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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1996 Commission file number 0-7928
COMTECH TELECOMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
Delaware 3665 11-2139466
(State of Incorporation) (Primary Standard Industrial (IRS Employer
Classification Code) Identification No.)
105 Baylis Road, Melville, New York 11747
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (516) 777-8900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share Shares Outstanding
Title of each class as of October 18, 1996
2,633,384
The Registrant hereby indicates by check mark whether it (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, and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant (based upon the closing bid price quoted on NASDAQ) is approximately
$ 8,558,000(as of October 18, 1996).
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the document listed below have been incorporated by
reference into the indicated Part of this Annual Report on Form 10-K:
Proxy Statement for Annual Part III
Meeting of Shareholders to be held
December 12, 1996
INDEX
- --------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS 1
General 1
Telecommunications Overview 2
Amplifier Technology Overview 3
Narrative Description of Business 3
Comtech Antenna Systems, Inc. ("CASI") 4
Comtech Communications Corp. ("CCC") 4
Comtech Microwave Products Corp. ("CMPC") 4
Comtech Systems, Inc. ("CSI") 4
Sales, Marketing and Customer Support 4
Backlog 5
Manufacturing 6
Research and Development 6
Patents and Licenses 6
Competition 7
Key Personnel/Employees 7
ITEM 2 PROPERTIES 8
ITEM 3 LEGAL PROCEEDINGS 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER
MATTERS 9
Dividends 9
Approximate Number of Equity Security Holders 9
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 10
i
INDEX
- --------------------------------------------------------------------------------
PART II (Continued)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 11
Comparison of the Fiscal Years 1996 and 1995 11
Comparison of the Fiscal Years 1995 and 1994 12
Liquidity and Capital Resources 13
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANT'S ON ACCOUNTING AND FINANCIAL DISCLOSURE 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT 14
ITEM 11. EXECUTIVE COMPENSATION 14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K 15
SIGNATURE 17
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
ii
PART I
ITEM 1. BUSINESS
GENERAL
Comtech Telecommunications Corp. (the "Company"), a Delaware corporation, is
principally engaged in the design, development, manufacture and installation of
high technology electronic products and systems. The Company's communications
products are used worldwide for voice, data, facsimile and video transmissions
at microwave frequencies in satellite, tropospheric scatter, terrestrial line-
of-sight and wireless telecommunications. The Company's solid state high power
amplifiers are used in electronic defense, wireless communications,
electromagnetic compatibility and susceptibility testing, and high power test
instrumentation applications. The Company sells its products directly to end-
users, as well as to subcontractors and prime contractors which incorporate such
products in full system installations.
The Company has been in operation since 1967 and currently offers a broad
product line of solid state high power amplifiers and satellite and troposcatter
earth station equipments and subsystems. It sells its products to many of the
world's providers of telecommunication services and users of high power
electronic test systems, including domestic and foreign common carriers and
telephone companies, defense systems, medical and automotive equipment
producers, electromagnetic compatibility and susceptibility system suppliers,
oil and gas companies (for communicating with offshore platforms) private and
wireless networks, broadcasters, cable television operators, utilities and
municipal, state and national governments. The Company works closely with
customers and potential customers to develop product lines in market niches
where it believes that it can become a leading supplier. It believes that this
strategy is best effected through decentralized subsidiaries and operating units
that can respond quickly to changing market and customer requirements.
The Company's products are based primarily on microwave and radio frequency
technologies, with the same basic technological concepts being applied across
the Company's product lines. In the last decade, the Company's products have
increasingly incorporated digital microwave technology. The Company believes
its expertise in satellite, troposcatter and wireless telecommunications and
solid state high power amplification provides a solid base for the development
of future products and services, including new instrumentation and
communications products and systems.
Comtech has four operating units, Comtech Antenna Systems, Inc. ("CASI"),
Comtech Communications Corp. ("CCC"), Comtech Microwave Products Corp. ("CMPC")
and Comtech Systems, Inc. ("CSI").
CASI is a supplier of fiberglass and metal antenna products used in satellite
and troposcatter communication systems. CCC designs and manufactures satellite
communications products including frequency converters, solid state power
amplifiers, low noise amplifiers and satellite subsystems. CMPC supplies state-
of-the-art high power solid state amplifiers for the electronic defense,
wireless communication, high power test instrument systems and state-of-the-art
automated electromagnetic compatibility and susceptibility instrumentation
systems. CSI designs, manufactures and installs troposcatter and terrestrial
line-of-sight communications systems and equipment for defense and commercial
applications for communicating with offshore oil and gas platforms.
TELECOMMUNICATIONS OVERVIEW
Telecommunications Market. The demand for telecommunications is increasing
worldwide as emerging economies seek to modernize and as increasingly
information-intensive countries introduce new telecommunications services. The
telecommunications industry has expanded rapidly during the last decade due to
both technological advances and regulatory changes. Regulatory initiatives have
enhanced competition in telecommunications, thereby opening new markets and
providing incentives for the development of new products. Examples of these
changes include the development of advanced digital communications, the
assignment of radio frequencies to cellular telephone services and the
development of private satellite networks. Advances in technology have lowered
per-unit communications costs, increased product reliability, and encouraged a
proliferation of new and enhanced communications products and services.
1
Transmission Technology Options. Customers for telecommunications
equipment must weigh the relative costs and advantages of the six presently
available transmission technologies: copper cable, fiber optic cable, high
frequency radio systems, wireless microwave systems, tropospheric scatter
systems and satellite systems. Rarely is a complete communications network or
system based solely on one of these technologies. Transmission is normally
routed through a combination of technologies, each employed where most cost-
effective. The Company's products are used in satellite, tropospheric scatter
and wireless microwave communications.
. Copper cable, the traditional transmission medium most familiar to
consumers, is being replaced and supplemented by the other media,
particularly for high-volume and long distance transmissions where it
has substantial capacity, cost and reliability limitations.
. Fiber optic cable is best suited to high-volume, point-to-point,
short- or long-distance links where its advantages - capacity, quality
and security - justify the long lead time and high cost to equip and
install a network.
. High frequency radio systems ("HF") employ long wavelengths which
are propagated beyond line-of-sight distances either by surface waves
traveling along the earth's perimeter or by skywave reflection of the
transmitted waves off different layers of the ionosphere.
Communications using HF surface wave propagation are reliable to
distances of 300 miles and skywave propagation can support
communication ranges of from 50 to 6,000 miles. Skywave propagation
is, however, subject to the variations in height and density of the
ionospheric layers. Such variations are diurnal, seasonal, and
cyclical, with the occasional added impact of solar flare disturbances
and magnetic storms. Improvements in modern technology and the use of
adaptive frequency management techniques that enhance propagation
prediction have greatly increased HF communication reliability and
data throughput. HF radio is used as a prime military and defense
communications means for short and medium range applications.
. Wireless and microwave communications systems, generally used for
point-to-point communications, employ signals with extremely short
wave-lengths which travel only in line-of-sight paths over relatively
short distances, generally under 30 miles, can be quickly and easily
installed, require relatively low initial capital investment, and can
be upgraded and expanded over time. There are a wide variety of
microwave communication systems offering different frequencies,
modulation techniques (analog or digital), and data transmission
capacities.
. Tropospheric scatter microwave communication systems transmit
signals over distances from 30 to 400 miles by reflection of the
transmitted signals off the troposphere, an atmospheric layer located
approximately seven miles above the earth's surface. These systems,
which use microwave technology, are well suited for rapid introduction
of service in remote areas or where other communication alternatives
are unavailable because of terrain problems, such as large bodies of
water, mountains, etc. Such systems offer a high level of reliability
and security and are particularly suited to defense and commercial
voice and data communication applications. In addition, they have
special purpose point-to-point commercial applications, such as
communications to offshore gas and oil platforms and along pipelines
or railroads.
. Satellite communications systems have grown and diversified in
response to demand for efficient and accurate long-distance voice and
video communication and digital information exchange. In a satellite
communication system, information is relayed to and from microwave
transmitting and receiving stations on the ground by means of a low
earth orbit (LEO) satellite or a geostationary earth orbit (GEO)
satellite in an equatorial orbit, generally 22,300 miles, above the
earth's equator. Satellite communication systems are particularly
useful where long-range, high capacity and high quality point-to-point
or point-to-multipoint communication is desirable. As few as three
geostationary satellites can provide global communications coverage.
These systems, which use microwave technology, are well suited for
rapid introduction of service in remote areas or where communication
alternatives are unavailable, such as mobile, shipboard or military
applications.
2
AMPLIFIER TECHNOLOGY OVERVIEW
Included in the Company's products are solid state high power amplifiers.
Amplifiers are a class of electronic apparatus that reproduce signals with
greater power, current or voltage amplitude. Indispensable in the world of
signal processing, amplifiers can be as tiny as a microchip for a hearing aid or
as massive as a multi-story building for transmitting radio signals to submerged
submarines. Although the majority of amplifier applications are satisfied by
solid-state transistor and integrated circuit technology, vacuum tubes still
play an important role in the very high power microwave applications.
Amplifiers can be separated into three groups: DC Amplifiers, Audio Frequency
Amplifiers, and Radio Frequency Amplifiers. Each group can, in turn be
segregated into the general categories of Small Signal Amplifiers and the higher
power Large Signal Amplifiers. Small Signal Amplifiers in all three groups
employ solid-state technologies to create flexible, easily implemented
microelectronic building blocks, and are produced by established semiconductor
manufacturers as either catalog products or custom devices for special
applications specified by end-item products suppliers.
The Company's solid-state high power amplifiers are in the category of Large
Signal Amplifiers in the Microwave and Radio Frequency Spectrum. Large Signal
Amplifiers are used in wireless telecommunications, defense systems and
instrumentation applications, where they are employed to amplify microwave or
radio frequency ("RF") energy for the emission of signals. Other applications
are as power supply sources of RF energy for lasers and for the cyclotrons used
in atomic physics. Solid-state transistor technology dominates the field at
output power levels up to 3000 watts for frequencies up to 2000 Mhz. At
frequencies higher than 12,000 Mhz, electron tube technology continues to be the
most economical means of achieving high power at acceptable instantaneous
bandwidths. For applications that require both high power and narrow
bandwidths, electron tubes are still used at frequencies extending down to the
commercial broadcast bands. Because of their greater instantaneous bandwidths,
greater reliability and generally smaller size, however, solid-state amplifiers
are constantly being sought as replacements for vacuum tube amplifiers for all
applications throughout the useable frequency spectrum.
