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, 2000 ----------------------------------------------------- |_| 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 incorporation /organization) Identification 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) - -------------------------------------------------------------------------------- (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 - 7,262,876 shares outstanding as of June 6, 2000.
COMTECH TELECOMMUNICATIONS CORP. INDEX Page No. ---- PART I FINANCIAL INFORMATION Consolidated Balance Sheets - 2 April 30, 2000 (unaudited) and July 31, 1999 Consolidated Statements of Operations - 3 Three Months and Nine Months Ended April 30, 2000 and 1999 (unaudited) Consolidated Statements of Cash Flows - 4 Nine Months Ended April 30, 2000 and 1999 (unaudited) Notes to Consolidated Financial Statements 5 - 9 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-12 PART II OTHER INFORMATION 13 Signature Page 14
PART I FINANCIAL INFORMATION COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> April 30 ,2000 July 31, 1999 -------------- ------------- (unaudited) <S> <C> <C> ASSETS: Current assets: Cash and cash equivalents $ 10,483,000 $ 5,896,000 Marketable investment securities 35,857,000 -- Accounts receivable, less allowance for doubtful accounts of $145,000 at April 30, 2000 and July 31, 1999 7,729,000 5,152,000 Inventories, net 11,493,000 7,879,000 Prepaid expenses and other current assets 642,000 138,000 Deferred tax asset-current 731,000 1,658,000 Net assets of discontinued operations 192,000 -- ------------ ------------ Total current assets 67,127,000 20,723,000 Property, plant and equipment, net 4,708,000 4,310,000 Intangible assets, net of amortization 2,159,000 1,623,000 Other assets 237,000 274,000 Deferred tax asset-non current 2,917,000 2,917,000 ------------ ------------ Total assets $ 77,148,000 $ 29,847,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Current installments of long-term debt (including payable to related party of $339,000 at April 30, 2000 and $316,000 at July 31, 1999) $ 588,000 $ 605,000 Accounts payable 5,343,000 3,763,000 Accrued expenses and other current liabilities 6,357,000 6,026,000 Net liabilities of discontinued operations -- 137,000 ------------ ------------ Total current liabilities 12,288,000 10,531,000 Long-term debt, less current installments (including payable to related party of $244,000 at April 30, 2000 and $501,000 at July 31,1999) 824,000 959,000 Other long-term liabilities 394,000 -- ------------ ------------ Total liabilities 13,506,000 11,490,000 ------------ ------------ 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 at April 30, 2000 and 15,000,000 shares at July 31, 1999; issued 7,345,376 shares at April 30, 2000 and 4,471,368 shares at July 31,1999 735,000 447,000 Additional paid-in capital 66,743,000 23,801,000 Accumulated other comprehensive income (231,000) -- Accumulated deficit (2,578,000) (4,746,000) ------------ ------------ 64,669,000 19,502,000 Less: Treasury stock (82,500 shares at April 30, 2000 and July 31,1999) (184,000) (184,000) Deferred compensation expense (843,000) (961,000) ------------ ------------ 63,642,000 18,357,000 Commitments and contingencies Total liabilities and stockholders' equity $ 77,148,000 $ 29,847,000 ============ ============ </TABLE> See accompanying notes to consolidated financial statements 2
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> Three months ended Nine months ended April 30, April 30, (unaudited) (unaudited) ----------- ----------- 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 15,485,000 $ 10,473,000 $ 40,950,000 $ 28,265,000 ------------ ------------ ------------ ------------ Operating costs and expenses: Cost of sales 11,098,000 7,298,000 29,080,000 19,681,000 Selling, general and administrative 2,919,000 1,810,000 7,381,000 4,930,000 Research and development 500,000 528,000 1,611,000 1,507,000 ------------ ------------ ------------ ------------ Total operating costs and expenses 14,517,000 9,636,000 38,072,000 26,118,000 ------------ ------------ ------------ ------------ Operating income from continuing operations 968,000 837,000 2,878,000 2,147,000 Other (expense) income: Interest expense (28,000) (49,000) (99,000) (156,000) Interest income 583,000 9,000 635,000 44,000 Other income -- 10,000 -- 12,000 ------------ ------------ ------------ ------------ Income from continuing operations before provision (benefit) for income taxes 1,523,000 807,000 3,414,000 2,047,000 Provision (benefit) for income taxes 552,000 149,000 1,246,000 (1,056,000) ------------ ------------ ------------ ------------ Income from continuing operations 971,000 658,000 2,168,000 3,103,000 Loss from operations of discontinued