines than we do. A
significant technological breakthrough by others, including smaller competitors
or new companies could have a material adverse effect on our business. In
addition, certain of our customers have technological capabilities in our
product areas and could choose to replace our products with their own.
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In the market for mobile data communications services, there are several
much larger competitors with existing systems. The most prominent of these
competitors is Qualcomm Incorporated. Existing competitors are aggressively
pricing their products and services and may continue to do so in the future. We
anticipate that new competitors will enter the market in the future. Competitors
continue to offer new value-added products and services, which we may be unable
to match on a timely or cost-effective basis. Increased competition may impact
margins throughout the industry.
We believe that competition in all of our markets is based primarily on
product performance, reputation, delivery times, customer support and price. Due
to our decentralized organizational structure and proprietary know-how, we
believe we have the ability to develop, produce and to deliver equipment on a
cost-effective basis faster than many of our competitors.
Key Personnel/Employees
We believe our success is dependent upon the continued contributions of
our key management personnel, including the key management at each of our
operating units, and depends to a significant extent upon Fred Kornberg, our
Chairman, Chief Executive Officer and President. Many of our key personnel,
particularly the key engineers, would be difficult to replace, and are not
subject to employment or non-competition agreements. The development of our
mobile data communications services business is particularly dependent upon Joel
R. Alper, the President of Comtech Mobile Datacom Corp. The success of our
telecommunications transmissions segment is particularly dependent upon Richard
L. Burt, President of our Comtech Systems, Inc. subsidiary and Robert L.
McCollum, President of our Comtech EF Data Corp. subsidiary. Our growth and
future success will depend in large part upon our ability to attract and retain
highly qualified engineering, sales and marketing personnel. Competition for
such personnel from other companies, academic institutions, government entities
and other organizations is intense. Although we believe we have been successful
to date in recruiting and retaining key personnel, we may not be successful in
attracting and retaining the personnel we require in order to continue to grow
and operate profitably. The management skills that have been appropriate for our
business in the past may not continue to be appropriate if our business
continues to grow and diversify.
At July 31, 2001, we had 651 employees, 349 of whom were engaged in
production and production support, 180 in research and development and other
engineering support and 122 in marketing and administrative functions. None of
the employees are represented by a labor union. We believe that our employee
relations are good.
Compliance with Federal, State and Local Environment Protection Laws
We are subject to a variety of local, state and federal governmental
regulations relating to the storage, discharge, handling, emission, generation,
manufacture and disposal of toxic or other hazardous substances used to
manufacture our products, particularly in connection with the fabrication of
fiberglass antennas by Comtech Antenna Systems, Inc. We believe that we are
currently in compliance in all material respects with such regulations and that
we have obtained all necessary environmental permits to conduct our business. To
date, compliance with federal, state or local environment protection laws has
not had a material effect on our capital expenditures, earnings or competitive
position, and we do not expect that such compliance will have a material effect
in the future.
ITEM 2. PROPERTIES
Our corporate offices are located in a portion of the 46,000-square foot
facility on more than two acres of land in Melville, New York, which also houses
Comtech PST. We lease this facility from a partnership controlled by our
Chairman, Chief Executive Officer and President. The lease, as amended, provides
for our exclusive use of the premises as they now exist for an initial term of
ten years through December 2001. We have the option to extend the term of the
lease for an additional ten-year period and a right of first refusal in the
event of a sale of the facility. We have exercised our option to extend the
lease for an additional ten-year period. The base annual rental under the lease
is subject to adjustments.
9
We lease the 32,000-square foot facility on eight acres of land used by
Comtech Antenna Systems, Inc. in St. Cloud, Florida from a Florida land trust
which was controlled by the President of Comtech PST. The lease provides for our
exclusive use of the premises as they now exist for a term expiring September
2003. We have the option to extend the term of the lease for an additional
five-year period. The base annual rental under the lease is subject to
adjustments. The President of Comtech PST sold his interest in the facility
during fiscal 2001.
We lease a 72,500-square foot facility for Comtech Systems, Inc. in
Orlando, Florida from an unrelated third party. The lease provides for the
exclusive use of the premises as they now exist through April 2002. The base
annual rental is subject to adjustments.
We lease a 113,000-square foot facility in Tempe, Arizona for our Comtech
EF Data Corp. operating unit from an unrelated third party. The lease provides
for the exclusive use of the premises as they now exist through January 2006.
We lease 7,100-square feet of space located in Germantown, Maryland that
is used by Comtech Mobile Datacom Corp. from an unrelated third party. This
lease provides for the exclusive use of the premises as they now exist through
August 2004.
ITEM 3. LEGAL PROCEEDINGS
Two former employees have commenced an action in the United States
District Court, District of New Jersey, against the Company and others
asserting, among other things, breach of certain restricted stock agreements and
seeking unspecified monetary damages, specific performance of the restricted
stock agreements, including the issuance of an aggregate 225,000 shares of the
Company's Common Stock for a purchase price of $.10 per share, and other relief.
The Company believes it has meritorious defenses to all the claims asserted and
intends to vigorously defend the action. It has filed an answer and has asserted
certain counterclaims. There is a pending motion of the plaintiffs to dismiss
the counterclaims and to strike certain of the affirmative defenses. The Company
has opposed the motion and cross-moved to dismiss the claims of one plaintiff.
We are subject to certain legal actions, which arise, in the normal course
of business. We believe that the outcome of these actions will not have a
material effect on our consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our stockholders during the fourth quarter of
the fiscal year ended July 31, 2001.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the Nasdaq National Market under the symbol
"CMTL." The following table shows the quarterly range of the high and low sale
prices for our common stock as reported by the Nasdaq National Market. Such
prices do not include retail markups, markdowns, or commissions.
Common Stock
------------
High Low
---- ---
Fiscal Year Ended 7-31-00
First Quarter $14.56 8.00
Second Quarter 29.50 14.13
Third Quarter 26.25 10.38
Fourth Quarter 17.13 8.63
Fiscal Year Ended 7-31-01
First Quarter $19.88 12.00
Second Quarter 19.50 9.00
Third Quarter 19.00 11.00
Fourth Quarter 17.99 11.45
Dividends
We have never paid cash dividends on our common stock and we intend to
continue this policy for the foreseeable future. We expect to use earnings to
finance the development and expansion of our business. Our Board of Directors
reviews our dividend policy periodically. The payment of dividends in the future
will depend upon our earnings, capital requirements, financial condition and
other factors considered relevant by our Board of Directors.
Approximate Number of Equity Security Holders
As of October 12, 2001, there were approximately 743 holders of the Company's
common stock. Such number of record owners was determined from the Company
shareholders' records and does not include beneficial owners of the Company's
common stock held in the names of various security holders, dealers and clearing
agencies.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table shows selected historical consolidated financial data for
Comtech. Detailed historical financial information is included in the audited
consolidated financial statements for fiscal years 2001 and 2000.
11
Year Ended July 31,
(In thousands, except per share amounts)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Consolidated Statement of
Operations Data:
Net Sales $ 135,931 66,444 37,886 30,114 24,746
Cost of sales 87,327 45,942 26,405 21,330 17,670
--------- ------ ------ ------ ------
Gross profit 48,604 20,502 11,481 8,784 7,076
Expenses:
Selling, general and administrative 22,707 12,058 6,554 6,013 5,415
Research and development 10,190 2,644 2,022 1,319 1,023
In-process research and development -- 10,218 -- -- --
Amortization of intangibles 2,552 230 78 -- --
--------- ------ ------ ------ ------
35,449 25,150 8,654 7,332 6,438
--------- ------ ------ ------ ------
Operating income (loss) 13,155 (4,648) 2,827 1,452 638
Other expenses (income):
Interest expense 4,015 381 204 234 284
Interest income (2,303) (1,511) (65) (36) (33)
Other (income) expense, net 841 201 (39) (30) (151)
--------- ------ ------ ------ ------
Income (loss) from continuing
operations before income taxes 10,602 (3,719) 2,727 1,284 538
Provision (benefit) for income taxes 3,888 85 (3,754) 180 54
--------- ------ ------ ------ ------
Income (loss) from continuing
operations
6,714 (3,804) 6,481 1,104 484
Discontinued operations:
Loss from operations of
discontinued segment (less
applicable income tax benefit of -- (137) (622) -- --
$79 in 2000 and $320 in 1999)
Loss on disposal of discontinued
segment, including provision of
$430 for operating losses during
phase out period (net of income tax
benefit of $306) -- -- (594) -- --
--------- ------ ------ ------ ------
Net income (loss) $ 6,714 (3,941) 5,265 1,104 484
========= ====== ===== ===== ======
Basic income (loss) per share:
Income (loss) from continuing
operations $ 0.91 (0.67) 1.56 0.28 0.13
Loss from discontinued operations -- (0.02) (0.29) -- --
--------- ------ ------ ------ ------
Basic income (loss) $ 0.91 (0.69) 1.27 0.28 0.13
========= ====== ===== ===== ======
Diluted income (loss) per share:
Income (loss) from continuing
operations $ 0.85 (0.67) 1.42 0.27 0.12
Loss from discontinued operations -- (0.02) (0.27) -- --
--------- ------ ------ ------ ------
Diluted income (loss) $ 0.85 (0.69) 1.15 0.27 0.12
========= ====== ===== ===== ======
Weighted average number of
common shares outstanding-
Basic 7,348 5,663 4,143 3,902 3,873
Potential dilutive common shares 562 -- 430 264 33
--------- ------ ------ ------ ------
Weighted average number of
common and common equivalent
shares outstanding assuming
dilution-
Diluted 7,910 5,663 4,573 4,166 3,906
========= ====== ===== ===== ======
12
Other Consolidated Operating Data:
Backlog at period-end $ 50,094 50,538 38,637 15,452 14,724
New orders 135,487 78,345 61,071 30,842 29,770
Research and development-internal
and customer funded 11,846 6,916 3,801 1,675 1,459
EBITDA (1) 19,730 7,954 4,337 2,658 1,693
(1) Earnings from continuing operations before interest, taxes, depreciation
and amortization and non-recurring items.
As of July 31,
(In thousands)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Consolidated Balance Sheet Data:
Total assets $146,988 126,031 29,847 19,710 17,960
Working capital 67,089 65,267 10,192 8,917 7,930
Long-term debt 42,000 37,900 -- -- --
Long-term capital lease obligations 2,157 908 959 1,445 1,310
Other long-term liabilities 259 367 -- -- --
Stockholders' equity 65,565 57,782 18,357 12,093 10,878
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We design, develop, produce and market sophisticated wireless
telecommunications transmission products and systems and solid state high-power
broadband amplifiers for commercial and government purposes. Our products are
used in point-to-point and point-to-multipoint telecommunication applications
such as satellite communications, over-the-horizon microwave systems, telephone
systems and cable and broadcast television. Our broadband amplifier products are
also used in cellular and PCS instrumentation testing and certain defense
systems.
Our business consists of three segments: mobile data communications
services, telecommunications transmission, and RF microwave amplifiers. We began
reporting financial results on a segment basis in fiscal 1999. Our sales of
mobile data communications services may increase substantially if, when and as
orders are received under our contract with the U.S. Army and we penetrate other
government and commercial markets for these services.
Our sales are made to domestic and international customers, both
commercial and governmental. International sales (including sales to prime
contractors for end use by international customers) are expected to remain a
substantial portion of our total sales for the foreseeable future due to the
growing worldwide demand for wireless and satellite telecommunication products
and services and our expanded line of RF microwave amplifier product offerings
to meet these demands.
At times, a substantial portion of our sales may be derived from a limited
number of relatively large customer contracts, the timing of which cannot be
predicted. Quarterly sales and operating results may be significantly affected
by one or more of such contracts. Accordingly, we can experience significant
fluctuations in sales and operating results from quarter to quarter.
Sales consist of stand-alone products and systems. For the past five years
we have endeavored to achieve greater product sales as a percentage of total
sales, because product sales generally have higher gross profit margins than
systems sales. In the future, as our installed base of mobile data
communications terminals is established, we expect an increasing amount of our
sales will be attributable to the recurring service revenue component of our
mobile data communications services segment.
We generally recognize income under contracts only when the products are
shipped. However, when the performance of a contract will extend beyond a
12-month period, income is recognized on the percentage-of-completion method.
Profits expected to be realized on contracts are based on total sales value as
related to
13
estimated costs at completion. These estimates are reviewed and revised
periodically throughout the lives of the contracts, and adjustments to profits
resulting from such revisions are made cumulative to the date of the change.
Estimated losses on long-term contract-in-progress are recorded in the period in
which such losses become known.
Our gross profit is affected by a variety of factors, including the mix of
products, systems and services sold, production efficiency, price competition
and general economic conditions.
Selling, general and administrative expenses consist primarily of salaries
and benefits for marketing, sales and administrative employees, advertising and
trade show costs, professional fees and amortization of deferred compensation.
Our research and development expenses relate to both existing product
enhancement and new product development. A portion of our research and
development efforts is related to specific contracts and is recoverable under
those contracts because they are funded by the customers. Such customer-funded
expenditures are not included in research and development expenses for financial
reporting purposes but are reflected in cost of sales.
In the first quarter of fiscal 1999, we acquired the assets and assumed
certain liabilities of two businesses through newly formed, wholly-owned
subsidiaries: Comtech Mobile Datacom Corp., our mobile data communications
services business; and Comtech Wireless, Inc., our wireless local loop business.
Both acquisitions were accounted for using the purchase method of accounting. In
June 1999, the U.S. Army awarded Comtech Mobile Datacom Corp. a contract which,
subject to, among other things, government funding and deployment decisions,
provides for the purchase of up to $418.2 million in mobile terminal units and
global data communications services over an eight-year period. Sales will be
dependent upon annual government funding and deployment decisions.
Comtech Wireless, Inc. designed and manufactured wireless local loop
systems for the rural and remote telephony market. Due to disappointing results
and uncertain prospects, effective July 31, 1999, we adopted a plan to liquidate
Comtech Wireless, Inc. on or about January 31, 2000. The results of operations
for the segment have been shown as a discontinued operation in the consolidated
financial statements. Comtech Wireless, Inc. did not have any sales in fiscal
1999, 2000 and 2001.
