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 January 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 of (I.R.S. Employer Identification Number) incorporation/organization) 105 Baylis Road, Melville, New York 11747 -------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (631) 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 - 7,394,797 shares outstanding as of March 09, 2001. --------------------------------------------------------------------------
COMTECH TELECOMMUNICATIONS CORP. INDEX Page No. --- PART I FINANCIAL INFORMATION Consolidated Balance Sheets - 2 January 31, 2001 (unaudited) and July 31, 2000 Consolidated Statements of Operations - 3 Three Months and Six Months Ended January 31, 2001 and 2000 (unaudited) Consolidated Statements of Cash Flows - 4 Six Months Ended January 31, 2001 and 2000 (unaudited) Notes to Consolidated Financial Statements 5 - 10 Management's Discussion and Analysis of Financial Condition and Results of Operations 10-15 Quantitative and Qualitative Disclosures about Market Risk 15 PART II OTHER INFORMATION 16 Signature Page 17 1
PART I FINANCIAL INFORMATION COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> January 31, July 31, 2001 2000 ------------- ----------- <S> <C> <C> Assets (Unaudited) Current assets: Cash and cash equivalents $ 15,401,000 12,587,000 Marketable investment securities 19,243,000 18,634,000 Accounts receivable, less allowance for doubtful accounts of $907,000 at January 31, 2001 and $806,000 at July 31, 2000 32,415,000 24,204,000 Other receivables -- 9,038,000 Inventories, net 29,367,000 26,170,000 Prepaid expenses and other current assets 1,368,000 583,000 Deferred tax asset - current 3,322,000 3,125,000 ------------- ----------- Total current assets 101,116,000 94,341,000 Property, plant and equipment, net 9,895,000 10,738,000 Intangible assets, net of accumulated amortization of $1,480,000 at January 31, 2001 and $308,000 at July 31, 2000 16,545,000 17,669,000 Other assets 465,000 468,000 Deferred tax asset - non current 2,815,000 2,815,000 ------------- ----------- Total assets $ 130,836,000 126,031,000 ============= =========== Liabilities and Stockholders' Equity Current liabilities: Current installments of long-term debt $ 4,200,000 2,100,000 Current installments of capital lease obligations (including payable to related party of $332,000 at January 31, 2001 and $347,000 at July 31, 2000) 708,000 608,000 Accounts payable 10,236,000 11,260,000 Accrued expenses and other current liabilities 13,432,000 13,657,000 Income tax payable 3,365,000 1,449,000 ------------- ----------- Total current liabilities 31,941,000 29,074,000 Long-term debt, less current installments 35,800,000 37,900,000 Capital lease obligations, less current installments (including payable to related party of $154,000 at July 31, 2000) 838,000 908,000 Other long-term liabilities 313,000 367,000 ------------- ----------- Total liabilities 68,892,000 68,249,000 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 7,473,047 shares at January 31, 2001 and 7,349,176 shares at July 31, 2000 747,000 735,000 Additional paid-in capital 67,270,000 66,740,000 Accumulated other comprehensive loss (404,000) (113,000) Accumulated deficit (4,808,000) (8,687,000) ------------- ----------- 62,805,000 58,675,000 Less: Treasury stock (82,500 shares at January 31, 2001 and July 31, 2000) (184,000) (184,000) Deferred compensation (677,000) (709,000) ------------- ----------- Total stockholders' equity 61,944,000 57,782,000 ------------- ----------- Total liabilities and stockholders' equity $ 130,836,000 126,031,000 ============= =========== Commitments and contingencies </TABLE> See accompanying notes to consolidated financial statements 2
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) <TABLE> <CAPTION> Three months ended Six months ended January 31, January 31, ----------- ----------- 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 33,111,000 13,717,000 72,957,000 25,464,000 Cost of sales 20,455,000 9,576,000 47,193,000 17,982,000 ------------ ---------- ---------- ---------- Gross profit 12,656,000 4,141,000 25,764,000 7,482,000 ------------ ---------- ---------- ---------- Operating expenses: Selling, general and administrative 6,217,000 2,493,000 12,384,000 4,415,000 Research and development 2,618,000 581,000 5,416,000 1,111,000 Amortization of intangibles 579,000 23,000 1,172,000 47,000 ------------ ---------- ---------- ---------- Total operating expenses 9,414,000 3,097,000 18,972,000 5,573,000 ------------ ---------- ---------- ---------- Operating income 3,242,000 1,044,000 6,792,000 1,909,000 Other expense (income): Interest expense 920,000 34,000 1,878,000 71,000 Interest income (812,000) (21,000) (1,406,000) (53,000) Other (92,000) -- (92,000) -- ------------ ---------- ---------- ---------- Income before provision for income taxes 3,226,000 1,031,000 6,412,000 1,891,000 Provision for income taxes 1,354,000 369,000 2,533,000 694,000 ------------ ---------- ---------- ---------- Net income $ 1,872,000 662,000 3,879,000 1,197,000 ============ ========== ========== ========== Net income per share: Basic $ 0.26 0.15 0.53 0.27 ============ ========== ========== ========== Diluted $ 0.24 0.13 0.49 0.23 ============ ========== ========== ========== Weighted average number of common shares outstanding-basic 7,309,000 4,478,000 7,289,000 4,438,000 Potential dilutive common shares 546,000 736,000 572,000 682,000 ------------ ---------- ---------- ---------- Weighted average number of common and common equivalent shares outstanding assuming dilution - diluted 7,855,000 5,214,000 7,861,000 5,120,000 ============ ========== ========== ========== </TABLE> See accompanying notes to consolidated financial statements 3
