UNITED STATESSECURITIES 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 quarterly period ended April 30, 2004
( )
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
(Exact name of registrant as specified in its charter)
Delaware
11-2139466
(State or other jurisdiction of incorporation /organization)
(I.R.S. Employer 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)
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
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of June 3, 2004, the number of outstanding shares of Common Stock, par value $.10 per share, of the Registrant was 14,222,945 shares.
COMTECH TELECOMMUNICATIONS CORP.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets – April 30, 2004 (Unaudited) and July 31, 2003
2
Consolidated Statements of Operations - Three Months and Nine Months Ended April 30, 2004 and 2003 (Unaudited)
3
Consolidated Statements of Cash Flows - Nine Months Ended April 30, 2004 and 2003 (Unaudited)
4
Notes to Consolidated Financial Statements
5 - 10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
11 - 18
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
18
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Item 6.
Exhibits and Reports on Form 8-K
19
Signature Page
20
Certifications
21 - 24
1
PART IFINANCIAL INFORMATIONCOMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
April 30, 2004
July 31, 2003
Assets
(Unaudited)
Current assets:
Cash and cash equivalents
$
152,818,000
48,617,000
Restricted cash
4,196,000
4,288,000
Accounts receivable, net
48,565,000
26,696,000
Inventories, net
36,626,000
34,048,000
Prepaid expenses and other current assets
2,155,000
1,742,000
Deferred tax asset – current
5,699,000
Total current assets
250,059,000
121,090,000
Property, plant and equipment, net
13,351,000
12,328,000
Goodwill and other intangibles with indefinite lives
17,726,000
Intangibles with definite lives, net
9,855,000
11,353,000
Deferred financing costs, net
3,677,000
—
Other assets
370,000
390,000
Deferred tax asset – non-current
1,363,000
296,401,000
164,250,000
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Current installments of capital lease obligations
343,000
899,000
Accounts payable
11,154,000
11,527,000
Accrued expenses and other current liabilities
17,301,000
13,267,000
Customer advances and deposits
5,855,000
2,491,000
Deferred service revenue
13,439,000
11,160,000
Interest payable
554,000
Income taxes payable
6,414,000
6,945,000
Total current liabilities
55,060,000
46,289,000
Convertible senior notes
105,000,000
Capital lease obligations, less current installments
194,000
393,000
Total liabilities
160,254,000
46,682,000
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 14,363,570 shares at April 30, 2004 and 14,020,769 shares at July 31, 2003
1,436,000
1,402,000
Additional paid-in capital
110,321,000
107,573,000
Retained earnings
24,623,000
8,884,000
136,380,000
117,859,000
Less:
Treasury stock (140,625 shares)
(185,000
)
Deferred compensation
(48,000
(106,000
Total stockholders’ equity
136,147,000
117,568,000
Total liabilities and stockholders’ equity
Commitments and contingencies
See accompanying notes to consolidated financial statements.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)
Three months endedApril 30,
Nine months endedApril 30,
2004
2003
Net sales
51,244,000
48,753,000
164,334,000
122,352,000
Cost of sales
30,635,000
32,262,000
102,132,000
80,641,000
Gross profit
20,609,000
16,491,000
62,202,000
41,711,000
Expenses:
Selling, general and administrative
8,775,000
7,270,000
26,153,000
19,970,000
Research and development
3,993,000
3,014,000
11,198,000
9,326,000
Amortization of intangibles
499,000
488,000
1,498,000
1,540,000
10,772,000
38,849,000
30,836,000
Operating income
7,342,000
5,719,000
23,353,000
10,875,000
Other expense (income):
Interest expense
675,000
682,000
750,000
2,059,000
Interest income
(324,000
(66,000
(543,000
(187,000
Income before provision for income taxes
6,991,000
5,103,000
23,146,000
9,003,000
Provision for income taxes
2,238,000
1,633,000
7,407,000
2,881,000
Net income
4,753,000
3,470,000
15,739,000
6,122,000
Net income per share:
Basic
0.33
0.31
1.12
0.54
Diluted
0.29
1.02
0.52
Weighted average number of common shares outstanding – basic
14,217,000
11,351,000
14,083,000
11,307,000
Potential dilutive common shares
1,187,000
711,000
1,354,000
563,000
Weighted average number of common and common equivalent shares outstanding assuming dilution – diluted
15,404,000
12,062,000
15,437,000
11,870,000
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
Nine months ended April 30,
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment and amortization of intangibles
4,738,000
4,617,000
Amortization of deferred financing costs
144,000
Provision for doubtful accounts
123,000
170,000
Provision for inventory reserves
956,000
1,749,000
Income tax benefit from stock option exercises
1,001,000
Loss on disposal of property, plant and equipment
90,000
Changes in operating assets and liabilities, net of effect of acquisitions:
92,000
(4,247,000
Accounts receivable
(21,992,000
(4,410,000
Inventories
(3,534,000
(209,000
(413,000
(637,000
20,000
(78,000
(373,000
2,197,000
4,034,000
1,981,000
3,364,000
4,610,000
2,279,000
4,332,000
(531,000
2,961,000
Net cash provided by operating activities
6,291,000
19,158,000
Cash flows from investing activities:
Purchases of property, plant and equipment
(4,295,000
(3,057,000
Purchase of technology license
(75,000
Payment for business acquisitions
(440,000
Cash received in connection with business acquisitions
551,000
Net cash used in investing activities
(3,021,000
Cash flows from financing activities:
Principal payments on capital lease obligations
(755,000
(802,000
Proceeds from issuance of convertible senior notes, net of related costs of $3,821,000
101,179,000
Proceeds from exercises of stock options, warrants and employee stock purchase plan shares
1,781,000
452,000
Net cash provided by (used in) financing activities
102,205,000
(350,000
Net increase in cash and cash equivalents
104,201,000
15,787,000
Cash and cash equivalents at beginning of period
15,510,000
Cash and cash equivalents at end of period
31,297,000
Supplemental cash flow disclosure:
Cash paid during the period for:
Interest
52,000
1,415,000
Income taxes
6,937,000
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
(1)
General
The accompanying consolidated financial statements at and for the three and nine months ended April 30, 2004 and 2003 are unaudited. In the opinion of management, the information furnished reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited interim periods. The results of operations for such periods are not necessarily indicative of the results of operations to be expected for the full year.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended July 31, 2003 and the notes thereto contained in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission, and the Company’s other filings with the Securities and Exchange Commission.
