SECURITIES AND EXCHANGE COMMISSION
WASHINGTON , D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 1999
|_| 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
(Address of Principal Executive Offices)
11747
(Zip Code)
Registrant's telephone number, including area code (516) 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 22, 1999 was
approximately $52,208,352.
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 14, 1999 Part III
INDEX
PART I
ITEM 1. BUSINESS 1
Overview 1
Telecommunications Transmission Business
Segment Overview 2
RF Microwave Amplifier Business Segment Overview 3
Mobile Data Communications Services Business
Segment Overview 4
Sales, Marketing and Customer Support 5
Compliance with Federal, State and Local Environment
Protection Laws 5
Backlog 5
Manufacturing and Service 6
Patents and Licenses 6
Competition 7
Key Personnel/Employees 7
Disclosure Regarding Forward-Looking Statements 7
ITEM 2. PROPERTIES 8
ITEM 3. LEGAL PROCEEDINGS 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS 8
Dividends 9
Approximate Number of Equity Security Holders 9
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 9
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 11
Overview 12
Results of Operations
Comparison of Fiscal 1999 and 1998 12
Comparison of Fiscal 1998 and 1997 13
Liquidity and Capital Resources 14
Year 2000 Compliance 15
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF REGISTRANT 16
ITEM 11. EXECUTIVE COMPENSATION 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT 16
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULE AND REPORTS ON FORM 8-K 17
SIGNATURE 19
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE F-1
ii
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 components and
systems that are used by telecommunication and defense systems and
telecommunications service providers in a broad range of applications. 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 telecommunications customers by drawing upon
proprietary expertise in key microwave amplification and transmission
technologies developed over more than 32 years of operations.
A majority of our sales in fiscal 1999 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. Our
internally funded and customer funded research and development expenses
aggregated $3.8 million, $1.7 million and $1.5 million in fiscal 1999, 1998 and
1997, representing 10.0%, 5.6% and 6.0% of our net sales in those fiscal years.
We conduct our business through three decentralized but complementary
product and service segments: telecommunications transmission, RF microwave
amplifiers, and our development-stage mobile data communication services
business that we acquired in 1998.
Telecommunications transmission -- modems, frequency up converters
and down converters, solid state, high-power amplifiers, satellite very
small aperture (VSAT) transceivers and antennas for satellite ground
station applications and adaptive modems and microwave radios for
over-the-horizon microwave communications systems. Customers include,
among others, satellite systems integrators and communication service
providers and oil companies.
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 testing amplifiers used in the
cellular and wireless industries and amplifiers in jamming and
identification, friend or foe (IFF) defense systems. Customers include,
among others, communication service providers, cellular and PCS telephony
manufacturers and defense contractors.
Mobile data communications services -- Secure, real time two-way
messaging links between mobile platforms, such as land vehicles, rail and
aircraft, remotely placed fixed site sensors and user headquarters through
our Germantown, Maryland gateway satellite earth station. The network
employs leased satellite capacity and direct line or Internet links
between our gateway and user headquarters. Depending upon the end-user's
needs, our system can be configured to provide a wide range of non-voice
applications, ranging from simple location tracking to messaging, e-mail,
broadcasting of information, meter and other sensor reading, and monitor
and control of gauges and sensors.
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. We have not yet received
significant orders under this contract, which can be terminated by the
U.S. Army at any time for its convenience, and we cannot assure you that
we will receive any such orders.
Sales for use by international customers represented approximately
60.1%, 46.5%, and 57.3% of our net sales in fiscal years 1999, 1998 and
1997, respectively. We believe that the global expansion of
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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 will be sold to
international customers.
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.
Our three business segments -- telecommunications transmission, RF
microwave amplifiers and our development-stage mobile data communications
services business -- 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 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
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 can be routed
through a combination of technologies, each employed where most cost-effective.
Our products are used in satellite, over-the-horizon microwave, terrestrial
line-of-sight microwave and wireless.
Satellite communications systems have grown and diversified in
response to demand for efficient 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, high capacity and high quality point-to-point or
point-to-multipoint communication 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 service in remote areas or where communication
alternatives are unavailable, such as mobile, shipboard or defense
applications.
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. The net effect
is that the signal is reflected by a large number of scattering
particles in the troposphere which, in turn, directs a portion of
the transmitted signal energy well beyond line-of-sight. Such
systems offer a high level of reliability and security.
Wireless and line-of-sight microwave communications systems,
generally used for point-to-point communications, employ signals
with extremely short wave-lengths which travel only in line-of-sight
paths over relatively short distances, generally under 30 miles, can
be quickly and easily installed, require relatively low initial
capital investment and can be upgraded and expanded over time.
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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.
Fiber optic cable is best suited to high-volume, 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.
Copper cable, the traditional transmission medium most familiar to
consumers, is being replaced and supplemented by the other media,
particularly for high-volume and long distance transmissions where
it has substantial capacity, cost and reliability limitations.
Our Comtech Systems, Inc. subsidiary, located in St. Cloud, Florida,
designs, markets, manufactures and installs telecommunication products for
domestic and international applications. It also supplies telecommunication
systems by combining its products with equipment manufactured by our other
Comtech operating units and third parties.
Comtech Systems Inc.'s product line consists 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. Comtech Systems Inc.'s 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 benefits over the traditional analog
over-the-horizon microwave products offered by most of its competitors.
Our Comtech Communications Corp. subsidiary 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. Comtech Communications Corp. recently
introduced its own turbo codec modem product line. This forward error correction
solution offers significantly improved performance, power and bandwidth
performance over traditional systems.
Our Comtech Antenna Systems, Inc. subsidiary, 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 are a class of electronic apparatus that 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. Although the majority of amplifier applications
are satisfied by solid state transistor and integrated circuit technology,
vacuum tubes still play an important role in the very high-power microwave
applications. Because of their greater instantaneous bandwidths, greater
reliability and generally smaller size, however, solid state amplifiers are
constantly being sought as replacements for vacuum tube amplifiers for all
applications throughout the useable frequency spectrum.
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We are one of a small number of companies producing solid state,
high-power, broadband RF amplifier products that use the microwave and radio
frequency (RF) spectrums in a wide range of applications. Our products amplify
energy for applications including wireless, telecommunications, instrumentation,
and defense systems.
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 and airport 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 by simulating
operating environment conditions.
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, sound amplifiers, 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 solid state, 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.
Our Comtech PST Corp. subsidiary, located in Melville, New York, designs,
develops, manufactures and markets solid state, high-power large signal
amplifiers in the microwave and RF spectrums for communications, defense and
instrumentation applications where they are employed to amplify microwave or RF
energy for the emission of signal. Comtech PST Corp. sells its products to
domestic and foreign commercial users, governmental agencies and prime
contractors. We believe it is an innovative supplier of solid state, high-power
amplifiers and related power processing equipment, which also replace amplifiers
using vacuum tube systems.
Mobile Data Communications Services Business Segment
The demand for mobile data communications services and products has
increased dramatically over the past years for both government and commercial
applications. This demand is driven by digital technology advances coupled with
the desire to locate, track, manage, monitor and communicate with mobile and
fixed assets. The transmission of these services 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.
Through our Comtech Mobile Datacom Corp. subsidiary, we have developed and
have begun marketing a satellite-based data communications system for the land
transportation, remote sensing, utility and aviation markets. Applications
include asset tracking (using information obtained from the Global Positioning
Satellite system), 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. Customers can access their message or
data through an Internet connection or a direct line to their personal web
sites. We developed our system, including our mobile terminals and the software
to operate our gateway data processing system, through a combination of internal
development and government contract funding.
Comtech Mobile Datacom Corp. acquired the assets of its predecessor
company, Mobile Datacom Corp., in 1998. Mobile Datacom Corp. was formed in 1993
by its President and CEO, Joel R.Alper, along with a number of senior executive
and technical personnel formerly employed by COMSAT Corp., which transferred its
mobile data communication technology to Mobile Datacom Corp. and provided a
portion of its initial funding for the company. Over the intervening years,
Mobile Datacom Corp. made successive improvements in its technology through
development contracts with a variety of government agencies, and provided
limited commercial services in the land transportation and aviation markets.
