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, 1999 ----------------------------------------------------- |_| 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 - 2,927,604 shares outstanding as of 05/26/99.
COMTECH TELECOMMUNICATIONS CORP. INDEX Page No. ---- PART I FINANCIAL INFORMATION Consolidated Balance Sheets - 3 April 30, 1999 (unaudited) and July 31, 1998 Consolidated Statements of Income- 4 Three Months and Nine Months Ended April 30, 1999 and 1998 (unaudited) Consolidated Statements of Cash Flows - 5 Nine Months Ended April 30, 1999 and 1998 (unaudited) Notes to Consolidated Financial Statements 6-7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 PART II OTHER INFORMATION 12 Signature Page 13 2
PART I FINANCIAL INFORMATION COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> April 30, 1999 July 31, 1998 -------------- ------------- (unaudited) <S> <C> <C> ASSETS: Current assets: Cash and cash equivalents $ 2,919,000 $ 2,724,000 Restricted cash 22,000 22,000 Accounts receivable, less allowance for doubtful accounts of $256,000 at April 30, 1999 and $170,000 at July 31, 1998 8,719,000 5,932,000 Inventories, net 8,292,000 6,135,000 Prepaid expenses and other current assets 234,000 276,000 Deferred tax asset - current 1,192,000 -- ------------ ------------ Total current assets 21,378,000 15,089,000 ------------ ------------ Property, plant and equipment, net 4,313,000 4,314,000 Intangible assets 1,646,000 -- Other assets 312,000 307,000 Deferred tax asset - non current 228,000 -- ------------ ------------ Total assets $ 27,877,000 $ 19,710,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Current installments of long-term debt (including payable to related party of $308,000 at April 30, 1999 and $309,000 at July 31, 1998) $ 650,000 $ 804,000 Notes payable 1,100,000 -- Accounts payable 4,603,000 2,588,000 Accrued expenses and other current liabilities 5,001,000 2,780,000 ------------ ------------ Total current liabilities 11,354,000 6,172,000 ------------ ------------ Long-term debt, less current installments (including payable to related party of $583,000 at April 30, 1999 and $817,000 at July 31, 1998) 1,031,000 1,445,000 ------------ ------------ Total liabilities 12,385,000 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 2,927,604 shares at April 30, 1999 and 2,672,004 at July 31, 1998 293,000 267,000 Additional paid-in capital 23,762,000 22,189,000 Accumulated deficit (7,345,000) (10,011,000) ------------ ------------ Less: Treasury stock (55,000 shares at April 30, 1999 and July 31, 1998) (184,000) (184,000) Deferred compensation expense (1,034,000) (168,000) ------------ ------------ 15,492,000 12,093,000 ------------ ------------ Total liabilities and stockholders' equity $ 27,877,000 $ 19,710,000 ============ ============ </TABLE> See accompanying notes to consolidated financial statements. 3
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended April 30, April 30, -------------------- -------------------- 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 10,473,000 $ 8,689,000 $ 28,265,000 $ 22,323,000 ------------ ------------ ------------ ------------ Operating costs and expenses: Cost of sales 7,309,000 6,388,000 19,714,000 15,998,000 Selling, general and administrative 1,972,000 1,535,000 5,319,000 4,263,000 Research and development 597,000 330,000 1,747,000 920,000 ------------ ------------ ------------ ------------ Total operating costs and expenses 9,878,000 8,253,000 26,780,000 21,181,000 ------------ ------------ ------------ ------------ Operating income 595,000 436,000 1,485,000 1,142,000 Other (expenses) income: Interest expense (49,000) (18,000) (156,000) (246,000) Interest income 9,000 10,000 44,000 19,000 Other income 10,000 -- 12,000 4,000 ------------ ------------ ------------ ------------ Income from operations before provision (benefit) for income taxes 565,000 428,000 1,385,000 919,000 Provision (benefit) for income taxes 67,000 40,000 (1,281,000) 110,000 ------------ ------------ ------------ ------------ Net income $ 498,000 $ 388,000 $ 2,666,000 $ 809,000 ============ ============ ============ ============ Net income per share: Basic $ .18 $ .15 $ .98 $ .31 ============ ============ ============ ============ Diluted $ .16 $ .13 $ .90 $ .29 ============ ============ ============ ============ Weighted average number of common and common equivalent shares outstanding - Basic computation 2,821,442 2,600,320 2,719,870 2,597,406 Potential dilutive common shares 259,997 414,985 258,259 245,297 ------------ ------------ ------------ ------------ Weighted average number of common and common equivalent shares outstanding assuming dilution - Diluted computation 3,081,439 3,015,305 2,978,129 2,842,703 ============ ============ ============ ============ </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) 1999 1998 ---- ---- <S> <C> <C> Cash flows from operating activities: Net income $ 2,666,000 $ 809,000 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 1,038,000 853,000 Deferred income taxes (1,420,000) -- Provision for bad debt 86,000 -- Amortization of deferred compensation expense net 176,000 39,000 Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable (2,672,000) (503,000) Inventories (1,742,000) (321,000) Prepaid expenses and other current assets (45,000) (95,000) Prepaid expenses and other current assets (42,000) (95,000) Other assets 39,000 (13,000) Accounts payable 1,212,000 844,000 Accrued expenses and other liabilities 1,442,000 736,000 ----------- ----------- Net cash provided by operating