(2)
Reclassifications
Certain reclassifications have been made to previously reported statements to conform to the Company’s current financial statement format.
(3)
Accounts Receivable
Accounts receivable consist of the following:
Accounts receivable from commercial customers
17,378,000
10,952,000
Unbilled receivables (including retainages) on contracts-in-progress
20,443,000
10,084,000
Amounts receivable from the U.S. government and its agencies
11,465,000
6,572,000
49,286,000
27,608,000
Less allowance for doubtful accounts
721,000
912,000
The amount of retainage included in unbilled receivables was $20,000 at April 30, 2004. In the opinion of management, substantially all of the unbilled balances will be billed and collected within one year.
As of April 30, 2004, a prime contractor and a North African country represented 15.6% and 21.5%, respectively, of total net accounts receivable.
(4)
Inventories consist of the following:
Raw materials and components
18,524,000
16,431,000
Work-in-process and finished goods
23,668,000
22,716,000
42,192,000
39,147,000
Reserve for anticipated losses on contracts and inventory reserves
5,566,000
5,099,000
Inventories directly related to long-term contracts were $9,946,000 and $13,742,000 at April 30, 2004 and July 31, 2003, respectively.
5
(5)
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
Accrued wages and benefits
7,767,000
5,724,000
Accrued commissions
2,925,000
1,993,000
Accrued warranty
4,127,000
3,139,000
Other
2,482,000
2,411,000
Changes in the Company’s product warranty liability during the nine months ended April 30, 2004 and 2003 were as follows:
Balance at beginning of period
2,975,000
Provision for warranty obligations
2,865,000
1,761,000
Charges incurred
(1,877,000
(1,816,000
Balance at end of period
2,920,000
(6)
2.0% Convertible Senior Notes due 2024
On January 27, 2004, the Company issued $105,000,000 of its 2.0% convertible senior notes in a private offering pursuant to Rule 144A of the Securities Act of 1933, as amended. The net proceeds from this transaction were $101,179,000 after deducting the initial purchaser’s discount and other transaction costs.
The notes bear interest at an annual rate of 2.0% and, during certain periods, the notes are convertible into shares of the Company’s common stock at an initial conversion price of $47.25 per share (a conversion rate of 21.1640 shares per $1,000 original principal amount of notes), subject to adjustment in certain circumstances. The notes may be converted if, during a conversion period on each of at least 20 trading days, the closing sale price of the Company’s common stock exceeds 120% of the conversion price in effect. Upon conversion of the notes, in lieu of delivering common stock, the Company may, in its discretion, deliver cash or a combination of cash and common stock. The Company may, at its option, redeem some or all of the notes on or after February 4, 2009. Holders of the notes will have the right to require the Company to repurchase some or all of the outstanding notes on February 1, 2011, February 1, 2014 and February 1, 2019 and upon certain events, including a change in control. If not redeemed by the Company or repaid pursuant to the holders’ right to require repurchase, the notes mature on February 1, 2024.
The 2.0% interest is payable in cash, semi-annually, through February 1, 2011. After such date, the 2.0% interest will be accreted into the principal amount of the notes. Also, commencing with the six month period beginning February 1, 2009, if the average note price for the applicable trading period equals 120% or more of the accreted principal amount of such notes, the Company will pay contingent interest at an annual rate of 0.25%.
The notes are general unsecured obligations of the Company, ranking equally in right of payment with all of its other existing and future unsecured senior indebtedness and senior in right of payment to any of its future subordinated indebtedness. The notes are fully and unconditionally guaranteed on a senior subordinated basis by certain of the Company’s subsidiaries.
The Company intends to use the net proceeds of the offering for working capital and general corporate purposes and potentially for future acquisitions of businesses or technologies or repurchases of the Company’s common stock. The Company filed a registration statement with the SEC, which has become effective, for the resale of the notes and the shares of common stock issuable upon conversion of the notes.
6
(7)
Earnings Per Share
The Company calculates earnings per share (“EPS”) in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share”. Basic EPS is computed based on the weighted average number of shares outstanding. Diluted EPS reflects the maximum dilution from potential common stock issuable pursuant to the exercise of stock options and warrants, if dilutive, outstanding during each period. Since the conditions required for conversion of the convertible senior notes have not been met, the Company did not assume conversion of the notes in calculating diluted EPS for the three and nine months ended April 30, 2004. All share and per share amounts have been restated to reflect a three-for-two stock split effective July 2003.
For the three and nine months ended April 30, 2004, 99,500 and 33,833 options, respectively, were not included in the calculation of diluted EPS, as their effect would have been antidilutive. For the three and nine months ended April 30, 2003, 347,500 and 893,333 options, respectively, were not included in the calculation of diluted EPS, as their effect would have been antidilutive.
(8)
Stock-Based Compensation Plans
The Company accounts for its stock option plans under the intrinsic value method of APB Opinion No. 25, and as a result, no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company’s net income and income per share would have been reduced to the following pro forma amounts:
Three months ended April 30,
Net income, as reported
Less: Stock-based employee compensation expense based on fair value method, net of related tax
(384,000
(158,000
(1,088,000
(468,000
Pro forma net income
4,369,000
3,312,000
14,651,000
5,654,000
As reported
Pro forma
1.04
0.50
0.28
0.27
0.95
0.48
The per share weighted average fair value of stock options granted during the three months ended April 30, 2004 and 2003 was $17.81 and $4.14, respectively, on the date of grant. These fair values were determined using the Black Scholes option-pricing model with the following weighted average assumptions: 2004 – expected dividend yield of 0%, risk free interest rate of 2.68%, expected volatility of 77.04%, and an expected life of 5 years; 2003 – expected dividend yield of 0%, risk free interest rate of 2.54%, expected volatility of 62.15%, and an expected life of 5 years.