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Six Months Ended January 31, ----------- 2001 2000 ---- ---- <S> <C> <C> Cash flows from operating activities: Net income: $ 3,879,000 1,197,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 3,354,000 817,000 Deferred income tax benefit -- 577,000 Provision for bad debt allowance 101,000 4,000 Reduction of inventory reserves (234,000) (180,000) Changes in operating assets and liabilities: Accounts receivable (8,312,000) (3,387,000) Other receivables 9,038,000 -- Inventories (2,963,000) (925,000) Prepaid expenses and other current assets (786,000) (656,000) Other assets (41,000) 2,000 Accounts payable (1,024,000) 687,000 Accrued expenses and other current liabilities (196,000) 450,000 Income tax payable 1,916,000 -- Other liabilities (54,000) 421,000 ------------ ---------- Net cash provided by (used in) continuing operations 4,678,000 (993,000) Net cash used in discontinued operations -- (320,000) ------------ ---------- Net cash provided by (used in) operating activities 4,678,000 (1,313,000) ------------ ---------- Cash flows from investing activities: Purchases of property, plant and equipment (952,000) (674,000) Payment for business acquisition (62,000) -- Purchase of marketable investment securities (1,096,000) -- ------------ ---------- Net cash used in investing activities (2,110,000) (674,000) ------------ ---------- Cash flows from financing activities: Borrowings under line of credit facility -- 1,000,000 Repayment of borrowings under line of credit facility -- (1,000,000) Principal payments on capital lease obligations (296,000) (322,000) Proceeds from exercise of stock options 542,000 315,000 ------------ ---------- Net cash provided by (used in) financing activities 246,000 (7,000) ------------ ---------- Net increase (decrease) in cash and cash equivalents 2,814,000 (1,994,000) Cash and cash equivalents at beginning of period 12,587,000 5,896,000 ------------ ---------- Cash and cash equivalents at end of period $ 15,401,000 3,902,000 ============ ========== Supplemental cash flow disclosure: Cash paid during the period for: Interest $ 1,816,000 71,000 Income taxes $ 617,000 187,000 Non cash investing activities: Acquisition of equipment through capital leases $ 326,000 -- </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 for the three months and six months ended January 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 financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended July 31, 2000 and the notes thereto contained in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on October 30, 2000. (2) Reclassifications Certain reclassifications have been made to previously reported statements to conform to current classifications. (3) Acquisitions In January 2000, we acquired certain assets and assumed certain liabilities of Hill Engineering, Inc. ("Hill") in exchange for 50,000 shares of the Company's common stock. The acquisition was accounted for under the "purchase method" of accounting. The purchase price amounted to approximately $371,000 which principally represents the fair value of the initial 30,000 shares of common stock issued to Hill. The remaining 20,000 shares were placed in escrow and will only be released to the sellers if certain profit goals, as defined in the agreement are met and will be recorded at fair value on the date when the profit goals are met. The excess of the purchase price over the net assets acquired of approximately $606,000 is included in intangible assets in the accompanying consolidated balance sheet and is being amortized over a 15-year period. On July 10, 2000, the Company acquired the business of EF Data, the satellite communications division of Adaptive Broadband Corporation, at an estimated adjusted cost of $54,359,000. The preliminary cash purchase price of $61,500,000 was partially financed with $40,000,000 supplied through institutional secured borrowings. Direct acquisition costs amounted to approximately $1,628,000. Based upon the acquisition agreement, an adjustment to the purchase price in the amount of $9,038,000 was due to the Company which was included in the consolidated balance sheet in other receivables at July 31, 2000. This amount was received by the Company in September 2000. The acquisition was accounted for under the purchase method of accounting. The cost of the acquisition was allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the date of the acquisition. The excess of the cost over the fair value of the net assets acquired amounted to approximately $26,157,000, of which $10,218,000 was allocated to in-process research and development and was expensed as of the acquisition date, $7,508,000 was recorded as purchased technology which is being amortized over seven years, $3,577,000 was recorded as other purchased intangibles which are being amortized over five to seven years and $4,854,000 has been recorded as goodwill, which is being amortized over ten years. (4) Marketable Investment Securities Marketable investment securities at January 31, 2001 consists of a mutual fund investment classified as available-for-sale and is recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on these available-for-sale securities are excluded from earnings and are reported as a component of accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. 5
