UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 2002
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-7928
COMTECH TELECOMMUNICATIONS CORP.
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2139466
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
105 Baylis Road
Melville, New York 11747
(Address of Principal Executive Offices)
Registrant's telephone number, including area code (631) 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
Series A Junior Participating Cumulative Preferred Stock par value $.10 per
share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. 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 registrant's voting stock held by
non-affiliates of the registrant, computed by reference to the closing sales
price as quoted on the Nasdaq National Market on October 11, 2002 was
approximately $46,547,000.
The number of shares of the registrant's common stock outstanding on October 11,
2002 was 7,509,821.
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 Meeting
of Shareholders to be held December 10, 2002 Part III
INDEX
PART I
ITEM 1. BUSINESS 1
Overview 1
Business Strategies 2
Important Developments 3
Telecommunications Transmission Business Segment 4
RF Microwave Amplifier Business Segment 5
Mobile Data Communications Services Business Segment 6
Sales, Marketing and Customer Support 6
Backlog 6
Manufacturing and Service 7
Research and Development 7
Patents and Licenses 7
Competition 8
Key Personnel/Employees 8
Compliance with Federal, State and Local Environment
Protection Laws 8
ITEM 2. PROPERTIES 8
ITEM 3. LEGAL PROCEEDINGS 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 10
Dividends 10
Approximate Number of Equity Security Holders 10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 12
Overview 12
Critical Accounting Policies 14
i
Results of Operations 15
Comparison of Fiscal 2002 and 2001 15
Comparison of Fiscal 2001 and 2000 16
Liquidity and Capital Resources 18
Recent Accounting Pronouncements 18
Forward-Looking Statements and Risk Factors 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT 24
ITEM 11. EXECUTIVE COMPENSATION 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS 24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 24
ITEM 14. CONTROLS AND PROCEDURES 24
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON
FORM 8-K 25
SIGNATURES 27
CERTIFICATIONS 28
SUBSIDIARIES 30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE F-1
ii
Note: As used in this Annual Report on Form 10-K, the terms "Comtech," "we" and
"our company" mean Comtech Telecommunications Corp. and Comtech's subsidiaries.
PART I
ITEM 1. BUSINESS
Overview
We design, develop, produce and market sophisticated wireless telecommunications
transmission products and solid state high-power broadband amplifiers for
commercial and government purposes. Our telecommunications products are used in
point-to-point and point-to-multipoint telecommunications transmission and
reception applications such as satellite communications, over-the-horizon
microwave systems, and cable and broadcast television. Our broadband amplifier
products are used in communications, cellular and medical instrumentation and
defense systems. We also offer satellite mobile data communications services.
Our products meet the high performance requirements of our customers by drawing
upon proprietary expertise in key microwave amplification and transmission
technologies developed over more than 35 years of operations.
Demand for our products over the past five years has been driven by the global
commercial and domestic government expansion of telecommunications services such
as satellite systems, broadcast, cellular telephone systems, over-the-horizon
microwave systems and the Internet. However, fiscal 2002 was adversely impacted
by the significant downturn in capital spending in the telecommunications
sector.
Telecommunications Industry Trends
The demand for telecommunications is largely tied to emerging economies
seeking to modernize their infrastructure and increasingly
information-intensive markets introducing new telecommunications services.
The telecommunications industry has expanded rapidly over the last decade.
Such rapid expansion has resulted in excess capacity which has reduced
capital spending in fiscal 2002. Long-term, the industry, particularly in
the wireless area, is poised for growth due to the following:
Deregulation and Privatization. Many developing countries that had
previously not committed significant resources to or place a high priority
on developing and upgrading their communications systems are now doing so,
primarily through deregulation and privatization. A significant number of
these countries do not have the resources, or have large geographic areas
or terrain that make it difficult, to install extensive land-based
networks on a cost-effective basis. This provides an opportunity for
satellite and other wireless communications services systems to meet the
requirement for communications services in these countries.
Growing Demand for Data Communications Services. Factors contributing to
the growing demand for communications services include worldwide economic
development and the increasing globalization of commerce. Businesses have
a growing need for higher bandwidth services to communicate with their
customers and employees around the world and are increasingly reliant upon
Internet and multimedia applications. We expect demand for these kinds of
higher bandwidth services to grow in both developed and developing
countries.
Increasing Cost-Effectiveness. The relative cost-effectiveness of
satellite and other wireless telecommunications services is a major factor
driving the growth in areas with rapidly developing telecommunications
infrastructures. These developing infrastructures often cover large
geographic areas, where population concentrations that are separated by
significant distances require a technology whose cost and speed of
implementation is relatively insensitive to distance.
Technological Advances. Technological advances continue to increase the
capacity of telecommunications networks and reduce the overall cost of the
systems and the services they deliver. This increases the number of
potential end users for the services and expands the available market. We
believe that recent technological developments, such as bandwidth on
demand and signal processing methods, will continue to stimulate demand.
1
Product and Service Segments
We conduct our business through three decentralized but complementary
product and service segments: telecommunications transmission, RF
microwave amplifiers, and our mobile data communications services
business. The segments operate through individual operating units, each of
which maintains its own sales, marketing, product development and
manufacturing functions. We believe that this organizational structure
allows the key personnel of each operating unit to be more responsive to
their particular markets and customers. Brief descriptions of our business
segments and operating units follow.
Telecommunications transmission - Products in this segment include
modems, frequency up converters and down converters, solid state
high-power amplifiers, VSAT transceivers and antennas for satellite
ground station applications and adaptive modems and microwave radios
for over-the-horizon microwave communications systems. Primary
markets include satellite systems integrators and communications
service providers, defense contractors and oil companies. Customers
include, among others, Globecomm Systems, Hughes Network Systems,
DirecTV, ATT Alascom, Northrop Grumman, BP Amoco, Exxon Mobil and
the U.S. government.
RF microwave amplifiers - This segment provides solid state
high-power broadband amplifier products in the microwave and radio
frequency (RF) spectrums for a wide range of applications, including
cellular and wireless instrumentation, medical systems, jamming and
identification friend or foe (IFF) and other defense systems. Target
markets are communications service providers, cellular and PCS
telephony system manufacturers and defense contractors. Customers
include, among others, Motorola, Ericsson, Nokia Telecommunications,
Condor Systems, Siemens Medical Systems, Lucent Technologies,
Northrop Grumman, Raytheon, Lockheed Martin and the U.S. government.
Mobile data communications services - This segment provides secure,
real time two-way location of and messaging between mobile
platforms, such as land vehicles, rail and aircraft, or remotely
placed fixed site sensors and headquarters through our Germantown,
Maryland gateway satellite earth station. The network employs leased
satellite capacity to communicate between the mobile platform and
user headquarters via satellite, terrestrial and Internet links.
Depending upon the end-user's needs, our system can be configured to
provide a wide range of data applications, ranging from simple
location tracking to messaging, e-mail, broadcasting of information
and various other sensor monitoring.
See note 11 to the Consolidated Financial Statements for more information
regarding segment net sales, operating income (loss) and total assets as
of and for the fiscal years ended July 31, 2002, 2001 and 2000.
We believe that the global expansion of telecommunications, particularly
in developing countries in Asia, South America, the Middle East and
Europe, represents a key opportunity for growth in our telecommunications
business. Included as international sales are sales made to domestic
companies for inclusion in products which are sold to international
customers. Sales for use by international customers represented
approximately 41.2%, 46.2% and 71.4% of our total net sales in fiscal
years 2002, 2001 and 2000, respectively. Sales to the U.S. government
represented 33.8%, 23.1% and 8.8% of our total net sales in fiscal 2002,
2001 and 2000, respectively.
Our product designs are based on both analog and digital microwave
technologies. Digital microwave technology can significantly enhance
performance of telecommunications systems. We have invested significant
resources in developing our technological expertise, and work closely with
customers and potential customers to develop product lines in market
niches where we believe our expertise can enable us to become a leading
supplier.