segment (net of applicable income tax) -- (160,000) -- (437,000) ------------ ------------ ------------ ------------ Net income $ 971,000 $ 498,000 $ 2,168,000 $ 2,666,000 ============ ============ ============ ============ Basic income (loss) per share: Income from continuing operations $ 0.15 $ 0.16 $ 0.42 $ 0.76 Loss from operations of segment -- (0.04) -- (0.11) ------------ ------------ ------------ ------------ Basic income per share $ 0.15 $ 0.12 $ 0.42 $ 0.65 ============ ============ ============ ============ Diluted income (loss) per share: Income from continuing operations $ 0.13 $ 0.14 $ 0.38 $ 0.69 Loss from operations of discontinued segment -- (0.03) -- (0.10) ------------ ------------ ------------ ------------ Diluted income per share $ 0.13 $ 0.11 $ 0.38 $ 0.60 ============ ============ ============ ============ Weighted average number of common shares outstanding - basic computation 6,513,000 4,232,000 5,120,000 4,080,000 Potential dilutive common shares 689,000 390,000 652,000 387,000 ------------ ------------ ------------ ------------ Weighted average number of common and common equivalent shares outstanding assuming dilution - diluted computation 7,202,000 4,622,000 5,772,000 4,467,000 ============ ============ ============ ============ </TABLE> See accompanying notes to consolidated financial statements 3
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Nine Months Ended April 30, --------- (unaudited) 2000 1999 ---- ---- <S> <C> <C> Cash flows from operating activities: Net income: $ 2,168,000 $ 2,666,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Loss from discontinued operations -- 437,000 Depreciation and amortization 1,231,000 1,178,000 Deferred income taxes 1,060,000 (1,195,000) Provision for bad debt 4,000 86,000 Changes in assets and liabilities, net of effect of acquisitions: Accounts receivable (2,394,000) (2,672,000) Inventories (3,334,000) (1,820,000) Prepaid expenses and other current assets (504,000) (41,000) Other assets (8,000) 56,000 Accounts payable 1,325,000 1,208,000 Accrued expenses and other current liabilities (100,000) 1,412,000 Other liabilities 394,000 -- ------------ ------------ Net cash (used in) provided by continuing operations (158,000) 1,315,000 Net cash used in discontinued operations (329,000) (543,000) ------------ ------------ Net cash (used in) provided by operating activities (487,000) 772,000 ------------ ------------ Cash flows from investing activities: Investment in marketable securities (36,221,000) -- Purchases of property, plant and equipment (935,000) (435,000) Payment for business acquisition, net of cash acquired (11,000) (173,000) ------------ ------------ Net cash used in investing activities (37,167,000) (608,000) ------------ ------------ Cash flows from financing activities: Borrowings under line of credit facility 1,000,000 850,000 Repayment of borrowings under line of credit facility (1,000,000) -- Principal payments on long-term debt (618,000) (849,000) Proceeds from exercise of stock options 409,000 30,000 Proceeds from common stock offering, net 42,450,000 -- ------------ ------------ Net cash provided by financing activities 42,241,000 31,000 ------------ ------------ Net increase in cash and cash equivalents 4,587,000 195,000 Cash and cash equivalents at beginning of period 5,896,000 2,746,000 ------------ ------------ Cash and cash equivalents at end of period $ 10,483,000 $ 2,941,000 ============ ============ Supplemental cash flow disclosure: Cash paid during the period for: Interest $ 99,000 $ 156,000 Income taxes 299,000 150,000 Non cash investing and financing activities: Fair value adjustment to securities available-for-sale $ (231,000) $ -- Acquisition of property and equipment through capital leases 281,000 281,000 Capital stock issued in connection with business acquisition 371,000 528,000 Note payable issued in connection with business acquisition -- 250,000 </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 nine months and three months ended April 30, 2000 and 1999 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, 1999 and the notes thereto contained in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on October 29, 1999. (2) Reclassification Certain balances in the prior fiscal quarter have been reclassified to conform to the current fiscal quarter and fiscal year end presentation. (3) Marketable Investment Securities Marketable investment securities at April 30, 2000 consists of a mutual fund investment classified as available-for-sale and 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 until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. (4) Comprehensive Income Effective August 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". This Statement requires