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, 2001 ------------------------------------------------------ |_| 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 (I.R.S. Employer Identificaiton of incorporation /organization) Number) 105 Baylis Road, Melville, New York 11747 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (631) 777-8900 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) 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 CORPORATE ISSUERS: As of December 10, 2001, the number of outstanding shares of Common Stock, par value $.10 per share, of the Registrant was 7,437,646.
COMTECH TELECOMMUNICATIONS CORP. INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - October 31, 2001 (Unaudited) and July 31, 2001 2 Consolidated Statements of Operations - Three Months Ended October 31, 2001 and 2000 (Unaudited) 3 Consolidated Statements of Cash Flows - Three Months Ended October 31, 2001 and 2000 (Unaudited) 4 Notes to Consolidated Financial Statements 5 - 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 11 PART II. OTHER INFORMATION 11 Item 1. Legal Proceedings 11 Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURE PAGE 12 1
PART I FINANCIAL INFORMATION COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> October 31, 2001 July 31, 2001 ---------------- ------------- Assets (Unaudited) ----------- <S> <C> <C> Current assets: Cash and cash equivalents $ 16,717,000 36,205,000 Accounts receivable, less allowance for doubtful accounts of $774,000 at October 31, 2001 and $845,000 at July 31, 2001 29,693,000 27,374,000 Inventories, net 34,111,000 36,732,000 Prepaid expenses and other current assets 621,000 1,151,000 Deferred tax asset - current 2,634,000 2,634,000 ------------- ------------- Total current assets 83,776,000 104,096,000 Property, plant and equipment, net 12,140,000 11,778,000 Goodwill and other intangibles with indefinite lives, net of accumulated amortization of $1,648,000 at October 31, 2001 and July 31, 2001 17,671,000 17,657,000 Other intangibles with definite lives, net of accumulated amortization of $1,570,000 at October 31, 2001 and $1,209,000 at July 31, 2001 9,892,000 10,162,000 Other assets, net 421,000 569,000 Deferred tax asset - non current 2,726,000 2,726,000 ------------- ------------- Total assets $ 126,626,000 146,988,000 ============= ============= Liabilities and Stockholders' Equity Current liabilities: Current installments of long-term debt -- 5,900,000 Current installments of capital lease obligations (including payable to related party of $63,000 at October 31, 2001 and $155,000 at July 31, 2001) 1,024,000 1,097,000 Accounts payable 8,729,000 11,014,000 Accrued expenses and other current liabilities 13,088,000 13,615,000 Deferred service revenue 2,542,000 2,073,000 Income tax payable 3,806,000 3,308,000 ------------- ------------- Total current liabilities 29,189,000 37,007,000 Long-term debt, less current installments 28,683,000 42,000,000 Capital lease obligations, less current installments 1,915,000 2,157,000 Other long-term liabilities 232,000 259,000 ------------- ------------- Total liabilities 60,019,000 81,423,000 Stockholders' equity: Preferred stock, par value $.10 per share; shares authorized and unissued 2,000,000 -- -- Common stock, par value $.10 per share; authorized 30,000,000 shares, issued 7,519,510 shares at October 31, 2001 and 7,511,105 shares at July 31, 2001 752,000 751,000 Additional paid-in capital 67,613,000 67,490,000 Accumulated deficit (1,071,000) (1,973,000) ------------- ------------- 67,294,000 66,268,000 Less: Treasury stock (82,500 shares) (184,000) (184,000) Deferred compensation (503,000) (519,000) ------------- ------------- Total stockholders' equity 66,607,000 65,565,000 ------------- ------------- Total liabilities and stockholders' equity $ 126,626,000 146,988,000 ============= ============= Commitments and contingencies </TABLE> See accompanying notes to consolidated financial statements. 2
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended October 31, ----------------------------- (Unaudited) 2001 2000 ------------ ----------- Net sales $ 31,045,000 39,846,000 Cost of sales 20,240,000 26,738,000 ------------ ----------- Gross profit 10,805,000 13,108,000 ------------ ----------- Operating expenses: Selling, general and administrative 5,573,000 6,167,000 Research and development 2,648,000 2,797,000 Amortization of intangibles 361,000 594,000 ------------ ----------- Total operating expenses 8,582,000 9,558,000 ------------ ----------- Operating income 2,223,000 3,550,000 Other expense (income): Interest expense 973,000 957,000 Interest income (182,000) (593,000) ------------ ----------- Income before provision for income taxes 1,432,000 3,186,000 Provision for income taxes 530,000 1,179,000 ------------ ----------- Net income $ 902,000 2,007,000 ============ =========== Net income per share: Basic $ 0.12 0.28 ============ =========== Diluted $ 0.11 0.25 ============ =========== Weighted average number of common 7,437,000 7,269,000 shares outstanding - basic Potential dilutive common shares 545,000 622,000 ------------ ----------- Weighted average number of common and common equivalent shares outstanding assuming dilution - diluted 7,982,000 7,891,000 ============ =========== See accompanying notes to consolidated financial statements. 3