(5) Common Stock Offering In February and March 2000, the Company sold an aggregate of 2,645,000 shares of its common stock in a public offering resulting in net proceeds to the Company of approximately $42,400,000. (6) Comprehensive Income The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", which requires all companies to report all changes in equity during a period in a financial statement or in the case of interim reporting, a footnote. The Company's total comprehensive income for the three-month and six-month periods ended January 31, 2001 and 2000 was as follows: <TABLE> <CAPTION> For the Three Months Ended For the Six Months Ended January 31, January 31, ---------------------------- -------------------------- 2001 2000 2001 2000 ----------- ------- --------- --------- <S> <C> <C> <C> <C> Net income $ 1,872,000 662,000 3,879,000 1,197,000 Other comprehensive income (loss), net of tax: Unrealized loss on available-for-sale securities (256,000) -- (291,000) -- Unrealized loss on forward foreign currency contracts (50,000) -- -- -- ----------- ------- --------- --------- $ 1,566,000 662,000 3,588,000 1,197,000 =========== ======= ========= ========= </TABLE> (7) Accounts Receivable Accounts receivable consist of the following: <TABLE> <CAPTION> January 31, 2001 July 31, 2000 ---------------- ------------- <S> <C> <C> Accounts receivable from commercial customers $25,467,000 19,841,000 Unbilled receivables (including retainages) on contracts-in-progress 2,169,000 2,602,000 Amounts receivable from the United States government and its agencies 5,686,000 2,567,000 ----------- ----------- 33,322,000 25,010,000 Less allowance for doubtful accounts 907,000 806,000 ----------- ----------- $32,415,000 24,204,000 =========== =========== </TABLE> (8) Inventories Inventories consist of the following: <TABLE> <CAPTION> January 31, 2001 July 31, 2000 ---------------- ------------- <S> <C> <C> Raw materials and components $16,273,000 14,814,000 Work-in-process 15,389,000 14,265,000 ----------- ----------- 31,662,000 29,079,000 Less: Progress payments -- 380,000 Reserve for anticipated losses on contracts and inventory reserves 2,295,000 2,529,000 ----------- ----------- $29,367,000 26,170,000 =========== =========== </TABLE> 6
(9) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: January 31, 2001 July 31, 2000 ---------------- ------------- Customer advances and deposits $ 2,035,000 1,346,000 Accrued wages and benefits 3,375,000 3,970,000 Accrued commissions 1,205,000 3,992,000 Accrued warranty 2,298,000 2,314,000 Accrued interest on long-term debt 308,000 247,000 Deferred service revenue 964,000 -- Other 3,247,000 1,788,000 ----------- ---------- $13,432,000 13,657,000 =========== ========== (10) Capital Lease Obligations Capital lease obligations consist of the following: January 31, 2001 July 31, 2000 ---------------- ------------- Obligations under capital leases $1,546,000 1,516,000 Less current installments 708,000 608,000 ---------- --------- $ 838,000 908,000 ========== ========= (11) Long-Term Debt Long-term debt consists of the following: January 31, 2001 July 31, 2000 ---------------- ------------- Long-term debt $40,000,000 40,000,000 Less current installments 4,200,000 2,100,000 ----------- ---------- $35,800,000 37,900,000 =========== ========== (12) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (13) Earnings Per Share The Company calculates earnings per share ("EPS") in accordance with 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. (14) 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 7
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 antennas 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 links 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. Sales between segments were negligible. Eliminations consist of intercompany balances. <TABLE> <CAPTION> Three months ended January 31, 2001 ------------------ (in thousands) Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Eliminations Total ------------ ---------- -------- ----------- ------------ ----- <S> <C> <C> <C> <C> <C> <C> Net sales $27,861 3,306 1,944 - 33,111 Operating income (loss) 4,590 75 (297) (1,126) 3,242 Interest income 118 4 - 690 812 Interest expense 897 23 - - 920 Depreciation and amortization 1,300 220 55 21 1,596 Expenditures for long-lived assets 368 232 21 4 625 Total assets 69,372 11,079 11,465 97,492 (58,572) 130,836 <CAPTION> Three months ended January 31, 2000 ------------------ (in thousands) Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Eliminations Total ------------ ---------- -------- ----------- ------------ ----- <S> <C> <C> <C> <C> <C> <C> Net sales $10,440 2,635 642 - 13,717 Operating income (loss) 1,917 (121) (137) (615) 1,044 Interest income - - - 21 21 Interest expense 8 25 1 - 34 Depreciation and amortization 135 185 34 45 399 Expenditures for long-lived assets 350 40 75 - 465 Total assets 12,609 7,237 4,052 12,405 (3,757) 32,546 </TABLE> 8
<TABLE> <CAPTION> Six months ended January 31, 2001 ---------------- (in thousands) Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Eliminations Total ------------ ---------- -------- ----------- ------------ ----- <S> <C> <C> <C> <C> <C> <C> Net sales $60,295 7,215 5,447 - 72,957 Operating income (loss) 9,232 (73) (475) (1,892) 6,792 Interest income 131 4 - 1,271 1,406 Interest expense 1,836 42 - - 1,878 Depreciation and amortization 2,770 445 107 32 3,354 Expenditures for long-lived assets 839 417 80 4 1,340 Total assets 69,372 11,079 11,465 97,492 (58,572) 130,836 <CAPTION> Six months ended January 31, 2000 ---------------- (in thousands) Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Eliminations Total ------------ ---------- -------- ----------- ------------ ----- <S> <C> <C> <C> <C> <C> <C> Net sales $19,893 4,784 787 - 25,464 Operating income (loss) 3,387 (181) (218) (1,079) 1,909 Interest income - - - 53 53 Interest expense 16 53 2 - 71 Depreciation and amortization 289 370 69 89 