The per share weighted average fair value of stock options granted during the nine months ended April 30, 2004 and 2003 was $9.52 and $2.80, respectively, on the date of grant. These fair values were determined using the Black Scholes option-pricing model with the following weighted average assumptions: 2004 – expected dividend yield of 0%, risk free interest rate of 3.22%, expected volatility of 50.66% and an expected option life of 5 years; 2003 – expected dividend yield of 0%, risk free interest rate of 3.32%, expected volatility of 56.52%, and an expected option life of 5 years.
(9)
Segment and Principal Customer Information
Reportable operating segments are determined based on the Company’s management approach. The management approach, as defined by SFAS No. 131, is based on the way that the chief operating decision-maker organizes the segments within an enterprise for making operating decisions and assessing performance. While the Company’s results of operations are primarily reviewed on a consolidated basis, the chief operating decision-maker also manages the enterprise in three segments: (i) telecommunications transmission, (ii) RF microwave amplifiers and (iii) mobile data communications. Telecommunications transmission products include modems, frequency converters, satellite VSAT transceivers and antennas and over-the-horizon microwave communications products
7
and systems. RF microwave amplifier products include high-power amplifier products that use the microwave and radio frequency spectrums. Mobile data communications provide satellite-based mobile tracking and messaging hardware and related services. Unallocated assets consist principally of cash, deferred financing costs and deferred tax assets. Unallocated expenses result from such corporate expenses as legal, accounting and executive. Interest expense associated with the Company’s 2% convertible senior notes is not allocated to the operating segments. Corporate management defines and reviews segment profitability based on the same allocation methodology as presented in the segment data tables. Substantially all of the Company’s long-lived assets are located in the United States.
Intersegment sales for the three and nine months ended April 30, 2004 by the telecommunications transmission segment to the RF microwave amplifiers segment were $908,000 and $1,989,000, respectively. Intersegment sales for the three and nine months ended April 30, 2004 by the telecommunications transmission segment to the mobile data communications segment were $2,775,000 and $9,686,000, respectively. Intersegment sales have been eliminated from the tables below.
Intersegment sales for the three and nine months ended April 30, 2003 by the telecommunications transmission segment to the RF microwave amplifiers segment were $920,000 and $2,868,000, respectively. Intersegment sales for the three and nine months ended April 30, 2003 by the telecommunications transmission segment to the mobile data communications segment were $6,758,000 and $7,668,000, respectively.
Three months endedApril 30, 2004(in thousands)
Telecommunications Transmission
RF Microwave Amplifiers
Mobile Data Communications
Unallocated
Total
34,754
4,751
11,739
51,244
Operating income (loss)
7,834
131
962
(1,585
7,342
323
324
8
661
675
1,189
271
96
58
1,614
Expenditures for long-lived assets, including intangibles
1,393
345
117
1,875
85,577
22,711
24,995
163,118
296,401
Three months endedApril 30, 2003(in thousands)
26,762
5,729
16,262
48,753
4,286
429
2,149
(1,145
5,719
65
66
461
221
682
1,097
318
67
27
1,509
1,386
29
175
1,597
59,035
21,640
30,611
37,356
148,642
Nine months endedApril 30, 2004(in thousands)
103,547
14,371
46,416
164,334
21,625
618
6,086
(4,976
23,353
22
518
543
34
698
750
3,502
814
308
114
4,738
3,531
433
292
39
4,295
Nine months endedApril 30, 2003(in thousands)
70,863
18,560
32,929
122,352
8,847
1,721
3,348
(3,041
10,875
178
187
666
2,059
3,362
858
226
171
4,617
2,700
252
573
3,547
During the three months ended April 30, 2004 and 2003, approximately 36.5% and 50.1%, respectively, of the Company’s net sales resulted from contracts with the U.S. government or prime contractors to the U.S. government. During the nine months ended April 30, 2004 and 2003, approximately 40.3% and 44.9%, respectively, of the Company’s net sales resulted from contracts with the U.S. government and prime contractors to the U.S. government.
International sales comprised 46.6% and 34.4% of net sales during the three months ended April 30, 2004 and 2003, respectively. International sales comprised 44.5% and 38.3% of net sales during the nine months ended April 30, 2004 and 2003, respectively. International sales include sales to domestic companies for inclusion in products which will be sold to international customers.
During the three months ended April 30, 2004 and 2003, sales to one customer, a prime contractor, represented 10.9% and 22.1% of net sales, respectively. Sales to the same customer for the nine months ended April 30, 2004 and 2003 were 15.2% and 15.5% of net sales, respectively.
Direct and indirect sales to a North African country, including certain sales to the prime contractor mentioned above, during the three and nine months ended April 30, 2004 represented 15.9% of total net sales in both periods. No foreign country represented 10% or more of net sales in the three and nine months ended April 30, 2003.
9
(10)
Accounting for Business Combinations, Goodwill and Other Intangible Assets
Intangibles with definite lives arising from acquisitions as of April 30, 2004 and July 31, 2003 are as follows:
Gross Carrying Amount
Accumulated Amortization
Existing technology
12,266,000
5,553,000
4,261,000
Core technology
1,315,000
256,000
146,000
Technology license
2,229,000
287,000
206,000
Trade name
175,000
34,000
19,000
Order backlog
88,000
16,073,000
6,218,000
4,720,000
The aggregate amortization expense for the nine months ended April 30, 2004 and 2003 was $1,498,000 and $1,540,000, respectively. The estimated amortization expense for the twelve months ending April 30, 2005, 2006, 2007, 2008 and 2009 is $2,012,000, $2,012,000, $2,012,000, $846,000, and $634,000, respectively.