Business Strategies
We manage our business with the following principal corporate strategies:
o Operate on a decentralized basis to maximize responsiveness to
customers.
o Continue product innovation through investment in research and
development.
2
o Capitalize on synergies among our business segments to secure
larger contracts.
o Pursue acquisitions and investments in complementary
businesses, technologies, products and services.
Specific operating strategies for our business segments include:
Telecommunications transmission.
o Continue broadening our line of satellite earth station
products to better serve our customers with a full line of
video, data and voice products.
o Enhance our existing products to serve rapidly developing
markets requiring higher speed and greater bandwidth, such as
emerging applications for wireless Internet access.
o Maintain our market leadership in over-the-horizon microwave
technologies by broadening applications and increasing product
performance.
RF microwave amplifiers.
o Continue to incorporate the latest advances in solid state
device electronics to broaden our product line bandwidth and
high-power capabilities.
o Encourage system integrators and end users to outsource their
requirements to the Company rather than pursue this
specialized field in-house.
o Combine high-power amplifiers and solid state switches for
advanced communications applications.
Mobile data communications services.
o Maximize the opportunities available to supply the Logistics
Command under the U.S. Army contract.
o Pursue identified opportunities to offer our products and
services to other government agencies.
o Penetrate the emerging markets for commercial uses,
particularly in the land mobile and remote sensing markets.
Important Developments
In July 2000, we acquired the business of EF Data, the satellite communications
division of Adaptive Broadband Corporation, for approximately $54.2 million in
cash. Forty million dollars of the purchase price was supplied through
institutional secured borrowings bearing interest at 9.25% due in installments
through 2005, and the balance from internal company funds. We prepaid $19.2
million of this debt in August 2001. We combined this operation with our
existing Arizona Comtech Communications Corp. satellite operations included in
our telecommunications transmissions segment.
In April 2001, we acquired certain assets and product lines of MPD Technologies,
Inc. for $12.7 million. The purchase price was financed through $10 million of
institutional secured borrowings and the balance from internal company funds.
The secured borrowing bears an interest rate of 8.5% and requires interest only
payments through June 2005 at which time the entire principal is due. We
combined this operation with our New York Comtech PST Corp. operation in our RF
microwave amplifiers segment.
On July 31, 2002, we acquired certain assets and assumed certain liabilities of
Advanced Hardware Architectures, Inc. for $7.0 million in cash. The purchase
price was financed from internal Company funds. This operation is included in
our telecommunications transmission segment.
3
Telecommunications Transmission Business Segment
The demand for telecommunications is largely tied to emerging economies seeking
to modernize their infrastructure and increasingly information-intensive markets
introducing new telecommunications services. Advances in technology have lowered
per-unit communications costs, increased product reliability and encouraged a
proliferation of new enhanced communications products and services.
In making procurement decisions, customers for telecommunications transmission
equipment must weigh the relative cost and advantages of the six presently
available transmission technologies: copper cable, fiber optic cable, high
frequency radio systems, wireless microwave systems, over-the-horizon microwave
systems and satellite systems. Rarely is a complete communications network or
system based solely on one of these technologies. Transmission of information
can be routed through a combination of technologies, each employed where most
cost-effective. Our products are used in systems employing satellite,
over-the-horizon microwave, terrestrial line-of-sight microwave and wireless
technologies.
Copper Cable, the traditional transmission medium most familiar to
customers, is being replaced and supplemented by the other media,
particularly for high-volume broadband and long distance
transmissions where it has substantial capacity, cost and
reliability limitations.
Fiber Optic Cable is best suited to high-volume broadband,
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 (HF) radio systems employ long wavelengths which are
propagated beyond line-of-sight distance either by surface waves
traveling along the earth's perimeter or by skywave reflection of
the transmitted waves off different layers of the ionosphere. This
mode of transmission is very limited in capacity.
Wireless and line-of-sight microwave communications systems
generally used for point-to-point communications, employ signals
with extremely short wavelengths 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 provide broadband capacity which can be
upgraded and expanded over time.
Over-the-horizon microwave communication systems transmit signals
over distances from 30 to 600 miles by reflection of the transmitted
signals off the troposphere, an atmospheric layer located
approximately seven miles above the earth's surface. Such systems
offer a high level of reliability and security, are limited in
capacity but are used for transmission over unfriendly terrain.
Satellite communications systems have grown and diversified in
response to demand for efficient broadband and reliable long
distance voice and video communication and digital information
exchange. In a satellite communications system, information is
relayed to and from microwave transmitting and receiving stations on
the ground by means of low earth orbit (LEO), medium earth orbit
(MEO), or geostationary earth orbit (GEO) satellites, which are
generally placed in an orbit from 600 to 22,300 miles above the
earth's equator. Satellite communications systems are particularly
useful where long-range, broadband high capacity and high quality
point-to-point or point-to-multipoint communication transmission is
desirable. As few as three GEO satellites can provide global
communications coverage. These systems, which use microwave
technology, are well suited for rapid introduction of long distance
service in remote areas or where communication alternatives are
unavailable, such as mobile, shipboard or defense applications.
Our Comtech EF Data Corp. operating unit, located in Tempe, Arizona, designs,
develops, manufactures and markets equipment used in commercial and defense
satellite communications. The equipment includes modems, frequency up converters
and down converters, solid state power amplifiers and satellite VSAT
transceivers, which combine our frequency converters with solid state,
high-power amplifiers. 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, complexity and value. Our turbo codec
modem product line offers significantly improved performance, power and
bandwidth performance over traditional systems. This operating unit is a
combination and integration of our Comtech Communications Corp. subsidiary with
the acquired EF Data product line. The
4
acquisition of EF Data's business expanded Comtech's growing telecommunications
capabilities and enhanced Comtech's product offerings, distribution reach and
market presence. Additionally, it enabled Comtech to enter the satellite
networking solution business.
Our Comtech AHA Corporation operating unit, located in Pullman, Washington,
designs, develops and markets forward error correction integrated circuits and
data coding technology solutions for telecommunications systems customers. This
new subsidiary was formed as a result of our acquisition on July 31, 2002 of
certain assets and liabilities of Advanced Hardware Architectures, Inc. Comtech
AHA Corporation's products include the latest generation forward error
correction technology, called Turbo Product Codec (TPC). These patented TPC
chips are an important enabling technology included in Comtech EF Data Corp.'s
bandwidth efficient modems. Comtech AHA Corporation has also developed chips
used in other telecommunication applications, as well as data compression for
copiers and tape storage.
Our Comtech Systems, Inc. operating unit, located in Orlando, Florida, has a
product line consisting primarily of equipment for over-the-horizon microwave
systems and networks. It has a turnkey capability that ranges from system and
network planning through equipment and system training and operation and
maintenance programs. It also supplies satellite telecommunications systems by
combining its products with equipment manufactured by our other operating units
and third parties. Comtech Systems, Inc. markets its products and services to
oil and gas companies and other commercial users, foreign defense commands and
system prime contractors. We believe that Comtech Systems, Inc.'s products,
which employ our patented adaptive modem digital transmission technology, offer
high-speed data (8 mbs) benefits over the traditional analog and digital (2 mbs)
over-the-horizon microwave products offered by its competition.
Our Comtech Antenna Systems, Inc. operating unit, located in St. Cloud, Florida,
designs, manufactures, and markets a wide variety of fiberglass and aluminum
antennas for over-the-horizon microwave and satellite communication
applications, including distributed network programming, cable and broadcast
television and radio as well as other forms of information and entertainment
distribution. Comtech Antenna Systems, Inc. designs antennas for specific types
of telecommunications systems and, typically, sells standardized products to
independent distributors, prime contractors and end-user customers. Comtech
Antenna Systems, Inc.'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.
RF Microwave Amplifier Business Segment
Amplifiers 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 or to outer space.
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 wireless
electronic system components used in cellular and PCS networks.
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, wireless telephones, radios,
televisions, medical equipment, aircraft and other products has led to
increasingly serious problems with electromagnetic interference. Manufacturers,
therefore, test these electronic systems for electromagnetic compatibility and
susceptibility using broadband high-power RF microwave amplifiers such as those
we manufacture. 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, wireless telephones or video games by passengers in
flight.