817 Expenditures for long-lived assets 443 94 132 5 674 Total assets 12,609 7,237 4,052 12,405 (3,757) 32,546 </TABLE> (15) Accounting for Derivatives and Hedging Activities Effective August 1, 2000, the Company adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. Management believes it is prudent to minimize the risk caused by foreign currency fluctuation. Management minimizes the risk by hedging foreign currency receivables by purchasing forward foreign currency contracts ("forward contracts") from financial institutions. Forward contracts represent commitments to purchase or sell a particular foreign currency at a future date and at a specific price. Since forward contracts are purchased for the exact amount of foreign currency needed, the Company feels that it eliminates all risks relating to foreign currency fluctuation. Senior management continually monitors foreign currency risks and the use of this derivative instrument. Changes in the fair value of forward contracts designated and qualifying as cash flow hedges of forecasted transactions are reported in accumulated other comprehensive income (loss). The gains and losses are reclassified into earnings, as a component of cost of sales in the same period as the asset acquired affects earnings. Upon settlement of the forward contracts during the quarter ended January 31, 2001, the Company reclassified the $50,000 unrealized gain on forward contracts previously recorded during the quarter ended October 31, 2000 into earnings as a component of cost of sales. 9
The Company does not enter into derivative instruments for any purpose other than cash flow hedging purposes. That is, the Company does not speculate using derivative instruments. The impact of adopting this statement did not have a material effect on the Company's consolidated financial statements. The Company did not have any derivative instruments at January 31, 2001. (16) 2001 Employee Stock Purchase Plan At the Annual Stockholders' Meeting, held on December 12, 2000, the stockholders approved the Company's 2001 Employee Stock Purchase Plan ("the Plan"). This plan provides for the purchase by eligible employees of up to 300,000 shares of the Company's common stock subject to certain limitations as defined in the Plan. (17) Recent Accounting Pronouncements The SEC has issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", which provides the SEC Staff's interpretations of the applications of generally accepted revenue recognition accounting principles. The Company must adopt SAB No. 101, as amended, by May 1, 2001. Management does not expect the adoption to have a material effect on its consolidated financial statements. Effective May 1, 2001, the Company is also required to adopt the provisions of EITF No. 00-10, "Accounting for Shipping and Handling Fees and Costs". Management does not expect the adoption to have a material effect on its consolidated financial statements. (18) Subsequent Event On March 5, 2001, the Company entered into an agreement to acquire certain assets and product lines of MPD Technologies, Inc. The purchase price is $11 million, subject to adjustment. Closing is expected to take place on or about April 30, 2001. The Company intends to combine these operations with its Comtech PST subsidiary and include it in its RF Microwave Amplifiers segment. This acquisition will be accounted for under the purchase method of accounting. COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. Included among the factors which might cause such results to differ are: among others, the Company's mobile data communications business being in a developmental stage; our inability to keep pace with rapid technological changes; our backlog being subject to customer cancellation or modification; our sales to the U.S. government being subject to funding, deployment and other risks; our fixed price contracts being subject to risks; our dependence on component availability, subcontractor availability and performance by key suppliers; the highly competitive nature of our markets; our dependence on international sales; and other risk factors detailed in the Company's Form 10-K and other cautionary statements contained in the Company's Securities and Exchange Commission filings. Overview We design, develop, produce and market sophisticated wireless telecommunications transmission components 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 telecommunications and reception applications such as satellite communications, over-the-horizon microwave systems, cellular telephone systems and cable and broadcast television. Our broadband amplifier products are also used in cellular and PCS instrumentation testing and certain defense systems. 10
Our business consists of three segments: mobile data communications services, telecommunications transmission, and RF microwave amplifiers. We began reporting financial results on a segment basis in fiscal 1999. Our sales of mobile data communications services are expected to 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' international customers) are expected to increase in the foreseeable future due to the growing worldwide demand for wireless and satellite telecommunications and our expanded line of product offerings to meet these demands. A substantial portion of our sales is 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. For the quarter ended January 31, 2001, there were no customers for which sales accounted for 10% or more of our consolidated sales. For the quarter ended January 31, 2000, sales to one customer accounted for 46.4% of consolidated sales. Accordingly, we experience significant fluctuations in sales and operating results from