Intangibles with indefinite lives by reporting unit as of April 30, 2004 are as follows:
Telecommunications transmission
7,870,000
RF microwave amplifiers
8,422,000
Mobile data communications
1,434,000
The Company performed its annual required impairment test for goodwill and other intangibles with indefinite lives as of August 1, 2003 and determined that no impairment existed as of such date.
(11)
Recent Accounting Pronouncement
On March 31, 2004, the Financial Accounting Standards Board issued a proposed statement, “Share-Based Payment - An Amendment to Statement Nos. 123 and 95,” that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The proposed statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally would require instead that such transactions be accounted for using a fair-value-based method. As proposed, this standard would be applied prospectively for fiscal years beginning after December 15, 2004 (the Company’s 2006 fiscal year), as if all share-based compensation awards granted, modified or settled after December 15, 1994 had been accounted for using the fair value based method of accounting.
(12)
Subsequent Event
In May 2004, the Company acquired certain assets and assumed certain liabilities of Memotec, Inc. (“Memotec”), a subsidiary of Kontron AG, and at the same time, purchased inventory owned by Kontron Canada Inc., which currently manufactures Memotec’s products, for an aggregate purchase price of approximately $5,100,000.
The Memotec business, located in St. Laurent, Quebec, Canada, develops a comprehensive range of multi-service platforms capable of optimizing communication networks. Memotec, which is part of the Company’s telecommunications transmission segment, has annual revenues of approximately $6,000,000. The manufacturing of Memotec’s products will eventually be transferred to our manufacturing facility in Tempe, Arizona.
10
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We design, develop, produce and market innovative products, systems and services for advanced communications solutions addressing commercial and government markets. We conduct our business through three complementary segments: telecommunications transmission, mobile data communications and RF microwave amplifiers. We sell our products into markets where we believe we have technological, engineering, systems design or other expertise that differentiate our product offerings. We believe we are leaders in the market segments that we serve.
Our telecommunications transmission segment, our largest business segment, provides specialized products and systems for satellite, over-the-horizon microwave and line-of-sight microwave telecommunications systems. Our mobile data communications segment provides satellite-based mobile location, tracking and messaging services and mobile satellite transceivers primarily for defense applications, including logistics, support and battlefield command and control. Our RF microwave amplifier segment designs, manufactures and markets solid-state, high power, broadband RF microwave amplifier products.
A substantial portion of our sales may be derived from a limited number of relatively large customer contracts, the timing of revenues from which cannot be predicted. Quarterly sales and operating results may be significantly affected by one or more of such contracts. Accordingly, we can experience significant fluctuations in sales and operating results from quarter to quarter and period-to-period comparisons may not be indicative of future performance.
We generally recognize income on contracts only when the products are shipped. However, when the performance of a contract will extend beyond a 12-month period, revenue is recognized on the percentage-of-completion method. Profits expected to be realized on contracts are based on total estimated sales value as compared to total estimated costs at completion. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change. Estimated losses on long-term contracts-in-progress are recorded in the period in which such losses become known.
Since our contract with the U.S. Army for the Movement Tracking System is for an eight-year period, revenue recognition is based on the percentage-of-completion method. The gross margin is based on the estimated sales and expenses for the entire eight-year contract. The amount of revenue recognized has been limited to the amount of funded orders received from the U.S. Army. The portion of such orders representing prepaid service time revenue is being deferred until the service time is used by the customer. Significant changes in the estimates used to derive the gross profit margin can materially impact our operating results and financial condition in future periods (see Critical Accounting Policies below for more information).
Our gross profit is affected by a variety of factors, including the mix of products, systems and services sold, production efficiency, price competition and general economic conditions.
Selling, general and administrative expenses consist primarily of salaries and benefits for marketing, sales and administrative employees, advertising and trade show costs, professional fees and other administrative costs.
Our research and development expenses relate to both existing product enhancement and new product development. A portion of our research and development effort 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.
CRITICAL ACCOUNTING POLICIES
We consider the following accounting policies to be critical due to the estimation process involved in each.
Revenue Recognition on Long-Term Contracts. As discussed above, when the performance of a contract will extend beyond a 12-month period, revenue and related costs are recognized on the percentage-of-completion method of accounting. Profits expected to be realized on such contracts are based on total estimated sales for the contract compared to total estimated costs at completion of the contract. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change. Estimated losses on long-term contracts are recorded in the period in which the losses become known.
11
Some of our largest contracts, including our contract with the U.S. Army for the Movement Tracking System, are accounted for using the percentage-of-completion method. We have been engaged in the production and delivery of goods and services on a continual basis under contractual arrangements for many years. Historically, we have demonstrated an ability to accurately estimate revenues and expenses relating to our long-term contracts. However, there exist inherent risks and uncertainties in estimating revenues and expenses, particularly on larger or longer-term contracts. If we do not accurately estimate the total sales and related costs on such contracts, the estimated gross margins may be significantly impacted or losses may need to be recognized in future periods. Any such resulting changes in margins or contract losses could be material to our results of operations and financial position.
In addition, most government contracts have termination for convenience clauses that provide the customer with the right to terminate the contract at any time. Such terminations could impact the assumptions regarding total contract revenues and expenses utilized in recognizing profit under the percentage-of-completion method of accounting. Changes to these assumptions could materially impact our results of operations and financial position. Historically, we have not experienced material terminations of our long-term contracts.
We also address customer acceptance provisions in assessing our ability to perform our contractual obligations under long-term contracts. Our inability to perform on our long-term contracts could materially impact our results of operations and financial position. Historically, we have been able to perform on our long-term contracts.