In early 1999, Comtech Mobile Datacom Corp. lead a multi-company team in
competing for the U.S. Army's Movement Tracking System, a system to be deployed
by the 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. In September 1999, Comtech Mobile
Datacom completed the
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first major milestone in the contract, a validation demonstration involving
communicating between mobile terminals in Germany and Texas, over two satellite
links with the respective ground stations interconnected via the Internet.
Sales, Marketing and Customer Support
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 both 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.
Our international sales from all three business segments represented
approximately 60.1%, 46.5% and 57.3% of total net sales in fiscal 1999, 1998 and
1997, respectively. International sales are expected to continue to increase due
to the global expansion of telecommunications and microwave instrumentation and
we expect that international sales will remain a substantial portion of our
total sales for the foreseeable future.
Domestic commercial sales represented approximately 24.3%, 34.0% and 25.7%
and U.S. government sales represented 15.6%, 19.5% and 17.0% of our net sales in
fiscal 1999, 1998 and 1997, respectively.
Sales to one customer in fiscal 1999 and to different customers in fiscal
1998 and 1997 represented 27.0%, 12.2% and 10.2% of our consolidated net sales,
respectively.
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.
Backlog
Our backlog as of July 31, 1999 and 1998 was approximately $38.6 million
and $15.4 million, respectively. We expect that a substantial majority of the
backlog as of July 31, 1999 will be recognized as sales during fiscal 2000. We
received payments in respect of progress billings and advance payments
aggregating approximately $2.9 million as of July 31, 1999 in connection with
orders included in the backlog at that date. Approximately 2.7% of that backlog
consisted of U.S. government contracts, subcontracts and government funded
programs, approximately 92.1% consisted of orders for use by foreign customers
or domestic companies whose products will be sold to foreign customers and
approximately 5.2% consisted of orders for use by domestic commercial customers.
Our backlog at July 31, 1999 included a $100,000 funded order under the Mobile
Datacom Corp.'s contract with the U.S. Army.
Our backlog consists solely of orders believed to be firm. In the case of
contracts with departments or agencies of the U.S. government, 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 the
contract.
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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 Communications businesses, as well as a significant
portion of Comtech PST's business, operate under short lead times and usually
generate sales out of inventory.
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.
operating unit has been qualified for ISO 9001 and we are in the process of
qualifying our other operating units.
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 are used by us 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. See "Mobile Data Communications Services Business
Segment" for a further description of manufacturing operations in that segment.
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 internal research and development or acquisitions,
of new or enhanced products and technologies.
We reported research and development expenses of $2.0 million, $1.3
million and $1.0 million in fiscal 1999, 1998 and 1997, respectively,
representing 5.3%, 4.4% and 4.1% of total net sales, respectively, for such
years. 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 1999, 1998 and 1997, we were reimbursed by customers for such activities
in the amounts of $1.8 million, $356,000 and $436,000, respectively.
Accordingly, our aggregate research and development expenditures (internal and
customer funded) were 10.0%, 5.6% and 6.0% of net sales in fiscal 1999, 1998 and
1997, 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.
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Competition
Our 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 should
they decide it would be advantageous for them to do so.
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, which has sold over 250,000 mobile units
and provides messaging and maintenance services to over 850 transportation
companies in the United States alone. 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 our telecommunications transmission and RF
amplifier business segments' markets is based primarily on price, product
performance, reputation, delivery times and customer support. 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 our President and
Chief Executive Officer, Fred Kornberg. 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. 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, 1999, we had 268 employees, 132 of whom were engaged in
production and production support, 89 in research and development and other
engineering support and 49 in marketing and administrative functions. None of
the employees are represented by a labor union. We believe that our employee
relations are good.
Disclosure Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides for
forward-looking statements. Certain information in Items 1,2,3,7 and 8 of this
Form 10-K include information that is forward-looking, such as our anticipated
sales levels, our anticipated liquidity and capital requirements and the results
of legal proceedings. The matters referred to in forward-looking statements
could be affected by the risks and uncertainties involved in our business. These
risks and uncertainties include, but are not limited to, the effect of economic
and market conditions, unpredictable reductions in funding for government
defense expenditures, and the risks associated with international sales,
including fluctuations in foreign currency exchange rates, political and
economic instability, availability of suitable export financing, export license
requirements, tariff regulations and other U.S. and foreign regulations that may
apply to the export of our products, as well as certain other risks described
above in this Item under "Backlog,"
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"Competition" and "Key Personnel/Employees" and below in Item 3 in "Legal
Proceedings" and in Item 7 in "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements in this
paragraph and elsewhere in this Form 10-K.
ITEM 2. PROPERTIES
Our corporate offices are located in a portion of the 46,000-square foot
facility on two acres of land in Melville, New York which also houses Comtech
PST.
We lease the facility in Melville, New York 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. The base annual rental under the lease is
subject to adjustments. We believe that the terms of this lease are not less
advantageous to us than those that would have been available to us from an
unrelated party.
We lease the 32,000-square foot facility on eight acres of land used by
Comtech Antenna Systems, Inc. and Comtech Systems, Inc. in St. Cloud, Florida
from a Florida land trust controlled by our Senior Vice President and Chief
Financial Officer. 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. We believe that the terms of this
lease are not less advantageous to us than those that would have been available
to us from an unrelated party.
We lease a 20,000-square foot building in Tempe, Arizona for our Comtech
Communications Corp. operating unit from an unrelated third party. The lease
provides for the exclusive use of the premises as they now exist for a term of
three years through April 2001.
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. We have a one-time option to terminate the lease effective August
31, 2003 by providing at least six months' notice and paying $17,500. The base
annual rental under this lease is subject to adjustments.
ITEM 3. LEGAL PROCEEDINGS
We are subject to certain legal actions which arise out of 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, 1999.
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.
8
Common Stock
------------
High (1) Low (1)
-------- -------
Fiscal Year Ended 7-31-98
First Quarter $ 3 5/12 $ 2 1/3
Second Quarter 3 1/16 2 5/6
Third Quarter 6 1/24 4
Fourth Quarter 6 1/2 4 1/6
Fiscal Year Ended 7-31-99
First Quarter 6 1/2 3 1/3
Second Quarter 6 1/2 4 1/3
Third Quarter 5 11/12 3 5/6
Fourth Quarter 18 2/3 5 1/4
(1) Amounts adjusted to reflect a three-for-two stock split effective
July 30, 1999.
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 22, 1999, there were approximately 770 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
(in thousands except per share amounts)
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 1999 and 1998.
Year Ended July 31,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Consolidated Statement
of Operations Data:
Net sales $ 37,886 30,114 24,746 20,916 16,455
Cost of sales 26,405 21,330 17,670 14,819 12,096
Gross profit 11,481 8,784 7,076 6,097 4,359
-------- -------- -------- -------- --------
Expenses:
Selling, general and 6,632 6,013 5,415 5,015 4,658
administrative
Research and development 2,022 1,319 1,023 741 1,036
-------- -------- -------- -------- --------
8,654 7,332 6,438 5,756 5,694
-------- -------- -------- -------- --------
Operating earnings (loss) 2,827 1,452 638 341 (1,335)
Other expenses (income):
Interest expense 204 234 284 302 341
Interest income (65) (36) (33) (60) (171)
Other income (39) (30) (151) -- (20)
-------- -------- -------- -------- --------
9
Income (loss) from continuing
operations before income taxes 2,727 1,284 538 99 (1,485)
Income tax (benefit) expense (3,754) 180 54 27 17
-------- -------- -------- -------- --------
Income (loss) from continuing
operations 6,481 1,104 484 72 (1,502)
Discontinued operations:
Loss from operations of discontinued
segment (less applicable income tax benefit
of $320) (622) -- -- -- --
Loss on disposal of discontinued segment
(including provision of $430 for operating
losses during phase out period, less (594) -- -- -- --
applicable income tax benefit of $306)
-------- -------- -------- -------- --------
Net income (loss) $ 5,265 1,104 484 72 (1,502)
======== ======== ======== ======== ========
Basic income (loss) per share: (1)
Income (loss)from continuing $ 1.56 0.28 0.13 0.02 (0.39)
operations
Loss from discontinued operations (0.29) -- -- -- --
-------- -------- -------- -------- --------
Basic income (loss) per share $ 1.27 0.28 0.13 0.02 (0.39)
======== ======== ======== ======== ========
Diluted income (loss) per share: (1)
Income (loss) from continuing $ 1.42 0.27 0.12 0.02 (0.39)
operations
Loss from discontinued operations (0.27) -- -- -- --
-------- -------- -------- -------- --------
Diluted income (loss) per share $ 1.15 0.27 0.12 0.02 (0.39)
======== ======== ======== ======== ========
(1)Reflects three-for-two stock split
effective July 30, 1999
Weighted average number
common shares outstanding -
Basic computation 4,143 3,902 3,873 3,887 3,885
Potential dilutive common shares 430 264 33 105 --
-------- -------- -------- -------- --------
Weighted average number of common
and common equivalent shares
outstanding assuming dilution -
Diluted computation 4,573 4,166 3,906 3,992 3,885
======== ======== ======== ======== ========
As of July 31,
-----------------------------------------------
Consolidated Balance Sheet Data: 1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Total assets $29,847 19,710 17,960 16,629 16,783
Working capital 10,192 8,917 7,930 7,797 7,681
Long-term debt, less current installments 959 1,445 1,310 1,875 2,277
Stockholders' equity 18,357 12,093 10,878 10,301 10,081
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We design, develop, produce and market sophisticated components and
systems that are used by telecommunication and defense systems and
telecommunications service providers in a broad range of applications. A
substantial portion of our business is derived from a limited number of
relatively large customer contracts, the timing of which cannot be predicted.