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Three Months Ended October 31, ----------------------------- (Unaudited) 2001 2000 ------------ ----------- <S> <C> <C> Cash flows from operating activities: Net income $ 902,000 2,007,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Decrease in bad debt allowance (71,000) (59,000) Provision for (reduction of) inventory reserves 259,000 (462,000) Depreciation and amortization 1,342,000 1,758,000 Deferred income tax provision -- (829,000) Changes in assets and liabilities: Accounts receivable (2,248,000) (11,756,000) Inventories 2,362,000 1,002,000 Prepaid expenses and other current assets 530,000 (13,000) Other assets 115,000 (32,000) Accounts payable (2,285,000) (429,000) Accrued expenses and other current liabilities (527,000) 3,714,000 Deferred service revenue 469,000 -- Income tax payable 498,000 1,470,000 Other long-term liabilities (27,000) 3,000 ------------ ----------- Net cash provided by (used in) operating activities 1,319,000 (3,626,000) ------------ ----------- Cash flows from investing activities: Purchases of property, plant and equipment (1,294,000) (715,000) Purchase of technology license (91,000) -- Purchase of marketable investment securities -- (449,000) Payment for business acquisitions, net of cash received (14,000) 9,038,000 ------------ ----------- Net cash (used in) provided by investing activities (1,399,000) 7,874,000 ------------ ----------- Cash flows from financing activities: Principal payments on capital lease obligations (315,000) (125,000) Prepayment of principal under loan agreement (19,217,000) -- Proceeds from exercise of stock options and warrants 124,000 42,000 ------------ ----------- Net cash used in financing activities (19,408,000) (83,000) ------------ ----------- Net increase (decrease) in cash and cash equivalents (19,488,000) 4,165,000 Cash and cash equivalents at beginning of period 36,205,000 12,587,000 ------------ ----------- Cash and cash equivalents at end of period $ 16,717,000 16,752,000 ============ =========== Supplemental cash flow disclosure: Cash paid during the period for: Interest $ 351,000 25,000 Income taxes $ 32,000 437,000 </TABLE> See accompanying notes to consolidated financial statements. 4
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) General The accompanying consolidated financial statements at and for the three months ended October 31, 2001 and 2000 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 such periods are not necessarily indicative of the results of operations to be expected for the full year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended July 31, 2001 and the notes thereto contained in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission. (2) Reclassification Certain reclassifications have been made to previously reported statements to conform to the Company's current financial statement format. (3) Acquisition In April 2001, we acquired certain assets and product lines of MPD Technologies, Inc. ("MPD") for $12.7 million, including transaction costs of $.8 million. The acquisition was accounted for under the purchase method of accounting. Accordingly, we have recorded the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The purchase price of $12.7 million was financed through $10.0 million of institutional secured borrowings and the balance from internal company funds. The Company's operating results for the three months ended October 31, 2001 include MPD. (4) Comprehensive Income The Company's total comprehensive income for the three month periods ended October 31, 2001 and 2000 was as follows: Three Months Ended October 31, ------------------------------ 2001 2000 -------- ---------- Net income $902,000 2,007,000 Other comprehensive income (loss), net of tax: Unrealized loss on available-for-sale securities -- (148,000) Net unrealized gain on forward foreign currency contracts -- 50,000 -------- ---------- Comprehensive income $902,000 1,909,000 ======== ========== (5) Accounts Receivable Accounts receivable consist of the following: <TABLE> <CAPTION> October 31, 2001 July 31, 2001 ---------------- ------------- <S> <C> <C> Accounts receivable from commercial customers $19,893,000 18,336,000 Unbilled receivables (including retainages) on contracts-in-progress 5,644,000 5,939,000 Amounts receivable from the United States government and its agencies 4,930,000 3,944,000 ----------- ----------- 30,467,000 28,219,000 Less allowance for doubtful accounts 774,000 845,000 ----------- ----------- Accounts receivable, net $29,693,000 27,374,000 =========== =========== </TABLE> 5
(6) Inventories Inventories consist of the following: <TABLE> <CAPTION> October 31, 2001 July 31, 2001 ---------------- ------------- <S> <C> <C> Raw materials and components $18,766,000 18,718,000 Work-in-process 17,884,000 20,294,000 ----------- ----------- 36,650,000 39,012,000 Less: Reserve for anticipated losses on contracts & inventory reserves 2,539,000 2,280,000 ----------- ----------- Inventories, net $34,111,000 36,732,000 =========== =========== </TABLE> (7) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: October 31, 2001 July 31, 2001 ---------------- ------------ Customer advances and deposits $ 3,279,000 2,089,000 Accrued wages and benefits 2,825,000 3,663,000 Accrued commissions 959,000 1,021,000 Accrued warranty 3,852,000 4,336,000 Other 2,173,000 2,506,000 ----------- ----------- $13,088,000 13,615,000 =========== =========== (8) Long-Term Debt In August 2001, the Company prepaid $19.2 million of principal on the $40.0 million of debt incurred in connection with the EF Data acquisition. After the prepayment, the aggregate remaining amount of principal outstanding relating to the $50 million of borrowings associated with the EF Data and MPD Technologies acquisitions was $28.7 million. There was no prepayment penalty as a result of the pay down, which was funded by available cash balances. As a result of the prepayment, our next principal payment on such borrowings is not due until December 2003. (9) Earnings Per Share The Company calculates earnings per share ("EPS") in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". Basic EPS is computed based on the weighted average number of shares outstanding. Diluted EPS reflects the maximum dilution from potential common stock issuable pursuant to the exercise of stock options and warrants, if dilutive, outstanding during each period. (10) Segment and Principal Customer Information The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Reportable operating segments are determined based on the Company's management approach. The management approach, as defined by SFAS No. 131, is based on the way that the chief operating decision-maker organizes the segments within an enterprise for making operating decisions and assessing performance. While the Company's results of operations are primarily reviewed on a consolidated basis, the chief operating decision-maker also manages the enterprise in three segments: (i) Telecommunications Transmission, (ii) RF Microwave Amplifiers and (iii) Mobile Data Communications Services. Telecommunications Transmission products include modems, frequency converters, satellite VSAT transceivers and antenna and over-the-horizon microwave communications products and systems. RF Microwave Amplifiers products include high-power amplifier products that use the microwave and radio frequency spectrums. Mobile Data Communications Services include two-way messaging between mobile platforms or remote sites and user headquarters using satellite, terrestrial microwave or Internet links. Unallocated assets consist principally of cash, deferred tax assets and intercompany receivables. Unallocated losses result from such corporate expenses as legal, accounting and executive. Segment sales below exclude inter-segment sales between the Telecommunications Transmission and RF Microwave Amplifiers segments aggregating $741,000 which were at approximately breakeven. 6
Three months ended October 31, 2001 ---------------- (in thousands) <TABLE> <CAPTION> Mobile Data ----------- Telecommunications RF Microwave Communications ------------------ ------------ -------------- Transmission Amplifiers Services Unallocated Total ------------ ---------- -------- ----------- ----- <S> <C> <C> <C> <C> <C> Net sales $20,251 6,600 4,194 -- 31,045 Operating income (loss) 2,740 310 48 (875) 2,223 Interest income 37 1 -- 144 182 Interest expense 745 228 -- -- 973 Depreciation and amortization 917 359 49 17 1,342 Expenditures for long-lived assets, including intangibles- 678 401 315 5 1,399 Total assets 66,201 25,179 15,421 19,825 126,626 </TABLE> Three months ended October 31, 2000 ---------------- (in thousands) <TABLE> <CAPTION> Mobile Data ----------- Telecommunications RF Microwave Communications ------------------ ------------ -------------- Transmission Amplifiers Services Unallocated Total ------------ ---------- -------- ----------- ----- <S> <C> <C> <C> <C> <C> Net sales $32,434 3,909 3,503 -- 39,846 Operating income (loss) 4,642 (148) (178) (766) 3,550 Interest income 13 -- -- 580 593 Interest expense 938 19 -- -- 957 Depreciation and amortization 1,470 225 52 11 1,758 Expenditures for long-lived assets, including intangibles 471 185 59 -- 715 Total assets 75,362 10,632 6,765 39,949 132,708 </TABLE> (11) Accounting for Business Combinations, Goodwill and Other Intangible Assets In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. This pronouncement also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". The Company adopted the provisions of SFAS No. 141 effective July 1, 2001 and SFAS No. 142 effective August 1, 2001. As of July 31, 2001, $4.6 million of intangibles, net of accumulated amortization of $.8 million, were reclassified as intangibles with indefinite lives. For the quarter ended October 31, 2000, the amount of amortization, net of income taxes, associated with goodwill and other intangibles with indefinite lives included in net income was $.2 million. If SFAS No. 142 had been adopted effective August 1, 2000, net income for the quarter ended October 31, 2000 would have been $2.2 million. Basic earnings per share would have been $0.30 and diluted earnings per share would have been $0.28. 7
