FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (As last amended in Rel. No. 34-26589, eff. 4/12/89) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20459 Form 10-Q (Mark One) (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended April 30, 1997 ----------------------------------------------------------- ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ------------------- --------------------- Commission File Number: 0-7928 --------------------------------------------------- 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 Number) incorporation or organization) --------------------------------------------------------------------------- 105 Baylis Road, Melville, New York 11747 (Address of principal executive offices) (Zip Code) (516) 777-8900 --------------------------------------------------------------------------- (Registrant's telephone number, including area code) --------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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. (X) Yes ( ) No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ( ) Yes ( ) No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, Par Value $.10 Per Share - 2,650,404 shares outstanding as of 04/30/97. 1
COMTECH TELECOMMUNICATIONS CORP. -------------------------------- INDEX ----- Page No. ---- PART I FINANCIAL INFORMATION Consolidated Balance Sheets - 3 April 30, 1997 (unaudited) and July 31, 1996 Consolidated Statements of Operations - 4 Three Months and Nine Months Ended April 30, 1997 and 1996 (unaudited) Consolidated Statements of Cash Flows - 5 Nine Months Ended April 30, 1997 and 1996 (unaudited) Notes to Consolidated Financial Statements 6-7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 PART II OTHER INFORMATION 11 Exhibit 11.0 Computation of Earnings (Loss) Per Common Share 12 Signature Page 13 2
PART I ------ FINANCIAL INFORMATION --------------------- COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- <TABLE> <CAPTION> April 30, 1997 July 31, 1996 -------------- ------------- (unaudited) <S> <C> <C> ASSETS: Current assets: Cash and cash equivalents $ 1,474,000 $ 1,840,000 Restricted cash 90,000 220,000 Accounts receivable, less allowance for doubtful accounts of $68,000 at April 30, 1997 and $28,000 at July 31, 1996 4,098,000 3,467,000 Inventories, net 7,793,000 6,527,000 Prepaid expenses and other current assets 263,000 196,000 ---------------- -------------- Total current assets 13,718,000 12,250,000 ---------------- -------------- Property, plant and equipment, net 3,743,000 3,996,000 Other assets 332,000 383,000 ---------------- -------------- Total assets $ 17,793,000 $ 16,629,000 ---------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Current installments of long-term debt (including payable to related party of $376,000 at April 30, 1997 and $351,000 at July 31, 1996) $ 620,000 $ 642,000 Notes Payable 300,000 -- Accounts payable 2,756,000 2,037,000 Accrued expenses and other current liabilities 1,986,000 1,774,000 ---------------- -------------- Total current liabilities 5,662,000 4,453,000 ---------------- -------------- Long-term debt, less current installments (including payable to related party of $1,227,000 at April 30, 1997 and $1,512,000 at July 31, 1996) 1,455,000 1,875,000 ---------------- -------------- Total liabilities 7,117,000 6,328,000 ---------------- -------------- Stockholders' equity: Preferred stock, par value $.10 per share; shares authorized and unissued 2,000,000 -- -- Common stock, par value $.10 per share; authorized 10,000,000 shares; issued and outstanding 2,650,404 shares at April 30, 1997 and 2,607,344 at July 31, 1996 265,000 261,000 Additional paid-in capital 22,285,000 22,235,000 Accumulated deficit (11,287,000) (11,599,000) ---------------- -------------- 11,263,000 10,897,000 Less: Treasury stock (55,000 shares at April 30, 1997 15,000 (184,000) (180,000) shares at July 31, 1996) Deferred compensation expense (403,000) (416,000) ---------------- -------------- 10,676,000 10,301,000 Total liabilities and stockholders' equity $ 17,793,000 $ 16,629,000 ---------------- -------------- See accompanying notes to consolidated financial statements </TABLE> 3