that all items recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Other comprehensive income may include foreign currency translation adjustments, minimum pension liability adjustments and unrealized gains and losses on marketable securities classified as available-for-sale. The Company's item of other comprehensive income (loss) includes unrealized loss on marketable equity securities. The Company's total comprehensive income for the three and nine month periods ended April 30, 2000 and 1999 was as follows: <TABLE> <CAPTION> Three months Nine months ended April 30 ended April 30 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income $ 971,000 $ 498,000 $ 2,168,000 $ 2,666,000 Other comprehensive income (loss), net of tax: Change in equity due to unrealized loss on available for sale securities (231,000) 0 (231,000) 0 ----------- ----------- ----------- ----------- Comprehensive income $ 740,000 $ 498,000 $ 1,937,000 $ 2,666,000 =========== =========== =========== =========== </TABLE> (5) Accounts Receivable Accounts receivable consist of the following: <TABLE> <CAPTION> April 30, 2000 July 31, 1999 <S> <C> <C> Accounts receivable from commercial customers $6,602,000 $3,924,000 Unbilled receivables (including retainages) on contracts-in-progress 671,000 1,154,000 Amounts receivable from the United States government and its agencies 601,000 219,000 ---------- ---------- 7,874,000 5,297,000 Less allowance for doubtful accounts 145,000 145,000 ---------- ---------- Accounts receivable, net $7,729,000 $5,152,000 ========== ========== </TABLE> 5
(6) Inventories Inventories consist of the following: April 30, 2000 July 31, 1999 Raw materials and components $ 4,808,000 $ 3,553,000 Work-in-process 8,438,000 5,798,000 ----------- ----------- 13,246,000 9,351,000 Less: Progress payments 479,000 302,000 Inventory reserves 1,274,000 1,170,000 ----------- ----------- Inventories-net $11,493,000 $ 7,879,000 =========== =========== (7) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: April 30, 2000 July 31, 1999 Customer advances and deposits $ 1,006,000 $ 2,798,000 Accrued wages and benefits 1,929,000 1,603,000 Accrued commissions 2,041,000 915,000 Other 1,381,000 710,000 ----------- ----------- $ 6,357,000 $ 6,026,000 =========== =========== (8) Long-Term Debt Long-term debt consists of the following: April 30, 2000 July 31, 1999 Obligations under capital leases $ 1,412,000 $ 1,564,000 Less current installments 588,000 605,000 ----------- ----------- $ 824,000 $ 959,000 =========== =========== (9) Other Long-Term Liabilities Other long-term liabilities consist of deferred revenue related to an extended warranty agreement. (10) 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. (11) Earnings Per Share The Company calculates earnings per share ("EPS") in accordance with the 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. All share and per share amounts have been restated to reflect a three-for-two stock split effective July 30, 1999. 6
(12) 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 $42.4 million. (13) 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 four segments: (I)Telecommunications Transmission, (II) RF Microwave Amplifiers, (III) Mobile Data Communications Services and (IV) Wireless Local Loop, which has been discontinued. Telecommunications Transmission products include modems, frequency converters, satellite VSAT transceivers and antennas and over-the-horizon microwave communications products and systems. RF Microwave Amplifier 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. Corporate assets consist principally of cash, deferred tax assets and intercompany receivables. Corporate losses result from such corporate expenses as legal, accounting and executive. Sales between segments were negligible. Eliminations consist of intercompany balances. Three months ended April 30, 2000 -------------- (in thousands) <TABLE> <CAPTION> Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Eliminations Total ------------ ---------- -------- ----------- ------------ ----- <S> <C> <C> <C> <C> <C> <C> Net sales $ 12,043 $ 2,995 $ 447 $ -- $ 15,485 Operating income (loss) 1,943 55 (438) (592) 968 Interest income -- -- -- 583 583 Interest expense 8 22 (2) -- 28 Depreciation and amortization 153 190 41 30 414 Expenditures for long-lived assets 229 256 57 -- 542 Total assets 12,119 9,649 4,888 54,636 (4,144) 77,148 </TABLE> Three months ended April 30, 1999 -------------- (in thousands) <TABLE> <CAPTION> Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Eliminations Total ------------ ---------- -------- ----------- ------------ ----- <S> <C> <C> <C> <C> <C> <C> Net sales $ 7,061 $ 3,381 $ 31 $ -- $10,473 Operating income (loss) 833 717 (215) (498) 837 Interest income -- -- -- 9 9 Interest expense 9 35 5 -- 49 Depreciation and amortization 124 157 47 163 491 Expenditures for long-lived assets 160 68 7 -- 235 Total assets 11,106 9,647 2,779 8,452 (4,107) 27,877 </TABLE> 7