Accordingly, we experience significant fluctuations in sales and operating
results from quarter to quarter.
Our business consists of three segments: telecommunications transmission;
RF microwave amplifiers; and mobile data communications services, which is a
development-stage business. We began reporting financial results on a segment
basis in fiscal 1999. Our sales are made to domestic and international
customers, both commercial and governmental. International sales are expected to
increase in the foreseeable future due to the growing worldwide demand for
wireless and satellite telecommunications and our expanded line of product
offerings to meet these demands.
Sales consist of stand-alone products and systems, although for the past
five years we have endeavored to achieve greater product sales as a percentage
of total sales, due to generally higher gross profit margins on products rather
than systems.
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.
Our gross profit is affected by a variety of factors, including the mix of
products, systems and equipment sold, production efficiency and price
competition.
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.
Deferred compensation consists of restricted stock awards granted to certain
operating management personnel. Under these grants, the employees purchased
shares of our common stock at prices representing a discount to the then market
value. The stock is subject to certain restrictions which lapse after ten years
and which may be removed earlier upon achievement of certain business unit
performance goals.
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.
As of the end of fiscal 1998, we had a 100% valuation allowance against
our gross deferred tax assets. During fiscal 1999, based on our assessment of
the recoverability of the deferred tax assets, we concluded that a full
valuation allowance was no longer necessary given our estimates of future
earnings and the expected timing of temporary difference reversals. Accordingly,
we reduced the valuation allowance to $777,000 and recorded a corresponding
one-time $4.6 million benefit for income taxes in fiscal 1999.
In the first quarter of fiscal 1999, through newly formed wholly-owned
subsidiaries Comtech Mobile Datacom, our Mobile data communications services
business, and Comtech Wireless, Inc., our wireless local loop business, we
acquired the assets and assumed certain liabilities of two businesses. Both
acquisitions were accounted for using the purchase method of accounting. The
goodwill resulting from the purchase of the mobile data communications services
business (i.e., the excess of the purchase price over the fair value of the net
assets acquired and liabilities assumed) is being amortized over a 20-year
period. 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 terminal units and global data communications services
over an eight-year period. Although sales will be dependent upon annual
government funding we are anticipating there will be sales under this
11
contract in fiscal 2000. Sales for the mobile data communications segment in
fiscal 1999 were approximately $300,000.
Comtech Wireless, Inc. designs and manufactures wireless local loop
systems for the rural and remote telephony market. Due to disappointing results
and uncertain prospects, in September 1999 the Board of Directors approved a
plan to liquidate Comtech Wireless, Inc. by January 31, 2000 and the results of
operations for the segment have been shown as a discontinued operation in the
consolidated financial statements as of and for the year ended July 31, 1999.
Comtech Wireless, Inc. did not have any sales in fiscal 1999 and negligible
revenues are anticipated in fiscal 2000.
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:
Fiscal Year
Ended July 31,
-------------------------------
1999 1998 1997
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Gross margin 30.3 29.2 28.6
Selling, general and administrative expenses 17.5 20.0 21.9
Research and development expenses 5.3 4.4 4.1
Operating income from continuing operations 7.5 4.8 2.6
Interest expense (income) net 0.4 0.8 (1.0)
Income before income taxes 7.2 4.3 2.2
Net income 13.9 3.7 2.0
Comparison of Fiscal 1999 and 1998
Net Sales Consolidated net sales were $37.9 million and $30.1 million for fiscal
1999 and 1998, respectively, representing an increase of $7.8 million or 25.8%.
This increase was due primarily to increased sales by our telecommunications
transmission segment of over-the-horizon microwave equipment, principally to one
customer, a major U.S. prime contractor. Total sales to this customer during
fiscal 1999 were approximately $10.2 million, representing 27.0% of the total
net sales. The total order received from this customer in fiscal 1999 was
approximately $42.5 million and the contract balance of approximately $32.3
million is expected to be recognized as revenue in fiscal 2000 and 2001. There
were no other customers for which total sales in fiscal 1999 represented 10% or
more of net sales. In fiscal 1998, sales to a different customer represented
12.2% of total net sales. Included in the telecommunications transmission
segment are sales of our satellite equipment products, which increased in fiscal
1999 by approximately 65.8%, due to additional product offerings. Sales from our
RF microwave amplifier segment declined by approximately 14.9% compared to
fiscal 1998, due to the timing of receipt of follow-on orders. International
sales increased by approximately $8.8 million or 62.7%, representing 60.1% and
46.5% of total net sales for fiscal 1999 and 1998, respectively. Domestic sales
decreased by $1.0 million or 9.9%, representing 24.3% and 34.0%, of total net
sales for fiscal 1999 and 1998, respectively. U.S. government sales increased by
$20,000 or .3%, representing 15.6% and 19.5% of total net sales for fiscal 1999
and 1998, respectively.
Gross Profit Gross profit was $11.5 million and $8.8 million for fiscal 1999 and
1998, respectively, representing an increase of $2.7 million or 30.7%. The
increase was due primarily to the increase in sales volume in fiscal 1999
compared to fiscal 1998. Gross margin as a percentage of net sales was 30.3% and
29.2% in fiscal 1999 and 1998, respectively, due primarily to increased sales of
products coupled with lower per unit costs.
Selling, General and Administrative Selling, general and administrative expenses
were $6.6 million and $6.0 million in the fiscal 1999 and 1998, respectively,
representing an increase of $619,000 or 10.3%. This increase
12
was due primarily to higher sales commissions, marketing personnel expenses,
deferred compensation and other administrative expenses. As a percentage of net
sales, these expenses were 17.5% and 20.0% in fiscal 1999 and 1998,
respectively. Although increased expenses were required to support the higher
sales volume in fiscal 1999 compared to fiscal 1998, these expenses increased at
a lower rate than the increase in sales. In addition, the increased expenditures
reflect those required by our mobile data communications services segment which
was formed in fiscal 1999.
Research and Development Research and development expenses were $2.0 million and
$1.3 million in fiscal 1999 and 1998, respectively, representing an increase of
$703,000 or 53.3%. We are continually enhancing and developing new products and
technologies. In fiscal 1999, the research and development expenses were
primarily for developing additional satellite product offerings and redesigning
components of over-the-horizon microwave products. Whenever possible, we seek
customer funding for research and development to adapt our products to
specialized customer requirements. During fiscal 1999 and 1998, we were
reimbursed $1.8 million and $356,000, respectively, which amounts are not
reflected in the reported research and development expenses.
Operating Income As a result of the foregoing factors, we had operating income,
from continuing operations, of $2.8 million and $1.5 million in fiscal 1999 and
1998, respectively, representing an increase of $1.4 million or 94.7%.
Interest Expense Interest expense was $204,000 and $234,000 for fiscal 1999 and
1998, respectively, representing a decrease of $30,000 or 12.8%. Interest
expense in both years was due primarily to interest associated with our capital
lease obligations.