In telecommunications, solid-state high power amplifiers are used to amplify
signals for radiation from transmitting antennas in satellite or other wireless
telecommunications systems. They are also used to amplify signals in defense
radar and electronic jamming systems. In the laboratory, solid-state high power
amplifiers are used to test the performance of high power microwave and cellular
electronic system components by simulating operating environment conditions.
Solid-state high power amplifiers are also used in electromagnetic compatibility
and susceptibility testing. The proliferation of electronic systems in products
such as automobiles, computers, cellular telephones, radios, televisions,
medical equipment, sound amplifiers, aircraft and other products has led to
increasingly serious problems with electromagnetic interference. Manufacturers,
therefore, test these electronic systems for electromagnetic compatibility and
susceptibility. For example, such testing may be used to determine whether the
various electronic systems in a commercial aircraft are likely to be affected by
the use of laptop computers or video games by passengers in flight.
NARRATIVE DESCRIPTION OF BUSINESS
The Company's product designs are based on both analog and digital microwave
technologies. Digital microwave technology can significantly enhance
performance. The Company has invested significant resources in developing its
technological expertise, and works closely with customers and potential
customers to develop product lines in market niches where it believes its
technical expertise in solid-state high power amplification and
telecommunication technologies can enable it to become a leading supplier.
The Company operates through subsidiaries, each of which maintains its own
sales, marketing, product development and manufacturing functions. The Company
believes that this organizational structure allows the key personnel of each
subsidiary, some of which are the founders of their subsidiaries, to be more
responsive to their particular markets and customers. Brief descriptions of the
operations of the Company's subsidiaries follow.
3
COMTECH ANTENNA SYSTEMS, INC. ("CASI")
CASI, located in St. Cloud, Florida, designs and manufactures a wide variety of
fiberglass and aluminum antennas for tropospheric scatter and satellite
communication applications, including distributed network programming, cable and
broadcast television, radio and other forms of information and entertainment
distribution. CASI designs antennas for specific types of telecommunications
systems and, typically, sells standardized products to independent distributors,
prime contractors and end user customers. CASI's antenna product line includes
fixed and mobile antenna systems and specialized multi-beam satellite antenna
systems that are capable of receiving signals simultaneously from many
independent satellites located up to 60 degrees apart.
COMTECH COMMUNICATIONS CORP. ("CCC")
CCC, located in Tempe, Arizona, designs and manufactures equipment used in
commercial and defense satellite communications applications with satellites
operating in the C, X and Ku-bands. The equipments include frequency up
converters (which convert the intermediate frequency ("IF") carrier to high
frequency transmit carrier, frequency down converters (which convert the higher
frequency transmit carrier to an IF carrier at the receive end), solid state
power amplifiers (which provide the final amplification of the transmit carriers
to a signal sufficient for transmission) low noise amplifiers (which amplify
the transmit carrier at the receive end) and satellite transceivers which
incorporate the frequency converters, solid state high power and low noise
amplifier technologies. These products comprise a broad range of receiving and
transmitting equipment offering a variety of state-of-the-art technical
capabilities with respect to performance, degree of complexity and value.
COMTECH MICROWAVE PRODUCTS CORP. ("CMPC")
CMPC, headquartered in Melville, New York, designs, develops and manufactures
solid state high power amplifiers for defense, wireless communications, and for
instrumentation systems. It sells its products to domestic and foreign
commercial users, governmental agencies and prime contractors. The Company
believes that CMPC is an innovative supplier of solid state high power
amplifiers and related power processing equipment, which products also replace
amplifiers using vacuum tube systems. CMPC is also currently developing
products for the growing commercial wireless, cellular, PCN/PCS and
electromagnetic compatibility and susceptibility amplification markets.
COMTECH SYSTEMS, INC. ("CSI")
CSI, headquartered in St. Cloud, Florida, designs, manufactures and installs
telecommunication systems and equipment for domestic and international
applications. CSI supplies telecommunication systems incorporating equipment
manufactured by it, other Comtech subsidiaries and third parties. Currently, a
significant portion of CSI's sales are for tropospheric scatter communication
products and systems sold to oil and gas companies.
CSI's product line consists primarily of equipment for tropospheric scatter
systems and networks. CSI has a turnkey capability that ranges from system and
network planning through equipment and system training and operation and
maintenance programs. CSI's products and services are marketed to oil and gas
companies and other commercial users, foreign defense commands, and other system
prime contractors. The Company believes that CSI's products, which employ
adaptive modem digital transmission technology, offer high speed data benefits
over the traditional analog tropospheric scatter products offered by most of its
competitors.
SALES, MARKETING AND CUSTOMER SUPPORT
The Company's sales and marketing efforts are handled independently by each
subsidiary. The sales and marketing strategy of the Company's subsidiaries vary
with particular markets served, and include direct sales by the subsidiary's own
sales force (sales, marketing and engineering personnel), sales through
independent representatives, value-added resellers or a combination of the
foregoing. Subsidiaries have also entered into sales distribution agreements
for certain products with distributors. Unlike sales representatives, who
merely find customers for the Company on a commission basis, distributors
purchase products from the Company for resale. The Company intends to continue
to expand its domestic and international marketing efforts through both
independent sales representatives and distributors.
4
Relationships with customers are established and maintained by management,
technical and marketing personnel. The Company's strategy includes a commitment
to provide ongoing customer support for its systems and equipment. This support
involves providing direct access to engineering staff or trained technical
representatives to resolve technical or operational problems.
The Company's sales of tropospheric scatter communications, satellite
communications and solid state high power amplifier products internationally
represented approximately 56%, 37% and 39% of net sales in the fiscal years
ended July 31, 1996, 1995 and 1994, respectively. Such international sales are
expected to continue to increase due to the global expansion of
telecommunications and microwave instrumentation, particularly in Asia, South
America, the Middle East and Europe and the Company expects that international
sales will remain a substantial proportion of its total sales.
In fiscal 1996 and 1995, there were no sales to any one customer which amounted
to over 10% of the consolidated net sales. During fiscal 1994, sales to one
foreign customer amounted to $3,410,000, or 23% of consolidated net sales.
International sales expose the Company to certain risks, including barriers to
trade, fluctuations in foreign currency exchange rates (which may make the
Company's products less price competitive), political and economic instability,
availability of suitable export financing, export license requirements, tariff
regulations, and other United States and foreign regulations that may apply to
the export of the Company's products, as well as the generally greater
difficulties of doing business abroad. The Company attempts to reduce the risk
of doing business in foreign countries by seeking contracts denominated in
United States dollars, advance payments and irrevocable letters of credit in its
favor.
Although the percentage of the Company's total net sales to agencies of the
United States or to contractors or subcontractors under contracts with United
States agencies has fluctuated over the past three years, such sales remain
significant, accounting for approximately 20%, 14% and 17% of total net sales
for the fiscal years ended July 31, 1996, 1995 and 1994, respectively. These
sales are subject to various risks, regulatory provisions applicable to
government contracts, including, among other things, unpredictable reductions in
funds available for the Company's projects and contract termination at the
convenience of the government. Government contracts are generally less
profitable than contracts with private industry but typically provide progress
payment funding.
The Company's domestic sales represented approximately 24%, 49% and 44% of net
sales in the fiscal years ended July 31, 1996, 1995 and 1994, respectively.
Although the percentage of the Company's total net sales to domestic customers
declined this past year, such sales are expected to increase due to the
expansion of wireless and satellite telecommunications product sales and the
Company expects that domestic sales will remain a substantial proportion of its
sales.
There is no material effect on the Company's capital expenditures, earnings or
competitive position resulting from compliance with Federal, state or local
environment protection laws.
BACKLOG
The Company's backlog as of July 31, 1996 and 1995 was approximately $9,700,000
and $10,242,000, respectively. Included in 1996 backlog is an order for
$4,000,000 from an international customer for which preliminary commitment of
financing has been received from the Export-Import Bank of The United States.
Final commitment is expected during the first quarter of fiscal 1997.
Substantially all of the backlog as of July 31, 1996 is expected to be
recognized as sales during the fiscal year ending July 31, 1997. The Company
had received progress billings and advance payments aggregating approximately
$359,000 as of July 31, 1996 in connection with orders included in the backlog
at that date. Approximately 29% of that backlog consisted of United States
government contracts, subcontracts and government funded programs, approximately
56% consisted of orders with foreign customers and approximately 15 % consisted
of orders with domestic commercial customers.
All of the contracts in the Company's backlog are subject to cancellation at the
convenience of the customer or for default in the event that the Company is
unable to complete the contract.
5
Variations in backlog from time to time are attributable in part to the timing
of the Company's preparation and submission of contract proposals, the timing of
contract awards and the delivery schedules on specific contracts. As a result,
management believes its backlog at any point in the fiscal year is not
necessarily indicative of the total sales anticipated for any particular future
period. New business orders for some of the Company's products may not be
reflected in the revenues of the Company for a year or more. CASI's business,
as well as a major portion of CMPC's and CCC's businesses, operate under a short
lead time and usually generate sales out of inventory.
MANUFACTURING
The Company's manufacturing operations consist principally of the assembly and
testing of electronic products designed by the Company and built by it from
purchased fabricated parts, printed circuits and electronic components and, in
the case of CASI, the casting of fiberglass antennas and the shaping of aluminum
antennas. The Company employs formal quality management programs and other
training programs, and expects to qualify its subsidiaries for the International
Standards Organization's (ISO 9000) quality procedure registration programs,
which is anticipated to be required in the future for product sales into the
European Community.