Impairment of Intangible Assets. As of April 30, 2004, our company’s intangible assets, including goodwill, aggregated $27.6 million. In assessing the recoverability of goodwill and other intangibles, we must make various assumptions regarding estimated future cash flows and other factors in determining the fair values of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets in future periods. Any such resulting impairment charges could be material to our results of operations.
Provisions for Excess and Obsolete Inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based on historical and future usage trends. Several factors may influence the sale and use of our inventories, including decisions to exit a product line, technological change and new product development. These factors could result in a change in the amount of excess and obsolete inventory on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory was overvalued, we would be required to recognize such costs in our financial statements at the time of such determination. Any such charges could be material to our results of operations and financial position.
Allowance for Doubtful Accounts. We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness, as determined by our review of our customers’ current credit information. Generally, we will require cash in advance or payment secured by irrevocable letters of credit before an order is accepted from an international customer that we do not do business with regularly. In addition, we seek to obtain insurance for certain international customers that we have determined could be a credit risk. However, we are not able to obtain irrevocable letters of credit or credit insurance in all instances. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the allowances established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Measurement of such losses requires consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and financial health of specific customers. Changes to the estimated allowance for doubtful accounts could be material to our results of operations and financial position.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2004 AND APRIL 30, 2003
Net Sales. Consolidated net sales were $51.2 million and $48.8 million for the three months ended April 30, 2004 and 2003, respectively, representing an increase of $2.4 million, or 4.9%. The increase was driven by significant growth in our telecommunications transmission segment partially offset by decreased sales in our mobile data communications and RF microwave amplifier segments, as described below.
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Sales from our telecommunications transmission segment were $34.8 million for the three months ended April 30, 2004, as compared to sales of $26.8 million for the three months ended April 30, 2003, an increase of $8.0 million, or 29.9%. The sales growth in this segment resulted primarily from (i) strong sales of our satellite earth station products and (ii) incremental over-the-horizon microwave systems sales relating to two large contract awards received in fiscal 2003, including the impact of the cumulative gross margin adjustments discussed below under “Gross Profit.” Our telecommunications transmission segment represented 67.8% of total net sales for the three months ended April 30, 2004, as compared to 54.9% for the prior year period. We continue to expect that the timing of our performance on large contracts in our over-the-horizon microwave systems product line can cause sales to fluctuate significantly from quarter-to-quarter. In addition, as most of our satellite earth station products are booked and shipped in the same quarter, fluctuations in market demand and the receipt of orders from our customers can cause sales of these products to fluctuate significantly from quarter-to-quarter.
Mobile data communications segment sales decreased $4.6 million, or 28.2%, from $16.3 million for the three months ended April 30, 2003 to $11.7 million for the three months ended April 30, 2004. The sales decrease in this segment was primarily the result of (i) lower sales of our Movement Tracking System to the U.S. Army and (ii) lower sales relating to a battle command application for the U.S. Army. Since most of our current activity in this segment relates to the U.S. Army, funding levels and the timing of the receipt of orders can significantly impact our sales from quarter-to-quarter. Quarterly net sales in this segment were expected, and are still expected, to be lower during the second half of fiscal 2004 as compared to the first half of fiscal 2004 due to the timing of orders received to date in fiscal 2004. Our mobile data communications segment represented 22.9% of total net sales for the three months ended April 30, 2004 as compared to 33.4% for the three months ended April 30, 2003.
Sales from our RF microwave amplifier segment were $4.7 million for the three months ended April 30, 2004 compared to $5.7 million for the three months ended April 30, 2003, representing a decrease of $1.0 million, or 17.5%. The decrease was the result of continued softness in certain commercial product lines, including our commercial aviation product line. Our RF microwave amplifier segment represented 9.3% of total net sales for the three months ended April 30, 2004 as compared to 11.7% for the three months ended April 30, 2003. Although we continue to be impacted by continued softness in certain commercial product lines, we have recently experienced an increase in demand for our amplifiers that are used in defense-related applications.
International sales (including sales to domestic companies for inclusion in products which are sold to international customers) represented 46.6% and 34.4% of total net sales for the three months ended April 30, 2004 and 2003, respectively. Domestic commercial sales represented 16.9% and 15.5% of total net sales for the three months ended April 30, 2004 and 2003, respectively. Sales to the U.S. government (including sales to prime contractors to the U.S. government) represented 36.5% and 50.1% of total net sales for the three months ended April 30, 2004 and 2003, respectively.
During the three months ended April 30, 2004 and 2003, sales to one customer, a prime contractor, represented 10.9% and 22.1% of total net sales, respectively. Direct and indirect sales to a North African country, including certain sales to the prime contractor mentioned above, during the three months ended April 30, 2004 represented 15.9% of total net sales. No foreign country represented 10% or more of total net sales in the three months ended April 30, 2003.
Gross Profit.Gross profit was $20.6 million and $16.5 million for the three months ended April 30, 2004 and 2003, respectively, representing an increase of $4.1 million, or 24.8%. The increase in gross profit was due primarily to the higher proportion of our sales being in the telecommunications transmission segment, which typically realize higher margins than sales in our other two segments, as well as increased operating efficiencies and overhead absorption resulting from the increase in this segment’s sales. The margins in the telecommunications transmission segment were favorably impacted during the three months ended April 30, 2004 by adjustments to the estimated gross margins due to lower than anticipated costs on two large over-the-horizon microwave system contracts as they draw nearer to completion. These adjustments resulted from our periodic review of total estimated sales and costs on long-term contracts, as discussed above under “Critical Accounting Policies-Revenue Recognition on Long-term Contracts.” These adjustments resulted in a cumulative increase to the gross margins recognized on such contracts of $1.8 million, which was recorded in the three months ended April 30, 2004. Further adjustments to the estimated gross margins are possible in future periods as these contracts are completed. Included in cost of sales for the three months ended April 30, 2004 and 2003, respectively, are provisions for excess and obsolete inventory of $0.1 million and $0.9 million. As discussed above under “Critical Accounting Policies – Provisions for Excess and Obsolete Inventory,” we regularly review our inventory and record a provision for excess and obsolete inventory based on historical and future usage assumptions.