Interest Income Interest income was $65,000 and $36,000 for fiscal 1999 and
1998, respectively, representing an increase of $29,000 or 80.6%. The increase
was due primarily to the increase in the amount of cash available to invest in
fiscal 1999 as compared to fiscal 1998. Interest income was primarily derived
from the cash on hand in excess of working capital requirements that is invested
in highly liquid, short-term money-market funds consisting primarily of direct
obligations of the U.S. government.
Income Taxes The benefit for income taxes applicable to continuing operations in
fiscal 1999 was $3.8 million compared to the provision for income taxes of
$180,000 in fiscal 1998. Due to our net operating loss carryforwards and other
temporary differences between recognition of income for financial reporting and
income tax purposes, we had deferred tax assets of $5.4 and $5.3 million in
fiscal 1999 and 1998, respectively. As of July 31, 1998, we assessed a 100%
valuation allowance against this deferred tax asset. During fiscal 1999, we
concluded that a full valuation allowance was no longer necessary given our
estimates of future earnings based on substantial new contracts entered into and
the expected timing of temporary difference reversals. Accordingly, we reduced
the valuation allowance to $777,000 during fiscal 1999. The effect of this
change resulted in a tax benefit to us in fiscal 1999 of $4.6 million, which was
partially offset by the provision for the current year's income tax expense.
Discontinued Operations In September 1999, we adopted a plan, effective as of
July 31, 1999, to liquidate the wireless local loop business. The loss from
operations, net of a tax benefit, for fiscal 1999, was $622,000. The loss on the
disposition of the segment, net of a tax benefit, was $594,000, which includes a
provision of $430,000 for operating losses expected to be incurred during the
phase-out period. The liquidation is expected to be completed by January 31,
2000.
Comparison of Fiscal 1998 and 1997
Net Sales Consolidated net sales were $30.1 million and $24.7 million in fiscal
1998 and 1997, respectively, representing an increase of $5.4 million or 21.7%.
This increase was due primarily to increased domestic and U.S. government sales
of high-power amplifiers and increased international sales of over-the-horizon
microwave equipment, partially offset by decreased international sales of
satellite communication products. International sales decreased by approximately
$184,000 or .6% representing 46.5% and 57.3% of total net sales for fiscal 1998
and 1997, respectively. Domestic sales increased by $2.9 million or 60.9%
representing 34.0% and 25.7% of total net sales. U.S. government sales increased
by $1.7 million or 39.9% representing 19.5% and 17.0% of total net sales in
fiscal 1998 and 1997, respectively. Sales to one customer in fiscal 1998 and
sales to different customers in fiscal 1997 represented 12.2% and 10.2% of
consolidated net sales for fiscal 1998 and 1997, respectively.
13
Gross Profit Gross profit was $8.8 million and $7.1 million for fiscal 1998 and
1997, respectively, representing an increase of $1.7 million. The primary reason
for this increase was a net increase in sales volume in fiscal 1998. Gross
profit, as a percentage of net sales, was relatively unchanged.
Selling, General and Administrative Selling, general and administrative expenses
were $6.0 million and $5.4 million in fiscal 1998 and 1997, respectively,
representing an increase of $598,000 or 11%. This increase was due primarily to
the increased expenses required to support the higher level of sales in the
fiscal 1998 period, including higher bid and proposal expenses, sales
commissions, marketing personnel expenses and other administrative expenses. As
a percentage of sales, however, these expenses decreased to 20.0% in fiscal
1998, from 21.9% in fiscal 1997.
Research and Development Research and development expenses were $1.3 million and
$1.0 million in fiscal 1998 and 1997, respectively, representing an increase of
$296,000 or 28.9%. Research and development expenses as a percentage of net
sales were 4.4% and 4.1%. This increase was primarily due to increased expenses
for general product improvements and for the development of a CSAT transceiver
and VSAT modem and a complement of additional product offerings to the
"fly-away" and "quick deployment" antenna product lines. Whenever possible, we
seek customer funding for research and development to adapt our products to
specialized customer requirements. During fiscal 1998 and 1997, we were
reimbursed $356,000 and $436,000, respectively, which amounts are not reflected
in the reported research and development expenses.
Operating Income As a result of the foregoing factors, we reported operating
income of $1.5 million in fiscal 1998 compared to operating income of $638,000
in fiscal 1997, representing an increase of $814,000 or 127.6%.
Interest Expenses Interest expense was $234,000 and $284,000 in the fiscal 1998
and 1997, respectively. Interest expense in both years was due primarily to
interest associated with our capital lease obligations.
Interest Income Interest income for fiscal 1998 and 1997 was $36,000 and
$33,000, respectively. This increase was due primarily to the increase in the
amount of cash available to invest in fiscal 1998. Interest income in fiscal
1997 included approximately $14,000 that was received from a customer for
extended payment terms.
Other Income We reported other income of $30,000 and $151,000 in fiscal 1998 and
1997, respectively. Other income in fiscal 1998 was due primarily to the gain on
a foreign currency exchange rate and to the sale of scrap materials. In fiscal
1997, the primary components were the result of a gain on the sale of a storage
facility, the sale of fully depreciated equipment and a finder's fee we earned,
offset by the write-off of other miscellaneous items.
Income Taxes The provision for income taxes was $180,000 and $54,000 in fiscal
1998 and 1997, respectively. This was comprised of $45,000 and $20,000 for
federal income tax and $135,000 and $34,000 for state income taxes in fiscal
1998 and 1997, respectively. Net operating loss carryforwards were available to
offset corporate federal income tax and we were generally subject only to the
alternative minimum tax. At such dates, we believed our tax benefits were
subject to a 100% valuation allowance as of July 31, 1998 and 1997 due to
earnings fluctuations inherent in our operations and recent operating losses.
Liquidity and Capital Resources
Our cash and cash equivalents position increased by $3.2 million from $2.7
million at July 31, 1998 to $5.9 million at July 31, 1999. Restricted cash of
$22,000, which was securing standby letters of credit at July 31, 1998, was no
longer required at the end of fiscal 1999. In fiscal 1999, operating activities
provided net cash of $4.9 million, investing activities used net cash of $1.2
million and financing activities used net cash of $598,000. During fiscal 1999,
we acquired the assets and assumed certain liabilities of two businesses: a
mobile data communications services business and a wireless local loop business.
The total consideration for these acquisitions of approximately $978,000 was
financed by a cash payment of $200,000, a non-recourse note of $250,000 and the
issuance of restricted stock and warrants. As of July 31, 1999, one of these
acquisitions, the wireless local loop business, was classified as a discontinued
operation and certain adjustments were made and expenses accrued, as a result of
this decision.
14
Accounts receivable as of July 31, 1999 decreased by $1.0 million from
July 31, 1998 to July 31, 1999 due primarily to the timing of the shipments and
subsequent collections. The allowance for doubtful accounts decreased by
$25,000. We review our allowance for doubtful accounts periodically and believe
it adequately reflects the collectibility of our receivables based on past
experience and our credit standards. Generally, foreign customers are required
to secure payment by an irrevocable letter of credit before an order is
accepted.
Inventory increased by $1.3 million from July 31, 1998 to July 31, 1999
due primarily to the higher level of backlog of orders. We generally operate on
a job-order cost basis, that is, costs are incurred as work-in-process inventory
for specific contracts or jobs. Accordingly, inventory levels will vary as a
function of our order backlog. We do have some product lines which require a
more rapid delivery response to customers' requirements and require us to
provide for a level of "off-the-shelf" equipment inventory availability. The
only other general inventory that we maintain is for basic components which are
common to many of our products. Inventory reserves increased by $341,000.
Inventory reserves are reviewed on an ongoing basis and adjustments are made as
needed.
Net intangible assets at July 31, 1999 of $1.6 million represent goodwill
as a result of our acquisition of a mobile data communications services business
and entry into that segment. The amortization period for this asset is 20 years.
Accounts payable increased by $372,000 from July 31, 1998 to July 31,
1999, due primarily to the timing of the purchases and to the higher volume of
inventory purchased due to the increased level of sales and backlog.