quarter to quarter and, because our backlog is comprised in large part of a small number of large contracts, we expect such fluctuations to continue in the near future. Sales consist of stand-alone products and systems. For the past five 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 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. Our gross profit is affected by a variety of factors, including the mix of products, systems and equipment sold, production efficiency and price competition. Selling, general and administrative expenses consist primarily of salaries and benefits for marketing, sales and administrative employees, advertising and trade show costs, professional fees and amortization of deferred compensation. Deferred compensation consists of restricted stock awards granted to certain operating management personnel. Under these grants, the employees purchased shares of our common stock at prices representing a discount to the then market value. The shares vest ten years after issuance, subject to earlier vesting upon achievement of certain operating unit performance goals. Our research and development expenses relate to both existing product enhancement and new product development. A portion of our research and development efforts is related to specific contracts and is recoverable under those contracts because they are funded by the customers. Such customer-funded expenditures are not included in research and development expenses for financial reporting purposes but are reflected in cost of sales. In June 1999, the U.S. Army awarded Comtech Mobile Datacom Corp. a contract which, subject to, among other things, government funding and deployment decisions and additional field testing, provides for the purchase of up to $418.2 million in mobile terminal units and global data communications services over an eight-year period. Sales will be dependent upon annual government funding and deployment decisions. As of January 31, 2001, we have received orders under the U.S. Army contract of approximately $7.1 million. Sales by our mobile data communications services segment in the six months ended January 31, 2001 and 2000 were approximately $5.4 million and $787,000, respectively. In January 2000, we acquired certain assets and assumed certain liabilities of Hill Engineering, Inc. ("Hill") in exchange for 50,000 shares of the Company's common stock. The acquisition is being accounted for under the "purchase method" of accounting. The purchase price amounted to approximately $371,000 which principally represents the fair value of the initial 30,000 shares of common stock issued to Hill. The remaining 20,000 shares were placed in escrow and will only be released to the sellers if certain profit goals, as defined in the agreement are met and will be recorded at fair value on the date when the profit goals are met. This business operates in the RF Microwave Amplifiers segment. The excess of the purchase price over the net assets acquired of approximately $606,000 is included in intangible assets in the accompanying consolidated balance sheet and is being amortized over a 15-year period. 11
In July 2000, we acquired the business of EF Data, the satellite communications division of Adaptive Broadband Corporation for cash. The acquisition is being 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 $26.2 million, of which $10.2 million was allocated to in-process research and development and was expensed as of the acquisition date, $7.5 million was recorded as purchased technology, $3.6 million was recorded as other purchased intangibles which are being amortized over 5-7 years and $4.9 million has been recorded as goodwill, which is being amortized over ten years. $40 million of the purchase price was supplied through institutional secured borrowings bearing interest at 9.25% due in semiannual installments through 2005, and the balance from internal company funds. We combined this operation with our existing satellite communications operations included in our telecommunications transmission segment. On March 5, 2001 we announced that the Company entered into an agreement to acquire certain assets and product lines of MPD Technologies, Inc. The purchase price is $11 million, subject to adjustment. The closing of the acquisition is expected to occur in April 2001. The Company intends to combine these operations with its Comtech PST subsidiary and include it in its RF Microwave Amplifiers segment. The acquisition will be accounted for under the purchase method of accounting. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2001 AND JANUARY 31, 2000 Net Sales. Consolidated net sales were $33.1 million and $13.7 million for the three months ended January 31, 2001 and 2000, respectively, representing an increase of $19.4 million or approximately 141.4%. This increase was due primarily to increased sales by our telecommunications transmission segment of satellite earth station products. The increase in this business segment, which was due primarily to the increase generated by the acquisition we completed in July 2000 of EF Data, a division of Adaptive Broadband Corp., was $17.4 million or approximately 166.9%. To a lesser extent we also had higher sales in our other two segments. The increase in our RF microwave amplifier segment was $671,000 or approximately 25.5% and the increase in our mobile data communications services segment was $1.3 million or approximately 202.8%. International sales increased by $7.3 million or approximately 78.6%, representing 50.0% and 67.6% of total net sales for the three months ended January 31, 2001 and 2000, respectively. Domestic sales increased by $7.2 million or