In January 2000, we acquired certain assets and assumed certain
liabilities of Hill Engineering Inc. ("Hill") in exchange for 50,000 shares of
the Company's common stock. The acquisition was accounted for under the
"purchase method of accounting". The purchase price amounted to approximately
$371,000, which principally represents the fair value of the initial 30,000
shares of common stock to be issued to Hill. The remaining 20,000 shares were
placed in escrow and will only be released to the sellers if certain profit
goals, as defined in the agreement are met and will be recorded at fair value on
the date when the profit goals are met. This business is part of the RF
microwave amplifiers segment. The excess of the purchase price over the net
assets acquired of approximately $606,000, net of amortization, is included in
goodwill in the accompanying consolidated balance sheet.
In July 2000, we acquired the business of EF Data, the satellite
communications division of Adaptive Broadband Corporation for cash. The
acquisition was accounted for under the "purchase method" of accounting.
Accordingly, we allocated the purchase price to the assets purchased and the
liabilities assumed based upon the estimated fair values at the date of the
acquisition. The excess of the purchase price over the fair values of the net
assets acquired was approximately $26.8 million, of which $10.2 million was
allocated to in-process research and development and was expensed as of the
acquisition date, $7.5 million was valued as purchased technology, $3.6 million
was valued as other purchased intangibles and $5.5 million has been recorded as
goodwill. Forty million dollars of the purchase price was supplied through
institutional secured borrowings bearing interest at 9.25% due in installments
through 2005, and the balance from internal company funds.
In April 2001, we acquired certain assets and product lines of MPD
Technologies, Inc. for cash. The acquisition was accounted for under the
"purchase method" of accounting. Accordingly, we have recorded the assets
purchased and the liabilities assumed based upon the estimated fair values at
the date of acquisition. The excess of the purchase price over the fair values
of the net assets acquired was approximately $9.7 million, of which $1.8 million
has been allocated to customer base, $1.8 million has been allocated to existing
technology and $6.1 million has been allocated to goodwill. The purchase price
was financed through $10 million of institutional secured borrowings and the
balance from internal company funds. The secured borrowing bears interest at a
rate of
14
8.5% and requires interest only payments through June 2005 at which time the
entire principal is due. We combined this operation with our Comtech PST Corp.
operation in our RF microwave amplifiers segment.
Results of Operations
The following table sets forth, for the periods indicated, certain income
and expense items expressed as a percentage of our net sales:
Year Ended July 31,
-------------------------
2001 2000 1999
---- ---- ----
Net sales 100% 100% 100%
Gross margin 35.8 30.9 30.3
Selling, general and administrative expenses 16.7 18.1 17.3
Research and development expenses 7.5 4.0 5.3
Amortization of intangibles 1.9 0.4 0.2
Operating income (loss) from continuing operations 9.7 (7.0) 7.5
Interest expense (income), net 1.3 (1.7) 0.4
Income (loss) before income taxes 7.8 (5.6) 7.2
Net income (loss) 4.9 (5.9) 13.9
Comparison of Fiscal 2001 and 2000
Net Sales Consolidated net sales were $135.9 million and $66.4 million for
fiscal 2001 and 2000, respectively, representing an increase of $69.5 million or
104.6%. This increase was primarily due to the acquisition in July 2000 of EF
Data. This business, which is included in our telecommunications transmission
segment, increased our product offerings and broadened our customer base for
satellite earth station equipment. Sales from our telecommunications
transmission segment were $106.3 million or 78.2% of our total net sales in
fiscal 2001 as compared to $53.3 million or 80.2% of our total net sales in
fiscal 2000. Substantially all of the increase in the telecommunications
transmission segment was the result of the EF Data acquisition. In fiscal 2001,
sales from our RF microwave amplifier segment were $16.4 million as compared to
$11.0 million in fiscal 2000. Approximately $2.7 million of this $5.4 million
increase was due to the acquisition we completed in April 2001 of certain assets
and product lines of MPD Technologies, Inc. This acquisition has increased our
product offerings and our customer base in our RF microwave amplifier segment.
The RF microwave amplifier segment was 12.1% of our total net sales in fiscal
2001 as compared to 16.5% in fiscal 2000. Sales from our mobile data
communications services segment were $13.2 million or 9.7% of our total net
sales in fiscal 2001 as compared to $2.2 million or 3.3% in fiscal 2000. This
increase of approximately $11.0 million was primarily due to increased sales of
our Movement Tracking System to the U.S. Army. International sales represented
46.2% of total net sales in fiscal 2001 as compared to 71.4% in fiscal 2000. The
decrease in the percentage of international sales reflects the absence in fiscal
2001 of significant revenues from one customer for over-the-horizon microwave
equipment which occurred in fiscal 2000. Domestic sales represented 30.7% of
total net sales in fiscal 2001 as compared to 19.8% in fiscal 2000. U.S.
government sales represented 23.1% of total net sales in fiscal 2001 as compared
to 8.8% in fiscal 2000. There were no customers in fiscal 2001 that represented
10% or more of our total sales. In fiscal 2000, sales to one customer, a major
U.S. prime contractor for ultimate sale to an international end user,
represented 43.1% of total sales. Sales during the second half of fiscal 2001
were adversely impacted by the weakening economy. Particular softness was
experienced in our telecommunications transmission segment as a result of the
significant downturn in the telecommunications market. We believe sales will
continue to be adversely impacted until such economic conditions improve.
Despite the difficult operating environment, the Company was profitable in all
four quarters of fiscal 2001.
Gross Profit Gross profit was $48.6 million and $20.5 million for fiscal 2001
and 2000, respectively, representing an increase of $28.1 million or 137.1%.
This increase was primarily due to the increase in sales volume. Gross margin,
as a percentage of net sales, was 35.8% and 30.9% in fiscal 2001 and 2000,
respectively. The higher gross margin in fiscal 2001 was largely due to the
increase in the sale of satellite earth station equipment products by our
telecommunications transmission segment as a result of the EF Data acquisition.
Those products generally have a lower per unit cost and yield a higher gross
margin than most other products and systems we sell.
15
Selling, General and Administrative Selling, general and administrative
expenses were $22.7 million and $12.1 million in fiscal 2001 and 2000,
respectively, representing an increase of $10.6 million or 88.3%. This increase
was the result of additional expenses, including additional personnel, sales and
marketing expenses and other administrative expenses, required to support the
higher sales volume. As a percentage of sales, these expenses were 16.7% and
18.1% of total net sales for fiscal 2001 and 2000, respectively.
Research and Development Research and development expenses were $10.2 million
and $2.6 million in fiscal 2001 and 2000, respectively, representing an increase
of approximately $7.6 million or 285.4%. The increase in fiscal 2001 was
principally due to the continuation of research and development for the projects
that were underway at the time of our acquisition of EF Data in July 2000, as
well as for expenses related to new product development and product
announcements for all of our businesses. As an investment for the future we are
continually enhancing and developing new products and technologies. Whenever
possible, we seek customer funding for research and development to adapt our
products to specialized customer requirements. During fiscal 2001 and 2000,
customers reimbursed us $1.7 million and $4.3 million, respectively, which
amounts are not reflected in the reported research and development expenses.
Amortization of Intangibles Amortization of intangibles was $2.6 million and
$230,000 for fiscal 2001 and 2000, respectively. The increase in fiscal 2001 was
primarily due to the full year of amortization expense relating to goodwill and
other identified intangibles associated with our acquisition of EF Data in July
2000. The increase also reflects the amortization of intangibles resulting from
our April 2001 acquisition of MPD Technologies. See discussion below regarding
recent accounting pronouncements affecting the future amortization of goodwill
and other intangibles.
In-Process Research and Development There was no in-process research and
development expense in fiscal 2001. In fiscal 2000, in connection with the
acquisition of EF Data, $10.2 million of the purchase price was allocated to
in-process research and development. Our financial statements for fiscal 2000
include a one-time charge of $10.2 million for the write-off of this amount in
accordance with generally accepted accounting principles.
Operating Income (Loss) As a result of the foregoing factors, we had operating
income from continuing operations of $13.2 million in fiscal 2001 as compared to
an operating loss from continuing operations in fiscal 2000 of $4.6 million.
Excluding the impact of the in-process research and development charge in fiscal
2000, operating income was $5.6 million.
Interest Expense Interest expense was $4.0 million and $381,000 for fiscal 2001
and 2000, respectively, representing an increase of approximately $3.6 million.
The increase was primarily due to the interest on the long term debt we incurred
in connection with the acquisition of EF Data in July 2000. The original amount
of the loan was $40.0 million payable over five years. In connection with our
acquisition of certain assets and product lines from MPD Technologies, Inc. in
April 2001, we borrowed an additional $10.0 million.
Interest Income Interest income was $2.3 million and $1.5 million for fiscal
2001 and 2000, respectively, representing an increase of $792,000. This increase
in fiscal 2001 was primarily due to the increase in the amount of cash available
in excess of working capital requirements, principally as result of the proceeds
received from a follow-on stock offering completed in the third quarter of
fiscal 2000.
Other Expense, Net Other expense, net was $841,000 and $201,000 for fiscal 2001
and 2000, respectively. The amount in fiscal 2001 related to a loss of $990,000
realized upon the sale in March 2001 of a short-term investment classified as
available-for-sale, offset by royalty and other income of $149,000. The amount
in fiscal 2000 primarily related to the loss realized upon the sale of a
short-term investment classified as available-for-sale.
Provision for Income Taxes The provision for income taxes in fiscal 2001
reflects an effective tax rate of 36.7%. The fiscal 2000 provision for income
taxes was effected by a change in the valuation allowance. (See note 9 to the
consolidated financial statements for further information regarding the
provision for income taxes.)
Comparison of Fiscal 2000 and 1999
Net Sales Consolidated net sales were $66.4 million and $37.9 million for
fiscal 2000 and 1999, respectively, representing an increase of $28.5 million or
approximately 75.4%. This increase was primarily due to increased sales by our
telecommunications transmission segment, principally to one customer, a major
U.S. prime contractor,
16
of over-the-horizon microwave equipment. Sales to this customer were $28.6
million and $10.2 million for fiscal 2000 and 1999, respectively, representing
43.1% and 27.0% of consolidated net sales for fiscal 2000 and 1999,
respectively. The total order received from this customer in fiscal 1999 was
approximately $43.6 million. The balance of $4.8 million is expected to be
recognized as revenue during fiscal 2001. There were no other customers in
fiscal 2000 or 1999 that represented 10% or more of consolidated net sales.
Included in the telecommunications transmission segment are products for
satellite earth stations. Sales of these products increased 162.5% due to
additional product offerings which were partly the result of our acquisition of
EF Data in July 2000. Sales from our RF microwave amplifier segment declined by
approximately 24.0% compared to fiscal 1999, due to the timing of the receipt of
expected follow-on orders. Sales from our mobile data communications services
segment increased from nominal sales, less than 1%, in fiscal 1999 to 3.3% of
consolidated net sales in fiscal 2000. International sales increased by
approximately $24.7 million or 107.9%, representing 71.4% and 60.1%, of total
net sales for fiscal 2000 and 1999, respectively. Domestic sales increased by
$4.0 million or 43.5%, representing 19.8% and 24.3% of total net sales for
fiscal 2000 and 1999, respectively. U.S. government sales decreased by $65,000
or 1.1%, representing 8.8% and 15.6% of total net sales for fiscal 2000 and
1999, respectively.
Gross Profit Gross profit was $20.5 million and $11.5 million for fiscal 2000
and 1999, respectively, representing an increase of $9.0 million or
approximately 78.6%. The increase was primarily due to the increase in sales
volume in fiscal 2000 compared to fiscal 1999. Gross margin as a percentage of
net sales was 30.9% and 30.3% in fiscal 2000 and 1999, respectively, due
primarily to the increase in sales of products with lower per unit costs, which
yield higher gross margins.
Selling, General and Administrative Selling, general and administrative
expenses were $12.1 million and $6.6 million in fiscal 2000 and 1999,
respectively, representing an increase of $5.5 million or approximately 84.0%.
This was primarily due to the increase in costs associated with supporting
increased sales such as administrative, selling and marketing salaries and
benefits, sales commissions, travel and other related expenses. We also incurred
additional expenses related to our acquisition of EF Data including the
integration of the facilities and workforce.
Research and Development Research and development expenses were $2.6 million
and $2.0 million in fiscal 2000 and 1999, respectively, representing an increase
of $600,000 or approximately 30.8%. As an investment for the future we are
continually enhancing and developing new products and technologies. In fiscal
2000, the increase is primarily due to expenses incurred by our recently
acquired business, for the continuation of research and development for the
projects that were underway at the time of the acquisition. Whenever possible,
we seek customer funding for research and development to adapt our products to
specialized customer requirements. During fiscal 2000 and 1999, customers
reimbursed us $4.3 million and $1.8 million, respectively, which amounts are not
reflected in the reported research and development expenses.
In-Process Research and Development In connection with the purchase of EF Data,
$10.2 million of the purchase price was allocated to in-process research and
development. This allocation was part of the overall purchase price allocation
performed by an independent third party engaged by us. The value of in-process
research and development is based upon new product development projects that
were underway at the time of the acquisition and are expected to eventually lead
to new products but had not yet established technological feasibility and for
which no future alternative use was identified. Our financial statements for
fiscal 2000 include a one-time charge of $10.2 million for the write-off of this
amount in accordance with generally accepted accounting principles.
Operating Income (Loss) As a result of the foregoing factors, we had an
operating loss from continuing operations of $4.6 million for fiscal 2000 as
compared to operating income of $2.8 million for fiscal 1999, representing a
decrease of $7.4 million.
Interest Expense Interest expense was $381,000 and $204,000 for fiscal 2000 and
1999, respectively, representing an increase of $177,000 or 86.8%. The increase
in fiscal 2000 was primarily due to the interest on $40.0 million of long-term
debt that we incurred during July 2000 that was used to partially finance the EF
Data acquisition. The balance of interest expense in fiscal 2000 and all of the
interest expense in fiscal 1999 was interest associated with our capital lease
obligations.
