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 October 31, 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 12/11/97. - --------------------------------------------------------------------------------
COMTECH TELECOMMUNICATIONS CORP. -------------------------------- INDEX ----- Page No. ---- PART I FINANCIAL INFORMATION Consolidated Balance Sheets - 3 October 31, 1997 (unaudited) and July 31, 1997 Consolidated Statements of Operations - 4 Three Months Ended October 31, 1997 and 1996 (unaudited) Consolidated Statements of Cash Flows - 5 Three Months Ended October 31, 1997 and 1996 (unaudited) Notes to Consolidated Financial Statements 6-7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-9 PART II OTHER INFORMATION 10 Exhibit 11.0 Computation of Earnings Per Common Share 11 Signature Page 12 2
PART I ------ FINANCIAL INFORMATION --------------------- COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- <TABLE> <CAPTION> October 31, 1997 July 31, 1997 ----------------- -------------- (unaudited) <S> <C> <C> ASSETS: Current assets: Cash and cash equivalents $ 946,000 $ 1,274,000 Restricted cash 57,000 90,000 Accounts receivable, less allowance for doubtful accounts of $95,000 at October 31, 1997 and $102,000 at July 31, 1997 5,741,000 5,551,000 Inventories, net 7,780,000 6,556,000 Prepaid expenses and other current assets 214,000 231,000 ------------ ------------ Total current assets 14,738,000 13,702,000 ------------ ------------ Property, plant and equipment, net 4,061,000 3,898,000 Other assets 351,000 360,000 ------------ ------------ Total assets $ 19,150,000 $ 17,960,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Current installments of long-term debt (including payable to related party of $384,000 at October 31, 1997 and $386,000 at July 31, 1997) $ 747,000 $ 606,000 Notes Payable 395,000 - Accounts payable 3,345,000 2,865,000 Accrued expenses and other current liabilities 2,346,000 2,301,000 ------------ ------------ Total current liabilities 6,833,000 5,772,000 ------------ ------------ Long-term debt, less current installments (including payable to related party of $1,035,000 at October 31, 1997 and $1,126,000 at July 31, 1997) 1,318,000 1,310,000 ------------ ------------ Total liabilities 8,151,000 7,082,000 ------------ ------------ 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 October 31, 1997 and July 31, 1997 265,000 265,000 Additional paid-in capital 22,127,000 22,127,000 Accumulated deficit (11,011,000) (11,115,000) ------------ ------------ Less: Treasury stock (55,000 shares at October 31, 1997 and July 31, 1997) (184,000) (184,000) Deferred compensation expense (198,000) (215,000) ------------ ------------ 10,999,000 10,878,000 ------------ ------------ Total liabilities and stockholders' equity $ 19,150,000 $ 17,960,000 ============ ============ </TABLE> See accompanying notes to consolidated financial statements. 3
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- Three Months Ended October 31, (Unaudited) ---------------------- 1997 1996 ---------- ---------- Net sales $5,934,000 $5,188,000 ---------- ---------- Operating costs and expenses: Cost of sales 4,040,000 3,807,000 Selling, general and administrative 1,428,000 1,071,000 Research and development 268,000 229,000 ---------- ---------- Total operating costs and expenses 5,736,000 5,107,000 ---------- ---------- Operating income 198,000 81,000 Other (expenses) income: Interest expense (78,000) (76,000) Interest income 6,000 9,000 Other income 3,000 72,000 ---------- ---------- Income before provision for income taxes 129,000 86,000 Provision for income taxes 25,000 5,000 ---------- ---------- Net income $ 104,000 $ 81,000 ========== ========== Earnings per share $.04 $.03 ========== ========== Weighted average number of common and common equivalent shares outstanding 2,672,907 2,622,384 ========== ========== See accompanying notes to consolidated financial statements 4
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- <TABLE> <CAPTION> Three Months Ended October 31, ----------- (unaudited) <S> <C> <C> 1997 1996 ----- ----- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 104,000 $ 81,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Gain on sale of property - (72,000) Depreciation and amortization 286,000 259,000 Amortization of deferred compensation 17,000 (62,000) Changes in assets and liabilities: Accounts receivable (190,000) (858,000) Inventories (1,224,000) (454,000) Prepaid expenses and other current assets 17,000 62,000 Other assets (5,000) (2,000) Accounts payable 480,000 393,000 Accrued expenses and other current liabilities 44,000 (38,000) ----------- ---------- Net cash used in operating activities (471,000) (691,000) ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (35,000) (85,000) ----------- Net cash used in investing