We believe our Comtech PST Corp. operating unit, located in Melville, New York,
is one of a small number of independent companies designing, developing,
manufacturing and marketing broadband high-power large signal amplifiers in the
microwave and RF spectrums. Our recent acquisition of assets and product lines
from MPD Technologies, Inc. discussed above, further expands our product
offerings in this segment for applications, including wireless and aircraft
air-to-ground satellite telecommunications, medical oncology systems,
instrumentation and defense systems. Comtech PST Corp. sells its products to
domestic and foreign commercial users, government
5
agencies and prime contractors. We believe it is an innovative supplier of these
amplifiers and related processing equipment.
Mobile Data Communications Services Business Segment
The demand for mobile data communications services and products has increased
dramatically in recent years for both government and commercial applications.
This demand has been driven by advances in digital technology coupled with the
need to better locate, track, manage, monitor and communicate with mobile and
fixed assets. The transmission of information may be done over various systems,
i.e., terrestrial, cellular or satellite, depending on the most cost-effective
approach to meet the application's requirements.
We are continuing to develop and market a Web-enabled, satellite-based mobile
data communications system.Through our satellite earth station gateway in
Germantown, Maryland, we can route signals to and from mobile or fixed, remote
terminals via leased satellite capacity. Customers can access their messages or
data through an Internet or terrestrial connection to their headquarters' Web
sites.
In early 1999, Comtech Mobile Datacom Corp. led a multi-company team in
competing for the U.S. Army's Movement Tracking System (MTS), a system being
deployed by the U.S. Army for global use in tracking its assets and
communicating by message in real time with these vehicles from fixed and mobile
command centers. The contract was awarded to Comtech Mobile Datacom Corp. in
June 1999. The contract allows for purchases of up to $418.2 million of
equipment and services over an eight-year period, and is also open to other
government agencies to procure their tracking and messaging requirements.
Through July 31, 2002, we have received orders for $34.5 million under this
contract, which can be terminated by the U.S. Army at any time. We are working
with the U.S. Army to increase the future level of funding for this program in
light of the lower than anticipated level of funding to date.
Sales, Marketing and Customer Support
Each of our operating units conducts its own sales and marketing efforts. In
some instances, our operating units may bundle other units' products. Sales and
marketing strategies vary with particular markets served and include direct
sales through sales, marketing and engineering personnel, sales through
independent representatives, value-added resellers or a combination of the
foregoing. Our operating units enter into sales distribution agreements for
certain products with distributors. Unlike sales representatives, who merely
find customers on a commission basis, some of our distributors purchase products
from us for resale. We intend to continue to expand domestic and international
marketing efforts through independent sales representatives, distributors and
value-added resellers.
Our management, technical and marketing personnel establish and maintain
relationships with customers. Our strategy includes a commitment to provide
ongoing customer support for our systems and equipment. This support involves
providing direct access to engineering staff or trained technical
representatives to resolve technical or operational issues.
Our international sales (including sales to prime contractors' international
customers) from all three business segments represented approximately 41.2%,
46.2% and 71.4% of total net sales in fiscal 2002, 2001 and 2000, respectively.
We expect that international sales will remain a substantial portion of our
total sales for the foreseeable future.
Domestic commercial sales represented approximately 25.0%, 30.7% and 19.8% of
our total net sales in fiscal 2002, 2001 and 2000, respectively. The balance of
our sales were to U.S. government departments or agencies and represented 33.8%,
23.1% and 8.8% of our total net sales in fiscal 2002, 2001 and 2000,
respectively.
In fiscal 2002, sales to the U.S. Army for the Movement Tracking System
represented 13.2% of our total net sales. There were no customers in fiscal 2001
which constituted 10% or more of our total net sales. Sales to one customer, a
major U.S. aerospace prime contractor, represented 43.1% of our total net sales
for fiscal 2000. A substantial portion of our sales may be derived from a
relatively small number of large customer contracts.
Backlog
Our backlog as of July 31, 2002 and 2001 was approximately $44.1 million and
$50.1 million, respectively. We expect that a substantial majority of the
backlog as of July 31, 2002 will be recognized as sales during fiscal 2003. We
received advance payments aggregating approximately $2.2 million as of July 31,
2002 in connection with
6
orders included in the backlog at that date. At July 31, 2002, approximately
40.9% of that backlog consisted of U.S. government contracts, subcontracts and
government funded programs, approximately 33.7% consisted of orders for use by
foreign customers (including sales to prime contractors' international
customers) and approximately 25.4% consisted of orders for use by domestic
commercial customers.
Our backlog consists solely of orders believed to be firm. In the case of
contracts with departments or agencies of the U.S. government, including our MTS
contract discussed above, orders are only included in backlog to the extent
funding has been obtained for such orders. All of the contracts in our backlog
are subject to cancellation at the convenience of the customer or for default in
the event that we are unable to perform under the contract.
Variations in backlog from time to time are attributable, in part, to the timing
of our preparation and submission of contract proposals, the timing of contract
awards and the delivery schedules on specific contracts. As a result, we believe
our backlog at any point in the fiscal year is not necessarily indicative of the
total sales anticipated for any particular future period. Our Comtech Antenna
and Comtech EF Data businesses operate under short lead times and usually
generate sales out of inventory, as is also the case for a significant portion
of our Comtech PST amplifier business.
Manufacturing and Service
Our manufacturing operations consist principally of the assembly and testing of
electronic products we design and build from purchased fabricated parts, printed
circuits and electronic components and, in the case of antennas, the casting of
fiberglass antennas. We employ formal quality management programs and other
training programs, including International Standards Organization's (ISO 9000)
quality procedure registration programs. Our Comtech PST Corp., Comtech Systems,
Inc. and Comtech EF Data Corp. operating units have been qualified for ISO 9001.
Our ability to deliver 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 we use in manufacturing our products.
Electronic components and raw materials used in our products are generally
obtained from independent suppliers. Some components are standard items and are
available from a number of suppliers. Others are manufactured to our
specifications by subcontractors. We obtain certain components and subsystems
from a single source or a limited number of sources. We believe 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 our business and results of operations.
Research and Development
The technology used in our products is subject to rapid development and frequent
change. Our business position is in large part contingent upon the continuous
refinement of our scientific and engineering expertise and the development,
either through research and development or acquisitions, of new or enhanced
products and technologies. A majority of our sales in fiscal 2002 were of
products developed by us or acquired through acquisitions within the past five
years.
Our aggregate research and development expenditures (internal and customer
funded) were 11.0%, 8.7% and 10.4% of total net sales in fiscal 2002, 2001 and
2000, respectively. We reported internal research and development expenses of
$11.0 million, $10.2 million and $2.6 million in fiscal 2002, 2001 and 2000,
respectively, representing 9.3%, 7.5% and 4.0% of total net sales, respectively,
for these periods. A portion of our research and development efforts relates to
the adaptation of our basic technology to specialized customer requirements and
is recoverable under such contracts, and such expenditures are not included in
our research and development expenses for financial reporting purposes. During
fiscal 2002, 2001 and 2000, we were reimbursed by customers for such activities
in the amounts of $2.0 million, $1.7 million and $4.3 million, respectively.
Patents and Licenses
Although we own or hold licenses for a number of patents, licenses and patents
have been of substantially less significance in our business than our scientific
and engineering know-how, production techniques, the timely application of our
technology and the design, development and marketing capabilities of our
personnel. Generally, we rely on the laws of unfair competition, restrictions in
licensing agreements and confidentiality agreements to protect such knowledge
and techniques. However, Comtech AHA's TPC chips are protected by patents which
are significant in protecting this proprietary technology. In addition, Comtech
Systems' 8mbs adaptive modem for
7
over-the-horizon microwave applications is protected by patents and is the only
modem in the world capable of 8mbs of transmission over a troposcatter channel.