Intangibles with indefinite lives by reporting unit as of October 31, 2001 are as follows: Telecommunications transmission $ 7,870,000 RF microwave amplifiers 8,367,000 Mobile data communications services 1,434,000 ----------- $17,671,000 =========== (12) Recent Accounting Pronouncements In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company is required to adopt SFAS No. 144 no later than August 1, 2002. The Company does not expect SFAS No. 144 will have a material impact on the Company's consolidated financial statements. COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We design, develop, produce and market sophisticated wireless telecommunications transmission products and systems and solid state high-power broadband amplifiers for commercial and government purposes. Our products are used in point-to-point and point-to-multipoint telecommunication applications such as satellite communications, over-the-horizon microwave systems, telephone systems and cable and broadcast television. Our broadband amplifier products are also used in cellular and PCS instrumentation testing and certain defense systems. Our business consists of three segments: mobile data communications services, telecommunications transmission, and RF microwave amplifiers. Our sales of mobile data communications services may increase substantially if, when and as orders are received under our contract with the U.S. Army and we penetrate other government and commercial markets for these services. Our sales are made to domestic and international customers, both commercial and governmental. International sales (including sales to prime contractors for end use by international customers) are expected to remain a substantial portion of our total sales for the foreseeable future due to the growing worldwide demand for wireless and satellite telecommunication products and services and our expanded line of RF microwave amplifier product offerings to meet these demands. At times, a substantial portion of our sales may be derived from a limited number of relatively large customer contracts, the timing of which cannot be predicted. Quarterly sales and operating results may be significantly affected by one or more of such contracts. Accordingly, we can experience significant fluctuations in sales and operating results from quarter to quarter. Sales consist of stand-alone products and systems. For the past several years we have endeavored to achieve greater product sales as a percentage of total sales, because product sales generally have higher gross profit margins than systems sales. In the future, as our installed base of mobile data communications terminals is established, we expect an increasing amount of our sales will be attributable to the recurring service revenue component of our mobile data communications services segment. We generally recognize income under contracts only when the products are shipped. However, when the performance of a contract will extend beyond a 12-month period, income is recognized on the percentage-of-completion method. Profits expected to be realized on contracts are based on total sales value as related to estimated costs at completion. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change. Estimated losses on long-term contracts-in-progress are recorded in the period in which such losses become known. 8
Our gross profit is affected by a variety of factors, including the mix of products, systems and services sold, production efficiency, price competition and general economic conditions. Selling, general and administrative expenses consist primarily of salaries and benefits for marketing, sales and administrative employees, advertising and trade show costs, professional fees and amortization of deferred compensation. Our research and development expenses relate to both existing product enhancement and new product development. A portion of our research and development efforts is related to specific contracts and is recoverable under those contracts because they are funded by the customers. Such customer-funded expenditures are not included in research and development expenses for financial reporting purposes but are reflected in cost of sales. In July 2000, we acquired the business of EF Data, the satellite communications division of Adaptive Broadband Corporation for cash. The acquisition was accounted for under the "purchase method" of accounting. Accordingly, we allocated the purchase price to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of the acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $26.8 million, of which $10.2 million was allocated to in-process research and development and was expensed as of the acquisition date. Forty million dollars of the purchase price was supplied through institutional secured borrowings bearing interest at 9.25% due in installments through 2005, and the balance from internal company funds. In April 2001, we acquired certain assets and product lines of MPD Technologies, Inc. for cash. The acquisition was accounted for under the "purchase method" of accounting. Accordingly, we have recorded the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The purchase price was financed through $10.0 million of institutional secured borrowings and the balance from internal company funds. The secured borrowing bears interest at a rate of 8.5% and requires interest only payments through June 2005 at which time the entire principal is due. We combined this operation with our Comtech PST Corp. operation in our RF microwave amplifiers segment. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2001 AND OCTOBER 31, 2000 Net Sales Consolidated net sales were $31.0 million and $39.8 million for the three months ended October 31, 2001 and 2000, respectively, representing a decrease of $8.8 million or 22.1%. Sales during the three months ended October 31, 2001 were adversely impacted by the current weak economic environment. Particular softness was experienced in our telecommunications transmission segment as a result of the significant downturn in the telecommunications market. We believe sales will continue to be adversely impacted until such economic conditions improve. Sales from our telecommunications transmission segment were $20.2 million, or 65.2% of our total net sales, during the three months ended October 31, 2001 as compared to $32.4 million, or 81.4% of our total net sales, during the three months ended October 31, 2000. As mentioned above, sales in this segment were adversely impacted by the current softness in the telecommunications industry. Sales from our RF microwave amplifier segment were $6.6 million and $3.9 million during the three months ended October 31, 2001 and 2000, respectively, or 21.3% and 9.8% of our total net sales. The increase was principally the result of the acquisition of certain assets and product lines of MPD Technologies, Inc. in April 2001. Sales from our mobile data communications services segment were $4.2 million, or 13.5% of our total net sales for the three months ended October 31, 2001, versus $3.5 million, or 8.8% of our total net sales for the three months ended October 31, 2000. This increase of approximately $.7 million was due to increased sales of our Movement Tracking System. International sales represented 43.9% and 49.2% of total net sales for the three months ended October 31, 2001 and 2000, respectively. Domestic sales represented 27.0% and 31.4% of total net sales for the three months ended October 31, 2001 and 2000, respectively. U.S. government sales represented 29.1% and 19.4% of total net sales for the three months ended October 31, 2001 and 2000, respectively. Gross Profit Gross profit was $10.8 million and $13.1 million for the three months ended October 31, 2001 and 2000, respectively. The decrease was due to the reduced level of sales discussed above. Gross margin, as a percentage of net sales, was 34.8% and 32.9% for the three months ended October 31, 2001 and 2000, respectively. The higher gross margin during the three months ended October 31, 2001 was primarily the result of low margin shipments that were made during the three months ended October 31, 2000 out of backlog relating to the July 2000 EF Data acquisition. Selling, General and Administrative Expenses Selling, general and administrative expenses were $5.6 million and $6.2 million for the three months ended October 31, 2001 and 2000, respectively. The decrease is related to the reduction in sales during the three months ended October 31, 2001. Research and Development Expenses Research and development expenses were $2.6 million and $2.8 million during the three months ended October 31, 2001 and 2000, respectively. As an investment for the future, we are continually enhancing 9
our existing products and developing new products and technologies. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the three months ended October 31, 2001 and 2000, customers reimbursed us $.5 million and $.2 million, respectively, which amounts are not reflected in the reported research and development expenses. Amortization of Intangibles Amortization of intangibles decreased from $.6 million to $.4 million during the three months ended October 31, 2001 compared to the three months ended October 31, 2000 as incremental amortization expense relating to the acquisition of certain assets and product lines of MPD Technologies, Inc. was more than offset by the cessation of goodwill amortization in accordance with newly adopted accounting pronouncements (see note 11 to the consolidated financial statements). Operating Income Operating income for the three months ended October 31, 2001 and 2000 was $2.2 million and $3.6 million, respectively. The decrease was primarily the result of the decrease in sales discussed above. Interest Expense Interest expense was $1.0 million for both the three months ended October 31, 2001 and 2000. Interest savings from the prepayment of $19.2 million of debt in August 2001 were offset by interest on borrowings in connection with the acquisition of certain assets and product lines of MPD Technologies, Inc. in April 2001. Interest Income Interest income was $.2 million and $.6 million for the three months ended October 31, 2001 and 2000, respectively. The decrease was the result of a lower level of investable funds during the three months ended October 31, 2001, as well as lower interest rates. Provision for Income Taxes The provisions for income taxes for both periods presented reflect effective tax rates of 37%, which are consistent with the rate for fiscal 2001. LIQUIDITY AND CAPITAL RESOURCES Our cash and cash equivalents decreased to $16.7 million at October 31, 2001 from $36.2 million at July 31, 2001. The decrease of $19.5 million was primarily the result of the prepayment in August 2001 of $19.2 million in borrowings related to the acquisition of EF Data. As a result of the prepayment, our next principal payment on long-term debt is not due until December 2003. Net cash provided by operating activities was $1.3 million for the three months ended October 31, 2001. Such amount reflects net income for the period plus the impact of non-cash items such as depreciation and amortization, partially offset by changes in working capital balances. Net cash used by investing activities was $1.4 million for the three