activities (35,000) (85,000) ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Notes payable 395,000 - Principal payments on long-term debt (250,000) (162,000) Exercise of stock options - 65,000 ----------- ---------- Net cash provided by financing activities 145,000 (97,000) Net decrease in cash and cash equivalents (361,000) (873,000) Cash and cash equivalents at beginning of period 1,364,000 2,060,000 ----------- ---------- Cash and cash equivalents at end of period $ 1,003,000 $1,187,000 =========== ========== Supplemental cash flow disclosure: - ---------------------------------- Cash paid during the period for: Interest $ 78,000 $ 76,000 Income taxes 25,000 5,000 </TABLE> Non cash items: - -------------- In the first quarter of fiscal 1998, the Company entered into new capital lease agreements in the amount of $400,000. In the first quarter of fiscal 1997, the Company sold a storage facility for approximately $127,000. The cash for this sale was received in a subsequent period. 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 three months ended October 31, 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 three months ended October 31, 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> October 31, 1997 July 31, 1997 ---------------- ------------- <S> <C> <C> Accounts receivable from commercial customers $5,103,000 $4,416,000 Unbilled receivables (including retainages) on contracts-in-progress 233,000 384,000 Amounts receivable from the United States government and its agencies 500,000 853,000 ---------- ---------- 5,836,000 5,653,000 Less allowance for doubtful accounts 95,000 102,000 ---------- ---------- Accounts receivable, net $5,741,000 $5,551,000 ========== ========== </TABLE> (3) Inventories ----------- Inventories consist of the following: <TABLE> <CAPTION> October 31, 1997 July 31, 1997 ---------------- ------------- <S> <C> <C> Raw materials and components $3,332,000 $2,276,000 Work-in-process 6,297,000 6,025,000 ---------- ---------- 9,629,000 8,301,000 Less: Progress payments 777,000 789,000 Inventory reserves 1,072,000 956,000 ---------- ---------- Inventories - net $7,780,000 $6,556,000 ========== ========== </TABLE> (4) Accrued Expenses and Other Current Liabilities ---------------------------------------------- Accrued expenses and other current liabilities consist of the following: <TABLE> <CAPTION> October 31, 1997 July 31, 1997 ---------------- ------------- <S> <C> <C> Customer advances and deposits $ 727,000 $ 406,000 Accrued wages and benefits 828,000 937,000 Accrued commissions 367,000 413,000 Other 424,000 545,000 ---------- ---------- $2,346,000 $2,301,000 ========== ========== </TABLE> 6
(5) Long-Term Debt -------------- Long-term debt consists of the following: October 31, 1997 July 31, 1997 ---------------- ------------- Obligations under capital leases $2,065,000 $1,916,000 Less current installments 747,000 606,000 ---------- ---------- $1,318,000 $1,310,000 ========== ========== (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 29, 1997, 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 OCTOBER 31, - ------------------------------------------------------------------------------ 1997 AND OCTOBER 31, 1996 - ------------------------- Net Sales. Net sales were $5,934,000 and $5,188,000 for the three months ended October 31, 1997 and 1996, respectively, representing an increase of 14.4%. This increase was due primarily to a higher level of sales of products at Comtech PST Corp., partially offset by results at Comtech Systems, Inc. Gross Margin. Gross profit was $1,894,000 or 31.9% of net sales for the three months ended October 31, 1997 compared to $1,381,000 or 26.6% of net sales for the same period in fiscal 1997. Higher gross profits in the fiscal 1998 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 $1,428,000 or 24.1% of net sales for the three months ended October 31, 1997 compared to $1,071,000 or 20.6% of net sales for the same period in fiscal 1997. The increased expense was partially due to a higher level of expenses required to support the increased sales volume. The fiscal 1997 period reflected a reduction to administrative expenses that resulted from the forfeiture of certain benefits by a former employee. Research and Development. Research and development expenses were $268,000 and $229,000 for the three months ended October 31, 1997 and 1996, respectively, representing a $39,000, or 17.0% increase. This increase was due primarily to expenses for general product improvements, and expanded product development at Comtech Communications Corp. Results from Operations. As a result of the foregoing factors, the Company had operating earnings of $198,000 for the three months ended October 31, 1997 compared to operating earnings of $81,000 for the comparable prior year period. Interest Expense. Interest expense was $78,000 and $76,000 for the three months ended October 31, 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 $6,000 and $9,000 for the three months ended October 31, 1997 and 1996, respectively. This decrease was due primarily to the decrease in the amount of cash available to invest in the fiscal 1998 period. 8