Competition
Our product businesses are highly competitive and characterized by rapid
technological change. In addition, the number of potential customers for our
products is limited. Our growth and financial condition depend, among other
things, on our 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 our competitors are substantially larger, have
significantly greater financial, marketing, research and development,
technological and operating resources and broader product lines than we do. A
significant technological breakthrough by others, including smaller competitors
or new companies could have a material adverse effect on our business. In
addition, certain of our customers have technological capabilities in our
product areas and could choose to replace our products with their own.
In the market for mobile data communications services, there are several much
larger competitors with existing systems. The most prominent of these
competitors is Qualcomm Incorporated. Existing competitors are aggressively
pricing their products and services and may continue to do so in the future. We
anticipate that new competitors will enter the market in the future. Competitors
continue to offer new value-added products and services, which we may be unable
to match on a timely or cost-effective basis. Increased competition may impact
margins throughout the industry.
We believe that competition in all of our markets is based primarily on product
performance, reputation, delivery times, customer support and price. Due to our
decentralized organizational structure and proprietary know-how, we believe we
have the ability to develop, produce and to deliver equipment on a
cost-effective basis faster than many of our competitors.
Key Personnel/Employees
We believe our success is dependent upon the continued contributions of our key
management personnel, including the key management at each of our operating
units, and depends to a significant extent upon Fred Kornberg, our Chairman,
Chief Executive Officer and President. Many of our key personnel, particularly
the key engineers, would be difficult to replace, and are not subject to
employment or non-competition agreements. Our growth and future success will
depend in large part upon our 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 we believe we have been successful to date in
recruiting and retaining key personnel, we may not be successful in attracting
and retaining the personnel we require in order to continue to grow and operate
profitably. The management skills that have been appropriate for our business in
the past may not continue to be appropriate if our business continues to grow
and diversify.
At July 31, 2002, we had 626 employees, 316 of whom were engaged in production
and production support, 178 in research and development and other engineering
support and 132 in marketing and administrative functions. None of the employees
are represented by a labor union. We believe that our employee relations are
good.
Compliance with Federal, State and Local Environment Protection Laws
We are subject to a variety of local, state and federal governmental regulations
relating to the storage, discharge, handling, emission, generation, manufacture
and disposal of toxic or other hazardous substances used to manufacture our
products, particularly in connection with the fabrication of fiberglass antennas
by Comtech Antenna Systems, Inc. We believe that we are currently in compliance,
in all material respects, with such regulations and that we have obtained all
necessary environmental permits to conduct our business. To date, compliance
with federal, state or local environment protection laws has not had a material
effect on our capital expenditures, earnings or competitive position, and we do
not expect that such compliance will have a material effect in the future.
ITEM 2. PROPERTIES
Our corporate offices are located in a portion of the 46,000-square foot
facility on more than two acres of land in Melville, New York, which also houses
Comtech PST. We lease this facility from a partnership controlled by our
Chairman, Chief Executive Officer and President. The lease, as amended, provides
for our use of the premises as
8
they now exist for a term of ten years through December 2011. We have 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.
We lease the 32,000-square foot facility on eight acres of land used by Comtech
Antenna Systems, Inc. in St. Cloud, Florida from an unrelated third party. The
lease provides for our exclusive use of the premises as they now exist for a
term expiring September 2003. We have the option to extend the term of the lease
for an additional five-year period. The base annual rental under the lease is
subject to adjustments.
We lease a 72,500-square foot facility for Comtech Systems, Inc. in Orlando,
Florida from an unrelated third party. The lease provides for the exclusive use
of the premises as they now exist through April 2007. The base annual rental is
subject to adjustments.
We lease a 113,000-square foot facility in Tempe, Arizona for our Comtech EF
Data Corp. operating unit from an unrelated third party. The lease provides for
the exclusive use of the premises as they now exist through February 2006. We
have the option to extend the term of the lease for an additional five-year
period.
We lease 10,500-square feet of space located in Germantown, Maryland that is
used by Comtech Mobile Datacom Corp. from an unrelated third party. This lease
provides for the exclusive use of the premises as they now exist through August
2004.
We lease 6,000-square feet of space located in Pullman, Washington that is used
by Comtech AHA Corporation from an unrelated third party. This lease provides
for the exclusive use of the premises as they now exist through July 2005.
ITEM 3. LEGAL PROCEEDINGS
In or about December 2000, two former employees, Shiv Verma and Robert Levin,
commenced an action in the United States District Court, District of New Jersey,
against the Company and others asserting, among other things, breach of certain
restricted stock agreements and seeking unspecified monetary damages, specific
performance of the restricted stock agreements, including the issuance of an
aggregate 225,000 shares of the Company's common stock for a purchase price of
$.10 per share, and other relief. The Company asserted defenses against the
claims and interposed certain counterclaims and third-party claims against NJL,
Inc., a company then controlled by Mr. Verma.
In April 2002, Mr. Levin dismissed his claims against the Company, and the
Company in return dismissed its counterclaims against him, without payment of
any monies by either party, with both the Company and Mr. Levin executing
general releases. On July 22, 2002, the District Judge dismissed Verma's
complaint with prejudice and the Company's counterclaims against Verma without
prejudice. On August 8, 2002, the Company voluntarily dismissed its third-party
claims against defendant NJL, Inc., without prejudice. As a result, there are no
claims or counterclaims pending by or against any party to the action, and the
case has been closed on the Court's docket.
We are subject to certain other legal actions, which arise, in the normal course
of business. We believe that the outcome of these actions will not have a
material effect on our consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our stockholders during the fourth quarter of the
fiscal year ended July 31, 2002.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the Nasdaq National Market under the symbol "CMTL".
The following table shows the quarterly range of the high and low sale prices
for our common stock as reported by the Nasdaq National Market. Such prices do
not include retail markups, markdowns, or commissions.
Common Stock
------------
High Low
---- ---
Fiscal Year Ended 7-31-01
First Quarter $19.88 12.00
Second Quarter 19.50 9.00
Third Quarter 19.00 11.00
Fourth Quarter 17.99 11.45
Fiscal Year Ended 7-31-02
First Quarter $16.45 12.50
Second Quarter 13.83 11.15
Third Quarter 12.90 8.25
Fourth Quarter 10.72 6.31
Dividends
We have never paid cash dividends on our common stock and we intend to continue
this policy for the foreseeable future. We expect to use earnings to finance the
development and expansion of our businesses. Our Board of Directors reviews our
dividend policy periodically. The payment of dividends in the future will depend
upon our earnings, capital requirements, financial condition and other factors
considered relevant by our Board of Directors.
Approximate Number of Equity Security Holders
As of October 11, 2002 there were approximately 705 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 name of various security holders, dealers and clearing
agencies.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table shows selected historical consolidated financial data for
the Company. Detailed historical financial information is included in the
audited consolidated financial statements for fiscal years 2002 and 2001.