The Company's ability to deliver its products to customers on a timely basis is
dependent in part upon the availability and timely delivery by subcontractors
and suppliers of the components and subsystems that are used by the Company in
manufacturing its products. Electronic components and raw materials used in the
Company's products are generally obtained from independent suppliers. Some
components are standard items and are available from a number of suppliers.
Others are manufactured to the Company's specifications by subcontractors. The
Company obtains certain components and subsystems from a single source or a
limited number of sources. The Company believes that most components and
equipment are available from existing or alternative suppliers and
subcontractors. A significant interruption in the delivery of such items could
have a material adverse effect on the Company's business and results of
operations.
RESEARCH AND DEVELOPMENT
The technology used in the Company's products is subject to rapid development
and frequent change, and the Company's business position is in large part
contingent upon the continuous refinement of its scientific and engineering
expertise and the development, either through internal research and development
or acquisitions of new or enhanced products and technologies.
Research and development expenses were $741,000, $1,036,000 and $760,000 in the
fiscal years ended 1996, 1995 and 1994, respectively, representing 3.5%, 6.3%
and 5.1% of total net sales, respectively, for such periods.
A portion of the Company's research and development efforts is related to
specific contracts and is recoverable under such contracts, and such
expenditures are not included in research and development expenses for financial
reporting purposes. During the fiscal years ended July 31, 1996, 1995 and 1994,
the Company was reimbursed by customers for such activities in the amounts of
$516,000, $382,000 and $178,000, respectively, representing 2.5%, 2.3% and 1.2%,
respectively, of total net sales.
The Company obtains customer funding for research and development where possible
to adapt the Company's basic technology to specialized customer requirements.
PATENTS AND LICENSES
Although the Company owns or holds licenses for a number of patents, patents and
licenses have been of substantially less significance in the Company's business
than have been its scientific and engineering know-how, production techniques,
the timely application of its technology and the design development and
marketing capabilities of its personnel. The Company relies on the laws of
unfair competition, restrictions in licensing agreements and confidentiality
agreements to protect such knowledge and techniques.
6
COMPETITION
The Company's business is highly competitive and characterized by rapid
technological change. In addition, the number of potential customers for the
Company's products is limited. The Company's growth and financial position
depends, among other things, on its ability to keep pace with such changes and
developments and to respond to the sophisticated requirements of an increasing
variety of electronic equipment users. Many of the Company's competitors are
substantially larger, have significantly greater financial, marketing and
operating resources and broader product lines than does the Company. A
significant technological breakthrough by others, including smaller competitors
or new companies, could have a material adverse effect on the Company's
business. In addition, certain of the Company's customers have technological
capabilities in the Company's product areas and could choose to replace the
Company's products with their own.
The Company believes that competition in its markets is based primarily on
price, product performance, reputation, delivery times and customer support.
The Company believes that, due to its organizational structure and proprietary
know-how, it has the ability to develop, produce and to deliver equipment on a
cost-effective basis faster than many of its competitors.
KEY PERSONNEL/EMPLOYEES
The Company operates through a number of subsidiaries, an organizational
structure which the Company believes fosters responsiveness to specific markets
and customers. This structure, however, leaves the Company with less central
control over the operations of its subsidiaries. The Company's success is
dependent upon the continued contributions of its key management personnel,
including the key management at each of its subsidiaries and depends to a
significant extent upon its President and Chief Executive Officer. Many of the
Company's key personnel, particularly the key engineers of its subsidiaries,
would be difficult to replace, and are not subject to employment or non-
competition agreements. The Company's growth and future success will depend in
large part upon its ability to attract and retain highly qualified engineering,
sales and marketing personnel. Competition for such personnel from other
companies, academic institutions, government entities and other organizations
is intense. Although the Company has been successful to date in recruiting and
retaining key personnel, there can be no assurance that the Company will be
successful in attracting and retaining the personnel it requires in order to
continue to grow and operate profitably. Also, there can be no assurance that
management skills which have been appropriate for the Company in the past will
continue to be appropriate if the Company continues to grow and diversify.
At July 31, 1996, the Company had 192 employees, 102 of whom were engaged in
production and PRODUCTION SUPPORT, 54 IN RESEARCH AND DEVELOPMENT AND OTHER
ENGINEERING SUPPORT AND 36 IN MARKETING AND ADMINISTRATIVE FUNCTIONS. NONE OF
THE EMPLOYEES IS REPRESENTED BY A LABOR UNION. THE COMPANY BELIEVES THAT ITS
EMPLOYEE RELATIONS ARE GOOD.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides for forward
looking statements. Certain information in Items 1,2,3,7 and 8 of this Form 10-
K included information that is forward looking, such as the Company's
anticipated sales levels, its anticipated liquidity and capital requirements and
the results of legal proceedings. The matters referred to in forward looking
statements could be affected by the risks and uncertainties involved in the
Company's business. These risks and uncertainties include, but are not limited
to, the effect of economic and market conditions, unpredictable reductions in
funding for government defense expenditures, and the risks associated with
international sales, including fluctuations in foreign currency exchange rates,
political and economic instability, availability of suitable export financing,
export license requirements, tariff regulations and other US and foreign
regulations that may apply to the export of the Company's products, as well as
certain other risks described above in this Item under "Backlog," "Competition"
and "Key Personnel/Employees" and below in Item 3 in "Legal Proceedings" and in
Item 7 in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Subsequent written and oral forward looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements in this paragraph and
elsewhere in this Form 10-K.
7
ITEM 2. PROPERTIES
The Company's corporate offices are located in a portion of the 46,000 square
foot facility on 2 acres of land in Melville, New York which also houses CMPC.
The Company leases this facility in Melville, New York from a partnership
controlled by the Company's Chairman, Chief Executive Officer and President.
The lease, as amended, provides for the Company's exclusive use of the premises
as they now exist for an initial term of ten years through December 27, 2001.
The Company has the option to extend the term of the lease for an additional
ten-year period and a right of first refusal in the event of a sale of the
facility. The base annual rental under the lease is subject to adjustments.
The Company believes that the terms of this lease are not less advantageous to
the Company than those that would have been available to the Company from an
unrelated party.
The Company leases the 32,000 square foot facility used by CASI and CSI in St.
Cloud, Florida from a Florida Land Trust, controlled by the Company's Vice
President and Chief Financial Officer. The lease provides for the Company's
exclusive use of the premises as they now exist for a term of ten years through
September 30, 1998. The base annual rental under the lease is subject to
adjustments. The Company believes that the terms of this lease are not less
advantageous to the Company than those that would have been available to the
Company from an unrelated party.
The Company leases a 10,000 sq. ft. building in Tempe, Arizona for its Comtech
Communications Corp. subsidiary. The lease provides for the exclusive use of
the premises as they now exist for a term of three years through February 1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to certain legal actions which arise out of the normal
course of business. It is management's belief that the outcome of these actions
will not have a material effect on the Company's consolidated financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to stockholders during the fourth quarter of the
fiscal year ended July 31, 1996.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market System under
the symbol "CMTL". The following table sets forth the range of high and low
closing sales prices for the Common Stock, as reported by NASDAQ. Such prices
do not include retail markups, markdowns, or commissions.
Common Stock
------------
High Low
------- ------------
FISCAL YEAR ENDING 7-31-95
First Quarter $ 5 $ 3 1/4
Second Quarter 4 2 1/8
Third Quarter 3 5/8 2 1/4
Fourth Quarter 3 3/8 2
FISCAL YEAR ENDING 7-31-96
First Quarter 3 1/2 2 1/4
Second Quarter 2 7/8 2 1/8
Third Quarter 5 2 3/16
Fourth Quarter 6 3/8 3
FISCAL YEAR ENDING 7-31-97
First Quarter 3 5/16 2 3/4
(through October 18, 1996)
DIVIDENDS
The Company has never paid a cash dividend on its Common Stock and the Company's
Board of Directors intends to continue this policy for the foreseeable future.
Earnings, if any, will be used to finance the development and expansion of the
Company's business.
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
As of October 18, 1996, there were approximately 1,300 holders of the Company's
Common Stock. Such number of record owners was determined from the Company
shareholders' records and does not include beneficial owners of the Company's
Common Stock held in the names of various security holders, dealers and clearing
agencies.
9
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended July 31,
--------------------------------------------------
1996 1995 1994 1993 1992
-------- --------- --------- -------- --------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales $20,916 $16,455 $14,873 $22,265 $19,434
Cost of sales 14,819 12,096 12,226 15,778 13,177
------- ------- ------- ------- -------
Gross profit 6,097 4,359 2,647 6,487 6,257
Expenses:
Selling, general and administrative 5,015 4,658 4,706 4,420 4,262
Research and development 741 1,036 760 314 423
------- ------- ------- ------- -------
5,756 5,694 5,466 4,734 4,685
------- ------- ------- ------- -------
Operating earnings (loss) 341 (1,335) (2,819) 1,753 1,572
Other expenses (income):
Interest expense 302 341 279 321 233
Interest income (60) (171) (253) (47) (77)
Other income --- (20) --- --- ---
------- ------- ------- ------- -------
Earnings (loss) before
provision for income taxes 99 (1,485) (2,845) 1,479 1,416
Provision for income taxes 27 17 25 45 123
------- ------- ------- ------- -------
Net earnings (loss) $ 72 $(1,502) $(2,870) $ 1,434 $ 1,293
======= ======= ======= ======= =======
Net earnings (loss) per share $.03 $(.58) $(1.14) $1.07 $1.03
======= ======= ======= ======= =======
CONSOLIDATED BALANCE SHEET DATA:
Total assets $16,629 $16,783 $18,289 $20,397 $16,761
Working capital 7,797 7,681 9,447 11,988 4,935
Long-term debt, less current
installments 1,875 2,277 2,535 2,760 2,832
Stockholders' equity 10,301 10,081 11,446 13,214 5,999
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income and
expense items expressed as a percentage of the Company's net sales:
Fiscal Year
Ended July 31
-------------
1996 1995 1994
------ ------ -----------
Net sales 100.0% 100.0% 100.0%
Gross Margin 29.1 26.5 17.8
Selling, general and administrative 24.0 28.3 31.6
expenses
Research and development expenses 3.5 6.3 5.1
Operating earnings (loss) 1.6 (8.1) (19.0)
Interest expense, net (1.2) (1.0) (.2)
Earnings (loss) before income taxes .5 (9.0) (19.1)
Net earnings (loss) .3 (9.1) (19.3)
COMPARISON OF THE FISCAL YEARS 1996 AND 1995
RESULT OF OPERATIONS
NET SALES. net sales were $20,916,000 and $16,455,000 for the fiscal years
ended July 31, 1996 and 1995, respectively, representing an increase of
$4,461,000 or 27.1%. This increase was primarily due to increased sales for use
by international customers. International sales represented approximately 56%
and 37% of total net sales for fiscal 1996 and 1995, respectively. The Company
expects that international sales will remain a significant proportion of its
total sales. Sales to agencies of the United States government or to end users
of such agencies represented approximately 20% and 14% of total net sales for
fiscal 1996 and 1995, respectively. The company anticipates that such sales
will remain substantially at the same level for the foreseeable future.