Accrued expenses and other current liabilities increased by $2.4 million
from July 31,1998 to July 31, 1999. This was due primarily to the increase in
customer advances and deposits and, to a lesser extent, to accrued wages and
benefits. Whenever possible, we require advance payments, deposits or
"milestone" payments on long-term contracts in order to provide working capital
while the contract is in process. Accrued wages and benefits are primarily a
function of the number of employees. At July 31,1999, we had 268 employees
compared to 216 employees at July 31,1998.
During fiscal 1999, we made leasehold improvements and purchases of
machinery and equipment of $1.1 million, of which $136,000 was financed by
capital leases.
All of our long-term debt consists of capital lease obligations. Principal
payments on long-term debt of $821,000 were made during fiscal 1999, resulting
in long-term debt, including the current portion, of $1.6 million.
We have an $8.0 million secured credit facility from Republic National
Bank of New York. The line of credit, which is to be used for working capital
requirements, is for a term of one year and bears interest on borrowing of
90-day LIBOR plus 1.50 % (6.875% at July 31,1999). During fiscal 1999, we drew
advances in the aggregate of $850,000 which were totally repaid by July 31,
1999. The credit facility expires December 31, 1999. We have renewed and
received increases in this line of credit annually since 1996.
We believe that our working capital position and available credit
facilities are sufficient to meet our cash requirements during the next year at
our current business levels. However, given the potential for receipt of large
orders under the U.S. Army contract, or the growth of our business beyond
expected levels, we may seek additional external financing.
Year 2000 Compliance
Management has initiated a company-wide program and has developed a formal
plan of implementation to prepare for the Year 2000. This includes taking
actions designed to ensure that our information technology systems, products and
infrastructure are Year 2000 compliant and that its customers, suppliers and
service providers have taken similar action. With respect to Year 2000 internal
issues, we have evaluated our information technology systems, products,
equipment and other facilities systems, and management believes that all are
Year 2000 compliant. With respect to our external Year 2000 issues, we are
surveying our customers, suppliers and service providers primarily through
written correspondence. Despite the efforts to survey customers, suppliers and
service providers, management cannot be certain as to the actual Year 2000
readiness of these third parties. To the extent any of our suppliers or service
providers are not Year 2000 ready, we believe that we will be able to obtain
other
15
suppliers or service providers without a significant interruption to our
business. Based upon responses to our inquiries of third parties, we currently
believe we do not have a need for a contingency plan. Certain experts who have
studied the issue have published reports indicating that the Year 2000 problem
could be substantially more severe in developing economies than in the United
States. A significant amount of our sales are for customers in developing
countries.
Our management currently believes that the costs related to our compliance
with the Year 2000 issue will not have a material adverse effect on our
consolidated financial position, results of operations or cash flows.
ITEM 7A. QUANTATATIVE 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 the 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 14, 1999 (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 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.
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 Company's Proxy Statement which
will be filed with the Securities and Exchange Commission no later than 120 days
after the close of its fiscal year.
16
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 July 1999, the Company filed a report on Form 8-K with respect to
the declaration of a three-for-two stock split, in the form of a 50%
stock dividend, by the Board of Directors. The additional shares
were distributed July 30, 1999 to stockholders of record on the
close of business on July 16, 1999.
(c) Exhibit index
17
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 Exhibit 3(b) to the
affecting the 5 to 1 reverse stock split Registrant's 1991
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 Exhibit 3(d) to the
increasing authorized shares to 12 million Registrant's 1994
Form 10-K
3(e) Amendment to the Certificate of Incorporation Exhibit 3(e) to
increasing the authorized shares to 15 million Registrant's 1998
Form 10-K
3(f) Form of Certificate of Designation of the Series A Exhibit 4(1) to the
Junior Participating Preferred Stock Registrant's Form
8-A/A dated
December 23, 1998
4(a) Rights Agreement dated as of December 15, 1998 Exhibit 4(1) to the
between the Registrant and American Stock Registrant's Form
Transfer and Trust Company, as Rights Agent 8-A/A dated
December 23, 1998
10(a) Amended and restated Employment Agreement dated Exhibit 10(a) of
January 14, 1998 between the Registrant and Fred the Registrant's
Kornberg 1998 Form 10-K
10(b) 1982 Incentive Stock Option and Appreciation Plan Exhibit A to the
Registrant's Proxy
Statement dated
October 29, 1982
10(c) Lease and amendment thereto on the Melville Exhibit 10(k) to
Facility the Registrant's
1992 Form 10-K
10(d) Amended and restated 1993 Incentive Stock Option Appendix A to the
Plan Registrant's Proxy
Statement dated
November 3, 1997
10(e) Time Accelerated Restricted Stock Purchase Exhibit 10(j) to
Agreements between Registrant and Principals of the Registrant's
Comtech Communications Corp. operating unit 1994 Form 10-K
10(f) Time Accelerated Restricted Stock Purchase
Agreements between Registrant and Principals of
Comtech Mobile Datacom Corp. operating unit
10(g) Movement Tracking System Contract between Comtech
Mobile Datacom Corp. 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(h) License Agreement between Vistar
Telecommunications Inc. and Comtech Mobile
Datacom Corp. dated August 31, 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)
21 Subsidiaries of the Company
23 Consent of KPMG LLP
27 Financial Data Schedule
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.
18
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, 1999 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, 1999 s/ Fred Kornberg Chairman of the Board
- ------------------ --------------------------- Chief Executive Officer
(Date) Fred Kornberg and President
(Principal Executive Officer)
October 19, 1999 s/ J. Preston Windus Senior Vice President
- ------------------ --------------------------- Chief Financial Officer
(Date) J. Preston Windus
October 19, 1999 s/ George Bugliarello Director
- ------------------ ---------------------------
(Date) George Bugliarello
October 19, 1999 s/ Richard L. Goldberg Director
- ------------------ ---------------------------
(Date) Richard L. Goldberg
October 19, 1999 s/ Gerard R. Nocita Director
- ------------------ ---------------------------
(Date) Gerard R. Nocita
October 19, 1999 s/ John B. Payne III Director
- ------------------ ---------------------------
(Date) John B. Payne III
October 19, 1999 s/ Sol S. Weiner Director
- ------------------ ---------------------------
(Date) Sol S. Weiner
19
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, 1999 and 1998 F-3
Statements of Operations for each of the years in the three-year
period ended July 31, 1999 F-4
Statements of Stockholders' Equity for each of the years in the
three-year period ended July 31, 1999 F-5
Statements of Cash Flows for each of the years in the
three-year period ended July 31, 1999 F-6, F-7
Notes to Consolidated Financial Statements F-8 - F-20
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
[LOGO] KPMG
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
have 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonably 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended July 31, 1999 in conformity with generally accepted
accounting principles. 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.