Nine months ended ----------------- April 30, 2000 (in thousands) <TABLE> <CAPTION> Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Eliminations Total ------------ ---------- -------- ----------- ------------ ----- <S> <C> <C> <C> <C> <C> <C> Net sales $ 31,937 $ 7,779 $ 1,234 $ -- $40,950 Operating income (loss) 5,331 (126) (656) (1,671) 2,878 Interest income -- -- -- 635 635 Interest expense 24 75 -- -- 99 Depreciation and amortization 442 560 110 119 1,231 Expenditures for long-lived assets 672 350 189 5 1,216 Total assets 12,119 9,649 4,888 54,636 (4,144) 77,148 </TABLE> Nine months ended ----------------- April 30, 1999 (in thousands) <TABLE> <CAPTION> Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Eliminations Total ------------ ---------- -------- ----------- ------------ ----- <S> <C> <C> <C> <C> <C> <C> Net sales $ 16,777 $ 11,365 $ 123 $ -- $28,265 Operating income (loss) 1,718 2,021 (337) (1,255) 2,147 Interest income 5 -- -- 39 44 Interest expense 29 119 8 -- 156 Depreciation and amortization 374 564 62 178 1,178 Expenditures for long-lived assets 407 289 7 13 716 Total assets 11,106 9,647 2,779 8,452 (4,107) 27,877 </TABLE> (14) Acquisition In January 2000, the Company acquired certain assets (including accounts receivable, inventory and fixed assets) and assumed certain liabilities of a company located in Topsfield, MA., Hill Engineering Inc. ("Hill") in exchange for 50,000 shares of the Company's common stock. Such shares were issued and placed in escrow and will be released to the sellers as follows: (i) 30,000 shares on January 21, 2001 assuming the resolution of certain pending claims; (ii) 10,000 shares on January 31, 2001 assuming Hill meets certain profit goals; and (iii) 10,000 shares on January 31, 2002 also assuming Hill meets certain profit goals. To the extent that Hill does not meet cumulative profit goals by January 31, 2005, the 20,000 escrow shares will be returned to the Company. The acquisition has been accounted for as a purchase. The purchase price amounted to approximately $371,000 which principally represents the fair value of the initial 30,000 shares of common stock to be issued to Hill. The remaining 20,000 shares will be recorded at fair value on the date when the profit goals are met. This business will operate as a division of the Company's wholly owned subsidiary, Comtech PST Corp., which is included in the RF Microwave Amplifiers segment. The accompanying consolidated financial statements reflect this acquisition at the fair value of the assets acquired ($652,000) and liabilities assumed ($871,000) and the operations of Hill from the date of acquisition through April 30, 2000. The excess of the purchase price over the net assets acquired approximated $606,000. This amount is included in intangible assets in the accompanying consolidated balance sheet and is being amortized over a 15 year period. The operations of Hill are not material to the operations of the Company. Pro forma results of operations were not provided as their effect on the consolidated operations were not material. 8
(15) Subsequent Event In May 2000 the Company entered into an agreement to acquire the business of EFData, the satellite communications division of Adaptive Broadband Corporation for $61.5 million cash. Closing of the transaction is expected by June 30, 2000 subject to normal conditions, including review by antitrust regulatory authorities, the Company's board of directors' approval and completion of satisfactory financing by the Company. 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 believed to be 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, 1999, or in the Company's other Securities and Exchange Commission filings, could affect the Company's actual results and could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company in this Quarterly Report on Form 10-Q. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2000 AND APRIL 30, 1999 Net Sales Consolidated net sales were $15.5 million and $10.5 million for the three months ended April 30, 2000 and 1999, respectively, representing an increase of $5.0 million or 47.9%. This increase was primarily due to increased sales by our telecommunications transmission segment of over-the-horizon microwave equipment principally to one customer, a major U.S. prime contractor, partly offset by lower sales at our RF microwave amplifier segment, primarily due to delays in receipt of expected follow-on orders. International sales increased by approximately $5.1 million or 73.3%, representing 78.0% and 66.5% of total net sales for the three months ended April 30, 2000 and 1999, respectively. Domestic sales decreased by $277,000 or 13.7%, representing 11.2% and 19.2% of total net sales for the three months ended April 30, 2000 and 1999, respectively. U.S. government sales increased by $184,000 or 12.4%, representing 10.8% and 14.2% of total net sales for the three months ended April 30, 2000 and 1999, respectively. Gross Profit Gross profit was $4.4 million and $3.2 million for the three months ended April 30, 2000 and 1999, respectively, representing an increase of $1.2 million or 38.2%. This increase was due primarily to the increase in sales volume. Gross margin, as a percentage of net sales, was 28.3% and 30.3% in the three months ended April 30, 2000 and 1999, respectively. The lower gross margin in the 2000 period was due primarily to the differences in the product mix as compared to the prior year period. Selling, General and Administrative Selling, general and administrative expenses were $2.9 million and $1.8 million for the three months ended April 30, 2000 and 1999, respectively, representing an increase of $1.1 million or 61.3%. This increase was due primarily to the additional expenses including additional personnel and sales commissions required to support the increased sales volume and also increases in amortization of deferred compensation and other administrative expenses. In addition, the increased expenditures reflected those required by our mobile data communications services segment. As a percentage of sales, these expenses were 18.9% and 17.3% in the three months ended April 30, 2000 and 1999, respectively. Research and Development Research and development expenses were $500,000 and $528,000 for the three months ended April 30, 2000 and 1999, respectively, representing a decrease of $28,000 or 5.3%. This decrease was primarily due to the increased customer funded research and development projects that the Company was engaged in as opposed to 9
internally funded projects. As a percentage of sales, research and development expenses were 3.2% and 5.0% for the three months ended April 30, 2000 and 1999, respectively. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the three months ended April 30, 2000 and 1999, customers reimbursed us $760,000 and $27,000, respectively, which amounts are not reflected in the reported research and development expenses. Operating Income As a result of the foregoing factors, we had operating income from continuing operations of $968,000 in the three months ended April 30, 2000 as compared to $837,000 in the prior year period, representing an increase of $131,000 or 15.7%. Interest Expense Interest expense was $28,000 and $49,000 for the three months ended April 30, 2000 and 1999, respectively, representing a decrease of $21,000 or 42.9%. Interest expense for both periods was substantially due to interest associated with our capital lease obligations. Interest Income Interest income was $583,000 and $9,000 for the three months ended April 30, 2000 and 1999, respectively, representing an increase of $574,000. This increase was due to the increase in the amount of cash available to invest during this period primarily as a result of the proceeds received from a follow-on stock offering completed this quarter. Interest income was primarily derived from the cash on hand in excess of working capital requirements that is invested in short-term money-market funds, commercial paper and investment funds. Provision for Income Taxes The provision for income taxes was $552,000 and $149,000 for the three months ended April 30, 2000 and 1999 respectively. The income tax provision for the three-month period of 2000 reflects an approximate 36% tax rate while the provision for the three-month period of 1999 reflects an effective tax rate of approximately 18%. For the three months ended April 30, 1999, the Company recognized deferred tax benefits based upon estimates of future taxable income. Deferred tax assets associated with tax carryforwards were recorded by July 31, 1999 and periods subsequent to fiscal 1999 reflect full Federal and local income tax expense. Comparison of THE RESULTS OF OPERATIONS FOR THE NINE Months ended APRIL 30, 2000 and APRIL 30, 1999 Net Sales Consolidated net sales were $41.0 million and $28.3 million for the nine months ended April 30, 2000 and 1999, respectively, representing an increase of $12.7 million or 44.9%. This increase was primarily due to increased sales by our telecommunications transmission segment of over-the-horizon microwave equipment principally to one customer, a major U.S. prime contractor, partly offset by lower sales at our RF microwave amplifier segment, primarily due to delays in receipt of expected follow-on