FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d OF THE SECURITIES EXCHANGE ACT OF 1934 (As last amended in Rel. No. 34-26589, eff. 4/12/89) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20459 Form 10-Q (Mark One) |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended October 31, 1999 ----------------------------------------------------- |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________________ to ___________________ Commission File Number: 0-7928 -------------------------------------------------- COMTECH TELECOMMUNICATIONS CORP. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 11-2139466 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation /organization) Identification Number) 105 Baylis Road, Melville, New York 11747 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (516) 777-8900 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. |_| Yes |_| No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, Par Value $.10 Per Share - 4,571,243 shares outstanding as of December 13, 1999. - --------------------------------------------------------------------------------
COMTECH TELECOMMUNICATIONS CORP. INDEX Page No. --- PART I FINANCIAL INFORMATION Consolidated Balance Sheets - 2 October 31, 1999 (unaudited) and July 31, 1999 Consolidated Statements of Operations - 3 Three Months Ended October 31, 1999 and 1998 (unaudited) Consolidated Statements of Cash Flows - 4 Three Months Ended October 31, 1999 and 1998 (unaudited) Notes to Consolidated Financial Statements 5-7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 PART II OTHER INFORMATION 11 Signature Page 12 1
PART I FINANCIAL INFORMATION COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> October 31, 1999 July 31, 1999 ---------------- ------------- (unaudited) <S> <C> <C> ASSETS: Current assets: Cash and cash equivalents $ 1,397,000 $ 5,896,000 Accounts receivable, less allowance for doubtful accounts of $145,000 at October 31, 1999 and July 31, 1999 9,577,000 5,152,000 Inventories, net 8,166,000 7,879,000 Prepaid expenses and other current assets 328,000 138,000 Deferred tax asset-current 1,391,000 1,658,000 Net assets of discontinued operations 80,000 -- ------------ ------------ Total current assets 20,939,000 20,723,000 Property, plant and equipment, net 4,202,000 4,310,000 Intangible assets, net of amortization 1,599,000 1,623,000 Other assets 258,000 274,000 Deferred tax asset-non current 2,917,000 2,917,000 ------------ ------------ Total assets $ 29,915,000 $ 29,847,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Current installments of long-term debt (including payable to related party of $323,000 at October 31, 1999 and $316,000 at July 31, 1999) $ 566,000 $ 605,000 Accounts payable 5,166,000 3,763,000 Accrued expenses and other current liabilities 3,891,000 6,026,000 Net liabilities of discontinued operations -- 137,000 ------------ ------------ Total current liabilities 9,623,000 10,531,000 Long-term debt, less current installments (including payable to related party of $418,000 at October 31, 1999 and $501,000 at July 31,1999 825,000 959,000 Other long-term liabilities 448,000 -- ------------ ------------ Total liabilities 10,896,000 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 15,000,000 shares; issued and outstanding 4,496,741 shares at October 31, 1999 and 4,471,368 shares at July 31, 1999 450,000 447,000 Additional paid-in capital 23,866,000 23,801,000 Accumulated deficit (4,211,000) (4,746,000) ------------ ------------ 20,105,000 19,502,000 Less: Treasury stock (82,500 shares at October 31, 1999 and July 31, 1999) (184,000) (184,000) Deferred compensation expense (902,000) (961,000) ------------ ------------ 19,019,000 18,357,000 Total liabilities and stockholders' equity $ 29,915,000 $ 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 October 31, (Unaudited) ----------------------------------- 1999 1998 ------------ ------------ <S> <C> <C> Net sales $ 11,747,000 $ 8,735,000 ------------ ------------ Operating costs and expenses: Cost of sales 8,406,000 6,008,000 Selling, general and administrative 1,946,000 1,640,000 Research and development 530,000 478,000 ------------ ------------ Total operating costs and expenses 10,882,000 8,126,000 ------------ ------------ Operating income from continuing operations 865,000 609,000 Other (expense) income: Interest expense (37,000) (52,000) Interest income 32,000 19,000 Other income -- 2,000 ------------ ------------ Income from continuing operations before provision for income taxes 860,000 578,000 Provision for income taxes 325,000 45,000 ------------ ------------ Income from continuing operations 535,000 533,000 Loss from operations of discontinued segment -- (139,000) ------------ ------------ Net income $ 535,000 $ 394,000 ============ ============ Basic income (loss) per share: Income from continuing operations $ 0.12 $ 0.14 Loss from operations of discontinued segment -- (.04) ------------ ------------ Basic income per share $ 0.12 $ 0.10 ============ ============ Diluted income (loss) per share: Income from continuing operations $ 0.11 $ 0.12 Loss from operations of discontinued segment -- (.03) ------------ ------------ Diluted income per share $ 0.11 $ 0.09 ============ ============ Weighted average number of common shares outstanding - basic computation 4,399,000 3,926,000 Potential dilutive common shares 683,000 345,000 ------------ ------------ Weighted average number of common and common equivalent shares outstanding assuming dilution- Diluted computation 5,082,000 4,271,000 ============ ============ </TABLE> See accompanying notes to consolidated financial statements 3