10
Years Ended July 31,
(In thousands, except per share amounts)
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Consolidated Statement of
Operations Data:
Net sales $ 119,357 135,931 66,444 37,886 30,114
Cost of sales 78,780 87,327 45,942 26,405 21,330
--------- --------- --------- --------- ---------
Gross profit 40,577 48,604 20,502 11,481 8,784
Expenses:
Selling, general and administrative 22,512 22,707 12,058 6,554 6,013
Research and development 11,041 10,190 2,644 2,022 1,319
In-process research and development 2,192 -- 10,218 -- --
Amortization of intangibles 1,471 2,552 230 78 --
--------- --------- --------- --------- ---------
37,216 35,449 25,150 8,654 7,332
--------- --------- --------- --------- ---------
Operating income (loss) 3,361 13,155 (4,648) 2,827 1,452
Other expenses (income):
Interest expense 3,061 4,015 381 204 234
Interest income (452) (2,303) (1,511) (65) (36)
Other (income) expense, net (28) 841 201 (39) (30)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes 780 10,602 (3,719) 2,727 1,284
Provision (benefit) for income taxes (368) 3,888 85 (3,754) 180
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations 1,148 6,714 (3,804) 6,481 1,104
Discontinued operations:
Loss from operations of discontinued
segment (less applicable income
tax benefit of $79 in 2000 and
$320 in 1999) -- -- (137) (622) --
Loss on disposal of discontinued
segment, including provision of
$430 for operating losses during
phase out period (net of income
tax benefit of $306) -- -- -- (594) --
--------- --------- --------- --------- ---------
Net income (loss) $ 1,148 6,714 (3,941) 5,265 1,104
========= ========= ========= ========= =========
Basic income (loss) per share:
Income (loss) from continuing
operations $ 0.15 0.91 (0.67) 1.56 0.28
Loss from discontinued operations -- -- (0.02) (0.29) --
--------- --------- --------- --------- ---------
Basic income (loss) $ 0.15 0.91 (0.69) 1.27 0.28
========= ========= ========= ========= =========
Diluted income (loss) per share:
Income (loss) from continuing
operations $ 0.15 0.85 (0.67) 1.42 0.27
Loss from discontinued operations -- -- (0.02) (0.27) --
--------- --------- --------- --------- ---------
Diluted income (loss) $ 0.15 0.85 (0.69) 1.15 0.27
========= ========= ========= ========= =========
Weighted average number of common
shares outstanding -
Basic 7,461 7,348 5,663 4,143 3,902
Potential dilutive common shares 344 562 -- 430 264
--------- --------- --------- --------- ---------
Weighted average number of common
and common equivalent shares
outstanding assuming dilution -
Diluted 7,805 7,910 5,663 4,573 4,166
========= ========= ========= ========= =========
(Continued)
11
Other Consolidated Operating Data:
Backlog at period-end $ 44,121 50,094 50,538 38,637 15,452
New orders 113,384 135,487 78,345 61,071 30,842
Research and development-internal
and customer funded 13,070 11,846 6,916 3,801 1,675
EBITDA (1) 10,783 19,730 7,954 4,337 2,658
(1) Earnings from continuing operations before interest, taxes, depreciation
and amortization and non-recurring items (primarily in-process research
and development charges).
As of July 31,
(In thousands)
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Consolidated Balance Sheet Data:
Total assets $ 126,586 146,988 126,031 29,847 19,710
Working capital 51,577 67,089 65,267 10,192 8,917
Long-term debt 28,683 42,000 37,900 -- --
Long-term capital lease obligations 1,294 2,157 908 959 1,445
Other long-term liabilities 58 259 367 -- --
Stockholders' equity 67,288 65,565 57,782 18,357 12,093
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We design, develop, produce and market sophisticated wireless telecommunications
transmission products and systems and solid state high-power broadband
amplifiers for commercial and government purposes. Our products are used in
point-to-point and point-to-multipoint telecommunication applications such as
satellite communications, over-the-horizon microwave systems, telephone systems
and cable and broadcast television. Our broadband amplifier products are also
used in cellular and PCS instrumentation testing, medical instrumentation and
certain defense systems. Our business consists of three segments:
telecommunications transmission, RF microwave amplifiers and mobile data
communications services.
Our sales are made to domestic and international customers, both commercial and
governmental. International sales (including sales to prime contractors for end
use by international customers) are expected to remain a substantial portion of
our total sales for the foreseeable future due to the worldwide demand for
wireless and satellite telecommunication products and services.
At times, a substantial portion of our sales may be derived from a limited
number of relatively large customer contracts, the timing of which cannot be
predicted. Quarterly sales and operating results may be significantly affected
by one or more of such contracts. Accordingly, we can experience significant
fluctuations in sales and operating results from quarter to quarter.
Sales consist of stand-alone products and systems. For the past several years,
we have endeavored to achieve greater product sales as a percentage of total
sales, because product sales generally have higher gross profit margins than
systems sales. In the future, as our installed base of mobile data
communications terminals is established, an increasing amount of our sales may
be attributable to the recurring service revenue component of our mobile data
communications services segment.
We generally recognize income on contracts only when the products are shipped.
However, when the performance of a contract will extend beyond a 12-month
period, income is recognized on the percentage-of-completion method. Profits
expected to be realized on contracts are based on total estimated sales value as
related to estimated costs at completion. These estimates are reviewed and
revised periodically throughout the lives of the contracts, and adjustments to
profits resulting from such revisions are made cumulative to the date of the
change. Estimated losses on long-term contracts-in-progress are recorded in the
period in which such losses become known.
12
Since our contract with the U.S. Army for the Movement Tracking System is for an
eight-year period, revenue recognition is based on the percentage-of-completion
method. The gross margin is based on the estimated sales and expenses for the
entire eight-year contract. The amount of revenue recognized has been limited to
the amount of funded orders received from the U.S. Army. The portion of such
orders representing service time revenue is being deferred until the service
time is used by the customer. Significant changes in the estimates used to
derive the gross profit margin can materially impact our operating results and
financial condition in future periods (see Critical Accounting Policies below
for more information).
Our gross profit is affected by a variety of factors, including the mix of
products, systems and services sold, production efficiency, price competition
and general economic conditions.
Selling, general and administrative expenses consist primarily of salaries and
benefits for marketing, sales and administrative employees, advertising and
trade show costs, professional fees and amortization of deferred compensation.
Our research and development expenses relate to both existing product
enhancement and new product development. A portion of our research and
development efforts is related to specific contracts and is recoverable under
those contracts because they are funded by the customers. Such customer-funded
expenditures are not included in research and development expenses for financial
reporting purposes, but are reflected in cost of sales.
Comtech Wireless, Inc. designed and manufactured wireless local loop systems for
the rural and remote telephony market. Due to disappointing results and
uncertain prospects, effective July 31, 1999, we adopted a plan to liquidate
Comtech Wireless, Inc. on or about January 31, 2000. The results of operations
for the segment have been shown as a discontinued operation in the consolidated
financial statements.
In January 2000, we acquired certain assets and assumed certain liabilities of
Hill Engineering Inc. ("Hill") in exchange for 50,000 shares of the Company's
common stock. The acquisition was accounted for under the purchase method of
accounting. The purchase price amounted to approximately $0.4 million, which
principally represents the fair value of the initial 30,000 shares of common
stock to be issued to Hill. The remaining 20,000 shares were placed in escrow
and will only be released to the sellers if certain profit goals, as defined in
the agreement are met and will be recorded at fair value on the date when the
profit goals are met. This business is part of the RF microwave amplifiers
segment. The excess of the purchase price over the net assets acquired of
approximately $0.6 million, net of amortization, is included in goodwill in the
accompanying consolidated balance sheet.
In July 2000, we acquired the business of EF Data, the satellite communications
division of Adaptive Broadband Corporation for cash. The acquisition was
accounted for under the purchase method of accounting. Accordingly, we allocated
the purchase price to the assets purchased and the liabilities assumed based
upon the estimated fair values at the date of the acquisition. The excess of the
purchase price over the fair values of the net assets acquired was approximately
$26.8 million, of which $10.2 million was allocated to in-process research and
development and expensed as of the acquisition date. Forty million dollars of
the purchase price was supplied through institutional secured borrowings bearing
interest at 9.25% due in installments through 2005, and the balance from
internal company funds.
In April 2001, we acquired certain assets and product lines of MPD Technologies,
Inc. for cash. The acquisition was accounted for under the purchase method of
accounting. Accordingly, we recorded the assets purchased and the liabilities
assumed based upon the estimated fair values at the date of acquisition. The
excess of the purchase price over the fair values of the net assets acquired was
approximately $9.8 million. The purchase price was financed through $10 million
of institutional secured borrowings and the balance from internal company funds.
The secured borrowing bears interest at a rate of 8.5% and requires interest
only payments through June 2005 at which time the entire principal is due. We
combined this operation with our Comtech PST Corp. operation in our RF microwave
amplifiers segment.