orders. International sales increased by approximately $14.9 million or 90.9%, representing 76.7% and 58.2% of total net sales for the nine months ended April 30, 2000 and 1999, respectively. Domestic sales decreased by $380,000 or 5.5%, representing 15.9% and 24.4% of total net sales for the nine months ended April 30, 2000 and 1999, respectively. U.S. government sales decreased by $1.9 million or 38.2%, representing 7.4% and 17.4% of total net sales for the nine months ended April 30, 2000 and 1999, respectively. Gross Profit Gross profit was $11.9 million and $8.6 million for the nine months ended April 30, 2000 and 1999, respectively, representing an increase of $3.3 million or 38.3%. This increase was due primarily to the increase in sales volume. Gross margin, as a percentage of net sales, was 29.0% and 30.4% in the nine months ended April 30, 2000 and 1999, respectively. The lower gross margin in the 2000 period was due primarily to the differences in the product mix as compared to the prior year period. Selling, General and Administrative Selling, general and administrative expenses were $7.4 million and $4.9 million for the nine months ended April 30, 2000 and 1999, respectively, representing an increase of $2.5 million or 49.7%. This increase was due primarily to the additional expenses required including additional personnel and sales commissions, to support the increased sales volume and also increases in amortization of deferred compensation and other administrative expenses. In addition, the increased expenditures reflected those required by our mobile data communications segment. As a percentage of sales, selling, general and administrative expenses were 18.0% and 17.4% in the nine months ended April 30, 2000 and 1999, respectively. 10
Research and Development Research and development expenses were $1.6 million and $1.5 million for the nine months ended April 30, 2000 and 1999, respectively, representing an increase of $104,000 or 6.9%. This increase is due to continuing development of new products and technologies and general product enhancement. As a percentage of sales research and development expenses were 3.9% and 5.3% for the nine months ended April 30, 2000 and 1999, respectively. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the nine months ended April 30, 2000 and 1999, customers reimbursed us $1,214,000 and $201,000, respectively, which amounts are not reflected in the reported research and development expenses. Operating Income As a result of the foregoing factors, we had operating income from continuing operations of $2.9 million in the nine months ended April 30, 2000 as compared to $2.1 million in the prior year period, representing an increase of $731,000 or 34.0%. Interest Expense Interest expense was $99,000 and $156,000 for the nine months April 30, 2000 and 1999, respectively, representing a decrease of $57,000 or 36.5%. Interest expense for both periods was substantially due to interest associated with our capital lease obligations. Interest Income Interest income was $635,000 and $44,000 for the nine months ended April 30, 2000 and 1999, respectively, representing an increase of $591,000 or 13.4%. This increase was due primarily to the increase in the amount of cash available to invest during this period. Interest income was primarily derived from the cash on hand in excess of working capital requirements that is invested in short-term money-market funds, commercial paper and investment funds. Provision for Income Taxes The provision for income taxes was $1.2 million for the nine months ended April 30, 2000 as compared to a benefit of $1.1 million in the prior year period. The income tax provision for the nine-month period of 2000 reflects an approximate 36.5% tax rate. The Company has net operating loss carryforwards available to offset present and future Federal income tax. In the second quarter of fiscal 1999, the Company recorded a deferred tax asset of $1.4 million to recognize a portion of its deferred tax assets which include such carryforwards. This resulted in a tax benefit in the nine months ended April 30, 1999, partially offset by the provision for the current period income tax expense, of $1.1 million. LIQUIDITY AND CAPITAL RESOURCES For the nine months ended April 30, 2000, our cash and cash equivalent position increased by $4.6 million, from $5.9 million at July 31, 1999 to $10.5 million at April 30, 2000. During February and March 2000, the Company completed a public offering of 2.6 million shares of its common stock resulting in net proceeds of approximately $42.4 million. At April 30, 2000, we had cash on hand of $2.5 million, cash equivalents in short-term investments of $8.0 million and $35.9 million in marketable investment securities. For