Gross margin, as a percentage of net sales, was 40.2% for the three months ended April 30, 2004, as compared to 33.8% for the three months ended April 30, 2003 primarily for the reasons discussed in the preceding paragraph.
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Selling, General and Administrative Expenses. Selling, general and administrative expenses were $8.8 million and $7.3 million for the three months ended April 30, 2004 and 2003, respectively, representing an increase of $1.5 million, or 20.5%. The increase was due to higher expenses relating to the increase in sales and profitability during the fiscal 2004 period, as well as compliance costs in connection with recently enacted corporate governance regulations and higher insurance costs. As a percentage of net sales, selling, general and administrative expenses were 17.2% and 15.0% for the three months ended April 30, 2004 and 2003, respectively.
Research and Development Expenses. Research and development expenses were $4.0 million and $3.0 million for the three months ended April 30, 2004 and 2003, respectively. Approximately $3.6 million and $2.8 million of such amounts, respectively, related to our telecommunications transmission segment. As an investment for the future, we are continually enhancing our existing products and developing new products and technologies. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the three months ended April 30, 2004 and 2003, customers reimbursed us $1.4 million and $1.5 million, respectively, which amounts are not reflected in the reported research and development expenses, but are included in sales with the related costs included in cost of sales.
Amortization of Intangibles. Amortization of intangibles of $0.5 million in both periods represents the amortization of intangibles with definite lives which we acquired in connection with various acquisitions.
Operating Income. Operating income for the three months ended April 30, 2004 and 2003, respectively, was $7.3 million and $5.7 million. The $1.6 million, or 28.1%, increase was the result of the higher sales and gross profit, discussed above, partially offset by higher operating expenses.
Operating income in our telecommunications transmission segment increased to $7.8 million for the three months ended April 30, 2004 from $4.3 million for the three months ended April 30, 2003 as a result of significantly higher sales combined with the related increased operating efficiencies and overhead absorption, as well as the impact of the gross margin adjustments, approximately $1.6 million net of related operating expenses, on two large over-the-horizon microwave system contracts discussed above. Our mobile data communications segment generated operating income of $1.0 million for the three months ended April 30, 2004 compared to $2.1 million for the three months ended April 30, 2003, a $1.1 million decrease due primarily to the decrease in sales and a change in product mix. Operating income in our RF microwave amplifier segment decreased to $0.1 million for the three months ended April 30, 2004 from $0.4 million for the three months ended April 30, 2003 as a result of the decrease in sales. Unallocated expenses increased to $1.6 million for the three months ended April 30, 2004 from $1.1 million for the three months ended April 30, 2003 due primarily to higher incentive compensation expense, increased costs associated with recent corporate governance regulations and higher insurance costs.
Interest Expense. Interest expense for the three months ended April 30, 2004 was $0.7 million, which primarily represented interest expense associated with our 2% convertible senior notes issued in January 2004. Interest expense for the three months ended April 30, 2003 was also $0.7 million, which related primarily to our long-term debt that we repaid in full in the fourth quarter of fiscal 2003.
Interest Income. Interest income for the three months ended April 30, 2004 was $0.3 million, as compared to $0.1 million for the three months ended April 30, 2003. The $0.2 million increase was due primarily to a higher average cash position resulting from our private placement of common stock in July 2003 and issuance of our 2% convertible senior notes in January 2004.
Provision for Income Taxes. The provision for income taxes was $2.2 million and $1.6 million for the three months ended April 30, 2004 and 2003, respectively. The effective tax rate was 32.0% in both periods.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 2004 AND APRIL 30, 2003
Net Sales. Consolidated net sales were $164.3 million and $122.4 million for the nine months ended April 30, 2004 and 2003, respectively, representing an increase of $41.9 million, or 34.2%. The increase was driven by significant growth in our telecommunications transmission and mobile data communications segments, as described below.
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Sales from our telecommunications transmission segment were $103.5 million for the nine months ended April 30, 2004, as compared to sales of $70.9 million for the nine months ended April 30, 2003, an increase of $32.6 million, or 46.0%. The significant sales growth in this segment resulted primarily from (i) incremental sales of our over-the-horizon microwave systems relating to two large contract awards received in fiscal 2003, including the impact of the cumulative gross margin adjustments discussed in the comparison of the three months’ results, and (ii) strong sales of our satellite earth station products. Our telecommunications transmission segment represented 63.0% of total net sales for the nine months ended April 30, 2004 as compared to 57.9% for the prior year period. We continue to expect that the timing of our performance on large contracts in our over-the-horizon microwave systems product line can cause sales to fluctuate significantly from quarter-to-quarter. In addition, as most of our satellite earth station products are booked and shipped in the same quarter, fluctuations in market demand and the receipt of orders from our customers can cause sales of these products to fluctuate significantly from quarter-to-quarter.
Mobile data communications segment sales increased $13.5 million, or 41.0%, from $32.9 million for the nine months ended April 30, 2003 to $46.4 million for the nine months ended April 30, 2004. The significant sales growth in this segment was primarily the result of (i) higher sales of our Movement Tracking System to the U.S. Army and (ii) higher sales relating to a battle command application for the U.S. Army. Since most of our current activity in this segment relates to the U.S. Army, funding levels and the timing of the receipt of orders can significantly impact our sales from quarter-to-quarter. Quarterly net sales in this segment were expected, and are still expected, to be lower during the second half of fiscal 2004 as compared to the first half of fiscal 2004 due to the timing of orders received to date in fiscal 2004. Our mobile data communications segment represented 28.2% of total net sales for the nine months ended April 30, 2004 as compared to 26.9% for the nine months ended April 30, 2003.