Domestic sales are expected to increase due to the anticipated increase in
demand for wireless and satellite telecommunications and microwave
electromagnetic compatibility instrumentation.
GROSS MARGIN. Gross profit was $6,097,000 or 29.1% of net sales in fiscal 1996
as compared to $4,359,000 or 26.5% of net sales in fiscal 1995. The primary
reason for the increase was an increase in in fiscal 1996 in both sales volume
and efficiencies in productions at Comtech Communications Corp., resulting in a
greater gross margin contribution. To a lesser degree, gross profits were
impacted by the gain on the settlement of a claim arising from an earlier
acquisition.. The Company paid $85,000 to the seller in settlement of a $250,000
note. The Settlement difference represented reimbursement to the company for
costs that it incurred due to the seller's failure to perform in accordance with
the agreement. Of this gain, $149,000 was included in cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $5,015,000 and $4,658,000 in fiscal 1996 and 1995, respectively,
representing an increase of $357,000. This increase was due primarily to the
increase in marketing and administrative expenses required to support the higher
level of sales in the fiscal 1996. As a percentage of sales however, these
expenses decreased to 24% in fiscal 1996 from 28.3% in fiscal 1995.
RESEARCH AND DEVELOPMENT. Research and development expenses were $741,000 and
$1,036,000 in fiscal years ended July 31, 1996 and 1995, respectively,
representing a decrease of $295,000 or 28.5%. research and development expenses
as a percentage of net sales were 3.5% and 6.3% in fiscal 1996 and 1995,
respectively. This decrease was primarily due to the decreased level of R&D
expenses at Comtech Communications Corp. as its initial product designs were
principally completed in fiscal 1995.
11
Whenever possible, the Company seeks customer-funding for research and
development to adapt the Company's products to specialized customer
requirements. During the fiscal years ended July 31, 1996 and 1995, the Company
was reimbursed $516,000 and $382,000, respectively, which amounts are not
reflected in the reported R&D expenses.
OPERATING EARNINGS. As a result of the foregoing factors, the Company had
operating income of $341,000 in fiscal 1996 compared to an operating loss of
$1,335,000 in fiscal 1995.
INTEREST EXPENSE. Interest expense was $302,000 and $341,000 in the fiscal
years ended July 31, 1996 and 1995, respectively. interest expense in both
years was substantially due to interest associated with the Company's capital
lease obligations.
INTEREST INCOME. Interest income for the fiscal years ended july 31, 1996 and
1995 was $60,000 and $171,000, respectively. this decrease was due primarily to
the decrease in the amount of cash available to invest in the fiscal 1996
period.
PROVISION FOR INCOME TAXES. The provision for income taxes was $27,000 and
$17,000 in fiscal 1996 and 1995, respectively, which principally relates to
state income taxes. The Company believes its tax benefits are subject to 100%
valuation allowance due to earnings fluctuations inherent in the Company's
operations and the potential limitations on utilization of loss and credit
carryforwards pursuant to sections 382 and 383 of the internal revenue code of
1986.
COMPARISON OF THE FISCAL YEARS 1995 AND 1994
RESULT OF OPERATIONS
NET SALES. Net sales were $16,455,000 and $14,873,000 for the fiscal years
ended July 31, 1995 and 1994, respectively, representing an increase of
$1,582,000 or 11%. this increase was primarily due to an increase in domestic
commercial sales, principally sales at the Comtech Communications Corp.
subsidiary which was formed in February 1994 and commenced significant levels of
shipments of products in the latter part of fiscal 1995. International sales
represented approximately 37% and 39% of total net sales for fiscal 1995 and
1994, respectively. Although the Company has been experiencing delays and
deferrals of orders in the international marketplace, it expects that
international sales will remain a significant proportion of its total sales.
Sales to agencies of the United States Government or to end users of such
agencies ("Government Sales") represented approximately 14% and 17% of total net
sales for fiscal 1995 and 1994, respectively. The Company anticipates that
Government Sales will remain at reduced levels for the foreseeable future due to
the reduction in United States defense spending. Domestic sales are anticipated
to increase due to the expansion of wireless and satellite telecommunications
and microwave electromagnetic compatibility instrumentation.
GROSS MARGIN. Gross Profit was $4,359,000 or 26.5% of net sales in fiscal 1995
as compared to $2,647,000 or 17.8% of net sales in fiscal 1994. The lower gross
margins in the fiscal 1994 period were attributable to technical difficulties
experienced with respect to certain projects. Additionally, improved margins
were experienced in fiscal 1995 in system sales and a product mix of equipment
sales.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $4,658,000 or 28.3% of net sales and $4,706,000 or 31.6% of net
sales in fiscal 1995 and 1994, respectively, representing a modest decline of
approximately 1%. Increased amounts of expenses in these areas at the Comtech
Communications Corp. subsidiary, due to its growth and development, partially
offset the decrease which was realized at the other subsidiaries as a result of
the cost reduction measures we instituted.
RESEARCH AND DEVELOPMENT. Research and development expense were $1,036,000 and
$760,000 in fiscal years ended July 31, 1995 and 1994, respectively,
representing an increase of $276,000 or 36%. Research and development expenses
as a percentage of net sales were 6.3% and 5.1% in fiscal 1995 and 1994,
respectively. The increase was due to increased research and development and
product development costs at Comtech Communications Corp. subsidiary.
12
Whenever possible, the Company seeks customer-funding for research and
development to adapt the Company's products to specialized customer
requirements. During the fiscal years ended July 31, 1995 and 1994, the Company
was reimbursed $382,000, and $178,000, respectively.
OPERATING EARNINGS. As a result of the foregoing factors, the Company had an
operating loss of $1,335,000 in fiscal 1995 as compared to a loss of $2,819,000
in fiscal 1994.
INTEREST EXPENSE. Interest expense was $341,000 and $279,000 in the fiscal
years ended July 31, 1995 and 1994, respectively. Interest expense in both
years was substantially due to interest associated with the Company's capital
lease obligations. There was no borrowing against the Company's bank line of
credit in either year.
INTEREST INCOME. Interest income for the fiscal years ended July 31, 1995 and
1994 was $171,000 and $253,000, respectively. This decrease was due primarily
to the decrease in the amount of cash available to invest in the fiscal 1995
period.
PROVISION FOR INCOME TAXES. The provision for income taxes was $17,000 and
$25,000 in fiscal 1995 and 1994, respectively, which principally relates to
state income taxes. The Company believes its tax benefits are subject to 100%
valuation allowance due to earnings fluctuations inherent in the Company's
operations and the potential limitations on utilization of loss and credit carry
forwards pursuant to sections 382 and 383 of the Internal Revenue code of 1986.
Liquidity and Capital Resources
- -------------------------------
The Company's cash and cash equivalents position decreased by $179,000, from
$2,019,000 at July 31, 1995 to $1,840,000 at July 31, 1996. Of this decrease,
$195,000 was added to restricted cash to secure additional standby letters of
credit that were outstanding at July 31, 1996. The balance was the net result
of cash provided by other operating activities and cash used in investing
activities and financing activities.
Accounts receivable were $3,467,000 at July 31, 1996 as compared to $4,490,000
at July 31, 1995, net of an allowance for doubtful accounts of $28,000 in fiscal
1996 and $137,000 in fiscal 1995. The decreased accounts receivable balance is
a result of the Company's efforts to shorten the collection cycle of accounts
receivables and also due to the timing of shipments. Included in the accounts
receivable balances for sales recorded on a percentage-of-completion basis were
$689,000 and $920,000 of unbilled accounts receivable at July 31, 1996 and 1995,
respectively. The portion of accounts receivable represented by unbilled
accounts receivable will vary at any time as a function of the volume of
contracts being performed by the Company that are accounted for on a percentage-
of-completion basis. The Company believes that its allowance for doubtful
accounts is sufficient based on past experience and the Company's credit
standards. The Company generally requires international customers to secure
their obligations by letter of credit.
Inventory levels of materials and work-in process, net of progress payments and
reserves were $6,527,000 and $5,011,000, respectively for fiscal years ended
July 31, 1996 and 1995. The primary increase was at our solid state amplifier
subsidiary which was necessary to support a 27% higher contract backlog at July
31, 1996 over the previous year. 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 state 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.
Investing activities used $129,000 of cash as a result of the net proceeds from
the sale of marketable securities offset by purchases of capital equipment.
This equipment was primarily needed by the Comtech Communications Corp.
subsidiary to complete their production stage development and at the Comtech
Microwave Products Corp. subsidiary to respond to increased operating levels.
Financing activities used $638,000 of cash for principal payments of long-term
debt.
13
In April 1996, the Company settled a claim in connection with a note payable
arising from an earlier acquisition. The Company paid $85,000 to the seller in
settlement of a $250,000 note. The settlement difference represented
reimbursement to the Company for costs that it incurred due to the seller's
failure to perform in accordance with the agreement. Of this gain, $149,000 was
included in cost of sales and $16,000 has been included in selling, general and
administrative expenses.