/s/ KPMG LLP
KPMG LLP
Melville, New York
September 24, 1999
F-2
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 1999 and 1998
Assets 1999 1998
------------ ------------
Current assets:
Cash and cash equivalents $ 5,896,000 2,724,000
Restricted cash -- 22,000
Accounts receivable, less allowance for doubtful
accounts of $145,000 in 1999 and $170,000 in 1998 5,152,000 5,932,000
Inventories, net 7,879,000 6,135,000
Prepaid expenses and other current assets 138,000 276,000
Deferred tax asset - current 1,658,000 --
------------ ------------
Total current assets 20,723,000 15,089,000
Property, plant and equipment, net 4,310,000 4,314,000
Intangible assets, net of amortization of $78,000 1,623,000 --
Other assets 274,000 307,000
Deferred tax asset - non current 2,917,000 --
------------ ------------
$ 29,847,000 19,710,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt (including payable to
related party of $316,000 in 1999 and $309,000 in 1998) $ 605,000 804,000
Accounts payable 3,763,000 2,588,000
Accrued expenses and other current liabilities 6,026,000 2,780,000
Net liabilities of discontinued operation 137,000 --
------------ ------------
Total current liabilities 10,531,000 6,172,000
Long-term debt, less current installments (including payable to
related party of $501,000 in 1999 and $817,000 in 1998) 959,000 1,445,000
------------ ------------
Total liabilities 11,490,000 7,617,000
------------ ------------
Stockholders' equity:
Preferred stock, par value $.10 per share; shares authorized and
unissued 2,000,000 -- --
Common stock, par value $.10 per share; authorized 15,000,000
shares; issued, 4,471,368 shares in 1999 and
4,008,006 shares in 1998 447,000 401,000
Additional paid-in capital 23,801,000 22,055,000
Accumulated deficit (4,746,000) (10,011,000)
------------ ------------
19,502,000 12,445,000
Less:
Treasury stock (82,500 shares in 1999 and 1998) (184,000) (184,000)
Deferred compensation (961,000) (168,000)
------------ ------------
18,357,000 12,093,000
------------ ------------
Commitments and contingencies
$ 29,847,000 19,710,000
============ ============
See accompanying notes to consolidated financial statements
F-3
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended July 31, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Net sales $ 37,886,000 30,114,000 24,746,000
------------ ------------ ------------
Costs and expenses:
Cost of sales 26,405,000 21,330,000 17,670,000
Selling, general and administrative 6,632,000 6,013,000 5,415,000
Research and development 2,022,000 1,319,000 1,023,000
------------ ------------ ------------
35,059,000 28,662,000 24,108,000
------------ ------------ ------------
Operating income from continuing operations 2,827,000 1,452,000 638,000
Other expenses (income):
Interest expense 204,000 234,000 284,000
Interest income (65,000) (36,000) (33,000)
Other (39,000) (30,000) (151,000)
------------ ------------ ------------
Income from continuing operations before
income taxes 2,727,000 1,284,000 538,000
Provision (benefit) for income taxes (3,754,000) 180,000 54,000
------------ ------------ ------------
Income from continuing operations 6,481,000 1,104,000 484,000
Discontinued operations (Note 13):
Loss from operations of discontinued segment
(net of applicable income tax benefit of $320,000) (622,000) -- --
Loss on disposal of segment, including provision
of $430,000 for operating losses during phase-out period
(net of applicable income tax benefit of $306,000) (594,000) -- --
------------ ------------ ------------
Net income $ 5,265,000 1,104,000 484,000
============ ============ ============
Basic income (loss) per share:
Income from continuing operations $ 1.56 0.28 0.13
Loss from discontinued operations (.29) -- --
------------ ------------ ------------
Basic income per share $ 1.27 0.28 0.13
============ ============ ============
Diluted income (loss) per share:
Income from continuing operations $ 1.42 0.27 0.12
Loss from discontinued operations (.27) -- --
------------ ------------ ------------
Diluted income per share $ 1.15 0.27 0.12
============ ============ ============
Weighted average number of common
shares outstanding - Basic computation 4,143,000 3,902,000 3,873,000
Potential dilutive common shares 430,000 264,000 33,000
------------ ------------ ------------
Weighted average number of common and common
equivalent shares outstanding assuming dilution -
Diluted computation 4,573,000 4,166,000 3,906,000
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended July 31, 1999, 1998 and 1997
Common stock Additional Treasury stock
--------------------------- paid-in Accumulated ---------------------------
Shares Amount capital deficit Shares Amount
------ ------ ------- ------- ------ ------
Balance July 31, 1996 3,911,016 $ 391,000 $ 22,105,000 $(11,599,000) 22,500 $ (180,000)
Amortization of deferred compensation -- -- -- -- -- --
Forfeiture of unvested restricted shares
issued pursuant to employee stock award
agreement -- -- (211,000) -- -- --
Purchase of treasury shares 60,000 (4,000)
Stock options exercised 64,590 7,000 100,000 -- -- --
Net income -- -- -- 484,000 -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance July 31, 1997 3,975,606 398,000 21,994,000 (11,115,000) 82,500 (184,000)
Amortization of deferred compensation -- -- -- -- -- --
Stock options exercised 32,400 3,000 61,000 -- -- --
Net income -- -- -- 1,104,000 -- --
------------ ------------ ------------ ------------ ------------ ------------
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)
============ ============ ============ ============ ============ ============
Deferred Stock-
compen- holders'
sation equity
------ ------
Balance July 31, 1996 $ (416,000) $ 10,301,000
Amortization of deferred compensation 43,000 43,000
Forfeiture of unvested restricted shares
issued pursuant to employee stock award
agreement 158,000 (53,000)
Purchase of treasury shares -- (4,000)
Stock options exercised -- 107,000
Net income -- 484,000
------------ ------------
Balance July 31, 1997 (215,000) 10,878,000
Amortization of deferred compensation 47,000 47,000
Stock options exercised -- 64,000
Net income -- 1,104,000
------------ ------------
Balance July 31, 1998 (168,000) 12,093,000
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
------------ ------------
Balance July 31, 1999 $ (961,000) $ 18,357,000
============ ============
See accompanying notes to consolidated financial statements.
F-5
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 5,265,000 1,104,000 484,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Loss from discontinued operations 1,216,000 -- --
Gain on sale of property -- -- (72,000)
Depreciation and amortization 1,510,000 1,206,000 1,055,000
Increase (decrease) in bad debt allowance (25,000) 68,000 74,000
Provision (reduction of) inventory reserves 341,000 (127,000) 466,000
Deferred income tax provision (benefit) (4,575,000) -- --
Changes in assets and liabilities, net of effects of acquisitions:
Restricted cash securing letter of credit obligations 22,000 68,000 130,000
Accounts receivable 1,006,000 (449,000) (2,158,000)
Inventories (1,724,000) 548,000 (495,000)
Prepaid expenses and other current assets 138,000 (45,000) (35,000)
Other assets 9,000 (3,000) (48,000)
Accounts payable 372,000 (277,000) 828,000
Accrued expenses and other current liabilities 2,376,000 479,000 527,000
----------- ----------- -----------
Net cash provided by continuing operations 5,931,000 2,572,000 756,000
Net cash used by discontinued operations (988,000) -- --
----------- ----------- -----------
Net cash provided by operating activities 4,943,000 2,572,000 756,000
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,000,000) (312,000) (903,000)
Sale of property, plant and equipment -- -- 127,000
Payment for business acquisitions net of cash received (173,000) -- --
----------- ----------- -----------
Net cash used in investing activities (1,173,000) (312,000) (776,000)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings under line of credit facility 850,000 1,900,000 1,150,000
Repayments of borrowings under line of credit facility (850,000) (1,900,000) (1,150,000)
Principal payments on long-term debt (821,000) (874,000) (649,000)
Proceeds from issuance of common stock:
Purchase of treasury stock -- -- (4,000)
Stock options 208,000 64,000 107,000
Restricted stock 15,000 -- --
----------- ----------- -----------
Net cash used in financing activities (598,000) (810,000) (546,000)
----------- ----------- -----------
(Continued)
F-6
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
1999 1998 1997
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents $ 3,172,000 1,450,000 (566,000)
Cash and cash equivalents at beginning of period 2,724,000 1,274,000 1,840,000
----------- ----------- -----------
Cash and cash equivalents at end of period $ 5,896,000 2,724,000 1,274,000
=========== =========== ===========
Supplemental cash flow disclosure
Cash paid during the period for:
Interest $ 204,000 234,000 284,000
=========== =========== ===========
Income taxes $ 169,000 22,000 38,000
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-7
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
(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 components 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.
Revenue under cost reimbursement contracts are recorded as costs are
incurred.
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.
(Continued)
F-8
Revenue not associated with long-term contracts are generally 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.
(d) Cash and Cash Equivalents
Cash equivalents consist of highly liquid direct obligations of the U.S.
government with a maturity at acquisition of three months or less.
Cash equivalents of July 31, 1999 and 1998 amounted to $2,258,000
and $1,991,000. These investments are carried at cost plus accrued
interest, which approximates market. The Company had $22,000 of
restricted cash securing letter of credit obligations with a
financial institution at July 31, 1998.
(e) Statement of Cash Flows
The Company acquired equipment financed by capital leases in the amounts
of $136,000, $1,207,000 and $48,000 in 1999, 1998 and 1997,
respectively.
(f) 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.
(g) 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 resulting from acquisitions, is being amortized over
twenty years. 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.
(h) Other Assets
Included in other assets at July 31, 1999 and 1998 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, 1999 and 1998,
accumulated amortization related to this purchased technology was
approximately $232,000 and $190,000, respectively. The Company
assesses the recoverability of the intangible asset by determining
whether the amortization of purchased technology over its remaining
life can be recovered through undiscounted future operating cash
flows from product sales utilizing the technology.
(i) 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 1999, 1998 and 1997, the
Company was reimbursed by customers for such activities in the
amount of $1,779,000, $356,000 and $436,000, respectively.