Sales from our RF microwave amplifier segment were $14.4 million for the nine months ended April 30, 2004 compared to $18.6 million for the nine months ended April 30, 2003, representing a decrease of $4.2 million, or 22.6%. The decrease was the result of continued softness in certain commercial product lines, including our commercial aviation product line. Our RF microwave amplifier segment represented 8.8% of total net sales for the nine months ended April 30, 2004 as compared to 15.2% for the nine months ended April 30, 2003. Although we continue to be impacted by continued softness in certain commercial product lines, we have recently experienced an increase in demand for our amplifiers that are used in defense-related applications.
International sales (including sales to domestic companies for inclusion in products which are sold to international customers) represented 44.5% and 38.3% of total net sales for the nine months ended April 30, 2004 and 2003, respectively. Domestic commercial sales represented 15.2% and 16.8% of total net sales for the nine months ended April 30, 2004 and 2003, respectively. Sales to the U.S. government (including sales to prime contractors to the U.S. government) represented 40.3% and 44.9% of total net sales for the three months ended April 30, 2004 and 2003, respectively.
During the nine months ended April 30, 2004 and 2003, sales to one customer, a prime contractor, represented 15.2% and 15.5% of total net sales, respectively. Direct and indirect sales to a North African country, including certain sales to the prime contractor mentioned above, during the nine months ended April 30, 2004 represented 15.9% of total net sales. No foreign country represented 10% or more of total net sales in the nine months ended April 30, 2003.
Gross Profit.Gross profit was $62.2 million and $41.7 million for the nine months ended April 30, 2004 and 2003, respectively, representing an increase of $20.5 million, or 49.2%. The increase was primarily due to the higher total sales and associated increased operating efficiencies and overhead absorption, the greater proportion of higher margin telecommunications transmission segment sales and the impact of the gross margin adjustments on two large over-the-horizon microwave system contracts discussed in the comparison of the three months’ results. Included in cost of sales for the nine months ended April 30, 2004 and 2003, respectively, are provisions for excess and obsolete inventory of $1.0 million and $1.7 million. As discussed above under “Critical Accounting Policies – Provisions for Excess and Obsolete Inventory,” we regularly review our inventory and record a provision for excess and obsolete inventory based on historical and future usage assumptions.
Gross margin, as a percentage of net sales, was 37.9% for the nine months ended April 30, 2004, as compared to 34.1% for the nine months ended April 30, 2003, primarily for the reasons discussed in the preceding paragraph.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $26.2 million and $20.0 million for the nine months ended April 30, 2004 and 2003, respectively, representing an increase of $6.2 million, or 31.0%. The increase was due to higher expenses relating to the significant increase in sales and profitability during the fiscal 2004 period, as well as compliance costs in connection with recently enacted corporate governance regulations and
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higher insurance costs. As a percentage of net sales, selling, general and administrative expenses were 15.9% and 16.3% for the nine months ended April 30, 2004 and 2003, respectively.
Research and Development Expenses. Research and development expenses were $11.2 million and $9.3 million for the nine months ended April 30, 2004 and 2003, respectively. Approximately $10.3 million and $8.4 million of such amounts, respectively, related to our telecommunications transmission segment. As an investment for the future, we are continually enhancing our existing products and developing new products and technologies. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the nine months ended April 30, 2004 and 2003, customers reimbursed us $3.8 million and $2.7 million, respectively, which amounts are not reflected in the reported research and development expenses, but are included in sales with the related costs included in cost of sales.
Amortization of Intangibles. Amortization of intangibles for the nine months ended April 30, 2004 and 2003 was $1.5 million. The amortization relates to intangibles with definite lives which we acquired in connection with various acquisitions.
Operating Income. Operating income for the nine months ended April 30, 2004 and 2003, respectively, was $23.4 million and $10.9 million. The $12.5 million increase was the result of the higher sales and gross profit, discussed above, partially offset by higher operating expenses.
Operating income in our telecommunications transmission segment increased to $21.6 million for the nine months ended April 30, 2004 from $8.8 million for the nine months ended April 30, 2003 as a result of significantly higher sales combined with the related increased operating efficiencies and overhead absorption, as well as the impact of the gross margin adjustments on two large over-the-horizon microwave system contracts discussed above. Our mobile data communications segment generated operating income of $6.1 million for the nine months ended April 30, 2004 compared to $3.3 million for the nine months ended April 30, 2003 due primarily to the increase in sales and more favorable product mix. Operating income in our RF microwave amplifier segment decreased to $0.6 million for the nine months ended April 30, 2004 from $1.7 million for the nine months ended April 30, 2003 as a result of the decrease in sales. Unallocated expenses increased to $5.0 million for the nine months ended April 30, 2004 from $3.0 million for the nine months ended April 30, 2003 due primarily to higher incentive compensation expense, increased costs associated with recent corporate governance regulations and higher insurance costs.
Interest Expense. Interest expense decreased from $2.1 million for the nine months ended April 30, 2003 to $0.8 million for the nine months ended April 30, 2004. The decrease was due to the prepayment of our long-term debt in July 2003. Interest expense for the nine months ended April 30, 2004 primarily represents interest expense associated with our 2% convertible senior notes issued in January 2004.
Interest Income. Interest income for the nine months ended April 30, 2004 was $0.5 million, as compared to $0.2 million for the nine months ended April 30, 2003. The $0.3 million increase was due primarily to a higher average cash position resulting from our private placement of common stock in July 2003 and issuance of our 2% convertible senior notes in January 2004.
Provision for Income Taxes. The provision for income taxes was $7.4 million and $2.9 million for the nine months ended April 30, 2004 and 2003, respectively, as a result of the significant increase in pre-tax profit. The effective tax rate was 32.0% in both periods.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents increased to $152.8 million at April 30, 2004 from $48.6 million at July 31, 2003.