activities 783,000 2,349,000 ----------- ----------- Cash flows from investing activities: Purchases of property, plant and equipment (446,000) (593,000) Payment for business acquisitions less net cash received (173,000) -- ----------- ----------- Net cash used in investing activities (619,000) (593,000) Cash flow from financing activities: Notes payable 850,000 -- Principal payments on long-term debt (849,000) (618,000) Proceeds from purchase of stock and exercise of stock options 30,000 40,000 ----------- ----------- Net cash provided by (used in) financing activities 31,000 (578,000) Net increase in cash and cash equivalents 195,000 1,178,000 Cash and cash equivalents at beginning of period 2,746,000 1,364,000 ----------- ----------- Cash and cash equivalents at end of period $ 2,941,000 $ 2,542,000 =========== =========== Supplemental cash flow disclosure Cash paid during the period for: Interest $ 156,000 $ 176,000 Income taxes 150,000 $ 50,000 </TABLE> Non-Cash Items: Non-cash items in the nine months ended April 30, 1999 include the issuance of a note payable of $250,000 and the issuance of common stock valued at $528,000 in connection with the acquisitions of new businesses. The Company entered into new capital lease agreements in the amounts of $281,000 and $756,000 in the nine months ended April 30, 1999 and 1998, respectively. 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 and nine months ended April 30, 1999 and 1998 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, 1999 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, 1999 July 31, 1998 -------------- ------------- <S> <C> <C> Accounts receivable from commercial customers $6,479,000 $4,302,000 Unbilled receivables (including retainages) on contracts-in-progress 1,417,000 1,531,000 Amounts receivable from the United States government and its agencies 1,079,000 269,000 ---------- ---------- 8,975,000 6,102,000 Less allowance for doubtful accounts 256,000 170,000 ---------- ---------- Accounts receivable, net $8,719,000 $5,932,000 ========== ========== </TABLE> (3) Inventories Inventories consist of the following: April 30, 1999 July 31, 1998 -------------- ------------- Raw materials and components $3,621,000 $3,365,000 Work-in-process 4,961,000 4,103,000 ---------- ---------- 8,582,000 7,468,000 Less: Progress payments 290,000 1,333,000 ---------- ---------- Inventories - net $8,292,000 $6,135,000 ========== ========== (4) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: April 30, 1999 July 31, 1998 -------------- ------------- Customer advances and deposits $2,352,000 $ 652,000 Accrued wages and benefits 1,542,000 1,068,000 Accrued commissions 467,000 452,000 Other 640,000 608,000 ---------- ---------- $5,001,000 $2,780,000 ========== ========== 6
(5) Long-Term Debt Long-term debt consists of the following: April 30, 1999 July 31, 1998 -------------- ------------- Obligations under capital leases $1,681,000 $2,249,000 Less current installments 650,000 804,000 ---------- ---------- $1,031,000 $1,445,000 ========== ========== (6) Acquisitions In the first quarter of fiscal 1999, the Company acquired the assets and assumed certain liabilities of two businesses. The acquisitions are being accounted for using the purchase method of accounting with the operations of these businesses being consolidated with those of the Company from their respective dates of acquisition. The excess of the purchase price over the fair value of the net assets acquired and liabilities assumed approximates $1,701,000, which has been included in intangible assets in the accompanying consolidated balance sheet and is being amortized over a 20 year period. (7) Income Taxes The provision for income tax consists primarily of state and local taxes offset in the quarter ending January 31, 1999 by $1,420,000 representing a reduction in the valuation allowance for deferred tax assets. Due to the continued profitability of the Company and the award of certain contracts, the Company believes it is more likely than not that a portion of its deferred tax assets will be realized. (8) Stock Grants During the nine months period ended April 30, 1999, the Company granted 150,000 shares of common stock to certain officers of one of the Company's operating units at a cost of $.10 per share. The grants relate to services to be provided over future years. The excess of market value over cost of $1,041,000 was recorded as deferred compensation and is being amortized to expense over a 10 year period, subject to certain acceleration provisions. 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, 1998, 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. Recent Developments During the first quarter of fiscal 1999, the Company formed two new wholly owned subsidiaries. Comtech Wireless, Inc. ("CWI") which is located in Woodbridge, New Jersey will design and manufacture Wireless Local Loop Systems for the rural and remote telephony market. Comtech Mobile Datacom Corp. ("CMDC"), which is located in Germantown, Maryland will provide satellite based packet data communication services between remote mobile and fixed assets and home base using an open architecture asset tracking system. CMDC will focus on transportation and energy markets, both commercial and government and will serve customers in the U.S. and elsewhere as satellite resources which offer global reach are deployed over the next few years. In October 1998, the Company's operating unit Comtech Systems, Inc. ("CSI"), was awarded a contract for approximately $42.5 million by a major U.S. Prime Contractor. The contract is for design, engineering, and production of sheltered communication terminals consisting of Comtech digital over-the-horizon and line-of-sight microwave radios and integrated UHF/VHF and HF radios for use in a foreign country. The terminals, configured for mobile deployment, are scheduled for delivery over approximately the next three years. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 1999 AND APRIL 30, 1998. Net Sales. Net sales were $10,473,000 and $8,689,000 for the three months ended April 30, 1999 and 1998, respectively, representing an increase of $1,784,000 or 20.5%. This was primarily due to an increase in sales at CSI, Comtech Antenna Systems, Inc.("CASI") and Comtech Communications Corp. ("CCC"), partially offset by a decrease in sales at Comtech PST Corp. ("CPST"). Sales at CSI are expected to continue to increase as the result of an order received in October 1998 for $42,500,000 for delivery over approximately the next three years. The increase in sales at CCC was partially the result of orders received for recently developed new products. Gross Margin. Gross profit was $3,164,000 or 30.2% of net sales for the three months ended April 30,1999 as compared to $2,301,000 or 26.5% of net sales for the same period in fiscal 1998. Higher gross profits in the fiscal 1999 period were due primarily to the higher sales volume. Higher gross profit margins, as a percent of net sales, were primarily due to the differing mix of products sold in each period. Selling, General and Administrative. Selling, general and administrative expenses were $1,972,000, or 18.8% of net sales and $1,535,000 or 17.7% of net sales for the three months ended April 30, 1999 and 1998, respectively, representing an increase of $437,000 or 28.5%. This increase was partially due to the additions of two new subsidiaries, CWI and CMDC, in fiscal 1999, as noted above. Research and Development Research and development expenses were $597,000 and $330,000 for the three months ended April 30, 1999 and 1998, respectively, representing an increase of $267,000 or 80.9%. This increase was primarily due to expenses for continuing product development and general product improvement. 8
Results From Operations. As a result of the foregoing factors, the Company had operating earnings of $ 595,000 for the three months ended April 30, 1999 as compared to operating earnings of $ 436,000 for the comparable prior year period. Interest Expense. Interest expense was $49,000 and $18,000 for the three months ended April 30, 1999 and 1998, respectively, representing an increase of $31,000. Interest expense for both periods was attributable largely to interest associated with the Company's capital lease obligations. Interest Income. Interest income was $9,000 and $10,000 for the three months ended April 30, 1999 and 1998, respectively. This change was due primarily to the amount of cash available to invest during these periods. Provision/Benefit for Income Taxes. The provision for income taxes was $67,000 and $40,000 for the three months ended April 30, 1999 and 1998, respectively, which principally relates to state income taxes. In the three months ended April 30, 1999, the Company recognized additional deferred tax benefits used upon estimates of future taxable income. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 1999 AND APRIL 30, 1998 Net Sales. Net sales were $28,265,000 and $22,323,000 for nine months ended April 30, 1999 and 1998, respectively, representing an increase of $5,942,000 or 26.6%. The increase in sales was due primarily to a higher volume of sales at CSI, CASI, and CCC, partially offset by results at CPST. Sales at CSI are expected to continue to increase as the result of an order received in October 1998 for $42,500,000 for delivery over approximately the next three years. The increase in sales at CCC was partially the result of orders received for recently developed new products. Gross Margin Gross profit was $8,551,000 or 30.3% of net sales for the nine months ended April 30, 1999 compared to $6,325,000 or 28.3% of net sales for the same period in fiscal 1998. Higher gross profits in the fiscal 1999 period were due primarily to the higher sales volume. Higher gross profit margins, as a percentage of net sales, were primarily due to the mix of products sold in each period. Selling, General and Administrative. Selling, general and administrative expenses were $5,319,000 or 18.8% of net sales for the nine months ended April 30, 1999 compared to $4,263,000 or 19.1% of net sales for the same period in fiscal 1998. The $1,056,000 increase in total costs was primarily due to the additional expenses required to support the increased sales volume and partially due to the addition of two new subsidiaries, CWI and CMDC. Research and Development. Research and development expenses were $1,747,000 and $920,000 for the nine months ended April 30, 1999 and 1998, respectively, representing an increase of $827,000 or 89.9%. This increase was due primarily to expenses for continuing product development and general product improvements. Results From Operations. As a result of the foregoing factors, the Company had operating earnings of $1,485,000 and $1,142,000 for the nine months ended April 30, 1999 and 1998, respectively. Interest Expense. Interest expense was $156,000 and $246,000 for the nine months ended April 30, 1999 and 1998, respectively. Interest expense for both periods was attributable largely to interest associated with the Company's capital lease obligations. Interest