Interest Income Interest income was $1.5 million and $65,000 for fiscal 2000
and 1999, respectively, representing an increase of $1.4 million. This increase
was due to the increase in the amount of cash available to invest during this
period primarily as a result of the proceeds received from a follow-on stock
offering completed in the third quarter of fiscal 2000. Interest income was
primarily derived from the short term investments of the cash on hand in excess
of working capital requirements.
17
Provision (Benefit) for Income Taxes On income from continuing operations we
had an income tax provision of $85,000 in fiscal 2000 as compared to an income
tax benefit in fiscal 1999 of $3.8 million. Our income tax provision is
calculated according to the provisions of SFAS No. 109, "Accounting for Income
Taxes". In applying the provisions of SFAS No. 109, temporary differences due to
the timing of the deductibility of items for income tax purposes as compared to
the timing of deductibility for financial reporting purposes, are recorded as
deferred tax assets and liabilities. (See note 9 to the consolidated financial
statements for further information regarding the provision for income taxes.)
Liquidity and Capital Resources
Our cash and cash equivalents position increased to $36.2 million at July
31, 2001 from $12.6 million at July 31, 2000. The increase of $23.6 million was
largely the result of the sale in fiscal 2001 of the Company's marketable
investment securities, which were $18.6 million as of July 31, 2000.
Net cash provided by operating activities was $4.8 million in fiscal 2001.
Such amount reflects net income for fiscal 2001 of $6.7 million, plus the impact
of non-cash items such as depreciation and amortization aggregating
approximately $7.5 million, which was substantially offset by increases in
accounts receivable and inventory. These increases are driven by the expansion
of our businesses during the past year. In addition, some of our product lines,
including our mobile data communications business, require long lead times for
materials. Some of our customers require a level of "off-the-shelf" inventory
availability.
Net cash provided by investing activities was $10.9 million in fiscal
2001. Net proceeds from the sale of marketable securities of $17.9 million were
offset by capital expenditures and the purchase of a technology license
aggregating $3.3 million. Cash of $12.7 million was used to purchase certain
assets and product lines from MPD Technologies, Inc. which is discussed above
under the caption "Overview". We received $9.0 million during fiscal 2001 in
connection with final adjustments to the purchase price of EF Data, which is
discussed above under the caption "Overview".
Net cash provided by financing activities was $7.9 million in fiscal 2001.
In connection with the acquisition of certain assets and product lines from MPD
Technologies, Inc. in April 2001, we borrowed an additional $10.0 million from
an institutional lender. The $10 million bears interest at 8.5% and requires
interest only payments until June 2005 at which time the entire principal amount
is due. We also repaid $2.1 million in fiscal 2001 on the $40 million of debt
borrowed from the same institutional lender in connection with the EF Data
acquisition. The $40 million bears interest at 9.25% and is payable
semi-annually, with interest, over a five-year period. Principal payments on
capital lease obligations amounted to $.7 million during fiscal 2001. Proceeds
from the sale of stock and exercise of options and warrants aggregated $.8
million.
We entered into new capital leases during fiscal 2001 in the amount of
$2,456,000 for the purchase of capital equipment and a technology license.
In August 2001, we prepaid $19.2 million of principal on the $40 million
of debt incurred in connection with the EF Data acquisition. After the
prepayment, the aggregate remaining amount of principal outstanding relating to
the $50 million of borrowings associated with the EF Data and MPD Technologies
acquisitions was $28.7 million. There was no prepayment penalty as a result of
the pay down, which was funded by available cash balances.
We believe that our cash and cash equivalents will be sufficient to meet
our operating cash requirements for at least the next year. In the event that we
identify a significant acquisition that requires additional cash, we would seek
to borrow additional funds or raise additional equity capital.
18
Recent Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, Business Combinations, and Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the
purchase method of accounting be used for all business combinations. Statement
141 also specifies criteria that intangible assets acquired in a purchase method
business combination must meet to be recognized and reported separately from
goodwill. Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of.
The Company adopted the provisions of Statement 141 effective July 1,
2001. The adoption of Statement 141 had no effect on the financial position or
results of operations of the Company. Statement 142 is effective for the Company
beginning August 1, 2001. At that time, any goodwill and intangible assets
determined to have an indefinite useful life that were acquired in a purchase
business combination will not be amortized, but will be evaluated for impairment
in accordance with the provisions of Statement 142.
Statement 141 requires, upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
As of August 1, 2001, the Company had unamortized goodwill and other
intangible assets with indefinite useful lives of $17.7 million. Such assets
will no longer be amortized under Statement 142. The Company does not believe
that the goodwill and other intangible assets with indefinite useful lives were
impaired as of August 1, 2001. Amortization expense relating to such assets in
fiscal 2002 would be $1.7 million if Statement 142 was not adopted.
Forward-Looking Statements and Risk Factors
Many statements in this Form 10-K constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking statements
include:
o Statements of goals, intentions and expectations;
o Estimates of risks and of future costs and benefits; and
o Statements of the ability to achieve financial and other goals.
These forward-looking statements are subject to significant uncertainties
because they are based upon or are affected by:
o Management's estimates and projections of U.S. and international
economic and business conditions;
o Future laws and regulations; and
o A variety of other matters, including those described below.
Because of these uncertainties, actual future results may be materially
different from the results indicated by these forward-looking statements, which
are inherently predictive and speculative. The following are some of the risks
that could cause actual results to differ significantly from those expressed or
implied by such statements.
19
All of our businesses are subject to rapid technological change; we must keep
pace with changes to compete successfully.
We are engaged in businesses characterized by rapid technological change,
evolving industry standards, frequent new product announcements and
enhancements, and changing customer demands. The introduction of products and
services embodying new technologies and the emergence of new industry standards
could render our products and services obsolete or non-competitive. The
technology used in our products and services evolves rapidly, and our business
position depends, in large part, on the continuous refinement of our scientific
and engineering expertise and the development, either through internal research
and development or acquisitions, of new or enhanced products and technologies.
We may not have the economic or technological resources to be successful in such
efforts and we may not be able to identify and respond to technological
improvements made by our competitors in a timely or cost-effective fashion. A
significant technological breakthrough by others, including smaller competitors
or new firms, could have a material adverse impact on our business.
A slowing economy and continued reduction in telecommunications equipment and
systems spending may negatively affect our revenues and profitability.
During the second half of fiscal 2001, our revenues were negatively
affected by the increasingly uncertain economic environment both in the overall
market, and more specifically in the telecommunications sector. If the economy
continues to slow, some of our customers may reduce their budgets for spending
on telecommunications equipment and systems. As a consequence, our current
customers and other prospective customers may postpone, reduce or even forego
the purchase of our products and systems, which could adversely affect our
revenues and profitability.
Our mobile data communications services business is subject to risk.
Our mobile data communications services business has a limited operating
history and to date has generated modest sales. It is subject to all of the
risks inherent in the operation of a new business enterprise. Moreover, our
business experience has been in producing products, not in providing services.
We may not be able to implement and operate our mobile data communications
services business successfully. In addition to the other risk factors described
in this section, the risk factors applicable to our mobile data communications
services business include the following:
o Although the U.S. Army contract obligates us to provide up to 56,000
mobile terminals and worldwide satellite services over an eight year
period as and when ordered by the U.S. Army and at the fixed prices
and other terms set forth in this contract, the U.S. Army is not
obligated to purchase any terminals or services under this contract
and may terminate this contract at its convenience. Sales under the
U.S. Army contract will be subject to unpredictable funding and
deployment decisions. Through July 31, 2001 we have received orders
for $15.9 million under this contract.
o Certain components that we need have purchasing lead-time of four
months or longer, and the U.S. Army contract requires us to provide
mobile terminals within 30 days after we receive an order.
o Our success in commercial markets will depend on, among other
things, our ability to access the best distribution channels, the
development of applications which create real value for the customer
and our ability to attract and retain qualified personnel. Delays in
delivering terminals could also adversely affect our ability to
obtain and retain commercial customers.
o In general, as we seek to grow our mobile data communications
services business, we anticipate that we will need to maintain a
substantial inventory in order to provide terminals to our customers
on a timely basis. If forecasted orders are not received, we might
be left with large inventories of slow moving or unusable parts or
terminals. This could result in an adverse effect on our business,
results of operations, liquidity and financial position.
o We will lease the satellite capacity necessary to operate our system
from third party satellite networks. We currently have a long-term
lease with a satellite network operator (TMI) for satellite coverage
in North America, Central America and the northern rim of South
America. While several vendors have announced plans for new
satellite systems, only one provider, INMARSAT, presently offers the
global coverage that will be required under the U.S. Army contract.
We cannot assure you that we will be
20
able to obtain sufficient satellite capacity or geographical
coverage from any vendor to operate our mobile data communications
services system on acceptable terms or on a timely basis.
o There are several existing competitors in the mobile data
communications market that have established systems with sizable
customer bases and much greater financial resources than us. The
largest of these competitors is Qualcomm Incorporated. Existing
competitors, including terrestrial service providers, are also
aggressively pricing their products and services and may continue to
do so in the future. Competitors continue to offer new value added
products and services, which we may be unable to match on a timely
or cost effective basis. Increased competition may impact margins
throughout the industry. We anticipate that new competitors will
enter the mobile data communications market in the future.
o All satellite communications are subject to the risk that a
satellite or ground station failure or a natural disaster may
interrupt service. Interruptions in service could have a material
adverse effect on our results of operations. With respect to U.S.
satellite service, satellite network providers have arranged to
provide back-up satellite and ground station service for each other
in the event of catastrophic failure.
o Our mobile terminals will be manufactured by subcontractors, the
first of which is SCI Systems, Inc. of Huntsville, Alabama, a large
electronics contract manufacturer. While we have successfully
produced limited quantities of terminals, we have not yet produced
significant quantities of terminals or complete assemblies (which
include computers and palm top input/output devices for
user-customized applications) and we cannot assure you that we will
be able to obtain them on a timely or cost-effective basis.
o We believe that we own or have licensed all intellectual property
rights necessary for the operation of our mobile data communications
services business as currently contemplated. If our terminals or
services are found to infringe on protected technology, we could be
required to redesign our terminals, license the protected
technology, and/or pay damages or other compensation to the
infringed party. If we are unable to license protected technology
used in our terminals or if we were required to redesign our
terminals, we could be prohibited from making and selling our
terminals or providing mobile data communications services.
Due to many factors, including the amount of business represented by large
contracts, our operating results are difficult to forecast and may be volatile.
We have experienced, and will experience in the future, significant
fluctuations in sales and operating results from quarter to quarter. One reason
for this is that a significant portion of our business - primarily the
over-the-horizon microwave systems and other products of our telecommunications
transmission business segment and a portion of our RF microwave amplifier
business segment - is derived from a limited number of relatively large customer
contracts, the timing of which cannot be predicted. While we generally recognize
income under contracts when the products are shipped, income is recognized on
the percentage-of-completion method when the performance of a contract will
extend beyond a 12-month period. Our net sales and operating results also may
vary significantly from period to period because of the following factors:
product mix sold; fluctuating market demand; price competition; new product
introductions by our competitors; fluctuations in foreign currency exchange
rates; unexpected changes in delivery of components or subsystems; political
instability; regulatory developments; and general economic conditions.
Accordingly, you should not rely on period-to-period comparisons as indications
of our future performance because these comparisons may not be meaningful.
Our dependence on international sales may adversely affect us.
Sales for use by international customers (including sales to prime
contractors' international customers) represented approximately 46.2%, 71.4% and
60.1%, and of our total net sales for the fiscal years ended July 31, 2001,
2000, and 1999, respectively. Approximately 49.7% of our backlog at July 31,
2001 consisted of orders for use by foreign customers. We expect that
international sales will continue to be a substantial portion of our total
sales. These sales expose us to certain risks, including barriers to trade,
fluctuations in foreign currency exchange rates (which may make our products
less price competitive), political and economic instability, availability of
suitable export financing, tariff regulations, and other U.S. and foreign
regulations that may apply to the export of
21
our products and the generally greater difficulties of doing business abroad. We
attempt to reduce the risk of doing business in foreign countries by seeking
subcontracts with large system suppliers, contracts denominated in U.S. dollars,
advance payments and irrevocable letters of credit in our favor.
Foreign defense contracts generally contain provisions relating to
termination at the convenience of the government. In addition, certain of our
products and systems may require licenses from U.S. government agencies for
export from the United States, and some of our products are not permitted to be
exported. We cannot be sure of our ability to gain any licenses that may be
required to export our products, and failure to receive required licenses could
materially reduce our ability to sell our products outside the United States.
Our dependence on component availability, subcontractor availability and
performance and key suppliers may adversely affect us.
We do not generally maintain a substantial inventory of components and
subsystems. We obtain certain components and subsystems from a single source or
a limited number of sources, but believe that most components and subsystems are
available from alternative suppliers and subcontractors. A significant
interruption in the delivery of such items, however, could have a material
effect on our business and results of operations.
Our backlog is subject to customer cancellation or modification.
We currently have a backlog of orders, mostly under contracts that the
customer may modify or terminate. We cannot assure you that our backlog will
result in net sales.
Our sales to the U.S. government are subject to funding and other risks.
We sell our products and services to agencies of the U.S. government or to
contractors or subcontractors under contracts with U.S. agencies. These sales
accounted for approximately 23.1%, 8.8% and 15.6% of our total net sales in
fiscal 2001, 2000 and 1999, respectively. As a result of our contract with the
U.S.Army, we expect sales to agencies of the U.S. government to increase
significantly in the future. As is customary for government sales, these sales
are subject to various risks. These risks include the ability of the U.S.
government to:
o change government policy which could reduce our business;
o terminate existing contracts for its convenience; and
o audit our contract-related costs and fees, including allocated
indirect costs.
A reduction in government agency budgets could cause us to experience
declining net sales, increased pressure on operating margins and, in certain
cases, net losses. The loss or significant cutback of a large program in which
we participate could also materially adversely affect our future results of
operations.