From time to time the Company utilizes short-term bank financing to fund its
working capital requirements. At present, the Company has a $4.5 million credit
facility with a financial institution. The line, which bears interest at 1%
over the prime rate, is to be secured at the time of borrowing by collateral
satisfactory to the financial institution. During fiscal 1996, the Company took
advances totaling $750,000 which were paid back in full by July 31, 1996. This
credit facility expires on January 31, 1997. The Company is presently
negotiating with the financial institution for a continued facility.
Additionally the Company has obtained a preliminary commitment from the Export-
Import Bank of the United States, for a guarantee of up to $1 million under the
Working Capital Guarantee Program. This program provides to the lender, a 90%
guarantee on qualifying loans made to the Company for export related contracts.
This line is presently in negotiation with the lender. The Company has in the
past and continues to place a high emphasis on cash collections as well as
seeking progress and advance payments on contracts when appropriate. The
Company's cash balances may fluctuate from time to time due to the timing of
contract deliveries and collection cycles.
The Company believes that its current cash position, funds generated from
operations and funds available from its current credit facility, collectively,
will be adequate to meet the Company's cash requirements.
The Company's cash investments consist of highly liquid interest bearing
commercial grade securities and certificates of deposit.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report, Consolidated Financial Statements, Notes to
Consolidated Financial Statements and related financial schedules are listed in
the index to Consolidated Financial Statements and Schedules annexed hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Certain information concerning the directors of the Company is incorporated by
reference to the Proxy Statement of the Company for the Annual Meeting of
Stockholders to be held December 12, 1996 (the "Proxy Statement") which will be
filed with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference to the
Company's Proxy Statement which will be filed with the Securities and Exchange
Commission no more than 120 days after close of its fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the Company's Proxy Statement which
will be filed with the Securities and Exchange Commission no later than 120 days
after the close of its fiscal year.
14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated by reference to the Company's Proxy Statement which will be filed
with the Securities and Exchange Commission no more than 120 days after the
close of its fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. and 2. Financial Statements and Financial Statement Schedule
The Financial Statements filed as part of this report are listed in the
accompanying Index to Consolidated Financial Statements and Schedule.
Incorporated By
Exhibit Page ---------------
- ------- ---- Reference to
Number Description of Exhibit Number Exhibit
- ------ ---------------------- ------ ---------------
3(a) Certificate of Exhibit 3(a) of
Incorporation of the the Registrant's
Registrant 1987 Form 10-K
3(b) Amendment of the Exhibit 3(b) to
Certificate of the Registrant's
Incorporation 1991 Form 10-K
affecting the 5 to 1
reverse stock split
3(c) By-Laws of the Exhibit 3(c) of
Registrant the Registrant's
1987 Form 10-K
3(d) Amendment to the Exhibit 3(d) to
Certificate of the Registrant's
Incorporation 1994 Form 10-K
increasing authorized
shares to 12 million
10(a) Employment Agreetment Exhibit 10(b) of
dated August 20, 1992 the Registrant's
between the 1992 Form 10-K
Registrant and Fred
Kornberg
10(b) Non-employee Exhibit 10(t) to
Directors' Stock the Registrant's
Option Plan 1987 Form 10-K
10(c) 1982 Incentive Stock Exhibit A to the
Option and Registrant's Proxy
Appreciation Plan Statement dated
October 29, 1982
10(d) Lease and amendment Exhibit 10(k) to
thereto on the the Registrant's
Melville Facility 1992 Form 10-K
10(e) 1993 Incentive Stock Appendix A to the
Option Plan Registrant's Proxy
Statement dated
December 3, 1992
10(f) Warrant Agreement Exhibit 4 to
dated July 21, 1993 Registration
between the Statement No.
Registrant and 33-63784
Barington Capital
Group, L.P.
10(g) Warrant Agreement Exhibit 4(b) to
dated July 9, 1993 the Registrant's
between Registrant Form 8-K dated
and PMCC Acquisition July 9, 1993
Corp.
15
10(h) Amendment to the Form S-8 filed
Registrant's 1993 August 31, 1994
Incentive Stock Registration No.
Option Plan 33-83584
10(i) Time Accelerated Exhibit 10(j) to
Restricted Stock the Registrant's
Purchase Agreements 1994 Form 10-K
between Registrant
and Principals of
Comtech
Communications Corp.
subsidiary
21 Subsidiaries of the Exhibit 21 to the
Company Registrant's 1996
Form 10-K
23 Consent of KPMG Peat Exhibit 23 to the
Marwick LLP Registrant's 1996
Form 10-K
Exhibits to this Annual Report on Form 10-K are available upon request for a
fee to the Company of $25.
16
SIGNATURE
---------
Pursuant to the requirements of Section 13 or 15 (d) 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.
October 29, 1996 By: s/Fred Kornberg
----------------------------- ----------------------------------------
(Date) Fred Kornberg, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title
--------- -----
10/29/96 s/Fred Kornberg Chairman of the Board
- ----------- ------------------------ -----------------------------
(Date) Fred Kornberg Chief Executive Officer
and Director
(Principal Executive Officer)
10/29/96 s/J. Preston Windus, Jr. Vice President,
- ----------- ------------------------ -----------------------------
(Date) J. Preston Windus, Jr. Chief Financial Officer
and Secretary
10/29/96 s/George Bugliarello Director
- ----------- ------------------------ -----------------------------
(Date) George Bugliarello
10/29/96 s/Richard L. Goldberg Director
- ----------- ------------------------ -----------------------------
(Date) Richard L. Goldberg
10/29/96 s/Gerard R. Nocita Director
- ----------- ------------------------ -----------------------------
(Date) Gerard R. Nocita
10/29/96 s/John B. Payne III Director
- ----------- ------------------------ -----------------------------
(Date) John B. Payne III
10/29/96 s/Sol S. Weiner Director
- ----------- ------------------------ -----------------------------
(Date) Sol S. Weiner
17
SUBSIDIARIES
------------
The following is a list of the active subsidiaries of the Company as of
October 29, 1996:
Subsidiary State of Incorporation
---------- ----------------------
Comtech Microwave Products Corp. New York
Comtech Systems, Inc. Delaware
Comtech Antenna Systems, Inc. Delaware
Comtech Communications Corp. Delaware
18
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
(FORM 10-K)
JULY 31, 1996 AND 1995
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Independent Auditors' Reports
Consolidated Financial Statements:
Balance Sheets at July 31, 1996 and 1995
Statements of Operations for each of the years in the three-year
period ended July 31, 1996
Statements of Stockholders' Equity for each of the years in the
three-year period ended July 31, 1996
Statements of Cash Flows for each of the years in the three-year
period ended July 31, 1996
Notes to Consolidated Financial Statements
Additional Financial Information Pursuant to the Requirements of
Form 10-K:
Schedule II - Valuation and Qualifying Accounts and Reserves
Exhibit 11 - Computation of Earnings (Loss) Per Share
Schedules not listed above have been omitted because they are either
not applicable or the required information has been given
elsewhere in the consolidated financial statements or notes
thereto.
F-1
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Comtech Telecommunications Corp.:
We have audited the consolidated balance sheets of Comtech
Telecommunications Corp. and subsidiaries as of July 31, 1996 and 1995
and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period
ended July 31, 1996. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement
schedule II as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Comtech Telecommunications Corp. and subsidiaries as of July 31, 1996 and
1995, and the results of their operations and their cash flows for each
of the years in the three-year period ended July 31, 1996 in conformity
with generally accepted accounting principles. Also in our opinion, the
related financial statement schedule II, when considered in relation to
the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
As discussed in notes to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting
Standards No.115, "Accounting for Certain Investments in Debt and Equity
Securities" in fiscal 1995.