approximately 202.5%, representing 32.2% and 25.5% of total net sales for the three months ended January 31, 2001 and 2000, respectively. U.S. government sales increased by $4.9 million or approximately 522.6%, representing 17.8% and 6.9% of total net sales for the three months ended January 31, 2001 and 2000, respectively. Gross Profit. Gross profit was $12.7 million and $4.1 million for the three months ended January 31, 2001 and 2000, respectively, representing an increase of $8.5 million or 205.6%. This increase was due partially to the increase in sales volume in the three months ended January 31, 2001 as compared to the same period in 2000 and also to the change in the product mix for the respective periods. Gross profit margin, as a percentage of net sales, was 38.2% and 30.2% in the three-month periods of 2001 and 2000, respectively. The higher gross profit margin was due primarily to the increase in the sale of satellite earth station equipment products by our telecommunications transmission segment, which generally have a lower per unit cost and yield a higher gross profit margin than most other equipment and systems we sell. Selling, General and Administrative. Selling, general and administrative expenses were $6.2 million and $2.5 million for the three months ended January 31, 2001 and 2000, respectively, representing an increase of $3.7 million or approximately 149.4%. This increase was due primarily to the additional expenses required to support the increased sales volume resulting from the acquisition of EF Data, including additional personnel, sales and marketing expenses and other administrative expenses. As a percentage of sales, these expenses were 18.8% and 18.2% in the 2001 and 2000 quarters, respectively. Research and Development. Research and development expenses were $2.6 million and $581,000 for the three-month periods of 2001 and 2000, respectively, representing an increase of $2.0 million or approximately 350.6 %. As an investment for the future we are continually enhancing and developing new products and technologies. In the three-month period of 2001, the increase is due primarily to expenses incurred by our recently acquired EF Data business, for the continuation of research and development for the projects that were underway at the time of the acquisition as well as new projects. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the three months ended January 31, 2001 and 2000, customers reimbursed us $173,000 and $208,000, respectively, which amounts are not reflected in the reported research and development expenses. Internally funded and customer funded research and development expenses combined, as a percentage of net sales, represented approximately 8.4% and 5.8% in the three-month periods of 2001 and 2000, respectively. 12
Operating Income. As a result of the foregoing factors, we had operating income of $3.2 million in the three months ended January 31, 2001 as compared to $1.0 million in the prior year period, representing an increase of approximately $2.2 million. Interest Expense. Interest expense was $920,000 and $34,000 for the three months ended January 31, 2001 and 2000, respectively, representing an increase of $886,000. The increase was due primarily to the interest on the $40.0 million of long-term debt that we incurred during July 2000 in connection with the acquisition of EF Data. The balance of interest expense in the three months ended January 31, 2001 and all of the interest expense in the 2000 period was interest associated with our capital lease obligations. Interest Income. Interest income was $812,000 and $21,000 for the three months ended January 31, 2001 and 2000, respectively, representing an increase of $791,000. This increase was due primarily to the increase in the amount of cash available to invest during this period principally as a result of the proceeds received from a follow-on stock offering completed in the third quarter of fiscal 2000. Interest income was primarily derived from the short-term investments of the cash on hand in excess of working capital requirements. Provision for Income Taxes. The provision for income taxes was $1.4 million and $369,000 for the three months ended January 31, 2001 and 2000, respectively, reflecting an approximate 42% and 36% effective tax rate, respectively. The increase in the effective tax rate for the three month period ended January 31, 2001 compared to the corresponding period of the prior year is due primarily to the increased profitability of the Company and an increase in the Company's effective state income tax rate. Such increases are attributable to the acquisition of EF Data in July 2000. Our income tax provision is calculated according to the provisions of SFAS No. 109, "Accounting for Income Taxes". In applying the provisions of SFAS No. 109, temporary differences due to the timing of the deductibility of items for income tax purposes as compared to the timing of deductibility for financial reporting purposes, are recorded as deferred tax assets and liabilities. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 31, 2001 AND JANUARY 31, 2000 Net Sales. Consolidated net sales were $73.0 million and $25.5 million for the six months ended January 31, 2001 and 2000, respectively, representing an increase of $47.5 million or approximately 186.5%. This increase was due primarily to increased sales by our telecommunications transmission segment of satellite earth station products. The increase in this business segment which was due primarily to the increase generated by the acquisition we completed in July 2000 of EF Data, a division of Adaptive Broadband Corp., was $40.4 million or approximately 203.1%. To a lesser extent we also had higher sales in our other two segments. The increase in our RF microwave amplifier segment was $2.4 million or approximately 50.8% and the increase in our mobile data communications services segment was $4.7 million or approximately 592.1%. International sales increased by $16.8 million or approximately 87.1%, representing 49.6% and 75.9% of total net sales for the six months ended January 31, 2001 and 2000, respectively. Domestic sales increased by $18.4 million or approximately 385.7%, representing 31.7% and 18.7% of total net sales for the six months ended January 31, 2001 and 2000, respectively. U.S. government sales increased by $12.3 million or approximately 891.5%, representing 18.7% and 5.4% of total net sales for the six months ended January 31, 2001 and 2000, respectively. Gross Profit. Gross profit was $25.8 million and $7.5 million for the six months ended January 31, 2001 and 2000, respectively, representing an increase of $18.3 million or 244.3%. This increase was due partially to the increase in sales volume in the six months ended January 31, 2001 as compared to the same period in 2000 and also to the change in the product mix for the respective periods. Gross profit margin, as a percentage of net sales, was 35.3% and 29.4% in the six-month periods of 2001 and 2000, respectively. The higher gross profit margin was due primarily to the increase in the sale of satellite earth station equipment products by our telecommunications transmission segment, which generally have a lower per unit cost and yield a higher gross profit margin than most other equipment and systems we sell. Selling, General and Administrative. Selling, general and administrative expenses were $12.4 million and $4.4 million for the six months ended January 31, 2001 and 2000, respectively, representing an increase of $8.0 million or approximately 180.5%. This increase was due primarily to the additional expenses required to support the increased sales volume resulting from the acquisition of EF Data, including additional personnel, sales and marketing expenses and other administrative expenses. As a percentage of sales, these expenses were 17.0% and 17.3% in the 2001 and 2000 periods, respectively. Research and Development. Research and development expenses were $5.4 million and $1.1 million for the six-month periods of 2001 and 2000, respectively, representing an increase of $4.3 million or approximately 387.5 %. As an investment for the future we are continually enhancing and developing new products and technologies. In the six-month period of 2001, the increase is due primarily to expenses incurred by our recently acquired EF Data business, for the continuation of research and development for the projects that were underway at the time of the acquisition as well as new projects. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer 13
requirements. During the six months ended January 31, 2001 and 2000, customers reimbursed us $360,000 and $454,000, respectively, which amounts are not reflected in the reported research and development expenses. Internally funded and customer funded research and development expenses combined, as a percentage of net sales, represented approximately 7.9% and 6.1% in the six-month periods of 2001 and 2000, respectively. Operating Income. As a result of the foregoing factors, we had operating income of $6.8 million in the six months ended January 31, 2001 as compared to $1.9 million in the prior year period, representing an increase of approximately $4.9 million. Interest Expense. Interest expense was $1.9 million and $71,000 for the six months ended January 31, 2001 and 2000, respectively, representing an increase of $1.8 million. The increase was due primarily to the interest on the $40.0 million of long-term debt that we incurred during July 2000 in connection with the acquisition of EF Data. The balance of interest expense in the six months ended January 31, 2001 and all of the interest expense in the 2000 period was interest associated with our capital lease obligations. Interest Income. Interest income was $1.4 million and $53,000 for the six months ended January 31, 2001 and 2000, respectively, representing an increase of $1.4 million. This increase was due primarily to the increase in the amount of cash available to invest during this period principally as a result of the proceeds received from a follow-on stock offering completed in the third quarter of fiscal 2000. Interest income was primarily derived from the short-term investments of the cash on hand in excess of working capital requirements. Provision for Income Taxes. The provision for income taxes was $2.5 million and $694,000 for the six months ended January 31, 2001 and 2000, respectively, reflecting an approximate 39.5% and 37% effective tax rate, respectively. The increase in the effective tax rate for the six month period ended January 31, 2001 compared to the corresponding period of the prior year is due primarily to the increased profitability of the Company and an increase in the Company's effective state income tax rate. Such increases are attributable to the acquisition of EF Data in July 2000. Our income tax provision is calculated according to the provisions of SFAS No. 109, "Accounting for Income Taxes". In applying the provisions of SFAS No. 109, temporary differences due to the timing of the deductibility of items for income tax purposes as compared to the timing of deductibility for financial reporting purposes, are recorded as deferred tax assets and liabilities. LIQUIDITY AND CAPITAL RESOURCES For the six month period ended January 31, 2001, our cash and cash equivalent position