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- <TABLE> <CAPTION> Three Months Ended Nine Months Ended April 30, April 30, ------------------ ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- Unaudited Unaudited Unaudited Unaudited --------- --------- --------- --------- <S> <C> <C> <C> <C> Net sales $ 5,531,000 $ 5,263,000 $ 16,767,000 $ 14,466,000 ------------ ------------ ------------ ------------ Operating costs and expenses: Cost of sales 3,696,000 3,670,000 11,929,000 10,125,000 Selling, general and administrative 1,395,000 1,287,000 3,678,000 3,654,000 Research and development 293,000 556,000 164,000 751,000 ------------ ------------ ------------ ------------ Total operating costs and expenses 5,384,000 5,121,000 16,358,000 14,335,000 ------------ ------------ ------------ ------------ Operating earnings 147,000 142,000 409,000 131,000 Other (expenses) income: Interest expense (67,000) (76,000) (215,000) (233,000) Interest income 3,000 18,000 16,000 55,000 Other income 6,000 - 123,000 - ------------ ------------ ------------ ------------ Earnings (loss) before provision for income taxes 89,000 84,000 333,000 (47,000) Provision for income taxes 6,000 5,000 21,000 15,000 ------------ ------------ ------------ ------------ Net income (loss) $ 83,000 $ 79,000 $ 312,000 $ (62,000) ------------ ------------ ------------ ------------ Earnings (loss) per share $ .03 $ .03 $ .12 $ (.02) ------------ ------------ ------------ ------------ Weighted average number of common and common equivalent shares outstanding 2,601,660 2,590,344 2,580,355 2,590,344 ------------ ------------ ------------ ------------ </TABLE> See accompanying notes to consolidated financial statements 4
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- <TABLE> <CAPTION> Nine Months Ended April 30, ------------------ (unaudited) 1997 1996 ---- ---- <S> <C> <C> Cash flows from operating activities: Net income (loss) $ 312,000 4 (62,000) Adjustments to reconcile net income (loss) to net cash used in operating activities: Gain on sale of property (72,000) Depreciation and amortization 793,000 733,000 Amortization (reversal) of deferred compensation expense net (40,000) 108,000 Gain on settlement of claim --- (165,000) Changes in assets and liabilities: Accounts receivable (631,000) 161,000 Inventories (1,265,000) (1,905,000) Prepaid expenses and other current assets (67,000) 38,000 Other assets (6,000) (2,000) Accounts payable 719,000 381,000 Notes Payble 300,000 --- Accrued expenses and other current liabilities 212,000 431,000 --------------- -------------- Net cash provided by (used in) operating activities 255,000 (282,000) --------------- -------------- Cash flows from investing activities: Purchases of property, plant and equipment (494,000) (372,000) Sale of property, plant and equipment 127,000 --- Net proceeds of sales of marketable securities --- 279,000 --------------- -------------- Net cash used in investing activities (367,000) (93,000) --------------- -------------- Cash flows from financing activities: Principal payments on long-term debt (486,000) (386,000) Proceeds from exercise of stock options 106,000 --- Purchase of treasury stock (4,000) --- --------------- -------------- Net cash used in financing activities (384,000) (386,000) Net decrease in cash and cash equivalents (496,000) (761,000) Cash and cash equivalents at beginning of period 2,060,000 2,044,000 --------------- -------------- Cash and cash equivalents at end of period $ 1,564,000 $ 1,283,000 --------------- -------------- Supplemental cash flow disclosure: Cash paid during the period for: Interest $ 215,000 $ 233,000 Income taxes $ 21,000 $ 15,000 Non cash items: The Company entered into new capitalized lease agreements in the amount of $44,000 and $195,000 during the nine months ended April 30, 1997 and 1996, respectively. </TABLE> See accompanying notes to consolidated financial statements. 5
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES ------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (1) General The accompanying consolidated financial statements for the nine months ended April 30, 1997 and 1996 are unaudited. In the opinion of management, the information furnished reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited interim periods. The results of operations for the nine months ended April 30, 1997 are not necessarily indicative of the results of operations to be expected for the full year. (2) Accounts Receivable Accounts receivable consist of the following: <TABLE> <CAPTION> April 30, 1997 July 31, 1996 -------------- ------------- <S> <C> <C> Accounts receivable from commercial customers $3,643,000 $2,079,000 Unbilled receivables (including retainages) on contracts-in-progress 272,000 689,000 Amounts receivable from the United States Government and its agencies 251,000 727,000 ---------- ---------- 4,166,000 3,495,000 Less allowance for doubtful accounts 68,000 28,000 ---------- ---------- Accounts receivable, net $4,098,000 $3,467,000 ---------- ---------- <CAPTION> (3) Inventories Inventories consist of the following: April 30, 1997 July 31, 1996 -------------- ------------- <S> <C> <C> Raw materials and components $2,108,000 $1,754,000 Work-in-process 7,147,000 5,414,000 ----------- ------------ 9,255,000 7,168,000 Less: Progress payments 680,000 151,000 Inventory reserves 782,000 490,000 ----------- ------------ Inventories - net $7,793,000 $6,527,000 ----------- ------------ <CAPTION> (4) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: April 30, 1997 July 31, 1996 -------------- ------------- <S> <C> <C> Customer advances and deposits $516,000 $208,000 Accrued wages and benefits 518,000 680,000 Accrued commissions 464,000 355,000 Other 488,000 531,000 ----------- ------------ $1,986,000 $1,774,000 ----------- ------------ </TABLE> 6
<TABLE> <CAPTION> (5) Long-Term Debt Long-term debt consists of the following: April 30, 1997 July 31, 1996 -------------- ------------- <S> <C> <C> Obligations under capital leases $ 2,075,000 $2,517,000 Less current installments 620,000 642,000 ----------- ---------- $ 1,455 000 $1,875,000 ----------- ---------- </TABLE> (6) Earnings Per Share Earnings per share are based on the weighted average number of common and common equivalent shares (if dilutive) outstanding during each year. 7
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES ------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL --------------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- Forward-Looking Statements -------------------------- Certain information contained in this Quarterly Report on Form 10-Q, including, without limitation, information appearing under Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Factors set forth in the Company's Annual Report on Form 10-K, filed October 31, 1996, or in the Company's other Securities and Exchange Commission filings, could affect the Company's actual results and could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company in this Quarterly Report on Form 10-Q. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL - --------------------------------------------------------------------------- 30, 1997 AND APRIL 30, 1996 - ---------------------------- Net Sales. Net sales were $5,531,000 and $5,263,000 for the three months ended April 30, 1997 and 1996, respectively, representing an increase of 5.1%. This increase was due primarily to a higher level of sales of satellite frequency converters at the Company's Comtech Communications Corp. subsidiary. Gross Margin. Gross profit was $1,835,000 or 33.2% of net sales for the three months ended April 30, 1997 compared to $1,593,000 or 30.3% of net sales for the same period in fiscal 1996. Higher gross profits in the fiscal 1997 period were due primarily to the higher sales volume, and higher gross profit margins, as a percentage of sales, at Comtech PST Corp. and Comtech Communications Corp. Selling, General and Administrative. Selling, general and administrative expenses were $1,395,000 or 25.2% of net sales for the three months ended April 30, 1997 compared to $1,287,000 or 24.4% of net sales for the same period in fiscal 1996. The increased expense was due primarily to a higher level of expenses for bid and proposal expenses at the Comtech Systems, Inc. and Comtech PST Corp. subsidiaries. Research and Development. Research and development expenses were $293,000 and $164,000 for the three months ended April 30, 1997 and 1996, respectively, representing a $129,000, or 78.7% increase. This increase was due primarily to expenses for product improvements at Comtech PST Corp. and Comtech Systems, Inc. and new product development at Comtech Communications Corp. Results from Operations. As a result of the foregoing factors, the Company had operating earnings of $147,000 for the three months ended April 30, 1997 compared to operating earnings of $142,000 for the comparable prior year period. Interest Expense. Interest expense was $67,000 and $76,000 for the three months ended April 30, 1997 and 1996, respectively. Interest expense for both periods was attributable largely to interest associated with the Company's capital lease obligations. Interest Income. Interest income was $3,000 and $18,000 for the three months ended April 30, 1997 and 1996, respectively. This decrease was due primarily to the decrease in the amount of cash available to invest in the fiscal 1997 period. Other Income. Other income in the fiscal 1997 period was the result of the sale of fully depreciated equipment. 8