months ended October 31, 2001. Substantially all of the cash used related to capital expenditures aggregating $1.3 million. Net cash used by financing activities was $19.4 million for the three months ended October 31, 2001. We prepaid $19.2 million of borrowings in August 2001. In addition, principal payments on capital lease obligations amounted to $.3 million during the three months ended October 31, 2001. These uses of cash were offset by proceeds from the sale of stock and exercise of stock options aggregating $.1 million. We believe that our cash and cash equivalents will be sufficient to meet our operating cash requirements for at least the next year. In the event that we identify a significant acquisition that requires additional cash, we would seek to borrow additional funds or raise additional equity capital. FORWARD-LOOKING STATEMENTS Certain information in this Quarterly Report on Form 10-Q contains forward-looking statements, including but not limited to, information relating to the future performance and financial condition of the Company, the plans and objectives of the Company's management and the Company's assumptions regarding such performance and plans that are forward-looking in nature and involve certain significant risks and uncertainties. Actual results could differ materially from such forward-looking information. The Company's Form 10-K filed with the Securities and Exchange Commission identifies many of such risks and uncertainties, which include the following: o the impact of a continued domestic and foreign economic slow-down on the demand for our products and services, particularly in the telecommunications industry; 10
o risks associated with our mobile data communications business being in a developmental stage; o our potential inability to keep pace with rapid technological changes; o our backlog being subject to customer cancellation or modification; o our sales to the U.S. government being subject to funding, deployment and other risks; o our fixed price contracts being subject to risks; o our dependence on component availability, subcontractor availability and performance by key suppliers; o the highly competitive nature of our markets; o our dependence on international sales; o the adverse effect on demand for our products and services that would be caused by a decrease in the value of foreign currencies relative to the U.S. dollar; o the potential entry of new competitors in the mobile data communications industry; o uncertainty whether the satellite communications industry or infrastructure will continue to develop and the market will grow; o uncertainty whether the Internet will continue to grow in international markets; o the potential impact of increased competition on prices, profit margins and market share for the Company's products and services; o the availability of satellite capacity on a leased basis needed to provide the necessary global coverage for our mobile data communications services; o whether we can successfully implement our satellite mobile data communications services and achieve recurring revenues for such services; and o whether we can successfully combine and assimilate the operations of acquired businesses and product lines. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company's earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in money market funds. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. When applicable, the Company may enter into foreign currency contracts solely to hedge foreign currency receivables. It has established policies, procedures and internal processes governing the management of this hedging to reduce market risks inherent in foreign exchange. Therefore, any change in these markets would not materially affect the consolidated financial position, results of operations or cash flows of the Company. PART II OTHER INFORMATION Item 1. Legal Proceedings Two former employees have commenced an action in the United States District Court, District of New Jersey, against the Company and others asserting, among other things, breach of certain restricted stock agreements and seeking unspecified monetary damages, specific performance of the restricted stock agreements, including the issuance of an aggregate 225,000 shares of the Company's Common Stock for a purchase price of $.10 per share, and other relief. The Company believes it has meritorious defenses to all the claims asserted and intends to vigorously defend the action. It has filed an answer and has asserted certain counterclaims. There is a pending motion of the plaintiffs to dismiss the counterclaims and to strike certain of the affirmative defenses. The Company has opposed the motion and cross-moved to dismiss the claims of one plaintiff. We are subject to certain legal actions, which arise, in the normal course of business. We believe that the outcome of these actions will not have a material adverse effect on our consolidated financial position or results of operation. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None 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 13, 2001 By: /s/ Fred Kornberg ------------------------------- Fred Kornberg Chairman of the Board Chief Executive Officer and President Date: December 13, 2001 By: /s/ Robert G. Rouse ------------------------------- Robert G. Rouse Senior Vice President and Chief Financial Officer 12