All of our U.S. government contracts can be terminated by the U.S.
government for its convenience. Termination for convenience provisions provide
only for our recovery of costs incurred or committed, settlement expenses and
profit on work completed prior to termination. In addition to the right of the
U.S. government to terminate, U.S. government contracts are conditioned upon the
continuing approval by Congress of the necessary spending. Congress usually
appropriates funds for a given program on a fiscal-year basis even though
contract performance may take more than one year. Consequently, at the beginning
of a major program, the contract is usually not fully funded, and additional
monies are normally committed to the contract only if, as and when
appropriations are made by Congress for future fiscal years.
The U.S. government may review our costs and performance on their
contracts, as well as our accounting and general business practices. Based on
the results of such audits, the U.S. government may adjust our contract-related
costs and fees, including certain financing costs, goodwill, portions of
research and development costs, and certain marketing expenses, may not be
reimbursable under U.S. government contracts.
We obtain U.S. government contracts through a competitive bidding process.
We cannot assure you that we will continue to win competitively awarded
contracts or that awarded contracts will generate sufficient net sales to result
in profitability.
22
Acquisitions and strategic investments may divert our resources and management
attention; results may fall short of expectations.
We intend to continue pursuing selected acquisitions of and investments in
businesses, technologies and product lines as a key component of our growth
strategy. Any future acquisition or investment may result in the use of
significant amounts of cash, potentially dilutive issuances of equity
securities, incurrence of debt and amortization expenses related to goodwill and
other intangible assets. Acquisitions involve numerous risks, including:
o difficulties in the integration and assimilation of the operations,
technologies, products and personnel of an acquired business;
o diversion of management's attention from other business concerns;
and
o potential loss of key employees or customers of any acquired
business.
Our fixed price contracts subject us to risk.
Almost all of our products and services are sold under fixed price
contracts. This means that we bear the risk of unanticipated technological,
manufacturing, supply or other problems, price increases or increases in the
cost of performance.
Our markets are highly competitive.
The markets for our products are highly competitive. We cannot assure you
that we will be able to successfully compete or that our competitors will not
develop new technologies and products that are more commercially effective than
our own. We expect the Department of Defense's increased use of commercial
off-the-shelf products and components in military equipment will encourage new
competitors to enter the market. Also, although the implementation of advanced
telecommunications services is in its early stages in many developing countries,
we believe competition may intensify as businesses and foreign governments
realize the market potential of telecommunications services. Many of our
competitors have financial, technical, marketing, sales and distribution
resources greater than ours.
The loss of key technical or management personnel could adversely affect our
business.
Our success depends on the continued contributions of key technical
management personnel, including the key management at each of our subsidiaries.
Many of our key personnel, particularly the key engineers of our subsidiaries,
would be difficult to replace, and are not subject to employment or
noncompetition agreements. The development of our mobile data communications
services business is particularly dependent upon Joel R. Alper, the President of
our Comtech Mobile Datacom Corp. subsidiary. The success of our
telecommunications transmission segment is particularly dependent upon Richard
L. Burt, President of our Comtech Systems, Inc. subsidiary, and Robert L.
McCollum, President of our Comtech EF Data Corp. subsidiary. Our growth and
future success will depend in large part upon our ability to attract and retain
highly qualified engineering, sales and marketing personnel. Competition for
such personnel from other companies, academic institutions, government entities
and other organizations is intense. Although we believe that we have been
successful to date in recruiting and keeping key personnel, we may not be
successful in attracting and retaining the personnel we will need to continue to
grow and operate profitably. Also, the management skills that have been
appropriate for us in the past may not continue to be appropriate if we continue
to grow and diversify.
Our success also depends to a significant extent upon our President and
Chief Executive Officer, Fred Kornberg. The loss of the services of Mr. Kornberg
could have a material adverse effect on us. We have entered into an employment
contract with Mr. Kornberg. We have also purchased key man insurance in the
amount of $1.0 million on each of Fred Kornberg, Joel R. Alper, Richard L. Burt
and Robert L. McCollum.
Protection of our intellectual property is limited; we are subject to the risk
of third party claims of infringement.
Our businesses rely in large part upon our proprietary scientific and
engineering "know-how" and production techniques. Historically, patents have not
been an important part of our protection of our intellectual property rights. We
rely upon the laws of unfair competition, restrictions in licensing agreements
and confidentiality
23
agreements to protect our intellectual property. We limit access to and
distribution of our proprietary information. These efforts allow us to rely upon
the knowledge and experience of our management and technical personnel to market
our existing products and to develop new products. The departure of any of our
key management and technical personnel, the breach of their confidentiality and
non-disclosure obligations to us or the failure to achieve our intellectual
property objectives may have a material adverse effect on our business,
financial condition and results of operations.
Our ability to compete successfully and achieve future revenue growth will
depend, in part, on our ability to protect our proprietary technology and
operate without infringing upon the rights of others. We may fail to do so. In
addition, the laws of certain countries in which our products are or may be sold
may not protect our products and intellectual property rights to the same extent
as the laws of the United States.
Our operations are subject to environmental regulation.
We are subject to a variety of local, state and federal governmental
regulations relating to the storage, discharge, handling, emission, generation,
manufacture and disposal of toxic or other hazardous substances used to
manufacture our products, particularly in the fabrication of fiberglass antennas
by our Comtech Antenna Systems, Inc. subsidiary. We believe that we are
currently in compliance in all material respects with such regulations and that
we have obtained all necessary environmental permits to conduct our business.
Nevertheless, the failure to comply with current or future regulations could
result in the imposition of substantial fines, suspension or production,
alteration of our manufacturing processes or cessation of operations that could
materially adversely affect our business, financial condition and results of
operations.
Our stock price is volatile.
The stock market in general, and the stock prices of technology-based
companies in particular, have experienced extreme volatility that often has been
unrelated to the operating performance of any specific public companies. The
market price of our common stock has fluctuated significantly in the past and is
likely to fluctuate significantly in the future as well. Factors that may have
significant impact on the market price of our stock include:
o future announcements concerning us or our competitors;
o receipt or non-receipt of substantial orders for products and
services;
o results of technological innovations;
o new commercial products;
o changes in recommendations of securities analysts;
o government regulations;
o proprietary rights or product or patent litigation;
o changes in market conditions generally, particularly in the
market for small cap stocks; and
o limited public float.
Shortfalls in our revenues or earnings in any given period relative to the
levels expected by securities analysts could immediately, significantly and
adversely affect the trading price of our common stock.
We have never declared or paid dividends.
We have never declared or paid a cash dividend and do not intend to
declare any cash dividends on our common stock in the foreseeable future.
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to
changes in interest rates primarily from its investment of available cash
balances in money market funds. Under its current policies, the Company does not
use interest rate derivative instruments to manage exposure to interest rate
changes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report, Consolidated Financial Statements, Notes to
Consolidated Financial Statements and related financial schedule are listed in
the index to Consolidated Financial Statements and Schedule annexed hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Certain information concerning the directors and officers of the Company
is incorporated by reference to the Proxy Statement of the Company for the
Annual Meeting of Stockholders to be held December 11, 2001 (the "Proxy
Statement") which will be filed with the Securities and Exchange Commission no
more than 120 days after the close of its fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference
to the Proxy Statement, which will be filed with the Securities and Exchange
Commission no more than 120 days after the close of its fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the Proxy Statement, which will be
filed with the Securities and Exchange Commission no more than 120 days after
the close of its fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated by reference to the Company's Proxy Statement, which will be filed
with the Securities and Exchange Commission no more than 120 days after the
close of its fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. and 2. Financial Statements and Financial Statement Schedule
The Financial Statements filed as part of this report are listed in the
accompanying Index to Consolidated Financial Statements and Schedule.
(b) In May 2001, and as amended in July 2001, the Company filed a report
on Form 8-K with respect to the acquisition of certain assets and
products lines of MPD Technologies, Inc.
(c) Exhibit index
25
Exhibit Incorporated By
Number Description of Exhibit Reference to Exhibit
------ ---------------------- --------------------
3(a) Certificate of Incorporation of the Registrant Exhibit 3(a) of the Registrant's 1987
Form 10-K
3(b) Amendment of the Certificate of Incorporation effecting the 5 to 1 Exhibit 3(b) to the Registrant's 1991
reverse stock split Form 10-K
3(c) Amended and restated By-Laws of the Registrant Exhibit 3(c) of Registrant's 1998
Form 10-K
3(d) Amendment to the Certificate of Incorporation increasing authorized Exhibit 3(d) to the Registrant's 1994
shares to 12 million Form 10-K
3(e) Amendment to the Certificate of Incorporation increasing the Exhibit 3(e) to Registrant's 1998
authorized shares to 17 million Form 10-K
3(f) Form of Certificate of Designation of the Series A Junior Exhibit 4(1) to the Registrant's Form 8-A/A
Participating Preferred Stock dated December 23, 1998
3(g) Amendment to the Certificate of Incorporation increasing the Exhibit 3(g) to Registrant's 2000 Form 10-K
authorized shares to 32 million
4(a) Rights Agreement dated as of December 15, 1998 between the Registrant Exhibit 4(1) to the Registrant's Form 8-A/A
and American Stock Transfer and Trust Company, as Rights Agent dated December 23, 1998
10(a) Amended and restated Employment Agreement dated October 9, 2001
between the Registrant and Fred Kornberg
10(b) Lease and amendment thereto on the Melville Facility Exhibit 10(k) to the Registrant's 1992
Form 10-K
10(c) Amended and restated 1993 Incentive Stock Option Plan Appendix A to the Registrant's Proxy Statement
dated November 3, 1997
10(d) Time Accelerated Restricted Stock Purchase Agreements between Exhibit 10(f) to the Registrant's 1999
Registrant and Principals of Comtech Mobile Datacom Corp. operating Form 10-K
unit
10(e) Movement Tracking System Contract between Comtech Mobile Datacom Corp. Exhibit 10(g) to the Registrant's 1999 Form 10-K
and U.S. Army's CECOM Acquisition Center dated June 24, 1999 (certain
portions of this agreement have been omitted and filed separately with
the Securities and Exchange Commission pursuant to a request for
confidential treatment)
10(f) License Agreement between Vistar Telecommunications Inc. and Comtech Exhibit 10(h) to the Registrant's 1999
Mobile Datacom Corp. dated August 31, 1999 (certain portions of this Form 10-K
agreement have been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential
treatment)
10(g)(1) 2000 Stock Incentive Plan Appendix A to the Registrant's Proxy Statement
dated November 8, 1999
10(g)(2) Amendment to the 2000 Stock Incentive Plan Appendix A to the Registrant's Proxy Statement
dated November 6, 2000
10(h) Amended and Restated Asset Purchase Agreement between the Registrant Exhibit 2.1 to the Registrant's Form 8-K dated
and Adaptive Broadband Corporation dated as of July 10, 2000 July 10, 2000
10(i)(1) Loan and Security Agreement between the Registrant and The Teachers' Exhibit 10(k) to the Registrant's 2000 Form 10-K
Retirement System of Alabama, The Employees' Retirement System of
Alabama, The Alabama Heritage Trust Fund, PEIRAF-Deferred Compensation
Plan and State Employees' Health Insurance Fund, dated July 7, 2000
26
Exhibit Incorporated By
Number Description of Exhibit Reference to Exhibit
------ ---------------------- --------------------
10(i)(2) Amendment to the Loan and Security Agreement between the Registrant
and The Teachers' Retirement System of Alabama, The Employees'
Retirement System of Alabama, The Alabama Heritage Trust Fund,
PEIRAF-Deferred Compensation Plan and State Employees' Health
Insurance Fund, dated April 30, 2001
10(j) Asset Purchase Agreement between the Registrant and MPD Technologies, Exhibit 2.1 to the Registrant's Form 8-K dated
Inc., dated March 2, 2001 April 30, 2001
10(k) 2001 Employee Stock Purchase Plan Appendix B to the Registrant's Proxy Statement
dated November 6, 2000
21 Subsidiaries of the Registrant
23 Consent of KPMG LLP
Exhibits to this Annual Report on Form 10-K are available from the Company upon
request and payment to the Company for the cost of reproduction.
27
SIGNATURE
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.
COMTECH TELECOMMUNICATIONS CORP.
October 19, 2001 By: s/ Fred Kornberg
---------------------------- -------------------------------------
(Date) Fred Kornberg, Chairman of the Board
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 dates indicated.
Signature Title
--------------------------------- ------------------------------
October 19, 2001 s/ Fred Kornberg Chairman of the Board
----------------------------- --------------------------------- Chief Executive Officer
(Date) Fred Kornberg and President
(Principal Executive Officer)
October 19, 2001 s/ Robert G. Rouse Senior Vice President and
----------------------------- --------------------------------- Chief Financial Officer
(Date) Robert G. Rouse
October 19, 2001 s/ George Bugliarello Director
----------------------------- ---------------------------------
(Date) George Bugliarello
October 19, 2001 s/ Richard L. Goldberg Director
----------------------------- ---------------------------------
(Date) Richard L. Goldberg
October 19, 2001 s/ Edwin Kantor Director
----------------------------- ---------------------------------
(Date) Edwin Kantor
October 19, 2001 s/ Gerard R. Nocita Director
----------------------------- ---------------------------------
(Date) Gerard R. Nocita
October 19, 2001 s/ Sol S. Weiner Director
----------------------------- ---------------------------------
(Date) Sol S. Weiner
28
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedule
Page
----
Independent Auditors' Report F-2
Consolidated Financial Statements:
Balance Sheets at July 31, 2001 and 2000 F-3
Statements of Operations for each of the years in the three-year
period ended July 31, 2001 F-4
Statements of Stockholders' Equity for each of the years in the
three-year period ended July 31, 2001 F-5
Statements of Cash Flows for each of the years in the three-year
period ended July 31, 2001 F-6, F-7
Notes to Consolidated Financial Statements F-8 to F-25
Additional Financial Information Pursuant to the Requirements of Form 10-K:
Schedule II - Valuation and Qualifying Accounts and Reserves S-1
Schedules not listed above have been omitted because they are either
not applicable or the required information has been given elsewhere in the
consolidated financial statements or notes thereto.
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
Comtech Telecommunications Corp.:
We have audited the consolidated financial statements of Comtech
Telecommunications Corp. and subsidiaries as listed in the accompanying index.