KPMG PEAT MARWICK LLP
Jericho, New York
October 21, 1996
F-2
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 1996 and 1995
Assets 1996 1995
------ ---- ----
Current assets:
Cash and cash equivalents $ 1,840,000 2,019,000
Restricted cash 220,000 25,000
Marketable investment securities -- 275,000
Accounts receivable, less allowance for doubtful
accounts of $28,000 in 1996 and $137,000 in 1995 3,467,000 4,490,000
Inventories, net 6,527,000 5,011,000
Prepaid expenses and other current assets 196,000 286,000
----------- -----------
Total current assets 12,250,000 12,106,000
Property, plant and equipment, net 3,996,000 4,212,000
Other assets 383,000 465,000
----------- -----------
$ 16,629,000 16,783,000
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt (including payable to
related party of $351,000 in 1996 and $319,000 in 1995) 642,000 591,000
Notes payable -- 250,000
Accounts payable 2,037,000 1,894,000
Accrued expenses and other current liabilities 1,774,000 1,690,000
----------- -----------
Total current liabilities 4,453,000 4,425,000
Long-term debt, less current installments (including payable to
related party of $1,512,000 in 1996 and $1,862,000 in 1995) 1,875,000 2,277,000
----------- -----------
Total liabilities 6,328,000 6,702,000
----------- -----------
Stockholders' equity:
Preferred stock, par value $.10 per share; shares authorized and
unissued 2,000,000 -- --
Common stock, par value $.10 per share; authorized 10,000,000
shares; issued and outstanding, 2,607,344 shares in 1996 and
2,605,344 shares in 1995 261,000 261,000
Additional paid-in capital 22,235,000 22,230,000
Accumulated deficit (11,599,000) (11,671,000)
----------- -----------
10,897,000 10,820,000
Less:
Treasury stock (15,000 shares in 1996 and 1995) (180,000) (180,000)
Deferred compensation (416,000) (553,000)
Unrealized loss on securities -- (6,000)
----------- -----------
10,301,000 10,081,000
----------- -----------
Commitments and contingencies
$ 16,629,000 16,783,000
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended July 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Net sales $ 20,916,000 16,455,000 14,873,000
---------- ---------- ----------
Costs and expenses:
Cost of sales 14,819,000 12,096,000 12,226,000
Selling, general and administrative 5,015,000 4,658,000 4,706,000
Research and development 741,000 1,036,000 760,000
20,575,000 17,790,000 17,692,000
---------- ---------- ----------
Operating income (loss) 341,000 (1,335,000) (2,819,000)
Other expenses (income):
Interest expense 302,000 341,000 279,000
Interest income (60,000) (171,000) (253,000)
Other -- (20,000) --
---------- ---------- ----------
Income (loss) before provision for income taxes 99,000 (1,485,000) (2,845,000)
Provision for income taxes 27,000 17,000 25,000
---------- ---------- ----------
Net income (loss) $ 72,000 (1,502,000) (2,870,000)
========== ========== ==========
Net income (loss) per share $0.03 (.58) (1.14)
=========== ========== ==========
Weighted average number of common and
common equivalent shares outstanding 2,661,000 2,590,000 2,519,000
=========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
COMTECH TELECOMMUNICATION CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended July 31, 1996, 1995 and 1994
Common stock Additional Treasury stock
---------------- paid in Accumulated ---------------
Shares Amount capital deficit Shares Amount
------ ------ ------- ------- ------ ------
Balance July 31, 1993 2,292,144 $ 229,000 $ 20,617,000 $(7,299,000) 15,000 $(180,000)
Shared issued in connection with
stock option agreement 43,200 5,000 112,000 - - -
Shares issued in connection with
public offering of common stock 150,000 15,000 868,000 - - -
Restricted shares issued pursuant
to employee stock award agreements 120,000 12,000 633,000 - - -
Amortization of deferred compensation - - - - - -
Net loss - - - (2,870,000) - -
--------- --------- ---------- ------------ ------ ------
Balance July 31, 1994 2,605,344 261,000 22,230,000 (10,169,000) 15,000 (180,000)
Amortization of deferred compensation - - - - - -
Unrealized loss on securities - - - - - -
Net loss - - - (1,502,000) - -
--------- --------- ---------- ------------ ------ ------
Balance July 31, 1995 2,605,344 261,000 22,230,000 (11,671,000) 15,000 (180,000)
Realized loss on sale of securities - - - - - -
Amortization of deferred compensation - - - - - -
Stock options exercised 2,000 - 5,000 - - -
Net income - - - 72,000 - -
--------- --------- ---------- ------------ ------ ------
Balance July 31, 1996 2,607,344 $ 261,000 22,235,000 $ (11,599,000) 15,000 (180,000)
========= ========= ========== ============= ====== =======
Deferred Stock-
compen- holders'
sation Other equity
--------- ----- ------
Balance July 31, 1993 $(153,000) $ - $13,214,000
Shared issued in connection with
stock option agreement - - 117,000
Shares issued in connection with
public offering of common stock - - 883,000
Restricted shares issued pursuant
to employee stock award agreements (633,000) - 12,000
Amortization of deferred compensation 90,000 - 90,000
Net loss - - (2,870,000)
----------- --------- -----------
Balance July 31, 1994 (696,000) - 11,446,000
Amortization of deferred compensation 143,000 - 143,000
Unrealized loss on securities - (6,000) (6,000)
Net loss - - (1,502,000)
----------- --------- -----------
Balance July 31, 1995 (553,000) (6,000) 10,081,000
Realized loss on sale of securities - 6,000 6,000
Amortization of deferred compensation 137,000 - 137,000
Stock options exercised - - 5,000
Net income - - 72,000
----------- --------- -----------
Balance July 31, 1996 $ (416,000) $ - $10,301,000
=========== ========= ===========
See accompanying notes to consolidated financial statements.
F-5
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 72,000 (1,502,000) (2,870,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 992,000 798,000 686,000
Provision for bad debts, net -- 25,000 --
Provision for (reduction of) inventory reserves and
anticipated losses on contracts (71,000) (6,000) 468,000
Amortization of deferred compensation 137,000 143,000 90,000
Gain on settlement of claim (165,000) -- --
Loss on sale of securities 6,000 -- --
Changes in assets and liabilities:
Restricted cash securing letter of credit obligations (195,000) (25,000) --
Accounts receivable 1,023,000 (737,000) 916,000
Inventories (1,445,000) (1,126,000) (1,148,000)
Prepaid expenses and other current assets 90,000 (70,000) (51,000)
Notes Payable (85,000) -- --
Other assets 2,000 -- (489,000)
Accounts payable 143,000 531,000 (974,000)
Accrued expenses and other current liabilities 84,000 (495,000) 564,000
---------- ---------- ----------
Net cash provided by (used in)
operating activities 588,000 (2,464,000) (2,808,000)
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (404,000) (546,000) (291,000)
Net proceeds of sale (purchases) of marketable investment
securities 275,000 5,084,000 (5,365,000)
-------- ---------- ----------
Net cash (used in) provided by
investing activities (129,000) 4,538,000 (5,656,000)
---------- ---------- ----------
Cash flows from financing activities:
Borrowings under line of credit facility 750,000 -- --
Repayments of borrowings under line of credit facility (750,000) -- --
Principal payments on long-term debt (643,000) (560,000) (334,000)
Proceeds from issuance of common stock:
Exercise of underwriters allotment -- -- 883,000
Stock options 5,000 -- 117,000
Restricted stock -- -- 12,000
---------- ---------- ----------
Net cash (used in) provided by
financing activities (638,000) (560,000) 678,000
---------- ---------- ----------
(Continued)
F-6
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
1996 1995 1994
---------- --------- -----------
Net (decrease) increase in cash and cash equivalents $ (179,000) 1,514,000 (7,786,000)
Cash and cash equivalents at beginning of period 2,019,000 505,000 8,291,000
--------- --------- ----------
Cash and cash equivalents at end of period $ 1,840,000 2,019,000 505,000
========= ========= ==========
Supplemental cash flow disclosure
- ---------------------------------
Cash paid during the period for:
Interest $ 302,000 341,000 279,000
========= ========= ==========
Income taxes $ 27,000 17,000 13,000
========= ========= ==========
See accompanying notes to consolidated financial statements.
F-7
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 31, 1996 and 1995
(1) Summary of Significant Accounting and Reporting Policies
--------------------------------------------------------
(a) Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
Comtech Telecommunications Corp. and its subsidiaries (the Company), all
of which are wholly-owned. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) Nature of Business
------------------
The Company is engaged in the design, development, manufacture and
installation, for commercial and government applications, of high
technology communications and radio frequency amplifier equipment.
The Company's business is highly competitive and characterized by rapid
technological change. In addition the number of potential customers for
the Company's products is limited. The Company's growth and financial
position depends, amount other things, on its ability to keep pace with
such changes and developments and to respond to the sophisticated
requirements of an increasing variety of electronic equipment users.
Many of the Company's competitors are substantially larger, have
significantly greater financial, marketing and operating resources and
broader product lines than does the Company. A significant technological
breakthrough by others, including smaller competitors or new companies,
could have a material adverse effect on the Company's business. In
addition, certain of the Company's customers have technological
capabilities in the Company's product areas and could choose to replace
the Company's products with their own .
International sales expose the Company to certain risks, including barriers
to trade, fluctuations in foreign currency exchange rates (which may
make the Company's products less price competitive), political and
economic instability, availability of suitable export financing, export
license requirements, tariff regulations, and other United States and
foreign regulations that may apply to the export of the Company's
products, as well as the generally greater difficulties of doing
business abroad. The Company attempts to reduce the risk of doing
business in foreign countries by seeking contracts denominated in United
States dollars, advance payments and irrevocable letters of credit in
its favor.
(c) Revenue Recognition
-------------------
Sales on long-term, fixed price contracts, including pro-rata profits, are
generally recorded based on the relationship of total costs incurred to
date to total projected final costs or, alternatively, as progress
billings or deliveries are made. Sales under cost reimbursement
contracts are recorded as costs are incurred.
Sales on other contract orders are recognized under the units of delivery
method. Under this method, sales are recorded as units are delivered with
the related cost of sales recognized on each shipment based upon a
percentage of estimated final contract costs. Contract costs include
material, direct labor, manufacturing overhead and other direct costs.
Retainages and estimated earnings in excess of amounts billed on certain
multi-year programs are reported as unbilled receivables.
(Continued)
F-8
2
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
Sales not associated with long-term contracts are generally recognized when the
earnings process is complete, generally upon shipment or customer acceptance
Provision for anticipated losses on uncompleted contracts are made in the
period in which such losses are determined.
(d) Cash and Cash Equivalents
-------------------------
Cash equivalents consist of highly liquid direct obligations of the United
States government with a maturity at acquisition of three months or less.
These investments are carried at cost plus accrued interest, which
approximates market. The Company had $220,000 and $25,000 of restricted
cash securing letter of credit obligations with a financial institution at
July 31, 1996 and 1995, respectively.
(e) Statement of Cash Flows
-----------------------
The Company acquired equipment financed by capital leases in the amounts of
$292,000, $383,000 and $204,000 in 1996, 1995 and 1994, respectively. In
January 1994, the Company issued a $250,000 note payable in connection with
the purchase of equipment and an intellectual property rights agreement.
The note was subsequently settled in April 1996 for a cash payment of
$85,000 (see note 7).
(f) Marketable Investment Securities
--------------------------------
The Company adopted the provisions of Statement of Financial Accounting
Standards No.115 "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS No.115) effective August 1, 1994 and the cumulative effect
of this change was immaterial. Under SFAS No.115, the Company classifies its
investments in debt and equity securities as available-for-sale.
Accordingly, these investments are reported at fair value with unrealized
holding gains and losses excluded from earnings and reported as a separate
component of stockholders' equity, net of tax. Classification of investments
is determined at acquisition and reassessed at each reporting date. Realized
gains and losses are included in the determination of net earnings at the
time of sale and are derived using the specific identification method for
determining cost of securities sold.
(g) Inventories
-----------
Work in process inventory reflects all accumulated production costs, which
are comprised of direct production costs and overhead, reduced by amounts
attributable to units delivered. These inventories are reduced to their
estimated net realizable value by a charge to cost of sales in the period
such excess costs are determined.
Raw materials and components and work-in-process inventory associated with
short-term contracts and purchase orders are stated at the lower of cost or
market, computed on the first-in, first-out (FIFO) method.