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Three Months Ended October 31, ----------- (unaudited) 1999 1998 ---- ---- <S> <C> <C> Cash flows from operating activities: Net income $ 535,000 $ 394,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Loss from discontinued operations -- 139,000 Depreciation and amortization 418,000 353,000 Deferred income tax provision 267,000 -- Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable (4,425,000) 556,000 Inventories (287,000) (36,000) Prepaid expenses and other current assets (190,000) (74,000) Other assets (1,000) 8,000 Accounts payable 1,403,000 (72,000) Accrued expenses and other current liabilities (2,134,000) (278,000) Other liabilities 448,000 -- ----------- ----------- Net cash (used in) provided by continuing operations (3,966,000) 712,000 Net cash (used in) discontinued operations (218,000) (139,000) ----------- ----------- Net cash (used in) provided by operating activities (4,184,000) 851,000 ----------- ----------- Cash flows from investing activities: Purchases of property, plant and equipment (210,000) (265,000) Payment for business acquisitions net of cash acquired -- (173,000) ----------- ----------- Net cash used in investing activities (210,000) (438,000) ----------- ----------- Cash flows from financing activities: Principal payments on long-term debt (173,000) (212,000) Exercise of stock options 68,000 2,000 ----------- ----------- Net cash used in financing activities (105,000) (210,000) ----------- ----------- Net increase (decrease) in cash and cash equivalents (4,499,000) 203,000 Cash and cash equivalents at beginning of period 5,896,000 2,746,000 ----------- ----------- Cash and cash equivalents at end of period $ 1,397,000 $ 2,949,000 =========== =========== Supplemental cash flow disclosure: Cash paid during the period for: Interest $ 37,000 $ 52,000 Income taxes $ 104,000 $ 133,000 </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 ended October 31, 1999 and 1998 are unaudited. In the opinion of management, the information furnished reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited interim periods. The results of operations for the three months ended October 31, 1999 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) Reclassifications Certain balances in the prior fiscal quarter have been reclassified to conform to the current fiscal quarter and fiscal year end presentation. (3) Comprehensive Income The Company's operations did not give rise to items includible in comprehensive income which were not already included in net income. Accordingly, the Company's comprehensive income is the same as its net income for all periods presented. (4) Accounts Receivable Accounts receivable consist of the following: <TABLE> <CAPTION> October 31, 1999 July 31, 1999 ---------------- ------------- <S> <C> <C> Accounts receivable from commercial customers $5,833,000 $3,924,000 Unbilled receivables (including retainages) on 3,273,000 1,154,000 contracts-in-progress Amounts receivable from the United States government and its agencies 616,000 219,000 ---------- ---------- 9,722,000 5,297,000 Less allowance for doubtful accounts 145,000 145,000 ---------- ---------- Accounts receivable, net $9,577,000 $5,152,000 ========== ========== </TABLE> (5) Inventories Inventories consist of the following: October 31, 1999 July 31, 1999 ---------------- ------------- Raw materials and components $ 4,495,000 $ 3,553,000 Work-in-process 5,794,000 5,798,000 ----------- ----------- 10,289,000 9,351,000 Less: Progress payments 978,000 302,000 Inventory reserves 1,145,000 1,170,000 ----------- ----------- Inventories - net $ 8,166,000 $ 7,879,000 =========== =========== 5
(6) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: October 31, 1999 July 31, 1999 ---------------- ------------- Customer advances and deposits $ 184,000 $2,798,000 Accrued wages and benefits 1,782,000 1,603,000 Accrued commissions 1,585,000 915,000 Other 253,000 710,000 ---------- ---------- $3,804,000 $6,026,000 ========== ========== (7) Long-Term Debt Long-term debt consists of the following: October 31, 1999 July 31, 1999 ---------------- ------------- Obligations under capital leases $1,391,000 $1,564,000 Less current installments 566,000 605,000 ---------- ---------- $ 825,000 $ 959,000 ========== ========== (8) 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. (9) Earnings Per Share The Company calculates earning per share ("EPS") in accordance with the Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". Basic EPS are 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. (10) Segment and Principal Customer Information The Company adopted SFAS No. 131,"Disclosures about Segments of an Enterprise and Related Information." Reportable operating segments are determined based on the Company's management approach. The management approach, as defined by SFAS No. 131, is based on the way that the chief operating decision-maker organizes the segments within an enterprise for making operating decisions and assessing performance. While the Company's results of operations are primarily reviewed on a consolidated basis, the chief operating decision-maker also manages the enterprise in four segments: (I)Telecommunications Transmission, (II) RF Microwave Amplifiers, (III) Mobile Data Communications Services and (IV) Wireless Local Loop, which is being 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. 6