On July 31, 2002, we acquired certain assets and assumed certain liabilities of
Advanced Hardware Architectures, Inc. for cash. The acquisition was accounted
for under the purchase method of accounting. Accordingly, we allocated the
purchase price to the assets purchased and the liabilities assumed based upon
the estimated fair values at the date of acquisition. The excess of the purchase
price over the fair values of the net assets acquired was approximately $6.3
million, of which $2.2 million was allocated to in-process research and
development and expensed as of the acquisition date.
13
Critical Accounting Policies
The Company considers certain accounting policies to be critical due to the
estimation process involved in each.
Revenue Recognition on Long-Term Contracts
As discussed above, when the performance of a contract will extend beyond a
12-month period, revenue and related costs are recognized on the
percentage-of-completion method of accounting. Profits expected to be realized
on such contracts are based on total estimated sales for the contract compared
to total estimated costs at completion of the contract. These estimates are
reviewed and revised periodically throughout the lives of the contracts, and
adjustments to profits resulting from such revisions are made cumulative to the
date of the change. Estimated losses on long-term contracts are recorded in the
period in which the losses become known.
Some of the Company's largest contracts, including its contract with the U.S.
Army for the Movement Tracking System, are accounted for using the
percentage-of-completion method. If the Company does not accurately estimate the
total sales and related costs on such contracts, the estimated gross margins may
be significantly impacted or losses may need to be recognized in future periods.
Any such resulting reductions in margins or contract losses could be material to
the Company's results of operations and financial position.
The cumulative orders to-date under the Movement Tracking System contract have
been far below the Army's initial requirements. The Company is currently in
active discussions with the Army to address the funding shortfalls experienced
to date on this program. The ultimate resolution of these discussions could
result in, among other things, material changes to the estimates used in
applying the percentage-of-completion method of accounting.
Impairment of Intangible Assets
As of July 31, 2002, the Company's intangible assets, including goodwill,
aggregated $30.6 million. In assessing the recoverability of the Company's
goodwill and other intangibles, the Company must make various assumptions
regarding estimated future cash flows and other factors in determining the fair
values of the respective assets. If these estimates or their related assumptions
change in the future, the Company may be required to record impairment charges
for these assets in future periods. Any such resulting impairment charges could
be material to the Company's results of operations.
Provisions for Excess and Obsolete Inventory
We regularly review inventory quantities on hand and record a provision for
excess and obsolete inventory based on historical and future usage trends. The
review of excess and obsolete inventory primarily relates to our
telecommunications transmission and RF microwave amplifier segments. Several
factors may influence the sale and use of our inventories, including our
decisions to exit a product line, technological change and new product
development. These factors could result in a change in the amount of excess and
obsolete inventory on hand. Additionally, our estimates of future product demand
may prove to be inaccurate, in which case we may have understated or overstated
the provision required for excess and obsolete inventory. In the future, if we
determine that our inventory was overvalued, we would be required to recognize
such costs in the Company's financial statements at the time of such
determination. Any such charges could be material to the Company's results of
operations and financial position.
Allowance for Doubtful Accounts
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon customer payment history and current creditworthiness, as determined
by our review of our customers' current credit information. Generally, we will
require cash in advance or payment secured by irrevocable letters of credit
before an order is accepted from an international customer that we do not do
business with regularly. In addition, we have obtained credit insurance for
certain international customers that we have determined could be a credit risk.
We continuously monitor collections and payments from our customers and maintain
an allowance for doubtful accounts based upon our historical experience and any
specific customer collection issues that we have identified. While such credit
losses have historically been within our expectations and the allowances
established, we cannot guarantee that we will continue to experience the same
credit loss rates that we have in the past. Measurement of such losses requires
consideration of historical loss experience, including the need to adjust for
current conditions, and judgments about the probable effects of relevant
observable data, including present economic conditions such as delinquency rates
14
and financial health of specific customers. Changes to the estimated allowance
for doubtful accounts could be material to the Company's results of operations
and financial position.
Results of Operations
The following table sets forth, for the periods indicated, certain income and
expense items expressed as a percentage of our net sales:
Year Ended July 31,
------------------------------------------------------------------------
2002 2001 2000
--------------------- --------------------- ----------------------
Net sales 100.0% 100.0% 100.0%
Gross margin 34.0 35.8 30.9
Selling, general and administrative expenses 18.9 16.7 18.1
Research and development expenses 9.3 7.5 4.0
Amortization of intangibles 1.2 1.9 0.4
Operating income (loss) from continuing operations 2.8 9.7 (7.0)
Interest expense (income), net 2.2 1.3 (1.7)
Income (loss) before income taxes 0.7 7.8 (5.6)
Net income (loss) 1.0 4.9 (5.9)
Comparison of Fiscal 2002 and 2001
Net Sales. Consolidated net sales were $119.4 million and $135.9 million for
fiscal 2002 and 2001, respectively, representing a decrease of $16.5 million or
12.1%. The decrease was primarily due to the weak economic environment,
particularly in our telecommunications transmission segment. Sales from our
telecommunications transmission segment were $78.6 million in fiscal 2002, as
compared to sales of $106.3 million in fiscal 2001, a decrease of $27.7 million
or 26.1%. We believe sales in this segment will continue to be adversely
impacted until conditions in the telecommunications industry improve. Our
telecommunications transmission segment represented 65.9% of total net sales in
fiscal 2002 as compared to 78.2% in fiscal 2001. In fiscal 2002, sales from our
RF microwave amplifier segment were $22.8 million as compared to $16.4 million
in fiscal 2001. This increase of $6.4 million or 39.0% was principally the
result of the acquisition in April 2001 of certain assets and product lines of
MPD Technologies, Inc. Our RF microwave amplifier segment represented 19.1% of
total net sales in fiscal 2002 as compared to 12.1% in fiscal 2001. Sales from
our mobile data communications segment were $18.0 million in fiscal 2002 as
compared to $13.2 million in fiscal 2001, an increase of $4.8 million or 36.4%.
This increase was due to increased sales of our Movement Tracking System to the
U.S. Army. Sales from this segment represented 15.0% and 9.7% of total net sales
in fiscal 2002 and 2001, respectively. In fiscal 2002, our sales to the U.S.
Army for the Movement Tracking System represented 13.2% of our total net sales.
There were no customers in fiscal 2001 which constituted 10% or more of our
total net sales. International sales represented 41.2% of total net sales in
fiscal 2002 as compared to 46.2% in fiscal 2001. Domestic commercial sales
represented 25.0% of total net sales as compared to 30.7% in fiscal 2001 and
sales to the U.S. government and its agencies represented 33.8% and 23.1% in
fiscal 2002 and 2001, respectively.
Gross Profit. Gross profit was $40.6 million and $48.6 million for fiscal 2002
and 2001, respectively, representing a decrease of $8.0 million or 16.5%. This
decrease was primarily due to the reduced total level of sales discussed above.
Gross margin, as a percentage of net sales, decreased to 34.0% in fiscal 2002
compared to 35.8% in fiscal 2001. The decrease in the gross margin percentage
was driven by the significant decrease in telecommunications transmission
segment sales which generally carry higher margins than sales from the other two
segments.
Selling, General and Administrative. Selling, general and administrative
expenses were $22.5 million and $22.7 million in fiscal 2002 and 2001,
respectively, representing a decrease of $0.2 million. The decrease is related
to the reduction in sales during fiscal 2002.
Research and Development. Research and development expenses were $11.0 million
and $10.2 million in fiscal 2002 and 2001, respectively. Despite the softness in
sales discussed above, we are continuing to invest in the future by enhancing
our existing products and developing new products and technologies. Whenever
possible, we seek customer funding for research and development to adapt our
products to specialized customer requirements. During fiscal 2002 and 2001,
customers reimbursed us $2.0 million and $1.7 million, respectively, which
amounts are not reflected in the reported research and development expenses.