In connection with our audits of the consolidated financial statements, we also
audited the financial statement schedule II as listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Comtech
Telecommunications Corp. and subsidiaries as of July 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended July 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule II, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG LLP
Melville, New York
October 9, 2001
F-2
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 2001 and 2000
Assets 2001 2000
------------- ----------
Current assets:
Cash and cash equivalents $ 36,205,000 12,587,000
Marketable investment securities -- 18,634,000
Accounts receivable, less allowance for doubtful accounts of $845,000 in 2001
and $806,000 in 2000 27,374,000 24,204,000
Other receivables -- 9,038,000
Inventories, net 36,732,000 26,170,000
Prepaid expenses and other current assets 1,151,000 583,000
Deferred tax asset - current 2,634,000 3,125,000
------------- ----------
Total current assets 104,096,000 94,341,000
Property, plant and equipment, net 11,778,000 10,738,000
Goodwill and other intangibles with indefinite lives, net of accumulated
amortization of $1,648,000 in 2001 and $246,000 in 2000 17,657,000 10,223,000
Other intangibles with definite lives, net of accumulated amortization of $1,212,000
in 2001 and $62,000 in 2000 10,162,000 7,446,000
Other assets, net 569,000 468,000
Deferred tax asset - non current 2,726,000 2,815,000
------------- ----------
Total assets $ 146,988,000 126,031,000
============= ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 5,900,000 2,100,000
Current installments of capital lease obligations (including payable
to related party of $155,000 in 2001 and $347,000 in 2000) 1,097,000 608,000
Accounts payable 11,014,000 11,260,000
Accrued expenses and other current liabilities 13,615,000 13,657,000
Deferred service revenue 2,073,000 --
Income tax payable 3,308,000 1,449,000
------------- ----------
Total current liabilities 37,007,000 29,074,000
Long-term debt, less current installments 42,000,000 37,900,000
Capital lease obligations, less current installments (including payable
to related party of $154,000 in 2000) 2,157,000 908,000
Other long-term liabilities 259,000 367,000
------------- ----------
Total liabilities 81,423,000 68,249,000
Stockholders' equity:
Preferred stock, par value $.10 per share; shares authorized and
unissued 2,000,000 -- --
Common stock, par value $.10 per share; authorized 30,000,000 shares, issued
7,511,105 shares in 2001 and 7,349,176 shares in 2000 751,000 735,000
Additional paid-in capital 67,490,000 66,740,000
Accumulated other comprehensive income (loss) -- (113,000)
Accumulated deficit (1,973,000) (8,687,000)
------------- ----------
66,268,000 58,675,000
Less:
Treasury stock (82,500 shares) (184,000) (184,000)
Deferred compensation (519,000) (709,000)
------------- ----------
Total stockholders' equity 65,565,000 57,782,000
------------- ----------
Total liabilities and stockholders' equity $ 146,988,000 126,031,000
============= ===========
Commitments and contingencies
See accompanying notes to consolidated financial statements.
F-3
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended July 31, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
Net sales $ 135,931,000 66,444,000 37,886,000
Cost of sales 87,327,000 45,942,000 26,405,000
------------- ---------- ----------
Gross profit 48,604,000 20,502,000 11,481,000
Expenses:
Selling, general and administrative 22,707,000 12,058,000 6,554,000
Research and development 10,190,000 2,644,000 2,022,000
In-process research and development -- 10,218,000 --
Amortization of intangibles 2,552,000 230,000 78,000
------------- ---------- ----------
35,449,000 25,150,000 8,654,000
------------- ---------- ----------
Operating income (loss) from continuing operations 13,155,000 (4,648,000) 2,827,000
Other expenses (income):
Interest expense 4,015,000 381,000 204,000
Interest income (2,303,000) (1,511,000) (65,000)
Other, net 841,000 201,000 (39,000)
------------- ---------- ----------
Income (loss) from continuing operations before income taxes 10,602,000 (3,719,000) 2,727,000
Provision (benefit) for income taxes 3,888,000 85,000 (3,754,000)
------------- ---------- ----------
Income (loss) from continuing operations 6,714,000 (3,804,000) 6,481,000
Discontinued operations (Note 13):
Loss from operations of discontinued segment (net of applicable
income tax benefit of $79,000 in 2000 and $320,000 in 1999) -- (137,000) (622,000)
Loss on disposal of segment, including provision in 1999
of $430,000 for operating losses during phase-out period
(net of applicable income tax benefit of $306,000) -- -- (594,000)
------------- ---------- ----------
Net income (loss) $ 6,714,000 (3,941,000) 5,265,000
============= ========== ==========
Basic income (loss) per share:
Income (loss) from continuing operations $ 0.91 (0.67) 1.56
Loss from discontinued operations -- (0.02) (0.29)
------------- ---------- ----------
Basic income (loss) per share $ 0.91 (0.69) 1.27
============= ========== ==========
Diluted income (loss) per share:
Income (loss) from continuing operations $ 0.85 (0.67) 1.42
Loss from discontinued operations -- (0.02) (0.27)
------------- ---------- ----------
Diluted income (loss) per share $ 0.85 (0.69) 1.15
============= ========== ==========
Weighted average number of common shares outstanding-
Basic 7,348,000 5,663,000 4,143,000
Potential dilutive common shares 562,000 -- 430,000
------------- ---------- ----------
Weighted average number of common and common equivalent
shares outstanding assuming dilution -
Diluted 7,910,000 5,663,000 4,573,000
============= ========== ==========
See accompanying notes to consolidated financial statements.
F-4
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended July 31, 2001, 2000 and 1999
Common Stock Treasury Stock
------------ --------------
Accumulated
Additional Other
Paid-in Comprehensive Accumulated
Shares Amount Capital Income Deficit Shares Amount
------ ------ ------- ------ ------- ------ ------
Balance July 31, 1998 4,008,006 $ 401,000 $ 22,055,000 $ -- $(10,011,000) 82,500 $(184,000)
Amortization of deferred
compensation -- -- -- -- -- -- --
Stock issued in acquisition
of Mobile Datacom 150,000 15,000 513,000 -- -- -- --
Restricted shares issued
pursuant to employment
stock award agreement 225,000 22,000 1,034,000 -- -- -- --
Stock options exercised 88,362 9,000 199,000 -- -- -- --
Net income -- -- -- -- 5,265,000 -- --
--------- ----------- ------------ ----------- ------------ ------ ---------
Balance July 31, 1999 4,471,368 447,000 23,801,000 -- (4,746,000) 82,500 (184,000)
Amortization of deferred
compensation -- -- -- -- -- -- --
Stock issued in acquisition
of Hill Engineering 30,000 3,000 368,000 -- -- -- --
Stock options exercised 188,117 18,000 404,000 -- -- -- --
Unrealized loss on securities
net of reclassification
adjustment -- -- -- (113,000) -- -- --
Warrants exercised 14,691 1,000 (1,000) -- -- -- --
Shares issued in connection
with public offering 2,645,000 266,000 42,168,000 -- -- -- --
Net loss -- -- -- -- (3,941,000) -- --
--------- ----------- ------------ ----------- ------------ ------ ---------
Balance July 31, 2000 7,349,176 735,000 66,740,000 (113,000) (8,687,000) 82,500 (184,000)
Amortization of deferred
compensation -- -- -- -- -- -- --
Unrealized loss on securities
net of reclassification
adjustment -- -- -- 113,000 -- -- --
Stock options exercised 97,146 10,000 265,000 -- -- -- --
Employee stock purchase plan
shares purchased 14,112 1,000 157,000 -- -- -- --
Warrants exercised 50,671 5,000 328,000 -- -- -- --
Net income -- -- -- -- 6,714,000 -- --
--------- ----------- ------------ ----------- ------------ ------ ---------
Balance July 31, 2001 7,511,105 $ 751,000 $ 67,490,000 $ -- $ (1,973,000) 82,500 $(184,000)
========= =========== ============ =========== ============ ====== =========
Deferred Stockholders' Comprehensive
Compensation Equity Income
------------ ------ ------
Balance July 31, 1998 $ (168,000) $ 12,093,000 $ 1,104,000
Amortization of deferred
compensation 248,000 248,000 --
Stock issued in acquisition
of Mobile Datacom -- 528,000 --
Restricted shares issued
pursuant to employment
stock award agreement (1,041,000) 15,000 --
Stock options exercised -- 208,000 --
Net income -- 5,265,000 5,265,000
------------ ------------ -----------
Balance July 31, 1999 (961,000) 18,357,000 5,265,000
===========
Amortization of deferred
compensation 252,000 252,000 --
Stock issued in acquisition
of Hill Engineering -- 371,000 --
Stock options exercised -- 422,000 --
Unrealized loss on securities
net of reclassification
adjustment -- (113,000) (113,000)
Warrants exercised -- -- --
Shares issued in connection
with public offering -- 42,434,000 --
Net loss -- (3,941,000) (3,941,000)
------------ ------------ -----------
Balance July 31, 2000 (709,000) 57,782,000 (4,054,000)
===========
Amortization of deferred
compensation 190,000 190,000 --
Unrealized loss on securities
net of reclassification
adjustment -- 113,000 113,000
Stock options exercised -- 275,000 --
Employee stock purchase plan
shares purchased -- 158,000 --
Warrants exercised -- 333,000 --
Net income -- 6,714,000 6,714,000
------------ ------------ -----------
Balance July 31, 2001 $ (519,000) $ 65,565,000 $ 6,827,000
============ ============ ===========
See accompanying notes to consolidated financial statements.
F-5
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, 2001, 2000, and 1999
2001 2000 1999
------------ ---------- ---------
Cash flows from operating activities:
Net income (loss) $ 6,714,000 (3,941,000) 5,265,000
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Loss from discontinued operations -- 137,000 1,216,000
Loss on sale of marketable investment securities 990,000 88,000 --
Depreciation and amortization 6,575,000 2,149,000 1,510,000
Write-off of in-process research and development -- 10,218,000 --
Increase (decrease) in bad debt allowance 39,000 -- (25,000)
Provision for inventory reserves 264,000 244,000 341,000
Deferred income tax expense (benefit) 580,000 (1,298,000) (4,575,000)
Changes in assets and liabilities, net of effects of acquisitions:
Restricted cash securing letter of credit obligations -- -- 22,000
Accounts receivable (3,059,000) (2,111,000) 1,006,000
Inventories (8,132,000) (4,580,000) (1,724,000)
Prepaid expenses and other current assets (568,000) (412,000) 138,000
Other assets (335,000) (293,000) 9,000
Accounts payable (246,000) 3,048,000 372,000
Accrued expenses and other current liabilities 227,000 3,059,000 2,181,000
Income tax payable 1,859,000 1,449,000 195,000
Other liabilities (108,000) 367,000 --
------------ ---------- ---------
Net cash provided by continuing operations 4,800,000 8,124,000 5,931,000
Net cash used by discontinued operations -- (151,000) (988,000)
------------ ---------- ---------
Net cash provided by operating activities 4,800,000 7,973,000 4,943,000
------------ ---------- ---------
Cash flows from investing activities:
Purchases of marketable investment securities (1,330,000) (37,015,000) --
Proceeds from sale of marketable securities 19,221,000 18,000,000 --
Purchases of property, plant and equipment (2,776,000) (1,185,000) (1,000,000)
Purchase of technology license (563,000) -- --
Payment for business acquisitions, net of cash received (3,682,000) (63,138,000) (173,000)
------------ ---------- ---------
Net cash provided by (used in) investing activities 10,870,000 (83,338,000) (1,173,000)
------------ ---------- ---------
Cash flows from financing activities:
Borrowings under line of credit facility -- 1,000,000 850,000
Repayments of borrowings under line of credit facility -- (1,000,000) (850,000)
Borrowings under loan agreement 10,000,000 40,000,000 --
Repayment of borrowings under loan agreement (2,100,000) -- --
Principal payments on capital lease obligations (718,000) (800,000) (821,000)
Proceeds from issuance of common stock, net 158,000 42,434,000 --
Proceeds from exercises of stock options and warrants 608,000 422,000 208,000
Restricted stock issuances -- -- 15,000
------------ ---------- ---------
Net cash provided by (used in) financing activities 7,948,000 82,056,000 (598,000)
------------ ---------- ---------
(continued)
F-6
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
2001 2000 1999
----------- --------- ---------
Net increase in cash and cash equivalents $23,618,000 6,691,000 3,172,000
Cash and cash equivalents at beginning of period 12,587,000 5,896,000 2,724,000
----------- --------- ---------
Cash and cash equivalents at end of period $36,205,000 12,587,000 5,896,000
=========== ========== =========
Supplemental cash flow disclosure
---------------------------------
Cash paid during the period for:
Interest $ 3,898,000 134,000 204,000
=========== ========== =========
Income taxes $ 1,425,000 500,000 169,000
=========== ========== =========
Non cash investing and financing activities:
Acquisition of property, equipment and technology license
through capital leases $ 2,456,000 567,000 136,000
=========== ========== =========
Capital stock issued in connection with business acquisition -- 371,000 --
=========== ========== =========
See accompanying notes to consolidated financial statements.
F-7
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 31, 2001 and 2000
(1) Summary of Significant Accounting and Reporting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Comtech Telecommunications Corp. and its subsidiaries (the
Company), all of which are wholly owned. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) Nature of Business
We design, develop, produce and market sophisticated products and
systems that are used by telecommunications and defense systems and
service providers in a broad range of applications.
The Company's business is highly competitive and characterized by rapid
technological change. In addition, the number of potential customers
for the Company's products is limited. The Company's growth and
financial position depends, among other things, on its ability to
keep pace with such changes and developments and to respond to the
sophisticated requirements of an increasing variety of electronic
equipment users. Many of the Company's competitors are substantially
larger, have significantly greater financial, marketing and
operating resources and broader product lines than does the Company.
A significant technological breakthrough by others, including
smaller competitors or new companies, could have a material adverse
effect on the Company's business. In addition, certain of the
Company's customers have technological capabilities in the Company's
product areas and could choose to replace the Company's products
with their own.