(in thousands) Three months ended October 31, 1999 <TABLE> <CAPTION> Mobile Data Telecommunications RF Microwave Communications Corporate Transmission Amplifiers Services and Others Eliminations Total ------------ ---------- -------- ---------- ------------ ----- <S> <C> <C> <C> <C> <C> <C> Net sales $ 9,453 2,149 145 -- 11,747 Operating income (loss) 1,471 (60) (81) (465) 865 Interest income -- -- 32 32 Interest expense 8 28 1 -- 37 Depreciation and amortization 154 185 79 -- 418 Expenditures for long-lived assets 93 54 57 6 210 Total assets 12,405 8,255 3,333 9,892 (4,050) 29,835 </TABLE> Three months ended October 31, 1998 <TABLE> <CAPTION> Mobile Data Telecommunications RF Microwave Communications Corporate Transmission Amplifiers Services and Others Eliminations Total ------------ ---------- -------- ---------- ------------ ----- <S> <C> <C> <C> <C> <C> <C> Net sales $4,643 4,066 26 -- 8,735 Operating income (loss) 479 594 (56) (408) 609 Interest income -- -- 19 19 Interest expense 10 42 -- -- 52 Depreciation and amortization 87 201 -- -- 288 Expenditures for long-lived assets 127 125 -- -- 252 Total assets 8,809 7,771 2,466 7,069 (4,027) 22,088 </TABLE> 7
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements Certain information contained in this Quarterly Report on Form 10-Q, including, without limitation, information appearing under Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," are 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 OCTOBER 31, 1999 AND OCTOBER 31, 1998 Net Sales. Consolidated net sales were $11.7 million and $8.7 million for the three months ended October 31, 1999 and 1998, respectively, representing an increase of $3.0 million or 34.5%. This increase was primarily due to a higher volume of sales by our telecommunications transmission segment of over-the-horizon microwave equipment partly offset by lower sales at our RF microwave amplifier segment. Gross Profit. Gross profit was $3.3 million and $2.7 million for the three months ended October 31, 1999 and 1998, respectively, representing an increase of $614,000 or 23.0%. This increase was due primarily to the increase in sales volume. Gross profit margins, as a percentage of net sales, was 28.4% and 31.1% in the three month periods of 1999 and 1998, respectively. The lower gross profit margin in the 1999 period was due primarily to the changes in the product mix as compared to the prior year period. Selling, General and Administrative. Selling, general and administrative expenses were $1.9 million and $1.6 million for the three months ended October 31, 1999 and 1998, respectively, representing an increase of $306,000 or 18.7%. This increase was due primarily to the additional expenses required to support the increased sales volume including additional personnel, sales commissions, deferred compensation and other administrative expenses. As a percentage of sales, these expenses were 16.6% and 18.8% in the 1999 and 1998 quarters, respectively. Research and Development. Research and development expenses were $530,000 and $478,000 for the three month periods of 1999 and 1998, respectively, representing an increase of $52,000 or 10.9%. This increase is due to continuing development of new products and technologies and general product enhancement. Operating Income. As a result of the foregoing factors, we had operating income from continuing operations of $865,000 in the three months ended October 31, 1999 as compared to $609,000 in the prior year period. Interest Expense. Interest expense was $37,000 and $52,000 for the three months ended October 31, 1999 and 1998, respectively, representing a decrease of $15,000. Interest expense for both periods was substantially due to interest associated with the Company's capital lease obligations. Interest Income. Interest income was $32,000 and $19,000 for the three months ended October 31, 1999 and 1998, respectively, representing an increase of $13,000. 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 highly liquid, short-term money-market funds and commercial paper. 8
Provision for Income Taxes. The provision for income taxes was $325,000 and $45,000 for the three months ended October 31, 1999 and 1998, respectively. The income tax provision in fiscal 2000 reflects an approximate 38% tax rate while fiscal 1999 reflects an effective tax rate of approximately 8%. In the three months ended October 31, 1998, the Company utilized available Federal net operating loss carryforwards to offset taxable income which were not previously recorded as a deferred tax asset. The deferred tax assets associated with such carryforwards were recognized by July 31, 1999. LIQUITY AND CAPITAL RESOURCES For the three month period ended October 31, 1999, our cash and cash equivalent position decreased by $4.5 million from $5.9 million at July 31, 1999 to $1.4 million at October 31, 1999. Operating activities used $4.2 million, investing activities used $210,000 and financing activities used $105,000 . Accounts receivable increased by $4.4 million from July 