15
In-Process Research and Development. In connection with the purchase of certain
assets and liabilities of Advanced Hardware Architectures, Inc., $2.2 million of
the purchase price was allocated to in-process research and development. This
allocation was part of the overall purchase price allocation performed by an
independent third party. The value of in-process research and development is
based upon new product development projects that were underway at the time of
the acquisition and are expected to eventually lead to new products but had not
yet established technological feasibility and for which no future alternative
use was identified. In accordance with generally accepted accounting principles
("GAAP"), we recorded a one-time charge of $2.2 million for the write-off of
this amount. There was no in-process research and development expense in fiscal
2001.
Amortization of Intangibles. Amortization of intangibles was $1.5 million and
$2.6 million for fiscal 2002 and 2001, respectively, representing a decrease of
$1.1 million. In July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets." Under SFAS No. 142, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed at least annually for
impairment. Separate intangible assets that are not deemed to have an indefinite
life continue to be amortized over their useful lives. We applied the new rules
on accounting for goodwill and other intangible assets beginning in the first
quarter of fiscal 2002. If SFAS No. 142 had been effective August 1, 2000,
approximately $1.4 million of amortization expense would not have been expensed
in fiscal 2001.
Operating Income. As a result of the foregoing factors, we had operating income
from continuing operations of $3.4 million and $13.2 million in fiscal 2002 and
2001, respectively. Excluding the impact of the in-process research and
development charge in fiscal 2002, operating income was $5.6 million.
Interest Expense. Interest expense was $3.1 million and $4.0 million in fiscal
2002 and 2001, respectively. Additional interest on borrowings in connection
with the acquisition of MPD Technologies, Inc. in April 2001 were more than
offset by interest savings from the prepayment of $19.2 million of debt in
August 2001.
Interest Income. Interest income was $0.5 million and $2.3 million for fiscal
2002 and 2001, respectively. The decrease was the result of a lower level of
investable funds during fiscal 2002, as well as lower interest rates.
Other, Net. Our other income for fiscal 2002 was $28,000 as compared to other
expense of $0.8 million for fiscal 2001. The amount in fiscal 2001 primarily
related to the loss realized upon the sale in March 2001 of a short-term
investment classified as available-for-sale, offset by royalty and other income
received of $0.1 million.
Provision (Benefit) for Income Taxes. During fiscal 2002, the Company conducted
an independent study and identified certain research and experimentation tax
credits, relating to the current and prior years, which can be used to offset
regular income taxes. See note 9 to the consolidated financial statements. The
total amount of these credits more than offset the provision for income taxes.
The net effect was a benefit of $0.4 million for fiscal 2002.
Comparison of Fiscal 2001 and 2000
Net Sales. Consolidated net sales were $135.9 million and $66.4 million for
fiscal 2001 and 2000, respectively, representing an increase of $69.5 million or
104.6%. This increase was primarily due to the acquisition in July 2000 of EF
Data. This business, which is included in our telecommunications transmission
segment, increased our product offerings and broadened our customer base for
satellite earth station equipment. Sales from our telecommunications
transmission segment were $106.3 million or 78.2% of our total net sales in
fiscal 2001 as compared to $53.3 million or 80.2% of our total net sales in
fiscal 2000. Substantially all of the increase in the telecommunications
transmission segment was the result of the EF Data acquisition. In fiscal 2001,
sales from our RF microwave amplifier segment were $16.4 million as compared to
$11.0 million in fiscal 2000. Approximately $2.7 million of this $5.4 million
increase was due to the acquisition we completed in April 2001 of certain assets
and product lines of MPD Technologies, Inc. This acquisition has increased our
product offerings and our customer base in our RF microwave amplifier segment.
The RF microwave amplifier segment was 12.1% of our total net sales in fiscal
2001 as compared to 16.5% in fiscal 2000. Sales from our mobile data
communications services segment were $13.2 million or 9.7% of our total net
sales in fiscal 2001 compared to $2.2 million or 3.3% in fiscal 2000. This
increase of approximately $11.0 million was primarily due to increased sales of
our Movement Tracking System to the U.S. Army. International sales represented
46.2% of total net sales in fiscal 2001 as compared to 71.4% in fiscal 2000. The
decrease in the percentage of international sales reflects the absence in fiscal
2001 of significant revenues from one customer for over-the-horizon microwave
equipment which occurred in fiscal 2000. Domestic sales represented 30.7% of
total net sales in fiscal 2001 as compared to 19.8% in fiscal 2000. U.S.
government sales represented 23.1% of total net sales in fiscal 2001 as compared
to 8.8% in fiscal 2000. There were no customers in fiscal 2001 that represented
10% or more of our total sales. In fiscal 2000, sales to one customer, a
16
major U.S. prime contractor for ultimate sale to an international end user,
represented 43.1% of total sales. Sales during the second half of fiscal 2001
were adversely impacted by the weakening economy. Particular softness was
experienced in our telecommunications transmission segment as a result of the
significant downturn in the telecommunications market. We believe sales will
continue to be adversely impacted until such economic conditions improve.
Gross Profit. Gross profit was $48.6 million and $20.5 million for fiscal 2001
and 2000, respectively, representing an increase of $28.1 million or 137.1%.
This increase was primarily due to the increase in sales volume. Gross margin,
as a percentage of net sales, was 35.8% and 30.9% in fiscal 2001 and 2000,
respectively. The higher gross margin in fiscal 2001 was largely due to the
increase in the sale of satellite earth station equipment products by our
telecommunications transmission segment as a result of the EF Data acquisition.
Those products generally have a lower per unit cost and yield a higher gross
margin than most other products and systems we sell.
Selling, General and Administrative. Selling, general and administrative
expenses were $22.7 million and $12.1 million in fiscal 2001 and 2000,
respectively, representing an increase of $10.6 million or 88.3%. This increase
was the result of additional expenses, including additional personnel, sales and
marketing expenses and other administrative expenses, required to support the
higher sales volume. As a percentage of sales, these expenses were 16.7% and
18.1% of total net sales for fiscal 2001 and 2000, respectively.
Research and Development. Research and development expenses were $10.2 million
and $2.6 million in fiscal 2001 and 2000, respectively, representing an increase
of approximately $7.6 million or 285.4%. The increase in fiscal 2001 was
principally due to the continuation of research and development for the projects
that were underway at the time of our acquisition of EF Data in July 2000, as
well as for expenses related to new product development and product
announcements for all of our businesses. As an investment for the future we are
continually enhancing and developing new products and technologies. Whenever
possible, we seek customer funding for research and development to adapt our
products to specialized customer requirements. During fiscal 2001 and 2000,
customers reimbursed us $1.7 million and $4.3 million, respectively, which
amounts are not reflected in the reported research and development expenses.
Amortization of Intangibles. Amortization of intangibles was $2.6 million and
$230,000 for fiscal 2001 and 2000, respectively. The increase in fiscal 2001 was
primarily due to the full year of amortization expense relating to goodwill and
other identified intangibles associated with our acquisition of EF Data in July
2000. The increase also reflects the amortization of intangibles resulting from
our April 2001 acquisition of MPD Technologies.
In-Process Research and Development. There was no in-process research and
development expense in fiscal 2001. In fiscal 2000, in connection with the
acquisition of EF Data, $10.2 million of the purchase price was allocated to
in-process research and development. Our financial statements for fiscal 2000
include a one-time charge of $10.2 million for the write-off of this amount in
accordance with generally accepted accounting principles.
Operating Income (Loss). As a result of the foregoing factors, we had operating
income from continuing operations of $13.2 million in fiscal 2001 as compared to
an operating loss from continuing operations in fiscal 2000 of $4.6 million.
Excluding the impact of the in-process research and development charge in fiscal
2000, operating income was $5.6 million.
Interest Expense. Interest expense was $4.0 million and $381,000 for fiscal 2001
and 2000, respectively, representing an increase of approximately $3.6 million.
The increase was primarily due to the interest on the long term debt we incurred
in connection with the acquisition of EF Data in July 2000. The original amount
of the loan was $40.0 million payable over five years. In connection with our
acquisition of certain assets and product lines from MPD Technologies, Inc. in
April 2001, we borrowed an additional $10.0 million.