Provision for Income Taxes. The provision for income taxes was $6,000 and $5,000 for the three months ended April 30, 1997 and 1996, respectively, which principally relates to state income taxes. The Company files on a consolidated basis for federal income tax purposes and is not expected to incur federal taxes for these periods due to the previous losses incurred. The Company believes its tax benefits are subject to a 100% valuation allowance due to earnings fluctuations inherent in the Company's operations and the potential limitations on utilization of loss and credit carryforwards pursuant to Sections 382 and 383 of the Internal Revenue Code of 1986. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 1997 - -------------------------------------------------------------------------------- AND APRIL 30, 1996 - ------------------ Net Sales. Net sales were $16,767,000 and $14,466,000 for the nine months ended April 30, 1997 and 1996, respectively, representing an increase of $2,301,000 or 15.9%. The increase in sales was due primarily to a higher level of sales of solid state amplifiers and satellite frequency converters at Comtech PST Corp. and Comtech Communications Corp., respectively. Gross Margin. Gross profit was $4,838,000 or 28.9% of net sales for the nine months ended April 30, 1997 compared to $4,341,000 or 30% of net sales for the same period in fiscal 1996. Higher gross profits in the fiscal 1997 period were due primarily to the higher sales volume. Lower gross profit margins, as a percentage of net sales, in the 1997 period were due primarily to lower gross margins at Comtech Systems, Inc. Selling, General and Administrative. Selling, general and administrative expenses were $3,678,000 or 21.9% for the nine months ended April 30, 1997 compared to $3,654,000 or 25.2% of net sales for the same period in fiscal 1996. Included in fiscal 1997 is the forfeiture of certain benefits by a former employee relating to a restricted stock purchase agreement, which resulted in a reduction of $79,000 to administrative expenses. Research and Development. Research and development expenses were $751,000 and $556,000 for the nine months ended April 30, 1997 and 1996, respectively, representing a $195,000 or 35.1% increase. This increase was due primarily to expenses for product improvements at the Company's Comtech PST Corp. and Comtech Systems, Inc. subsidiaries and new product development at Comtech Communications Corp. which was partially offset by a decrease in these expenses at Comtech Antenna Systems, Inc. Results From Operations. As a result of the foregoing factors, the Company had operating earnings of $409,000 for the nine months ended April 30, 1997 compared to an operating profit of $131,000 for the comparable prior year period. Interest Expense. Interest expense was $215,000 and $233,000 for the nine months ended April 30, 1997 and 1996, respectively. Interest expense for both periods was attributable largely to interest associated with the Company's capital lease obligations. Interest Income. Interest income was $16,000 and $55,000 for the nine months ended April 30, 1997 and 1996, respectively. This decrease was due primarily to the decrease in the amount of cash available to invest in the fiscal 1997 period. Other Income. Other income in the fiscal 1997 period was primarily the result of the gain on the sale of a storage facility and fully depreciated equipment, and a finders fee the Company earned relating to an agreement with a foreign original equipment manufacturer. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- For the nine month period ended April 30, 1997, the Company's cash and cash equivalent position decreased by $496,000 from $2,060,000 at July 31, 1996 to $1,564,000 at April 30, 1997. 9
Operating activities used a net of $255,000. Accounts receivable were $4,098,000 at April 30, 1997 as compared to $3,467,000 at July 31, 1996, representing an increase of $631,000. This increase was primarily the result of the increase in sales. Included in these balances were $272,000 and $689,000 for April 30, 1997 and July 31 1996, respectively, for unbilled accounts receivable for sales recorded on a percentage-of-completion basis. The portion of accounts receivable that are accounted for on a percentage-of-completion basis will vary at any time as a function of the volume of contracts being performed by the Company that are accounted for on a percentage-of-completion basis. The Company believes that its allowance for doubtful accounts is sufficient based on past experience and the Company's credit standards. The Company generally requires international