Other Income. Other income was $3,000 and $72,000 for the three months ended October 31, 1997 and 1996, respectively. In the fiscal 1998 period, this amount was the proceeds from the sale of fully depreciated equipment. In the fiscal 1997 period this was the result of a gain from the sale of a storage facility. Provision for Income Taxes. The provision for income taxes was $25,000 and $5,000 for the three months ended October 31, 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. LIQUITY AND CAPITAL RESOURCES - ----------------------------- For the three month period ended October 31, 1997, the Company's cash and cash equivalent position decreased by $361,000 from $1,364,000 at July 31, 1997 to $1,003,000 at October 31, 1997. Operating activities used $471,000 of cash, investing activities used $35,000 of cash and financing activities provided $145,000 of cash. The increase in accounts receivable of $190,000 was primarily due to the timing of the shipments. The allowance for doubtful accounts decreased by $7,000 due to the write off of a receivable deemed to be uncollectible. The Company reviews its allowance for doubtful accounts periodically and believes that it is sufficient based on past experience and the Company's credit standards. Generally, foreign customers are required to secure their obligations by letter of credit. Inventory increased by $1,224,000, primarily due to the timing of material purchases. 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 Company's order backlog. The Company does have some product lines which require a more competitive delivery 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. Inventory reserves are reviewed on an ongoing basis and adjustments are made as needed. Accounts payable increased by $480,000 primarily due to the increase in inventory purchases for the period. The Company purchased property plant and equipment of $435,000 of which approximately $400,000 was financed by capital leases. Long term debt increased by $150,000. This was the net result of the addition of $400,000 from the aforementioned capital equipment purchases, offset by the payments of $250,000 made on existing capital leases. Notes payable was $395,000 at October 31, 1997 which was the net amount of borrowings outstanding on the Company's line of credit under the Working Capital Guarantee Program of the Export-Import Bank of the United States. This program, which is administered by Republic National Bank of New York, provides the lender a 90% guarantee of qualifying loans of up to $1,000,000, made to the Company for export related contracts. This is a component of the total secured credit facility of $5,000,000 from Republic National Bank of New York. The line bears interest on borrowings of 1/2% over the Bank's Reference Rate. The credit facility, which is for a one year period, is expiring on December 31, 1997. The Company is negotiating with the bank and expects to renew the facility for another year. The Company believes that its current cash position, funds generated from operations and funds available from the credit facility, collectively, would be adequate to meet the Company's foreseeable cash requirements. 9
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 per Common Share - Page 11 10
Exhibit 11.0 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES ------------------------------------------------- COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE ----------------------------------------------- (Unaudited) Three Months Ended October 31 ---------- 1997 1996 ---------- ---------- Net earnings $ 104,000 $ 81,000 - ------------ ========== ========== Computation of weighted average number of common and common equivalent shares outstanding during the period: Weighted average number of common shares 2,650,404 2,637,384 Weighted average shares assumed to be issued upon exercise of common stock option 77,503 --- Less Treasury Stock (55,000) (15,000) ---------- ---------- Weighted average number of common and common equivalent shares outstanding during the period 2,672,907 2,622,384 ========== ========== Earnings per share: $.04 $ .03 - ------------------- ========== ========== 11
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: December 12, 1997 By: _________________________ Fred Kornberg Chairman of the Board Chief Executive Officer and President Date: December 12, 1997 By: _________________________ J. Preston Windus, Jr. Vice President, Chief Financial Officer and Secretary 12