increased by $2.8 million from $12.6 million at July 31, 2000 to $15.4 million at January 31, 2001. Operating activities provided $4.7 million, investing activities used $2.1 million and financing activities provided $246,000. The following changes are reflected in the financial statements. Accounts receivable increased by $8.3 million from July 31, 2000, due primarily to the timing of the shipments and the subsequent collection of the related receivables. The allowance for doubtful accounts increased by $101,000. The Company reviews its allowance for doubtful accounts periodically and believes it is sufficient based on past experience and the Company's credit standards. We also have a credit insurance policy in the amount of $10.0 million for certain foreign receivables. Other receivables decreased by $9.0 million as a result of the receipt of this amount from Adaptive Broadband Corp. in accordance with the asset purchase agreement in connection with our acquisition of EF Data. Net inventories increased by $3.2 million, primarily due to the higher levels of inventory required by our mobile data communications segment for the U.S. Army contract. A significant portion of the Company's product lines require a competitive delivery response to customers' requirements and require the Company to provide for a level of "off-the-shelf" equipment. Thus, inventory levels will vary as a function of backlog and new orders. 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 decreased by $1.0 million primarily due to the timing of the inventory purchases. Taxes payable increased by $1.9 million primarily due to the additional income taxes associated with the increase in taxable income for the period. We entered into new capital leases during the period in the amount of $326,000 for the purchase of capital equipment. At January 31, 2001, our capital lease obligation, including current portion, was $1.5 million. 14
Our long-term debt, including the current portion, is $40.0 million. It bears an interest rate of 9.25% and is payable semi annually over a five-year period, with the first principal payment due on June 30, 2001. We may seek to increase our long-term borrowings in connection with the acquisition of certain assets and product lines of MPD Technologies, Inc., referred to above. Other long-term liabilities are for deferred revenue related to an extended warranty contract to be recognized over the life of the warranty contract. We believe that our cash and cash equivalents and short-term investments will be sufficient to meet our operating cash requirements for at least the next year. 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. The Company's exposure to debt price risks relates to its investment in a mutual fund which primarily invests in debt securities. At January 31, 2001, this investment was considered available-for-sale with any unrealized gains or losses deferred as a component of accumulated other comprehensive loss. The Company is subject to debt price risk associated with this investment which could ultimately affect the Company's available cash flow from that investment as well as realized gains and losses upon the ultimate sale of its investment in the mutual fund. 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. Any change in these markets would not materially affect the consolidated financial position, results of operations or cash flows of the Company. 15
PART II OTHER INFORMATION Item 1. Legal Proceedings Two former employees (the "Plaintiffs") of the Company's discontinued Comtech Wireless subsidiary, commenced an action in the United States District Court, District of New Jersey, against the Company and others (Verma, et al., V. Comtech Telecommunications Corp., et al.) 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 Company 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. Item 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Stockholders' Meeting, held on December 12, 2000, Mr. Richard L. Goldberg and Dr. George Bugliarello were reelected as Directors for a three-year term. The votes were as follows: Mr. Richard L. Goldberg - votes for 6,145,465; votes withheld 442,067. Dr. George Bugliarello - votes for 6,170,020; votes withheld 417,512. Mr. Fred Kornberg and Mr. Sol S. Weiner continued on as Directors for a term expiring in one year and Dr. John B. Payne and Mr. Gerard R. Nocita for a term expiring in two years. The stockholders ratified the selection of KPMG LLP as auditors by a vote of 6,555,950 shares for and 17,113 shares against with 14,469 shares abstaining. The stockholders approved the adoption of the Company's 2001 Employee Stock Purchase Plan by a vote of 3,374,061 for and 202,634 against with 273,260 shares abstaining. The stockholders approved the adoption of the amendment to the Company's 2000 Stock Incentive Plan by a vote of 2,171,715 for and 1,403,542 shares against with 274,698 shares abstaining. Item 6. Exhibits and Reports on Form 8-K (b) Reports on Form 8-K The following report on Form 8-K was filed during the three months ended January 31, 2001: 1. On December 11, 2000, a report on Form 8-K was filed for the purpose of amending and restating the description of the Company's common stock, par value $0.10, contained in the Company's Registration Statement dated November 22, 1974. 16
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: March 06, 2001 By: /s/ Fred Kornberg ------------------------------------ Fred Kornberg Chairman of the Board Chief Executive Officer and President Date: March 06, 2001 By: /s/ J. Preston Windus, Jr. ------------------------------------ J. Preston Windus, Jr. Senior Vice President Chief Financial Officer 17