International sales expose the Company to certain risks, including
barriers to trade, fluctuations in foreign currency exchange rates
(which may make the Company's products less price competitive),
political and economic instability, availability of suitable export
financing, export license requirements, tariff regulations, and
other United States and foreign regulations that may apply to the
export of the Company's products, as well as the generally greater
difficulties of doing business abroad. The Company attempts to
reduce the risk of doing business in foreign countries by seeking
contracts denominated in U.S. dollars, advance payments and
irrevocable letters of credit in its favor.
(c) Revenue Recognition
Revenues on long-term, fixed price contracts are generally recorded based
on the relationship of total costs incurred to date to total
projected final costs or, alternatively, as deliveries are made.
Revenues on other contract orders are recognized under the units of
delivery method. Under this method, revenues are recorded as units
are delivered with the related cost of sales recognized on each
shipment based upon a percentage of estimated final contract costs.
Contract costs include material, direct labor, manufacturing
overhead and other direct costs. Retainages and estimated earnings
in excess of amounts billed on certain multi-year programs are
reported as unbilled receivables.
Revenue not associated with long-term contracts is recognized when the
earnings process is complete, generally upon shipment or customer
acceptance.
Provision for anticipated losses on uncompleted contracts is made in the
period in which such losses are determined.
(Continued)
F-8
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(d) Cash and Cash Equivalents
Cash equivalents consist of highly liquid money market funds with a
maturity at acquisition of three months or less. Cash equivalents at
July 31, 2001 and 2000 amounted to $27,412,000 and $4,779,000,
respectively. These investments are carried at cost plus accrued
interest, which approximates market.
(e) Statement of Cash Flows
The Company acquired equipment and a technology license financed by
capital leases in the amounts of $2,456,000, $567,000 and $136,000
in 2001, 2000 and 1999, respectively.
(f) Marketable Investment Securities
Marketable investment securities at July 31, 2000 consisted of a mutual
fund investment classified as available-for-sale and recorded at
fair value. Such investment securities were sold in fiscal 2001.
Unrealized holding gains and losses, net of the related tax effect
on these available-for-sale securities, are excluded from earnings
and are reported as a component of accumulated other comprehensive
income until realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific
identification basis.
(g) Inventories
Work-in-process inventory reflects all accumulated production costs, which
are comprised of direct production costs and overhead, reduced by
amounts attributable to units delivered. These inventories are
reduced to their estimated net realizable value by a charge to cost
of sales in the period such excess costs are determined.
Raw materials and components and work-in-process inventory are stated at
the lower of cost or market, computed on the first-in, first-out
(FIFO) method.
(h) Long-Lived Assets
The Company's plant and equipment, which are recorded at cost, are
depreciated or amortized over their estimated useful lives (building
and improvements - 40 years, equipment - three to eight years) under
the straight-line method. Capitalized values of properties under
leases are amortized over the life of the lease or the estimated
life of the asset, whichever is less. Intangible assets, consisting
of goodwill and other intangible assets resulting from acquisitions,
are being amortized over their respective lives. See note 15 for
information regarding the impact of recent accounting pronouncements
on the amortization of intangibles in future periods. The Company
reviews its long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not
be recoverable. If the sum of the expected cash flows undiscounted
and without interest, is less than the carrying amount of the asset,
an impairment loss is recognized as the amount by which the carrying
amount of the asset exceeds its fair value.
(i) Other Assets
Included in other assets at July 31, 2001 and 2000 is approximately
$350,000, less accumulated amortization, which relates to an
intellectual property rights agreement being amortized over the
eight-year term of the agreement. At July 31, 2001 and 2000,
accumulated amortization related to this purchased technology was
approximately $321,000 and $277,000 respectively.
F-9
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(j) Research and Development Costs
The Company charges research and development costs to operations as
incurred, except in those cases in which such costs are reimbursable
under customer-funded contracts. In fiscal 2001, 2000 and 1999, the
Company was reimbursed by customers for such activities in the
amount of $1,656,000, $4,272,000 and $1,779,000 respectively.
(k) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(l) Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share". Basic EPS is computed based on the weighted
average number of shares outstanding. Diluted EPS reflects the
dilution from potential common stock issuable pursuant to the
exercise of stock options and warrants, if dilutive, outstanding
during each period. All share and per share amounts have been
restated to reflect a three-for-two stock split effective July 30,
1999 (Note 10(f)).
(m) Financial Instruments
Management of the Company believes that the book value of its monetary
assets and liabilities approximates fair value as a result of the
short-term nature of such assets and liabilities. Management further
believes that the fair market value of its long-term debt and
capital lease obligations does not differ materially from its
carrying value.
(n) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reported period. Actual results may differ from those estimates.
(o) Reclassifications
Certain reclassifications have been made to the fiscal 2000 consolidated
financial statements to conform to the 2001 presentation.
(p) Accounting for Stock-Based Compensation
The Company records compensation expense for employee stock options only
if the current market price of the underlying stock exceeds the
exercise price on the date of the grant. The Company has elected not
to implement the fair value based accounting method for employee
stock options of SFAS No. 123, "Accounting for Stock-Based
Compensation", but has elected to disclose the pro forma net income
per share for employee stock option grants made beginning in fiscal
1996 as if such method had been used to account for stock-based
compensation cost as described in SFAS No. 123.
F-10
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(q) Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
which requires companies to report all changes in equity during a
period, except those resulting from investment by owners and
distribution to owners, for the period in which they are recognized.
Comprehensive income is the total of net income and all other
non-owner changes in equity (or other comprehensive income) such as
unrealized gains/losses on securities classified as
available-for-sale, foreign currency translation adjustments and
minimum pension liability adjustments.
(2) Acquisitions
In the first quarter of fiscal 1999, the Company formed two
subsidiaries, Comtech Mobile Datacom Corp. ("CMDC") and Comtech
Wireless, Inc. ("CWI") to acquire the assets and assume certain
liabilities of two businesses. The purchase price of the business
acquired by CMDC amounted to $628,000 consisting of cash of
$100,000, 150,000 shares of restricted common stock, valued at
$528,000, and warrants to purchase 150,000 shares of common stock at
an exercise price of $6.57 per share. The purchase price of the
business acquired by CWI amounted to $350,000 consisting of $100,000
of cash and a non-recourse note payable of $250,000. The assets
acquired were inventories and equipment. Both acquisitions were
accounted for as purchases whereby the assets and liabilities of the
businesses acquired were consolidated with those of the Company from
their respective acquisition dates. The excess of the purchase price
over the fair value of the net assets of the business acquired by
CMDC approximated $1,701,000 and is being amortized over a 20-year
period. This amount, net of amortization, is included in goodwill
and other intangibles with indefinite lives in the accompanying
consolidated balance sheets. Effective July 31, 1999, the operations
of the business acquired by CWI were discontinued (see Note 13). The
pro forma effect of the acquisition of CMDC was not material to the
results of operations for the year ended July 31, 1999.
In January 2000, the Company acquired certain assets and assumed
certain liabilities of Hill Engineering Inc. ("Hill") in exchange
for 50,000 shares of the Company's common stock. Such shares were
issued and placed in escrow and will be released to the sellers as
follows: (i) 30,000 shares on January 21, 2001 assuming the
resolution of certain pending claims; (ii) 10,000 shares on January
31, 2001 assuming Hill meets certain profit goals; and (iii) 10,000
shares on January 31, 2002 also assuming Hill meets certain profit
goals. To the extent that Hill does not meet cumulative profit goals
by January 31, 2005, the 20,000 escrow shares will be returned to
the Company. The acquisition has been accounted for as a purchase.
The purchase price amounted to approximately $371,000, which
principally represents the fair value of the initial 30,000 shares
of common stock to be issued to Hill. The remaining 20,000 shares
will be recorded at fair value on the date when the profit goals are
met. This business operates in the RF microwave amplifiers segment.
The accompanying consolidated financial statements reflect this
acquisition at the fair value of the assets acquired ($652,000) and
liabilities assumed ($871,000) and include the operations of Hill
from the date of acquisition through July 31, 2000. The excess of
the purchase price over the net assets acquired of approximately
$606,000 is included in goodwill and other intangibles with
indefinite lives in the accompanying consolidated balance sheet and
is being amortized over a 15 year period. The operations of Hill are
not material to the operations of the Company. Pro forma results of
operations were not provided as their effect on the consolidated
operations was not material.
In July 2000, the Company acquired the business of EF Data, the
satellite communications division of Adaptive Broadband Corporation,
at an adjusted cost of $54,158,000. The preliminary cash purchase
price of $61,500,000 was partially financed with $40 million
supplied through institutional secured borrowings. Direct
acquisition costs amounted to $1,696,000. Based upon the acquisition
agreement, an adjustment to the purchase price in the amount of
$9,038,000 was due the Company, which is included in the
consolidated balance sheet in other receivables as of July 31, 2000
(this amount was received by the Company in September 2000). The
acquisition was accounted for under the purchase method of
accounting. The cost of the acquisition has been allocated to the
assets and the liabilities assumed based on their estimated fair
values at the date of the acquisition. The purchase price allocation
reflects $930,000 of adjustments for pre-acquisition contingencies
recorded in fiscal 2001. The excess of the cost over the fair value
of the net assets acquired amounted to approximately $26,818,000, of
which $10,218,000 was allocated to in-process research and
development and was expensed
F-11
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
as of the acquisition date, $7,508,000 was recorded as purchased
technology which is being amortized over seven years, $3,577,000 was
recorded as other purchased intangibles which are being amortized over
five to seven years and $5,515,000 has been recorded as goodwill, which is
being amortized over ten years. The in-process research and development
charge is included in the accompanying consolidated statement of
operations for the year ended July 31, 2000. The acquisition cost was
allocated as follows (in thousands):
Historical book value of net assets acquired $ 27,340
Adjustments to record assets and liabilities at fair value:
Fair value of in-process research and development costs 10,218
Fair value of existing technology 7,508
Fair value of assembled workforce 2,835
Fair value of customer base 742
Excess of the purchase price over the fair value of net assets 5,515
--------
$ 54,158
========
An independent third-party appraiser was used to assess and value the
purchased in-process research and development, existing technology,
assembled workforce and customer base from the acquisition. The
valuation of existing technology and in-process research and
development was determined for products under development, based
upon the estimated future revenues to be earned upon
commercialization of the products. The percentage of the cash flows
allocated to the purchased in-process research and development was
derived from the estimated percentage complete for each of the
projects. These cash flows were discounted back to their net present
value. The resulting projected net cash flows from such projects
reflects management's estimates of revenues and operating profits
related to such projects. The workforce and customer base valuation
was based upon replacement cost.
The operating results of EF Data have been included in the consolidated
statements of operations from the acquisition date (July 10, 2000).
The Company's unaudited pro forma results for fiscal years 1999 and
2000 assuming the merger occurred on August 1, 1998 and August 1,
1999 are as follows:
(in thousands, except
per share amounts)
1999 2000
---- ----
Net revenues $ 120,258 153,479
Net income (loss) (8,941) 187
Basic income (loss) per share (2.16) 0.03
Diluted income (loss) per share (2.16) 0.03
Weighted average shares 4,143 5,663
Weighted average shares assuming dilution 4,143 6,280
These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of
operations that actually would have resulted had the merger been in
effect August 1, 1998 and August 1, 1999, or the future results of
operations.
In April 2001, we acquired certain assets and product lines of MPD
Technologies, Inc. for $12.7 million, including transaction costs of
$.8 million. The acquisition was accounted for under the purchase
method of accounting. Accordingly, we have recorded the assets
purchased and the liabilities assumed based upon the estimated fair
values at the date of acquisition. The excess of the purchase price
over the fair values of the net assets acquired was approximately
$9.7 million of which $1.8 million has been allocated to customer
base which is being amortized over eight years, $1.8 million has
been allocated to existing technology which is being amortized over
six years and $6.1 million has been allocated to goodwill which is
being amortized over 20 years. The purchase price of $12.7 million
was financed through $10 million
F-12
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
of institutional secured borrowings and the balance from internal company
funds. The acquisition cost was allocated as follows (in thousands):
Historical book value of net assets acquired $ 2,927
Adjustments to record assets and liabilities at fair value
Fair value of existing technology 1,800
Fair value of customer base 1,800
Excess of the purchase price over the fair value of
net assets 6,124
-------
$12,651
=======
An independent third-party appraiser was used to assess and value the
existing technology and customer base from the acquisition. The
valuation of existing technology was determined for products
acquired, based upon the estimated future revenues to be earned from
the products. The customer base valuation was based upon replacement
cost.
The operating results of MPD Technologies have been included in the
consolidated statements of operations from the acquisition date
(April 30, 2001) through July 31, 2001. The Company's unaudited pro
forma results for fiscal years 2000 and 2001 assuming the merger
occurred on August 1, 1999 and August 1, 2000 are as follows:
(in thousands, except
per share amounts)
2000 2001
---- ----
Net revenues $ 88,848 153,485
Net income (loss) (6,117) 7,104
Basic income (loss) per share (1.08) 0.97
Diluted income (loss) per share (1.08) 0.90
Weighted average shares 5,663 7,348
Weighted average shares assuming dilution 5,663 7,910
These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of
operations that actually would have resulted had the merger been in
effect August 1, 1999 and August 1, 2000, or the future results of
operations.
See note 15 for information regarding the impact of recent accounting
pronouncements on the amortization of intangibles in future periods.
(3) Accounts Receivable
Accounts receivable consist of the following at July 31, 2001 and 2000:
2001 2000
----------- ----------
Accounts receivable from commercial customers $18,336,000 19,841,000
Unbilled receivables (including retainages)
on contracts-in-progress 5,939,000 2,602,000
Amounts receivable from the United States
government and its agencies 3,944,000 2,567,000
----------- ----------
28,219,000 25,010,000
Less allowance for doubtful accounts 845,000 806,000
----------- ----------
Accounts receivable, net $27,374,000 24,204,000
=========== ==========
In the opinion of management, substantially all of the unbilled
balances will be billed and collected during fiscal 2002.