customers to secure their obligations by letter of credit. Inventory levels of materials and components and work-in-process, net of progress payments and reserves were $7,793,000 at April 30, 1997 and $6,527,000 at July 31, 1996, representing an increase of $1,266,000. This increase was due primarily to the additional inventory required to address the increased backlog at April 30, 1997. The Company generally operates on a job-order cost basis, that is, costs are incurred as work-in-process inventory for specific contracts or "jobs" and, accordingly, inventory levels will vary as a function of the status of the Company's order backlog. The Company does have some product lines which require a more competitive response to customers requirements and require the Company to provide for a level of "off-the-shelf" equipment. The only other general inventory that the Company maintains is for basic components which are common for most of its products. Accounts payable increased by $719,000, from July 31, 1996 to April 30, 1997 primarily as a result of the increased sales volume requiring increased inventory purchases. Accrued expenses and other current liabilities increased by $212,000 as a result of an increase in customer advance payments and accrued commissions, partially offset by a decrease in accrued wages and benefits and other expenses. Investing activities used $367,000 of cash. The Company used $494,000 of cash for purchases of equipment. It received $127,000 as proceeds from the sale of a storage facility it previously owned and recognized a $72,000 profit from the sale which is included as other income. Financing activities used $384,000. The Company received $106,000 as proceeds from the exercise of employee incentive stock options. Principal payments on long term debt were $486,000. Additionally, the Company purchased forfeited restricted employee stock which has been added to the Company's treasury stock. In December 1996 the Company obtained a new $5,000,000 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 of 1/2% over the bank's Reference Rate. There was $300,000 of borrowings outstanding at April 30, 1997. A component of this facility is the administration by Republic of $1,000,000 of loans under the Working Capital Guarantee Program of the Export-Import Bank of the United States. This program provides the lender a 90% guarantee on qualifying loans made to the Company for export related contracts. The Company has not utilized this program to date. The Company believes that its current cash position, funds generated from operations and funds available from its credit facility, collectively, would be adequate to meet the Company's cash requirements. 10
PART II ------- OTHER INFORMATION ----------------- Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibit 11.0 The following exhibit is annexed hereto: Computation of Earnings (Loss) per Common Share - Page 12 11
Exhibit 11.0 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES ------------------------------------------------- COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE ----------------------------------------------- (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended April 30 April 30 ------------------ ----------------- 1997 1996 1997 1996 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net earnings (loss) $ 83,000 $ 79,000 $ 312,000 $ ( 62,000) - ------------------- ============= ============= ============ =============== Computation of weighted average number of common equivalent shares outstanding during the period: Weighted average number of common shares 2,645,621 2,605,344 2,626,386 2,605,344 Weighted average shares assumed to be issued upon exercise of common stock option 11,039 8,969 Less Treasury Stock (55,000) (15,000) (55,000) (15,000) --------------- --------------- ---------------- --------------- Weighted average number of common and common equivalent shares outstanding during the period 2,601,660 2,590,344 2,580,355 2,590,344 ============= ============= ============== ============= Earnings (loss) per share: $ .03 $ .03 $ .12 $ (.02) --------------- --------------- ---------------- --------------- </TABLE> 12
SIGNATURE --------- Pursuant to the requirements 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. -------------------------------- (Registrant) Date: June 10, 1997 By: --------------------------- Fred Kornberg Chairman of the Board Chief Executive Officer and President Date: June 10, 1997 By: --------------------------- J. Preston Windus, Jr. Vice President, Chief Financial Officer and Secretary 13