(Continued)
F-9
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(h) Depreciation and Amortization
-----------------------------
The Company's plant and equipment, recorded at cost, are depreciated or
amortized over their estimated useful lives (building and improvements - 40
years, equipment - three to eight years) under the straight line method.
Capitalized values of properties under leases are amortized over the life
of the lease or the estimated life of the asset, whichever is less.
(i) Other Assets
------------
Included in other assets at July 31, 1996 and 1995 is approximately $335,000
relating to an intellectual property rights agreement, which is being
amortized over the eight year term of the agreement. At July 31, 1996 and
1995, accumulated amortization related to this purchased technology were
approximately $102,000 and $58,000, respectively. The Company assesses the
recoverability of the intangible asset by determining whether the
amortization of purchased technology over its remaining life can be
recovered through undiscounted future operating cash flows from product
sales utilizing the technology.
(j) Research and Development Costs
-------------------------------
The Company charges research and development costs to operations as incurred,
except in those cases in which such costs are reimbursable under customer-
funded contracts.
(k) 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.
(l) Net Income (loss) Per Share
---------------------------
Net income (loss) per share are based on the weighted average number of
common and common equivalent shares (if dilutive) outstanding during each
year. Fully diluted per share information has been omitted because it does
not differ materially from primary income (loss) per share.
(m) Financial Instruments
---------------------
Management of the Company believes that the book value of its monetary assets
and liabilities, approximates fair value as a result of the short-term
nature of such assets and liabilities. Management further believes that
the fair market value of long-term debt relating to capital leases does not
differ materially from carrying value.
(Continued)
F-10
(n) Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amount of assets and
liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results may
differ from those estimates.
(2) Marketable Investment Securities
--------------------------------
As discussed in note 1, the Company adopted the provisions of SFAS No.115
effective August 1, 1994 and the cumulative effect of this change in
the method of accounting for certain investments in debt and equity
securities, net of income taxes was immaterial.
The following table presents the amortized cost, gross unrealized losses
and fair value of the investments available-for-sale as of July 31,
1995:
Gross
Amortized Unrealized Fair
Cost Losses Value
---- ------ -----
Commercial debt obligation $ 281,000 6,000 275,000
======= ===== =======
The Company did not hold any marketable securities at July 1, 1996.
(3) Accounts Receivable
-------------------
Accounts receivable consist of the following at July 31, 1996 and 1995:
1996 1995
---- ----
Accounts receivable from commercial customers $ 2,079,000 3,368,000
Unbilled receivables (including retainages) on
contracts-in-progress 689,000 920,000
Amounts receivable from the United States
Government and its agencies 727,000 339,000
--------- ---------
3,495,000 4,627,000
Less allowance for doubtful accounts 28,000 137,000
--------- ---------
Accounts receivable, net $ 3,467,000 4,490,000
========= =========
In the opinion of management, substantially all of the unbilled balances will
be billed and collected during fiscal 1997.
(Continued)
F-11
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Inventories
-----------
Inventories consist of the following at July 31, 1996 and 1995:
1996 1995
---- ----
Raw materials and components $ 1,754,000 1,437,000
Work-in-process 5,414,000 4,234,000
---------- ----------
7,168,000 5,671,000
Less:
Progress payments 151,000 93,000
Provision for anticipated losses on
contracts and inventory reserves 490,000 567,000
---------- ----------
Inventories, net $ 6,527,000 5,011,000
========== ==========
(5) Property, Plant and Equipment
-----------------------------
Property, plant and equipment consists of the following:
1996 1995
---- ----
Land $ 40,000 40,000
Buildings and improvements 320,000 320,000
Equipment 7,765,000 7,383,000
Leasehold improvements 299,000 285,000
Facilities financed by capital lease 3,365,000 3,365,000
Equipment financed by capital lease 2,546,000 2,246,000
----------- ----------
14,335,000 13,639,000
Less accumulated depreciation and amortization 10,339,000 9,427,000
---------- ----------
$ 3,996,000 4,212,000
========== ==========
Depreciation and amortization expense on property, plant and equipment
amounted to approximately $912,000, $709,000 and $665,000 for the years
ended July 31, 1996, 1995 and 1994, respectively.
(6) Accrued Expenses and Other Current Liabilities
----------------------------------------------
Accrued expenses and other current liabilities consist of the following at
July 31, 1996 and 1995:
F-12
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
1996 1995
---- ----
Customer advances and deposits $ 208,000 321,000
Accrued wages and benefits 680,000 461,000
Accrued commissions 355,000 401,000
Other 531,000 507,000
-------- --------
$ 1,774,000 1,690,000
========= =========
(7) Note Payable
------------
During fiscal 1996, the Company received a favorable judgment and settled
its dispute concerning the $250,000 note payable related to an asset
acquisition agreement. The settlement resulted in the Company paying
$85,000 to the seller. The settlement difference between the disputed
final contractual payment amount of $250,000 and the negotiated
settlement of $85,000, represented reimbursement to the Company for
costs that it incurred due to the seller's failure to perform in
accordance with the agreement. Accordingly, $149,000 has been included
in cost of sales and $16,000 has been included in selling, general and
administrative expenses.
(8) Short-Term Borrowings
---------------------
The Company has a $4,500,000 secured line of credit facility with a
financial institution which expires on January 31, 1997. Borrowings
under the facility will be secured by collateral satisfactory to the
financial institution and will bear interest at 1% above the prime rate,
as defined. At July 31, 1996, the interest rate for the facility was
9.75% and there were no direct borrowings outstanding.
(9) Long-Term Debt
--------------
Long-term debt consists of the following at July 31, 1996 and 1995:
1996 1995
---- ----
Obligations under capital leases $2,517,000 2,868,000
Less current installments 642,000 591,000
---------- ---------
$1,875,000 2,277,000
========== =========
The obligations under capital leases relate to the St. Cloud, Florida and
Melville, New York facilities, as well as certain equipment, the net
carrying value of which was $2,475,000 at July 31, 1996.
(Continued)
F-13
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Future minimum lease payments under capital leases as of July 31, 1996 are:
Years ending July 31,:
1997 $ 866,000
1998 748,000
1999 542,000
2000 412,000
2001 380,000
Thereafter 158,000
---------
Total minimum lease payments 3,106,000
Less amounts representing
interest (at rates varying
from 6.8% to 10.8%) 589,000
---------
2,517,000
Less current installments 642,000
---------
Obligations under capital leases,
net of current installments $1,875,000
==========
In September 1988, the Company sold and simultaneously leased back its St.
Cloud, Florida facility. The buyer/ lessor is a partnership in which one
of the Company's officers is a general partner. The lease is for a ten-year
period and provides for annual rentals of approximately $178,000 for fiscal
1996, subject to annual adjustment. For financial reporting purposes, the
Company has capitalized this lease at inception in the amount of $840,000,
net of deferred interest of $492,000. The outstanding balance at July 31,
1996 and 1995 approximated $258,000 and $360,000, respectively.
In December 1991, the Company and a partnership controlled by the Company's
Chairman and Chief Executive Officer entered into an agreement in which the
Company leases from the partnership its corporate headquarters and Melville
production facility. The lease is for a ten-year period and provides for
annual rentals of approximately $411,000 for fiscal 1996 subject to annual
adjustments equal to the lesser of 5% or the change in the Consumer Price
Index. For financial reporting purposes, the Company has capitalized this
lease at inception in the amount of $2,450,000, net of deferred interest of
$1,345,000. The outstanding balance at July 31, 1996 and 1995 approximated
$1,604,000 and $1,821,000, respectively.
(10) Income Taxes
------------
The provision for income taxes included in the accompanying consolidated
statements of operations consists of the following:
Year ended July 31,
-------------------
1996 1995 1994
---- ---- ----
Federal $ -- -- --
State and local 27,000 17,000 25,000
------ ------ ------
$ 27,000 17,000 25,000
====== ====== ======
(Continued)
F-14
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The provision for income taxes was $27,000, $17,000 and $25,000 for fiscal 1996,
1995 and 1994, respectively and differed from the amounts computed by
applying the U.S. Federal income tax rate of 34% as a result of the
following:
1996 1995 1994
---- ---- ----
Amount Rate Amount Rate Amount Rate
--------- ------ ---------- ------- ----------- -------
Computed "expected" tax
expense (recovery)............. $ 34,000 34.0% $(505,000) (34.0)% $ (976,000) (34.0)%
Increase (reduction) in income
taxes resulting from:
Change in the beginning
of the year valuation
allowance for deferred
tax assets allocated for
income tax expense......... (50,000) (50.5) 507,000 34.0 1,018,000 35.5
Utilization of tax benefit
carryforward............... -- -- -- -- -- --
State and local income tax,
net of Federal benefit..... 27,000 27.0 17,000 .1 25,000 .1
Other........................ 16,000 16.2 (2,000) -- (42,000) (1.5)
-------- ----- --------- ------ ---------- ------
Effective tax rate................ $ 27,000 27.0% $ 17,000 .1% $ 25,000 .1%
======== ===== ========= ====== ========== ======
As of July 31, 1996, the Company has net operating loss carryforwards of
approximately $12,634,860 for income tax purposes which expire in various
amounts through July 2010.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at July 31, 1996 and 1995 are presented
below. There are no temporary differences that give rise to deferred tax
liabilities.
1996 1995
---- ----
Deferred tax assets:
Allowance for doubtful accounts receivable 10,000 47,000
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the Tax
Reform Act of 1986 374,000 452,000
Plant and equipment, principally due to capitalized
interest and differences in depreciation 156,000 186,000
Compensated absences, principally due to accrual
for financial reporting purposes 213,000 195,000
Deferred compensation 144,000 94,000
Net operating loss carryforwards 4,294,000 4,294,000
Investment tax credit carryforwards 440,000 440,000
Alternative minimum tax credit carryforwards 87,000 87,000
----------- ----------
Total gross deferred tax assets 5,718,000 5,795,000
Less valuation allowance (5,718,000) (5,795,000)
----------- ----------
Net deferred tax assets $ -- --
=========== ==========
(Continued)
F-15
The valuation allowance for deferred tax assets as of August 1, 1995 was
$5,795,000. The change in the total valuation allowance for the year ended July
31, 1996 was a $77,000 decrease. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will be not realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers projected future taxable income and tax
planning strategies in making this assessment. In order to fully realize the
deferred tax asset, the Company will need to generate future taxable income of
approximately $16,500,000. Based upon the level of historical taxable income
and projections for future taxable income over the periods which the deferred
tax assets are deductible, management believes it is more likely than not the
Company will not realize the benefits of these deferred tax assets and has fully
reserved the deferred asset.