F-13
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Inventories
Inventories consist of the following at July 31, 2001 and 2000:
2001 2000
----------- ----------
Raw materials and components $18,718,000 14,814,000
Work-in-process and finished goods 20,294,000 14,265,000
----------- ----------
39,012,000 29,079,000
Less:
Progress payments -- 380,000
Reserve for anticipated losses on contracts
and inventory reserves 2,280,000 2,529,000
----------- ----------
Inventories, net $36,732,000 26,170,000
=========== ==========
(5) Property, Plant and Equipment
Property, plant and equipment consists of the following at July 31, 2001
and 2000:
2001 2000
----------- ----------
Equipment $22,681,000 18,958,000
Leasehold improvements 1,964,000 1,674,000
Facilities financed by capital lease 2,450,000 3,365,000
Equipment financed by capital lease 2,146,000 1,569,000
----------- ----------
29,241,000 25,566,000
Less accumulated depreciation and amortization 17,463,000 14,828,000
----------- ----------
$11,778,000 10,738,000
=========== ==========
Depreciation and amortization expense on property, plant and equipment
amounted to approximately $3,711,000, $1,562,000, and $1,152,000,
for the years ended July 31, 2001, 2000, and 1999 respectively.
(6) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at
July 31, 2001 and 2000:
2001 2000
----------- ---------
Customer advances and deposits $ 2,089,000 1,346,000
Accrued wages and benefits 3,663,000 3,970,000
Accrued commissions 1,021,000 3,992,000
Accrued warranty 4,336,000 2,314,000
Other 2,506,000 2,035,000
----------- ----------
$13,615,000 13,657,000
=========== ==========
(7) Capital Lease Obligations
Capital lease obligations consist of the following at July 31, 2001 and
2000:
2001 2000
---------- ---------
Obligations under capital leases $3,254,000 1,516,000
Less current installments 1,097,000 608,000
---------- ---------
$2,157,000 908,000
========== =========
F-14
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The obligations under capital leases relate to the Melville, New York
facilities, as well as certain equipment, the net carrying value of
which was $3,789,000, and $2,106,000 at July 31,2001 and 2000,
respectively.
Future minimum lease payments under capital leases as of July 31, 2001
are:
Years ending July 31,
2002 $ 1,322,000
2003 1,133,000
2004 916,000
2005 207,000
2006 112,000
Thereafter 6,000
-----------
Total minimum lease payments 3,696,000
Less amounts representing
interest (at rates varying
from 6.55% to 9.0%) 442,000
-----------
3,254,000
Less current installments 1,097,000
-----------
Obligations under capital leases,
net of current installments $ 2,157,000
===========
In December 1991, the Company and a partnership controlled by the
Company's Chairman, Chief Executive Officer and President entered
into an agreement in which the Company leases from the partnership
its corporate headquarters and Melville production facility. The
lease is for a ten-year period and provides for annual rentals of
approximately $468,000 for fiscal 2001, subject to annual
adjustments equal to the lesser of 5% or the change in the Consumer
Price Index. For financial reporting purposes, the Company has
capitalized this lease at inception in the amount of $2,450,000, net
of deferred interest of $1,345,000. The outstanding balance at July
31, 2001 and 2000 approximated $155,000 and $501,000, respectively.
The Company exercised its option to extend the lease for an
additional ten-year period during fiscal 2001.
(8) Long-term Debt
In July of 2000, in connection with the acquisition of EF Data, the
Company entered into a secured loan agreement with The Teachers'
Retirement System of Alabama, The Employees' Retirement System of
Alabama, the Alabama Heritage Trust Fund, PEIRAF-Deferred
Compensation Plan, and State Employees' Health Insurance Fund which
provided a term loan in the amount of $40,000,000, expiring on June
30, 2005. Costs incurred to obtain the financing amounted to
$289,000 and are included in other assets net of amortization in the
accompanying consolidated balance sheet. Borrowings under the term
loan are evidenced by promissory notes and are secured by all of the
Company's assets. The principal amount of the loan outstanding bears
interest at the per annum rate of 9.25%. The loan agreement contains
restrictive covenants, which, among other things, requires the
Company to maintain certain financial ratios. At July 31, 2001, the
Company was in compliance with such covenants. In August 2001, the
Company made a partial principal prepayment of $19.2 million against
the loans.
In April 2001, in connection with the acquisition of MPD Technologies,
the Company borrowed an additional $10,000,000 from The Teachers'
Retirement System of Alabama, The Employees' Retirement Systems of
Alabama and PEIRAF-Deferred Compensation Plan. Costs incurred to
obtain the financing amounted to $164,000 and are included in other
F-15
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
assets net of amortization in the accompanying consolidated balance
sheet. The loan which is evidenced by promissory notes and is
secured by all of the Company's assets, bears interest on the
principal amount outstanding at the per annum rate of 8.50%. The
loan requires interest only payments through June 2005 at which time
the entire principal is due.
Future minimum debt payments as of July 31, 2001 are:
Years ended July 31,
2002 $ 5,900,000
2003 9,550,000
2004 13,600,000
2005 18,850,000
--------------
Total minimum debt payments 47,900,000
Less current installments 5,900,000
--------------
Long-term debt, less current installments
$ 42,000,000
==============
(9) Income Taxes
The provision (benefit) for income taxes on continuing operations
included in the accompanying consolidated statements of operations
consists of the following:
Year ended July 31,
-------------------
2001 2000 1999
----------- --------- ----------
Federal - current $ 2,834,000 1,004,000 60,000
Federal - deferred 503,000 (1,204,000) (3,949,000)
State and local - current 474,000 446,000 135,000
State and local-deferred 77,000 (161,000) --
----------- --------- ----------
$ 3,888,000 85,000 (3,754,000)
=========== ========= ==========
The provision (benefit) for income taxes on income from continuing
operations was $3,888,000, $85,000, and ($3,754,000) for fiscal
2001, 2000 and 1999, respectively, and differed from the amounts
computed by applying the U.S. Federal income tax rate of 34% as a
result of the following:
2001 2000 1999
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ------
Computed "expected" tax expense $ 3,605,000 34.0% (1,338,000) (34.0)% 927,000 34.0%
Increase (reduction) in income taxes
Resulting from:
Change in the beginning of the year
valuation allowance for deferred (300,000) (2.8) 1,623,000 41.2 (4,544,000) (166.6)
tax assets
Utilization of tax benefit
carryforward -- -- -- -- (223,000) (8.2)
State and local income tax, net
of federal benefit 363,000 3.4 188,000 4.8 86,000 3.2
Other 220,000 2.1 (388,000) (9.8) -- --
----------- ---- ---------- ----- ------- ------
$ 3,888,000 36.7% 85,000 2.2% (3,754,000) (137.6)%
=========== ==== ========== ===== ========== =======
F-16
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at July 31, 2001
and 2000 are presented below.
2001 2000
----------- -----------
Deferred tax assets:
Allowance for doubtful accounts receivable $ 98,000 94,000
Intangibles 4,796,000 4,351,000
Inventory and warranty reserves 1,303,000 1,136,000
Plant and equipment, principally due to capitalized
leases and differences in depreciation 481,000 628,000
Compensation and commissions, principally due to accrual
for financial reporting purposes 423,000 1,895,000
Deferred compensation 116,000 236,000
Other 243,000 --
----------- -----------
Total gross deferred tax assets 7,460,000 8,340,000
Less valuation allowance (2,100,000) (2,400,000)
----------- -----------
Net deferred tax assets $ 5,360,000 $ 5,940,000
=========== ===========
The Company provides for income taxes under the provisions of SFAS No.
109, "Accounting for Income Taxes". SFAS 109 requires an asset and
liability based approach in accounting for income taxes. In
assessing the realizability of deferred tax assets and liabilities,
management considers whether it is more likely than not that some
portion or all of them will not be realized. During fiscal 1999, the
Company concluded that a full valuation allowance was no longer
necessary given its estimates of future earnings. Accordingly, the
Company reduced the valuation allowance by $4,544,000 during fiscal
1999. As of July 31, 2000 and 2001, the Company's gross deferred tax
asset has been offset by a valuation allowance related to the
extended write off period of in-process research and development
from the acquisition of EF Data. The Company must generate
approximately $19,500,000 of taxable income to fully utilize its
deferred tax assets. Management believes it is more likely than not
that the results of future operations will generate sufficient
taxable income to realize the net deferred tax assets.
(10) Stockholders' Equity
(a) Common Stock Offering
In February and March 2000, the Company sold an aggregate of 2,645,000
shares of its common stock in a public offering resulting in net
proceeds to the Company of approximately $42.4 million.
(b) Stock Option, Stock Purchase and Warrant Agreements
The Company has stock option and stock purchase plans and warrant
agreements as follows:
1993 Incentive Stock Option Plan - The 1993 Incentive Stock Option Plan,
as amended, provides for the granting to key employees and officers
of incentive and non-qualified stock options to purchase up to
1,042,500 shares of the Company's common stock at prices generally
not less than the fair market value at the date of grant with the
exception of anyone who, prior to the grant, owns more than 10% of
the voting power, the exercise price cannot be less than 110% of the
fair market value. In addition, it provided formula grants to
non-employee members of the
F-17
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Board of Directors. The term of the options may be no more than ten years.
However, for incentive stock options granted to any employee who,
prior to the granting of the option, owns stock representing more
than 10% of the voting power, the option term may be no more than
five years. As of July 31, 2001, the Company had granted incentive
stock options representing the right to purchase an aggregate of
1,086,515 shares at prices ranging between $1.50 - $11.94 per share,
of which 115,268 options were canceled and 627,328 are outstanding
at July 31, 2001. To date, 343,919 shares have been exercised.
Outstanding awards have been transferred to the 2000 Stock Incentive
Plan. The terms applicable to these awards prior to the transfer
continue to apply. The plan was terminated by the Board of Directors
in December 1999 due to the approval by the shareholders of the 2000
Stock Incentive Plan.
2000 Stock Incentive Plan- The 2000 Stock Incentive Plan, as amended,
provides for the granting to all employees and consultants of the
Company (including prospective employees and consultants)
non-qualified stock options, stock appreciation rights, restricted
stock, performance shares, performance units and other stock-based
awards. In addition, employees of the Company are eligible to be
granted incentive stock options. Non-employee directors of the
Company are eligible to receive non-discretionary grants of
nonqualified stock options subject to certain limitations. The
aggregate number of shares of common stock which may be issued may
not exceed 850,000 plus the shares that were transferred to the Plan
relating to outstanding awards that were previously granted under
the 1982 Incentive Stock Option Plan and the 1993 Incentive Stock
Option Plan. The Stock Option Committee of the Board of Directors,
consistent with the terms of the Plan, will determine the types of
awards to be granted, the terms and conditions of each award and the
number of shares of common stock to be covered by each award. Grants
of incentive and non-qualified stock options may not have a term
exceeding ten years or no more than five years in the case of an
incentive stock option granted to a stockholder who owns stock
representing more than 10% of the voting power. As of July 31, 2001,
the Company had granted incentive stock options representing the
right to purchase an aggregate of 486,700 shares at prices ranging
between $11.25 - $17.84 of which 16,000 options were canceled and
470,700 are outstanding at July 31, 2001. There have been no
exercises. All options granted have been incentive stock options at
prices equal to the fair market value of the stock on the date of
grant.
Warrants Issued Pursuant to Acquisition of CMDC - As part of the asset
purchase agreement for the acquisition of CMDC (see Note 2), the
Company issued warrants to the owners and creditors to purchase
150,000 shares of the Company's common stock at an exercise price of
$6.57. The warrants, which contain transferability restrictions, are
exercisable for a period of five years commencing September 24,
1998, and shares purchased through the exercise of these warrants
contain voting restrictions. Through fiscal 2001, warrants to
purchase 80,671 shares were exercised.
Employee Stock Purchase Plan - The Comtech Telecommunications Corp. 2001
Employee Stock Purchase Plan ("The Purchase Plan") was approved by
the shareholders on December 12, 2000. Pursuant to the Purchase
Plan, 300,000 shares of the Company's common stock will be reserved
for issuance. The Purchase Plan is intended to provide eligible
employees of the Company the opportunity to acquire common stock in
the Company at 85% of fair market value at date of issuance through
participation in the payroll-deduction based employee stock purchase
plan. During the year end July 31, 2001, the Company issued 14,112
shares of its common stock to participating employees in connection
with the Purchase Plan.
F-18
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
c) Option Activity
The following table sets forth summarized information concerning the
Company's stock options:
Weighted
Number average
of exercise
shares price
--------- ---------
Outstanding at July 31, 1998 858,195 $ 2.65
Granted 140,250 6.08
Expired/canceled (5,688) 5.90
Exercised (88,362) 2.43
--------- ---------
Outstanding at July 31, 1999 904,395 3.40
Granted 109,500 12.02
Expired/canceled (40,268) 5.69
Exercised (189,949) 2.71
--------- ---------
Outstanding at July 31, 2000 783,678 4.65
Granted 434,700 12.62
Expired/canceled (21,400) 9.05
Exercised (98,950) 3.13
--------- ---------
Outstanding at July 31, 2001 1,098,028 $ 7.86
========= =========
Options exercisable
July 31, 2001 354,948 $ 4.07
Options available for
grant at July 31, 2001 442,910
The options outstanding as of July 31, 2001 are summarized in ranges as
follows:
Number of
Range of Weighted average Options Weighted average
exercise price Exercise price outstanding remaining life
-------------- ---------------- ----------- ----------------
$ 1.50-3.99 $ 2.96 466,578 6 years
4.00-7.50 6.44 117,750 7 years
7.51-12.00 11.22 292,700 9 years
12.01-17.84 14.50 221,000 9 years
(d) Stock-Based Compensation Plans
The Company accounts for its stock option plans under APB Opinion No.
25, under which no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent with
SFAS No. 123, the Company's net income (loss) and income (loss) per
share would have been reduced to the following pro forma amounts:
F-19
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
2001 2000 1999
---------- ----------- ---------
Net income (loss) As reported $6,714,000 (3,941,000) 5,265,000
Pro forma $5,818,000 (4,617,000) 4,836,000
Net income (loss)
per share As reported Basic $ 0.91 (0,69) 1.27
Diluted $ 0.85 (0.69) 1.15
Pro forma Basic $ 0.79 (0.82) 1.17
Diluted $ 0.74 (0.82) 1.06
The per share weighted-average fair value of stock options granted
during 2001, 2000 and 1999 was $9.07, $9.14 and $3.19, respectively,
on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions:
2001 - expected dividend yield of 0%, risk-free interest rate of 5.16%,
expected volatility of 72.94% and an expected option life of 10
years.