31, 1999, due primarily to the timing of the shipments, the subsequent collection of the related receivables and an increase of approximately $2.1 million in unbilled receivables. The allowance for doubtful accounts of $145,000 remained the same. The Company reviews its allowance for doubtful accounts periodically and believes it is sufficient based on past experience and the Company's credit standards. Net inventories increased by $287,000, primarily due to the higher levels of inventory required by our mobile datacommunications services segment. The Company generally operates on a job-order cost basis, that is, costs are incurred as work-in-process inventory for specific contracts or "jobs" and, accordingly, inventory levels will vary as a function of the Company's order backlog. The Company does have some product lines which require a more competitive delivery response to customers' requirements and require the Company to provide for a level of "off-the shelf" equipment. The only other general inventory that the Company maintains is for basic components which are common for most of its products. Inventory reserves are reviewed on an ongoing basis and adjustments are made as needed. Net intangible assets at October 31, 1999 of $1.6 million consist of goodwill as a result of our acquisition, during fiscal 1999, of a mobile data communications services business and entry into that business segment. Accounts payable increased by $1.4 million primarily due to the increase of inventory purchases. The decrease of $2.1 million in accrued expenses and other current liabilities was primarily due to decreases in customer advances and deposits partly offset by increases in accrued commissions. Purchases of property plant and equipment were $210,000. Payment on long term debt was $173,000. Other long-term liabilities are for deferred revenue related to an extended warranty. We have an $8.0 million secured credit facility from Republic National Bank of New York. The line of credit, which is to be used for working capital requirements, is for a term of one year and bears interest on borrowing of 90-day LIBOR plus 1.50% (7.75% at October 31,1999). There were no borrowings outstanding at October 31,1999 and 1998. The credit facility expires December 31, 1999. We have renewed and received increases in this line of credit annually since 1996. We believe that our working capital position and available credit facilities are sufficient to meet our cash requirements during the next year at our current business levels. However, given the potential for receipt of large orders under the Company's multi-year contract with the U.S. Army, or other growth of our business beyond expected levels, we may seek additional external financing. Year 2000 Compliance Management has initiated a company-wide program and has developed a formal plan of implementation to prepare for the Year 2000. This includes taking actions designed to ensure that our information technology systems, products and infrastructure are Year 2000 compliant and that its customers, suppliers and service providers have taken similar action. With respect to Year 2000 internal issues, we have evaluated our information technology systems, products, equipment and other facilities systems, and management believes 9
that all are Year 2000 compliant. With respect to our external Year 2000 issues, we have surveyed our customers, suppliers and service providers primarily through written correspondence. Despite the efforts to survey customers, suppliers and service providers, management cannot be certain as to the actual Year 2000 readiness of these third parties. To the extent any of its suppliers or service providers are not Year 2000 ready, we believe that we will be able to obtain other suppliers or service providers without a significant interruption to its business. Based upon responses to our inquiries of third parties, we currently believe we do not have a need for a contingency plan. Certain experts who have studied the issue have published reports indicating that the Year 2000 problem could be substantially more severe in developing economies than in the United States. A significant amount of our sales are for customers in developing countries. Our management currently believes that the costs related to our compliance with the Year 2000 issue will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. 10
PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibit is being filed as part of this Report: Exhibition No. Description -------------- ----------- Exhibit 27 Financial Data Schedule 11
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMTECH TELECOMMUNICATIONS CORP. (Registrant) Date: December 14, 1999 By: /s/ Fred Kornberg ----------------------------------- Fred Kornberg Chairman of the Board Chief Executive Officer and President Date: December 14, 1999 By: /s/ J. Preston Windus, Jr. ------------------------------------ J. Preston Windus, Jr. Senior Vice President Chief Financial Officer 12
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMTECH TELECOMMUNICATIONS CORP. (Registrant) Date: December 14, 1999 By: ----------------------------------- Fred Kornberg Chairman of the Board Chief Executive Officer and President Date: December 14, 1999 By: ------------------------------------ J. Preston Windus, Jr. Senior Vice President Chief Financial Officer