Income. Interest income was $44,000 and $19,000 for the nine months ended April 30, 1999 and 1998, respectively. This increase was due primarily to the increase in the amount of cash available to invest in the fiscal 1999 period. Provision/Benefit for Income Taxes. The provision for income taxes was $110,000 for the nine months ended April 30, 1998, which principally relates to state income taxes. The benefit for income taxes of ($1,281,000) for nine months ended April 30, 1999 represents the provision for federal and state taxes offset by a reduction in the valuation allowance for deferred tax assets. Primarily due to the Company's continued profitability, the Company determined it was more likely than not that a portion of the valuation allowance would not be required and, consequently, during the quarter ended January 31, 1999, recorded a deferred tax asset and income tax benefit of $1,420,000. 9
LIQUIDITY AND CAPITAL RESOURCES For the nine month period ended April 30, 1999, the Company's cash and cash equivalent position increased by $195,000 from $2,746,000 at July 31, 1998 to $2,941,000 at April 30, 1999. Operating activities provided $783,000 of cash, investing activities used $619,000 of cash and financing activities provided $31,000 of cash. During the period, the Company formed two new wholly owned subsidiaries which acquired the assets and assumed certain liabilities of two other companies. The total consideration for these acquisitions was approximately $978,000 which was financed by a cash payment of $200,000, a promissory note of $250,000 and the balance through the issuance of restricted stock and warrants. The balances at April 30, 1999 include the assets and liabilities of these acquisitions. Net accounts receivable increased from July 31, 1998 by $2,787,000 due primarily to the timing of the shipments and the subsequent collection of the related receivable. The allowance for doubtful accounts increased by $86,000. The Company reviews its allowance for doubtful accounts periodically and believes it is sufficient based on past experience and Company's credit standards. Net inventory increased by $2,157,000 primarily due to a higher backlog of orders. 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. Net intangible assets at April 30, 1999 of $1,646,000 consist of "goodwill" as a result of the acquisitions referred to above, which is being amortized over 20 years. Accounts payable increased by $2,015,000 primarily due to the increase of inventory purchases. The increase of $2,221,000 in accrued expenses and other current liabilities was primarily due to increases in customer advances and deposits and accrued wages and benefits. During the nine months ended April 30, 1999, the Company made leasehold improvements and purchases of equipment of $727,000 of which $281,000 was financed by a capital lease. Long term debt (including current installments) decreased a net amount of $568,000 due to payments made of $849,000 and additional debt incurred of $281,000. All of the Company's long term debt consists of capital leases for its facilities and equipment. In December 1998 the Company renewed its credit facility with Republic National Bank of New York. The total facility available to the Company has increased to $8,000,000. The interest rate on borrowings is Libor plus 1-1/2%. Borrowings outstanding at April 30, 1999 amounted to $850,000. 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. 10
Year 2000 Compliance Management has initiated a company-wide program and has developed a formal plan of implementation to prepare the Company for the Year 2000. This includes taking actions designed to ensure that the Company's information technology ("IT") systems, products and infrastructure are Year 2000 compliant and that its customers, suppliers and service providers have taken similar action. At this time, management believes that the Company does not have any significant internal problem other than to upgrade some of its software to available new releases which are Year 2000 compliant. With respect to its external issues - customers, suppliers and service providers - the Company is surveying them 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 its suppliers or service providers are not Year 2000 ready, the Company believes that it will be able to obtain other suppliers or service providers without a significant interruption to its business. However, there can be no assurance that such interruption will not have a material adverse effect on the Company. To date, the Company has not formulated a Year 2000 contingency plan. The Company is reviewing responses to its inquiries and will determine the need for a contingency plan upon completion of this review. The Company anticipates completing its Year 2000 project in mid calendar 1999. Management currently believes that the costs related to the Corporation's compliance with the Year 2000 issue should not have a material adverse effect on its consolidated financial position, results of operations or cash flows. 11
PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibit is being filed as part of this Report: Exhibit No. Description ----------- ----------- Exhibit 27 Financial Data Schedule 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 11, 1999 By: /s/ Fred Kornberg -------------------------------- Fred Kornberg Chairman of the Board Chief Executive Officer and President Date: June 11, 1999 By: /s/ Gail Segui -------------------------------- Gail Segui Secretary, Treasurer and Chief Accounting Officer 13