Net cash provided by operating activities was $6.3 million for the nine months ended April 30, 2004. Such amount reflects (i) net income of $15.7 million plus the impact of depreciation, amortization, the provisions for doubtful accounts and inventory reserves, and the income tax benefit from stock-related transactions aggregating $7.0 million and (ii) changes in working capital balances, most notably increases in accounts receivable of $22.0 million and inventory of $3.5 million. Also impacting net cash provided by operating activities were increases in accrued expenses, customer advances and deposits and deferred service revenue aggregating $9.7 million. The increase in billed receivables is the result of the increase in sales during the nine months ended April 30, 2004 and the timing of related cash receipts. The increase in unbilled receivables reflects additional work performed on our long-term contracts, including a large contract with a North African country for which we have recently obtained credit insurance covering a significant portion of the credit risk associated with this contract.
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Net cash used in investing activities for the nine months ended April 30, 2004 was $4.3 million, representing capital expenditures.
During the third quarter of fiscal 2004, as a result of recent growth in our mobile data communications segment, we entered into a new lease agreement for approximately 32,000 square feet of office space located near our current facility in Germantown, Maryland. It is our intention to move to this new facility by December 31, 2004. As part of this relocation, we will build a state-of-the-art network operations center in the new facility. We also anticipate implementing a company-wide information reporting system. In connection with these activities, we expect to incur total capital expenditures of approximately $3.0 million, a substantial portion of which we believe will be incurred in the fourth quarter of fiscal 2004 and first quarter of fiscal 2005.
Net cash provided by financing activities was $102.2 million, due primarily to the net proceeds of $101.2 million from the sale of our 2% convertible senior notes in January 2004, as well as the proceeds from stock option exercises and employee stock purchase plan shares aggregating $1.8 million. These amounts were partially offset by principal payments on capital lease obligations of $0.8 million.
FINANCING ARRANGEMENT
On January 27, 2004, we issued $105.0 million of our 2% convertible senior notes in a private offering pursuant to Rule 144A of the Securities Act of 1933, as amended. The net proceeds from this transaction were $101.2 million after deducting the initial purchaser’s discount and other transaction costs. For further information concerning this financing, see “Notes to Consolidated Financial Statements – Note (6) 2.0% Convertible Senior Notes due 2024.”
COMMITMENTS
In the normal course of business, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment, and from time to time, technology licenses. We do not expect that these commitments as of April 30, 2004 will materially adversely affect our liquidity.
At April 30, 2004, we had contractual cash obligations to repay our 2% convertible senior notes, capital lease and operating lease obligations. Payments due under these long-term obligations are as follows:
Obligations due by fiscal year (in thousands)
Remainder of 2004
2005 and 2006
2007 and 2008
After 2008
2% convertible senior notes
105,000
Capital lease obligations
537
144
364
Operating lease commitments
15,359
3,433
7,797
2,296
1,833
Total contractual cash obligations
120,896
3,577
8,161
2,325
106,833
We have entered into standby letter of credit agreements with financial institutions relating to the guarantee of our future performance on certain contracts. At April 30, 2004, the balance of these agreements was $4.2 million. Cash we have pledged against such agreements aggregating $4.2 million has been classified as restricted cash in the consolidated balance sheet.
We believe that our cash and cash equivalents will be sufficient to meet our operating cash requirements for at least the foreseeable future. In the event that we identify a significant acquisition that requires additional cash, we would seek to borrow funds or raise additional equity capital.
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FORWARD-LOOKING STATEMENTS
Certain information in this Quarterly Report on Form 10-Q contains forward-looking statements, including but not limited to, information relating to the future performance and financial condition of the Company, the plans and objectives of the Company’s management and the Company’s assumptions regarding such performance and plans that are forward-looking in nature and involve certain significant risks and uncertainties. Actual results could differ materially from such forward-looking information. The Company’s filings with the Securities and Exchange Commission identify many of such risks and uncertainties, which include the following:
•
Our operating results being difficult to forecast and subject to volatility;
Our inability to maintain our government business;
Our inability to keep pace with technological changes;
Our dependence on international sales;
The impact of a continued domestic and foreign economic slow-down and reduction in telecommunications equipment and systems spending on the demand for our products, systems and services;
Our mobile data communications business being in an early stage;
Our backlog being subject to cancellation or modification;
Our dependence on component availability, subcontractor availability and performance by key suppliers;
Our fixed price contracts being subject to risk;
The impact of adverse regulatory changes on our ability to sell products, systems and services;
The impact of prevailing economic and political conditions on our businesses;
Whether we can successfully integrate and assimilate the operations of acquired businesses;
The impact of the loss of key technical or management personnel;
The highly competitive nature of our markets;
Our inability to protect our proprietary technology;
Our operations being subject to environmental regulation;
The impact of recently enacted and proposed changes in securities laws and regulations on our costs;
The impact of terrorist attacks and threats, and government responses thereto, and threats of war on our businesses; and
Our inability to satisfy our debt obligations, including the recently issued convertible senior notes.
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. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. If the interest rate the Company receives on its investment of available cash balances were to change by 10%, the effect would be immaterial.
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was carried out by the Company under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures have been designed and are being operated in a manner that provides reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. There have been no changes in the Company’s internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART IIOTHER INFORMATION
(a)
Exhibits
Exhibit 31.1 - Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b)
Reports on Form 8-K
Form 8-K, dated March 10, 2004 - Item 7 - Press release announcing the Company’s results of operations for the second quarter of fiscal year 2004.
Form 8-K, dated April 19, 2004 - Item 5 - Press release announcing agreement to acquire Memotec, Inc.
SIGNATURES
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 8, 2004
By:
/s/ Fred Kornberg
Fred Kornberg Chairman of the BoardChief Executive Officer and President(Principal Executive Officer)
/s/ Robert G. Rouse
Robert G. RouseSenior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)