the nine months ended April 30, 2000, cash used in operating activities from continuing operations, net of assets and liabilities acquired from Hill Engineering was $158,000, discontinued operations used $329,000. Cash used in investing activities was $37.2 million (principally the purchase of marketable investment securities) and cash provided by financing activities was $42.2 million. Accounts receivable increased by $2.4 million from July 31, 1999 to April 30, 2000, due primarily to the timing of shipments, and the subsequent collections of the related receivables in the following fiscal period. The allowance for doubtful accounts of $145,000 at April 30, 2000 remained the same as July 31, 1999. We review our allowance for doubtful accounts periodically and believe it adequately reflects the collectibility of our receivables based on past experience and our credit standards. Generally, foreign customers are required to secure payment by an irrevocable letter of credit before an order is accepted. Inventory increased by $3.3 million from July 31, 1999 to April 30, 2000 primarily due to the higher levels of inventory required by our mobile data communications services segment. We generally operate on a job-order cost basis, that is, costs are incurred as work-in-progress inventory for specific contracts or jobs. Accordingly, inventory levels will vary as a function of our order backlog. Some of our product lines require a more rapid delivery response to customers' requirements and require us to provide for a level of "off-the-shelf" equipment inventory availability. The only other general inventory that we maintain is for basic components which are common to many of our products. 11
Accounts payable increased by $1.3 million from July 31, 1999 to April 30, 2000 primarily due to an increase of inventory purchases. Purchases of property, plant and equipment, primarily related to expansion of facilities, were $1,216,000 of which approximately $281,000 was financed by a capital lease. All our long-term debt consists of capital lease obligations. Long-term debt (including current installments) decreased by $152,000. This was the net result of the addition of $281,000 of the aforementioned capital equipment purchase lease, offset by the payments made of $618,000. Other long-term liabilities of $394,000 are for deferred revenue related to an extended warranty agreement. We have a $12.0 million secured credit facility from HSBC Bank USA. The line of credit, which is to be used for working capital requirements, is for a term of one year and bears interest on borrowings at the 90-day LIBOR plus 1.50% (8.0% at April 30, 2000). The credit facility expires December 31, 2000. We have renewed and received increases in this line of credit annually since 1996. There were no borrowings outstanding at either April 30, 2000 or July 31, 1999. We believe that our working capital position, together with available credit facilities, will be sufficient to meet our operating cash requirements for at least the next year. In May 2000, the Company entered into an agreement to acquire a satellite communications business for $61.5 million cash. Closing of the transaction is expected by June 30, 2000 subject to normal conditions, including review by antitrust regulatory authorities, the Company's board of directors' approval and securing satisfactory financing. Year 2000 Compliance To date, the Company has not encountered any significant effects of the Y2K problems either internally or with third parties. This does not guarantee that problems will not occur in the future or have not yet been detected. 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 equity price risk relates to its investment in a mutual fund which primarily invests in equity securities. At April 30, 2000, this investment was considered available-for-sale with any unrealized gains or losses deferred as a component of accumulated other comprehensive income. The Company is subject to equity 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. 12
PART II OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds (c) See footnote (11) of Notes to Consolidated Financial Statements Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibit is being filed as part of this Report: Exhibition No. Description -------------- ----------- Exhibit 27 Financial Data Schedule (b) Reports on form 8-K none 13
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 14, 2000 By: /s/ Fred Kornberg --------------------------------------- Fred Kornberg Chairman of the Board Chief Executive Officer and President Date: June 14, 2000 By: /s/ J. Preston Windus, Jr. --------------------------------------- J. Preston Windus, Jr. Senior Vice President Chief Financial Officer 14