2000 - expected dividend yield of 0%, risk-free interest rate of 6.04%,
expected volatility of 82.74% and an expected option life of 10
years.
1999 - expected dividend yield of 0%, risk-free interest rate of 5.86%,
expected volatility of 69.5% and an expected option life of 10
years.
(e) Restricted Common Stock
In February 1994, a total of 180,000 (after effect of three-for-two
stock split - see Note 10 (f)) restricted shares of the Company's
common stock were granted by the Board of Directors to the principal
officers of one of the Company's operating units, Comtech
Communications Corp, ("CCC"), at a cost of $.10 per share. The award
relates to services to be provided over future years and, as a
result, the stock awards are subject to certain restrictions which
may be removed earlier upon CCC attaining certain business plan
milestones, as provided in the agreement, but no later than ten
years from the date of the award. The excess of market value over
cost of the shares awarded of $633,000 was recorded as deferred
compensation and is being amortized to expense over a ten-year
period subject to the aforementioned accelerated provisions, if
appropriate, as evaluated on an annual basis. The deferred
compensation was reflected as a reduction of stockholders' equity in
the accompanying consolidated balance sheet. In July 2000, the
Company combined the operations of CCC with Comtech EF Data Corp.
and the principal officers of CCC were made principal officers of
the combined companies. The remaining unamortized balance of
$136,000 of deferred compensation was expensed in fiscal 2000.
In October 1998, a total of 225,000 (after effect of three-for-two
stock split - see Note 10(f)) restricted shares of the Companys'
common stock were granted by the Board of Directors to the principal
officers and employees of the Companys' new subsidiary, Comtech
Mobile Datacom Corp. ("CMDC"), at a cost of $.10 per share. The
award relates to services to be provided over future years and, as a
result, the stock awards are subject to certain restrictions which
may be removed earlier upon CMDC attaining certain business plan
milestones, as provided in the agreement, but no later than ten
years from the date of the award. These awards also automatically
vest upon the employees' retirement or termination of employment by
the Company without cause. The excess of market value over cost of
the shares awarded of $1,041,000 was recorded as deferred
compensation and is being amortized to expense over a ten-year
period subject to the aforementioned accelerated provisions, if
appropriate, as evaluated on an annual basis. The deferred
compensation is reflected as a reduction of stockholders' equity in
the accompanying consolidated balance sheets.
F-20
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(f) Stock Split
On July 6, 1999, the Company's Board of Directors authorized a
three-for-two stock split effected in the form of a 50% stock
dividend payable July 30, 1999 to stockholders of record on July 16,
1999. All share and per share amounts in the accompanying
consolidated financial statements have been restated to reflect the
stock split.
(11) Segment and Principal Customer Information
Effective July 31, 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Reportable
operating segments are determined based on the Company's management
approach. The management approach, as defined by SFAS No. 131, is
based on the way that the chief operating decision-maker organizes
the segments within an enterprise for making operating decisions and
assessing performance. While the Company's results of operations are
primarily reviewed on a consolidated basis, the chief operating
decision-maker also manages the enterprise in three segments: (i)
Telecommunications Transmission, (ii) RF Microwave Amplifiers and
(iii) Mobile Data Communications Services. Telecommunications
Transmission products include modems, frequency converters,
satellite VSAT transceivers and antennas and over-the-horizon
microwave communications products and systems. RF Microwave
Amplifier products include high-power amplifier products that use
the microwave and radio frequency spectrums. Mobile Data
Communications Services include two-way messaging links between
mobile platforms or remote sites and user headquarters using
satellite, terrestrial microwave or Internet links. Unallocated
assets consist principally of cash, deferred tax assets and
intercompany receivables. Unallocated losses result from such
corporate expenses as legal, accounting and executive. Sales between
segments were negligible.
(in thousands)
Mobile Data
Telecommunications RF Microwave Communications Un-
Fiscal 2001 Transmission Amplifiers Services Allocated Total
----------- ------------ ---------- -------- --------- -----
Net sales $106,348 16,385 13,198 -- 135,931
Operating income (loss) 17,051 (470) (191) (3,235) 13,155
Interest income 211 8 4 2,080 2,303
Interest expense 3,728 287 -- -- 4,015
Depreciation and
amortization 4,995 1,159 229 192 6,575
Expenditure for
long-lived assets,
including intangibles 4,506 11,895 142 128 16,671
Total assets 64,116 25,067 16,596 41,209 146,988
Mobile Data
Telecommunications RF Microwave Communications Un-
Fiscal 2000 Transmission Amplifiers Services Allocated Total
----------- ------------ ---------- -------- --------- -----
Net sales $ 53,311 10,968 2,165 -- 66,444
Operating income (loss) 254 52 (2,350) (2,604) (4,648)
Interest income -- -- -- 1,511 1,511
Interest expense 282 99 -- -- 381
Depreciation and
amortization 974 763 159 253 2,149
Continued
F-21
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Mobile Data
Telecommunications RF Microwave Communications Un-
Fiscal 2000 Transmission Amplifiers Services Allocated Total
----------- ------------ ---------- -------- --------- -----
Expenditure for
long-lived assets,
including intangibles 27,166 1,356 286 5 28,813
Total assets 68,018 9,693 4,286 44,034 126,031
Mobile Data
Telecommunications RF Microwave Communications Un-
Fiscal 1999 Transmission Amplifiers Services Allocated Total
----------- ------------ ---------- -------- --------- -----
Net sales $23,045 14,523 318 -- 37,886
Operating income (loss) 2,296 2,503 (309) (1,663) 2,827
Interest income 10 -- -- 55 65
Interest expense 38 152 11 3 204
Depreciation
and amortization 461 714 87 248 1,510
Expenditure for
long-lived assets 791 326 1,734 3 2,854
Total assets 16,907 8,409 2,691 1,840 29,847
Sales to one customer in fiscal 2000 and 1999 represented 43.1% and 27.0%,
respectively, of total net sales. Such sales were made from the
telecommunications transmission business segment. No customer
represented more than 10% of sales in fiscal 2001. During fiscal
2001, 2000 and 1999, approximately 23.1%, 8.8% and 15.6%,
respectively, of the Company's net sales resulted from contracts
with the United States government and its agencies. Export sales
comprised 46.2%, 71.4% and 60.1% of net sales in fiscal 2001, 2000
and 1999, respectively. Export sales include sales to domestic
companies for inclusion in products, which will be sold to
international customers.
(12) Commitments and Contingencies
(a) Operating Leases
The Company is obligated under noncancellable operating lease
agreements. At July 31, 2001, the future minimum lease payments
under operating leases are as follows:
2002 $ 3,083,000
2003 3,276,000
2004 3,182,000
2005 2,884,000
2006 1,498,000
Thereafter 2,997,000
-----------
Total $16,920,000
===========
Lease expense charged to operations was $2,236,000, $474,000 and $301,000
in fiscal 2001, 2000 and 1999, respectively.
F-22
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(b) United States Government Contracts
Certain of the Company's contracts are subject to audit by applicable
governmental agencies. Until such audits are completed, the ultimate
profit on these contracts cannot be determined; however, it is
management's belief that the final contract settlements will not
have a material adverse effect on the Company's consolidated
financial position or results of operations.
(c) Litigation
Two former employees have commenced an action in the United States
District Court, District of New Jersey, against the Company and
others asserting, among other things, breach of certain restricted
stock agreements and seeking unspecified monetary damages, specific
performance of the restricted stock agreements, including the
issuance of an aggregate 225,000 shares of the Company's Common
Stock for a purchase price of $.10 per share, and other relief. The
Company believes it has meritorious defenses to all the claims
asserted and intends to vigorously defend the action. It has filed
an answer and has asserted certain counterclaims. There is a pending
motion of the plaintiffs to dismiss the counterclaims and to strike
certain of the affirmative defenses. The Company has opposed the
motion and cross-moved to dismiss the claims of one plaintiff.
The Company is subject to certain legal actions, which arise out of the
normal course of business. It is management's belief that the
outcome of these actions will not have a material adverse effect on
the Company's consolidated financial position or results of
operations.
(d) Employment Contract
Mr. Kornberg, the Company's Chairman of the Board of Directors, Chief
Executive Officer and President is employed pursuant to an
agreement, which was amended and restated in October 2001, which
provides, among other things, for his employment until 2003 at a
current base compensation of $385,000 per annum and incentive
compensation equal to 3.5% of the Company's pre-tax income plus such
additional amounts, if any, as the Board of Directors may from time
to time determine.
(13) Discontinued Operations
Based upon CWI's disappointing fiscal 1999 results of operations and its
uncertain future prospects, effective July 31, 1999, the Board of
Directors approved a plan to liquidate CWI by January 31, 2000.
Costs and expenses, and cash flows associated with CWI have been
excluded from the respective captions in the accompanying statements
of operations and statements of cash flows.
During fiscal 2000, the Company liquidated the operations of CWI and
recorded a loss of $137,000 net of applicable income taxes.
(14) Stockholder Rights Plan
On December 15, 1998, the Company's Board of Directors approved the
adoption of a stockholder rights plan in which one stock purchase
right ("Right") was distributed as a dividend on each outstanding
share of the Company's common stock to stockholders of record at the
close of business on January 4, 1999. Under the plan, the Rights
will be exercisable only if triggered by a person or group's
acquisition of 15% or more of the Company's common stock. If
triggered, each Right, other than Rights held by the acquiring
person or group, would entitle its holder to purchase a specified
number of the Company's common shares for 50% of their market value
at that time. Unless a 15% acquisition has occurred, the Rights may
be redeemed by the Company at any time prior to the termination date
of the plan.
F-23
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
This Right to purchase common stock at a discount will not be triggered
by a person's or group's acquisition of 15% or more of the common
stock pursuant to a tender or exchange offer which is for all
outstanding shares at a price and on terms that Comtech's Board of
Directors determines (prior to acquisition) to be adequate and in
the best interest of the Company an its stockholders. The Rights
will expire on December 15, 2008.
(15) Impact of Recent Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, Business Combinations, and Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets.
Statement 141 requires that the purchase method of accounting be
used for all business combinations. Statement 141 also specifies
criteria that intangible assets acquired in a purchase method
business combination must meet to be recognized and reported
separately from goodwill. Statement 142 will require that goodwill
and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 will
also require that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance
with Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of.
The Company adopted the provisions of Statement 141 effective July 1,
2001. The adoption of Statement 141 had no effect on the financial
position or results of operations of the Company. Statement 142 is
effective for the Company beginning August 1, 2001. At that time,
any goodwill and intangible assets determined to have an indefinite
useful life that were acquired in a purchase business combination
will not be amortized, but will be evaluated for impairment in
accordance with the provisions of Statement 142.
Statement 141 requires, upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were
acquired in a prior purchase business combination, and to make any
necessary reclassifications in order to conform with the new
criteria in Statement 141 for recognition apart from goodwill. Upon
adoption of Statement 142, the Company will be required to reassess
the useful lives and residual values of all intangible assets
acquired in purchase business combinations, and make any necessary
amortization period adjustments by the end of the first interim
period after adoption. In addition, to the extent an intangible
asset is identified as having an indefinite useful life, the Company
will be required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first
interim period. Any impairment loss will be measured as of the date
of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
As of August 1, 2001, the Company had unamortized goodwill and other
intangible assets with indefinite useful lives of $17.7 million.
Such assets will no longer be amortized under Statement 142. The
Company does not believe that the goodwill and other intangible
assets with indefinite useful lives were impaired as of August 1,
2001. Amortization expense relating to such assets in fiscal 2002
would be $1.7 million if Statement 142 was not adopted.
F-24
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(16) Unaudited Quarterly Financial Data
The following is a summary of unaudited quarterly operating results
(amount in thousands, except per share data):
Fiscal 2001 First Quarter Second Quarter Third Quarter Fourth Quarter Total
----------- ------------- -------------- ------------- -------------- --------
Net sales $39,846 33,111 32,322 30,652 135,931
Gross profit 13,108 12,656 12,343 10,497 48,604
Net income 2,007 1,872 1,527 1,308 6,714
Diluted income per share $ 0.25 0.24 0.19 0.16 0.85*
Fiscal 2000 First Quarter Second Quarter Third Quarter Fourth Quarter Total
----------- ------------- -------------- ------------- -------------- --------
Net sales $11,747 13,717 15,485 25,495 66,444
Gross profit 3,341 4,141 4,387 8,633 20,502
Income (loss) from
continuing operations 535 662 971 (5,972) (3,804)
Net income (loss) 535 662 971 (6,109) (3,941)
Diluted income (loss)
per share from
continuing operations $ 0.11 0.13 0.13 (0.82) (0.67)*
Diluted income (loss)
per share $ 0.11 0.13 0.13 (0.84) (0.69)*
* Income per share information for the full fiscal year may not equal
the total of the quarters within the year as a result of (i) a loss
in a quarter or the full year, and (ii) rounding.
F-25
SCHEDULE II
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended July 31, 2001, 2000 and 1999
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
-----------------------
(1) (2)
Charged to
Balance at Charged to other Transfers Balance at
beginning cost and accounts - (deductions) end of
Description of period expenses describe describe period
----------- --------- -------- -------- -------- ------
Allowance for doubtful accounts -
accounts receivable:
Year ended July 31,:
2001 $ 806,000 39,000(C) -- -- 845,000
2000 145,000 -- -- 661,000 (E) 806,000
1999 170,000 -- (25,000)(D) 145,000
Inventory reserves:
Year ended July 31,:
2001 $ 2,529,000 264,000(A) -- (513,000)(B) 2,280,000
2000 1,170,000 244,000(A) -- 1,115,000 (E) 2,529,000
1999 829,000 341,000(A) -- -- 1,170,000
(A) Increase in reserves for obsolete and slow moving inventory and losses on
contracts.
(B) Write-off of inventory.
(C) Increase in allowance for doubtful accounts.
(D) Write-off of uncollectible receivables.
(E) Acquired in acquisition of EF Data.
S-1