(Continued)
F-9
(j) 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.
(k) Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with the
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share". Basic EPS are computed based on the weighted
average number of shares outstanding. Diluted EPS reflects the
maximum 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 9(e)).
(l) 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 long-term debt relating to
capital leases does not differ materially from its carrying value.
(m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
(n) 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.
(o) Reporting 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
nonowner 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.
Comprehensive and other comprehensive income must be reported on the face
of annual financial statements or in the case of interim reporting,
the footnote approach may be utilized. The Company's operations did
not give rise to items includible in comprehensive income which were
not already included in net income. Accordingly, the Company's
comprehensive income is the same as its net income for all periods
presented.
F-10
(2) Accounts Receivable
Accounts receivable consist of the following at July 31, 1999 and 1998:
1999 1998
---------- ----------
Accounts receivable from commercial customers $3,924,000 4,302,000
Unbilled receivables (including retainages) on
contracts-in-progress 1,154,000 1,531,000
Amounts receivable from the United States
government and its agencies 219,000 269,000
---------- ----------
5,297,000 6,102,000
Less allowance for doubtful accounts 145,000 170,000
---------- ----------
Accounts receivable, net $5,152,000 5,932,000
========== ==========
In the opinion of management, substantially all of the unbilled
balances will be billed and collected during fiscal 2000.
(3) Inventories
Inventories consist of the following at July 31, 1999 and 1998:
1999 1998
---------- ----------
Raw materials and components $3,553,000 3,365,000
Work-in-process 5,798,000 4,932,000
---------- ----------
9,351,000 8,297,000
Less:
Progress payments 302,000 1,333,000
Reserve for anticipated losses on
contracts and inventory reserves 1,170,000 829,000
---------- ----------
Inventories, net $7,879,000 6,135,000
========== ==========
(4) Property, Plant and Equipment
Property, plant and equipment consists of the following at July 31, 1999
and 1998:
1999 1998
----------- -----------
Equipment $ 9,574,000 8,918,000
Leasehold improvements 427,000 352,000
Facilities financed by capital lease 3,365,000 3,365,000
Equipment financed by capital lease 4,219,000 3,802,000
----------- -----------
17,585,000 16,437,000
Less accumulated depreciation and amortization 13,275,000 12,123,000
----------- -----------
$ 4,310,000 4,314,000
=========== ===========
Depreciation and amortization expense on property, plant and equipment
amounted to approximately $1,152,000, $1,103,000 and $994,000 for
the years ended July 31, 1999, 1998 and 1997, respectively.
F-11
(5) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at
July 31, 1999 and 1998:
1999 1998
---------- ----------
Customer advances and deposits $2,798,000 652,000
Accrued wages and benefits 1,603,000 1,068,000
Accrued commissions 915,000 452,000
Other 710,000 608,000
---------- ----------
$6,026,000 2,780,000
========== ==========
(6) Short-Term Borrowings
In December 1998, the Company obtained an $8,000,000 secured credit
facility from Republic National Bank of New York. The line of credit
which is to be used for working capital requirements is for a term
of one year and bears interest on borrowings at 90 day LIBOR plus
1.50%. There were no borrowings outstanding at July 31, 1999.
(7) Long-Term Debt
Long-term debt consists of the following at July 31, 1999 and 1998:
1999 1998
---------- ----------
Obligations under capital leases $1,564,000 2,249,000
Less current installments 605,000 804,000
---------- ----------
$ 959,000 1,445,000
========== ==========
The obligations under capital leases relate to the Melville, New York
facilities, as well as certain equipment, the net carrying value of
which was $2,087,000 and $2,517,000 at July 31, 1999 and 1998,
respectively.
Future minimum lease payments under capital leases as of July 31, 1999
are:
Years ending July 31,:
2000 $ 725,000
2001 563,000
2002 315,000
2003 137,000
2004 51,000
----------
Total minimum lease payments 1,791,000
Less amounts representing interest
(at rates varying from 6.8% to 10.8%) 227,000
----------
1,564,000
Less current installments 605,000
----------
Obligations under capital leases, net
of current installments $ 959,000
==========
F-12
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 $448,000 for fiscal 1999, 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, 1999 and 1998 approximated $817,000 and $1,105,000,
respectively.
(8) 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,
-------------------
1999 1998 1997
----------- ----------- -----------
Federal -current $ 60,000 45,000 20,000
Federal -deferred (3,949,000) -- --
State and local - current 135,000 135,000 34,000
----------- ----------- -----------
$(3,754,000) 180,000 54,000
=========== =========== ===========
The provision (benefit) for income taxes on income from continuing
operations was ($3,754,000), $180,000 and $54,000 for fiscal 1999,
1998 and 1997, respectively and differed from the amounts computed
by applying the U.S. Federal income tax rate of 34% as a result of
the following:
1999 1998 1997
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Computed "expected" tax
expense $ 927,000 34.0% 437,000 34.0% 183,000 34.0%
Increase (reduction) in income
taxes resulting from:
Change in the beginning
of the year valuation
allowance for deferred
tax assets (4,544,000) (166.6) (93,000) (7.2) 264,000 49.6
Utilization of tax benefit
carryforward (223,000) (8.2) (299,000) (23.3) (430,000) (79.9)
State and local income tax,
net of Federal benefit 86,000 3.2 135,000 10.5 34,000 6.3
Other -- -- -- -- 3,000 --
----------- ------ ------- ---- ------ ----
Effective tax rate $(3,754,000) (137.6)% 180,000 14.0% 54,000 10.0%
=========== ====== ======= ==== ====== ====
As of July 31, 1999, the Company has net operating loss carryforwards
of approximately $10,260,000 for income tax purposes of which
$4,843,000 expires in 2004, $1,473,000 expires in 2005, $415,000
expires in 2009 and $3,529,000 expire in 2010 through 2012.
F-13
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at July 31, 1999
and 1998 are presented below.
1999 1998
---- ----
Deferred tax assets:
Allowance for doubtful accounts receivable $ 60,000 60,000
Inventory reserve 646,000 496,000
Plant and equipment, principally due to capitalized
leases and differences in depreciation (16,000) 27,000
Compensated absences, principally due to accrual
for financial reporting purposes 395,000 331,000
Deferred compensation 250,000 154,000
Net operating loss carryforwards 3,490,000 3,726,000
Investment tax credit carryforwards 440,000 440,000
Alternative minimum tax credit carryforwards 87,000 87,000
----------- -----------
Total gross deferred tax assets 5,352,000 5,321,000
Less valuation allowance (777,000) (5,321,000)
----------- -----------
Net deferred tax assets $ 4,575,000 --
=========== ===========
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. At July 31, 1998 the
Company had a 100% valuation allowance against these gross deferred
tax assets. During fiscal 1999, the Company concluded that a full
valuation allowance was no longer necessary given its estimates of
future earnings, which include substantial long-term contracts
entered into in the first and fourth quarters of fiscal 1999 and the
expected timing of temporary difference reversals. Accordingly, the
Company reduced the valuation allowance to $777,000 during fiscal
1999 and recorded deferred tax assets of $4,575,000 of which
$3,155,000 was recorded in the fourth quarter. The Company must
generate approximately $13,500,000 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.
(9) Stockholders' Equity
(a) Option and Warrant Plans and Agreements
The Company has several option and warrant plans and agreements as
follows:
1982 Incentive Stock Option Plan - The 1982 Incentive Stock Option and
Appreciation Plan provided for the granting to key employees and
officers of incentive stock options to purchase up to 240,000 shares
of the Company's common stock through September 29, 1992 at prices
not less than the fair market value of such shares on the date the
option is granted. The plan expired on September 29, 1992. Options
granted to purchase an aggregate of 16,350 shares remain
outstanding.
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 provides formula grants to
non-employee members of the 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. The plan expires in
2002, unless terminated earlier by the Board of Directors under
conditions specified in the plan. As of July 31, 1999, the Company
had granted incentive stock options representing the right to
purchase an aggregate of 1,029,015 shares at prices ranging between
$1.50 - $7.50 per share, of which 69,600 options were canceled and
888,045 are outstanding at July 31, 1999. To date, 71,370 shares
have been exercised.