In accordance with Section 382 of the Internal Revenue Code of 1986, as
amended and Section 383 of the Code, a change in more than 50% in the
beneficial ownership of the Company within a three-year period (an
Ownership Change) will place an annual limitation on the Company's ability
to utilize its existing NOL and general business tax credit carryforwards
(together, the Carryforwards) to offset United States Federal taxable
income in the current and future years. The Company does not believe that
an Ownership Change has occurred due to changes in the beneficial ownership
of the Company's common stock in the current three-year testing period
immediately prior to the completion in July 1993 of the Company's common
stock offering (the Offering). The Company has not calculated the
potential impact of the limitations provided under Section 382 and 383.
(11) Stockholders' Equity
--------------------
(a) Option and Warrant Plans and Agreements
---------------------------------------
The Company has several option and warrant plans and agreements.
1982 Incentive Stock Option Plan - The 1982 Incentive Stock Option and
--------------------------------
Appreciation Plan provided for the granting to key employees and officers
of incentive stock options to purchase up to 160,000 shares of the
Company's common stock through September 29, 1992 at prices not less than
the fair market value of such shares on the date the option is granted.
1993 Incentive Stock Option Plan - On January 20, 1993, the stockholders of
--------------------------------
the Company ratified the adoption of the 1993 Incentive Stock Option Plan
("the Plan"). The Plan is intended to replace the 1982 Incentive Stock
Option Plan which expired on September 29, 1992, but options granted under
the 1982 Plan to purchase an aggregate of approximately 92,520 shares of
common stock remain outstanding. 125,000 shares of common stock were
originally reserved for issuance under the 1993 Plan.
Pursuant to a January 1994 Plan amendment, the number of shares that may be
granted was increased to 245,000 shares. In addition, the Plan was amended
to provide formula grants to non-employee members of the Board of
Directors. Both incentive and non-qualified stock options may be granted
under the Plan. The term of the options may be no more than ten years
except for incentive stock options granted to any employee who, prior to
the granting of the option, owns stock representing
(Continued)
F-16
more than 10% of the voting power, for whom the option term may be no more
than five years. The exercise price for incentive stock options can
generally be no less than the fair market value at the date of grant, with
the exception of any employee who, prior to the granting of the option,
owns stock representing more than 10% of the voting power, as to whom the
exercise price cannot be less than 110% of the fair market value of the
Company's common stock at the date of grant. The Plan expires in 2002,
unless terminated earlier by the Board of Directors under conditions
specified in the Plan.
As of July 31, 1996, the Company had granted incentive stock options
representing the right to purchase an aggregate of 174,760 shares at prices
ranging between $2.25-$9.13 per share, of which 29,900 options were
canceled and 144,060 are outstanding. The options are exercisable ratably
over a five-year period commencing one year from the dates of grant. To
date, 800 shares have been exercised.
Directors' Option Plan - The 1987 Directors' Stock Option Plan provides for
----------------------
the granting of options to purchase up to 2,000 shares to each of the
Company's four outside directors at an option price of not less than the
fair market price per share at the date of grant. Options become
exercisable at the rate of 20 percent per year commencing one year from the
date of grant. At July 31, 1996, options to purchase 6,000 shares of the
Company's common stock are outstanding.
Warrant Held by Storage Technology Corp. (STC) - STC held a warrant, pursuant
----------------------------------------------
to a debt agreement, to purchase 90,000 shares of the Company's common
stock at an exercise price of $10.00 per share through March 8, 1990. No
portion of this warrant was exercised. In September 1990, STC agreed to
accept a cash payment of $708,000, including accrued interest of $22,000,
in full satisfaction of the outstanding principal balance of approximately
$1,372,000. As part of the settlement, the Company agreed to reissue a
warrant which provides for the purchase of up to 90,000 shares of the
Company's common stock for $7.50 per share. The warrant was not exercised
and expired on September 26, 1995.
Warrant Issued to PMCC Acquisition Corp. - Pursuant to a settlement of the
----------------------------------------
litigation arising from the sale of the Company's former Premier Microwave
Division, the Company issued to PMCC Acquisition Corporation a warrant to
purchase 100,000 shares of the Company's common stock at an exercise price
of $8.40. For financial reporting purposes, this warrant was valued at
$50,000. The warrants are exercisable for a period of five years,
commencing August 1, 1993 and shares purchased through the exercise of this
warrant contain both voting and transferability restrictions.
Underwriter Warrants - Pursuant to the Company's common stock offering
--------------------
completed in July 1993, the Underwriter received warrants to purchase
100,000 shares of common stock at a price of 140% of the offering price, or
$9.80, for a term of four years beginning on July 14, 1994.
(b) Option and Warrant Activity
---------------------------
The following table sets forth summarized information concerning the
Company's stock options and warrants:
F-17
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Number Option price
of shares range per share
--------- ---------------
Outstanding at July 31, 1993 457,540 $2.20-9.80
Granted 54,500 4.25-9.13
Expired/canceled (11,080) 2.20-7.95
Exercised (43,200) 2.20-6.13
-------
Outstanding at July 31, 1994 457,760 2.35-9.80
Granted 43,460 2.25-2.63
Expired/canceled (6,040) 4.13-7.95
Exercised -- --
-------
Outstanding at July 31, 1995 495,180 2.25-9.80
Granted 47,300 2.25-3.75
Expired/canceled (97,900) 4.25-7.50
Exercised (2,000) 2.50
-------
Outstanding at July 31, 1996 442,580 2.25-9.80
=======
Options/warrants exercisable at
July 31, 1996 330,552 2.50-9.80
=======
Options/warrants available for
grant at July 31, 1996 100,140
=======
(c) Restricted Common Stock
-----------------------
As part of an amended and restated employment agreement dated August 20,
1992, the Company sold 50,000 shares of its common stock, par value $.10
per share, to its president and chief executive officer at a purchase price
of $.50 per share, which was ratified by the stockholders. The market
value of the Company's common stock at the date of grant was $4.25 per
share. The employment agreement requires the forfeiture of these shares,
if the recipient leaves the employ of the Company, as defined in the
agreement, prior to August 31, 1997.
In February 1994, a total of 120,000 restricted shares of the Company's
common stock were granted by the Board of Directors to the principal
officers of the Company's subsidiary, CCC, at a cost of $.10 per share.
The award relates to services to be provided over future years and, as a
result, the stock awards are subject to certain restrictions which may be
removed earlier upon CCC attaining certain business plan milestones, as
provided in the agreement, but no later than ten years from the date of the
award. The excess of market value over cost of the shares awarded of
$633,000 was recorded as deferred compensation and is being amortized to
expense over a ten year period subject to the aforementioned accelerated
provisions, if appropriate, as evaluated on an annual basis. The deferred
compensation is reflected as a reduction of stockholder's equity in the
accompanying balance sheets.
(Continued)
F-18
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) Segment and Principal Customer Information
------------------------------------------
For the purposes of segment reporting, management considers Comtech to
operate in one industry, the communications equipment industry.
In fiscal 1996 and 1995, there were no sales to any one foreign or domestic
customer which amounted to over 10% of the consolidated net sales. During
fiscal 1994, sales to one foreign customer amounted to $3,410,000 or 23%
of consolidated net sales. During the fiscal years ended July 31, 1996,
1995 and 1994, approximately 20%, 14% and 17%, respectively, of the
Company's net sales resulted from contracts with the United States
government and its agencies. Export sales comprised 56%, 37% and 39% of
net sales in fiscal 1996, 1995 and 1994, respectively.
(13) Commitments and Contingencies
-----------------------------
(a) Operating Leases
----------------
The Company is obligated under noncancellable operating lease agreements. At
July 31, 1996, the future minimum lease payments under operating leases
are as follows:
1997 $ 87,000
1998 33,000
1999 16,000
2000 7,000
2001 --
Thereafter --
--------
$143,000
========
Lease expense charged to operations was $122,000, $126,000 and $90,000 in
fiscal 1996, 1995 and 1994, respectively.
(b) United States Government Contracts
----------------------------------
Certain of the Company's contracts are subject to audit by applicable
governmental agencies. Until such audits are completed, the ultimate
profit on these contracts cannot be determined; however, it is
management's belief that the final contract settlements will not have a
material adverse effect on the Company's consolidated financial
condition.
(c) Litigation
----------
The Company is subject to certain legal actions which arise out of the normal
course of business. It is management's belief that outcome of these
actions will not have a material adverse effect on the Company's
consolidated financial position.
F-19
Schedule II
-----------
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended July 31, 1996, 1995 and 1994
Column A Column B Column C Column D Column E
---------- -------------- ----------- --------------- ----------
Additions
--------------------------------------------------------------------
(1) (2)
Charged to
Balance at Charged to other Transfers Balance at
beginning cost and accounts - (deductions) end of
Description of period expenses describe describe period
- ----------------------------------- ---------- ---------- ---------- ----------- ----------
Allowance for doubtful accounts -
accounts receivable:
Year ended July 31,:
1996 $137,000 (109,000)(D) 28,000
1995 136,000 25,000 (C) -- (24,000)(D) 137,000
1994 136,000 -- -- -- 136,000
Inventory reserves:
Year ended July 31,:
1996 567,000 (77,000)(B) 490,000
1995 578,000 (11,000)(B) -- -- 567,000
1994 110,000 468,000 (A) -- -- 578,000
(A) Increase in reserves for contract and other adjustments.
(B) Reduction of excess reserves for contract and other adjustments.
(C) Increase of allowance for doubtful accounts.
(D) Write-off of uncollectible receivables.
S-1