F-14
Warrant Issued Pursuant to Acquisition of CMDC - As part of the asset
purchase agreement for the acquisition of Mobile Datacom Corp. (see
Note 12), which was incorporated into the Company as a wholly-owned
subsidiary, Comtech Mobile Datacom Corp., 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. Due to the transferability and voting
restrictions and other conditions, no value was ascribed to these
warrants for purposes of determining the cost of the acquisition.
(b) Option Activity
The following table sets forth summarized information concerning the
Company's stock options:
Number Weighted
of average exercise
shares price
------ -----
Outstanding at July 31, 1996 363,870 $ 2.42
Granted 43,500 2.16
Expired/canceled (21,810) 2.85
Exercised (64,590) 1.65
--------
Outstanding at July 31, 1997 320,970 2.55
Granted 583,125 2.99
Expired/canceled (13,500) 2.13
Exercised (32,400) 2.00
--------
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
======== ========
Options exercisable at
July 31, 1999 367,437 $ 2.93
Options available for
grant at July 31, 1999 83,085
The options outstanding as of July 31, 1999 are summarized in ranges as
follows:
Weighted Number of Weighted
Range of average options average
exercise price exercise price outstanding remaining life
-------------- -------------- ----------- --------------
$ 1.50 - 2.50 $ 2.08 123,870 6 years
2.51 - 4.99 3.09 663,525 8 years
5.00 - 7.50 6.55 117,000 7 years
F-15
(c) Stock-Based Compensation Plans
The Company has two stock option plans, the 1982 Incentive Stock Option
and Appreciation Plan and the 1993 Incentive Stock Option Plan. The
Company accounts for these 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 and income per share would have been
reduced to the following pro forma amounts:
1999 1998 1997
----------- ----------- -----------
Net income As reported $ 5,255,000 1,104,000 484,000
Pro forma $ 4,836,000 817,000 475,000
Net income
per share As reported Basic $ 1.27 0.28 0.13
Diluted $ 1.15 0.27 0.12
Pro forma Basic $ 1.17 0.21 0.12
Diluted $ 1.06 0.19 0.12
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net income and net
income per share amounts presented above because compensation cost
is reflected over the option's vesting period and compensation cost
for options granted prior to August 1, 1995 was not considered.
The per share weighted-average fair value of stock options granted
during 1999 and 1998 was $3.19 and $2.30, respectively, on the date
of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions:
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.
1998 - expected dividend yield of 0%, risk-free interest rate of 6%,
expected volatility of 63.32% and an expected option life of 10
years.
1997 - expected dividend yield of 0%, risk-free interest rate of 6%,
expected volatility of 64.49% and an expected option life of 10
years.
(d) Restricted Common Stock
In February 1994, a total of 180,000 (after effect of three-for-two
stock split - see Note 9(e)) 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 is reflected as a reduction of stockholders' equity in
the accompanying consolidated balance sheet. During fiscal 1997,
60,000 of such shares were forfeited due to the termination of an
officer's employment prior to vesting.
In October 1998, a total of 225,000 (after effect of three-for-two
stock split - see Note 9(e)) 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. The excess of market value over
cost of the
F-16
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 sheet as of July 31,1999.
(d) 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.
(10) 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 four segments:
(I)Telecommunications Transmission, (II) RF Microwave Amplifiers,
(III) Mobile Data Communications Services and (IV) Wireless Local
Loop, which is being discontinued. 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. Corporate assets consist principally of cash,
deferred tax assets and intercompany receivables. Corporate losses
result from such corporate expenses as legal, accounting and
executive. Sales between segments were negligible. Eliminations
consist of intercompany balances.
(in thousands)
Mobile Data Corporate
Telecommunications RF Microwave Communications and
Fiscal 1999 Transmission Amplifiers Services Others Eliminations 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 15,494 (13,654) 29,847
Mobile Data Corporate
Telecommunications RF Microwave Communications and
Fiscal 1998 Transmission Amplifiers Services Others Eliminations Total
----------- ------------ ---------- -------- ------ ------------ -----
Net sales $13,047 17,067 -- -- 30,114
Operating income (loss) 123 2,565 -- (1,236) 1,452
Interest income -- -- 36 36
Interest expense 52 160 -- 22 234
Depreciation and
amortization 506 653 -- 47 1,206
Expenditure for
long-lived assets 669 850 -- -- 1,519
Total assets 4,433 9,207 -- 11,930 (5,860) 19,710
(continued)
F-17
Net sales $12,513 12,233 -- -- 24,746
Operating income (loss) 356 1,296 -- (1,014) 638
Interest income -- 14 -- 19 33
Interest expense 58 214 -- 12 284
Depreciation and
amortization 515 550 -- (10) 1,055
Expenditure for
long-lived assets 440 511 -- -- 951
Total assets 8,116 9,346 -- 12,502 (12,004) 17,960
Sales to one customer in fiscal 1999 and to different customers in fiscal
1998 and 1997 represented 27.0% and 12.2% and 10.2% of the
consolidated net sales, respectively. Such sales were made from the
Telecommunications Transmission business segment in 1999 and 1997,
and from the RF Microwave Amplifier business segment in 1998.
During fiscal 1999, 1998 and 1997, approximately 16%, 20% and 17%,
respectively, of the Company's net sales resulted from contracts
with the United States government and its agencies. Export sales
comprised 60%, 46% and 57% of net sales in fiscal 1999, 1998 and
1997, respectively. Export sales include sales to domestic companies
for inclusion in products which will be sold to international
customers.
(11) Commitments and Contingencies
(a) Operating Leases
The Company is obligated under noncancellable operating lease
agreements. At July 31, 1999, the future minimum lease payments
under operating leases are as follows:
2000 $ 355,000
2001 355,000
2002 193,000
2003 196,000
-------------
$ 1,099,000
=============
Lease expense charged to operations was $301,000, $140,000 and $123,000 in
fiscal 1999, 1998 and 1997, respectively.
(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 condition.
(c) Litigation
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.
F-18
(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 January 1998 which provides, among
other things, for his employment until 2003 at a current basic
compensation of $295,000 per annum plus such additional amounts, if
any, as the Board of Directors may from time to time determine.
(12) 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 is included in intangible assets in the
accompanying consolidated balance sheet. Effective July 31, 1999,
the operations of the business acquired by CWI are being
discontinued (see Note 13). The pro forma effect of the acquisition
of CMDC was not material to the results of operations for the years
ended July 31,1999 and 1998.
(13) Discontinued Operations
Based upon CWI's disappointing fiscal 1999 results of operations and its
uncertain future prospects, in September 1999, the Board of
Directors approved a plan to liquidate CWI by January 31, 2000. The
consolidated financial statements of the Company have been
reclassified to reflect the effects of the Company's decision to
account for the disposal of CWI as a discontinued operation.
Accordingly, costs and expenses, assets and liabilities, and cash
flows associated with CWI have been excluded from the respective
captions in the accompanying consolidated balance sheet, statements
of operations and statements of cash flows. Components of amounts
included in the net liabilities of discontinued operations in the
accompanying consolidated balance sheet are as follows:
July 31, 1999
-------------
Inventory $ 293,000
Provision for operating losses during phase-out period (430,000)
----------
$ (137,000)
==========
The Company expects to liquidate the operations of CWI by January 31,
2000 and has estimated a loss of $470,000 on disposal of CWI's
assets and $430,000 for operating losses through January 31, 2000.
CWI had no revenue in fiscal 1999 and expenses of $942,000.
(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
F-19
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.
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 and its stockholders. The Rights
will expire on December 15, 2008.
F-20
Schedule II
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended July 31, 1999, 1998 and 1997
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,:
1999 $ 170,000 -- -- (25,000)(D) 145,000
1998 102,000 96,000 (C) -- (28,000)(D) 170,000
1997 28,000 85,000 (C) -- (11,000)(D) 102,000
Inventory reserves:
Year ended July 31,:
1999 $ 829,000 341,000 (A) -- -- 1,170,000
1998 956,000 -- -- (127,000)(B) 829,000
1997 490,000 466,000 (A) -- -- 956,000
(A) Increase in reserves for contract and other adjustments.
(B) Reduction of excess reserves for contract and other adjustments.
(C) Increase in allowance for doubtful accounts.
(D) Write-off of uncollectible receivables.
S-1