Interest Income. Interest income was $2.3 million and $1.5 million for fiscal
2001 and 2000, respectively, representing an increase of $792,000. This increase
in fiscal 2001 was primarily due to the increase in the amount of cash available
in excess of working capital requirements, principally as result of the proceeds
received from a follow-on stock offering completed in the third quarter of
fiscal 2000.
Other Expense, Net. Other expense, net was $841,000 and $201,000 for fiscal 2001
and 2000, respectively. The amount in fiscal 2001 related to a loss of $990,000
realized upon the sale in March 2001 of a short-term investment classified as
available-for-sale, offset by royalty and other income of $149,000. The amount
in fiscal 2000 primarily related to the loss realized upon the sale of a
short-term investment classified as available-for-sale.
17
Provision for Income Taxes. The provision for income taxes in fiscal 2001
reflects an effective tax rate of 36.7%. The fiscal 2000 provision for income
taxes was effected by a change in the valuation allowance. (See note 9 to the
consolidated financial statements for further information regarding the
provision for income taxes.)
Liquidity and Capital Resources
Our cash and cash equivalents position decreased to $15.5 million at July 31,
2002 from $36.2 million at July 31, 2001. During fiscal 2002, we prepaid $19.2
million of long-term debt and paid approximately $7.0 million, including
expenses, for the acquisition of certain assets and liabilities of Advanced
Hardware Architectures, Inc.
Net cash provided by operating activities was $9.4 million in fiscal 2002. Such
amount reflects (i) net income of $1.1 million, plus the impact of non-cash
items such as depreciation and amortization aggregating $5.2 million, and the
write-off of in-process research and development of $2.2 million; and (ii) the
changes in working capital balances.
Net cash used in investing activities in fiscal 2002 was $10.2 million. Cash of
$3.2 million was used for capital expenditures and $7.0 million was used for the
acquisition of Advanced Hardware Architectures, Inc.
Net cash used in financing activities in fiscal 2002 was $19.9 million. We
prepaid $19.2 million of long-term debt. Principal payments on capital lease
obligations amounted to $1.1 million. These uses of cash were offset by proceeds
from the sale of stock and exercise of stock options aggregating approximately
$0.5 million.
In the normal course of business, we routinely enter into binding and
non-binding purchase obligations primarily covering anticipated purchases of
inventory and equipment. We do not expect that these commitments as of July 31,
2002 will materially adversely affect our liquidity.
At July 31, 2002 we had contractual cash obligations to repay debt (including
capital lease obligations) and to make payments under operating leases. Payments
due under these long-term obligations are as follows:
Obligations due by fiscal year (in thousands)
2004 2006
and and After
Total 2003 2005 2007 2007
--------- --------- --------- --------- ---------
Long-term debt $ 28,683 -- 28,683 -- --
Capital lease obligations 2,356 1,062 1,114 180 --
Operating lease commitments 14,359 3,484 6,132 2,334 2,409
--------- --------- --------- --------- ---------
Total contractual cash obligations $ 45,398 4,546 35,929 2,514 2,409
========= ========= ========= ========= =========
We have entered into standby letter of credit agreements with financial
institutions relating to the guarantee of future performance on certain
contracts. At July 31, 2002, the balance of these agreements was $0.5 million.
We believe that our cash and cash equivalents will be sufficient to meet our
operating cash requirements for the foreseeable future. In the event that we
identify a significant acquisition that requires additional cash, we would seek
to borrow additional funds or raise additional equity capital.
Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Company
adopted SFAS No. 144 on August 1, 2002. The adoption did not have a material
impact on the Company's consolidated financial statements.
18
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
The Company adopted SFAS No. 145 on August 1, 2002. The adoption did not have a
material impact on the Company's consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company does not
expect adoption of SFAS No. 146 will have a material impact on the Company's
consolidated financial statements.
Forward-Looking Statements and Risk Factors
Many statements in this Form 10-K constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements include:
o Statements of goals, intentions and expectations;
o Estimates of risks and of future costs and benefits; and
o Statements of the ability to achieve financial and other goals.
These forward-looking statements are subject to significant uncertainties
because they are based upon or are affected by:
o Management's estimates and projections of U.S. and international
economic and business conditions;
o Future laws and regulations; and
o A variety of other matters, including those described below.
Because of these uncertainties, actual future results may be materially
different from the results indicated by these forward-looking statements, which
are inherently predictive and speculative. The following are some of the risks
that could cause actual results to differ significantly from those expressed or
implied by such statements.
All of our businesses are subject to rapid technological change; we must keep
pace with changes to compete successfully.
We are engaged in businesses characterized by rapid technological change,
evolving industry standards, frequent new product announcements and
enhancements, and changing customer demands. The introduction of products and
services embodying new technologies and the emergence of new industry standards
could render our products and services obsolete or non-competitive. The
technology used in our products and services evolves rapidly, and our business
position depends, in large part, on the continuous refinement of our scientific
and engineering expertise and the development, either through internal research
and development or acquisitions, of new or enhanced products and technologies.
We may not have the economic or technological resources to be successful in such
efforts and we may not be able to identify and respond to technological
improvements made by our competitors in a timely or cost-effective fashion. A
significant technological breakthrough by others, including smaller competitors
or new firms, could have a material adverse impact on our business.
A slowing economy and continued reduction in telecommunications equipment and
systems spending may negatively affect our revenues and profitability.
During the second half of fiscal 2001 and all of fiscal 2002, our revenues were
negatively affected by the increasingly uncertain economic environment both in
the overall market, and more specifically in the telecommunications sector. If
the economy continues to slow, some of our customers may further reduce their
budgets for spending on telecommunications equipment and systems. As a
consequence, our current customers and other prospective customers may postpone,
reduce or even forego the purchase of our products and systems, which could
adversely affect our revenues and profitability.
Our mobile data communications services business is subject to risk.
Our mobile data communications services business has a limited operating
history. It is subject to all of the risks inherent in the operation of a new
business enterprise. Moreover, our business experience has been in producing
products, not in providing services. We may not be able to implement and operate
our mobile data communications services business successfully. In addition to
the other risk factors described in this section, the risk factors applicable to
our mobile data communications services business include the following:
19
o Although the U.S. Army contract obligates us to provide up to 56,000
mobile terminals and worldwide satellite services over an eight year
period as and when ordered by the U.S. Army and at the fixed prices
and other terms set forth in this contract, the U.S. Army is not
obligated to purchase any terminals or services under this contract
and may terminate this contract. Sales under the U.S. Army contract
will be subject to unpredictable funding and deployment decisions.
Through July 31, 2002, we have received orders for $34.5 million
under this contract.
o Certain components that we need have purchasing lead-time of four
months or longer, and the U.S. Army contract requires us to provide
mobile terminals within 90 days after we receive an order.
o Our success in commercial markets will depend on, among other
things, our ability to access the best distribution channels, the
development of applications which create value for the customer and
our ability to attract and retain qualified personnel. Delays in
delivering terminals could also adversely affect our ability to
obtain and retain commercial customers.
o In general, as we seek to grow our mobile data communications
services business, we anticipate that we will need to maintain a
substantial inventory in order to provide terminals to our customers
on a timely basis. If forecasted orders are not received, we might
be left with large inventories of slow moving or unusable parts or
terminals. This could result in an adverse effect on our business,
results of operations, liquidity and financial position.
o We lease the satellite capacity necessary to operate our system from
third party satellite networks. We currently have a long-term lease
with a satellite network operator (TMI) for satellite coverage in
North America, Central America and the northern rim of South
America. While several vendors have announced plans for new
satellite systems, only one provider, INMARSAT, presently offers the
global coverage that will be required under the U.S. Army contract.
We cannot assure you that we will be able to obtain sufficient
satellite capacity or geographical coverage from any vendor to
operate our mobile data communications services system on acceptable
terms or on a timely basis.
o There are several existing competitors in the mobile data
communications market that have established systems with sizable
customer bases and much greater financial resources than us. The
largest of these competitors is Qualcomm Incorporated. Existing
competitors, including terrestrial service providers, are also
aggressively pricing their products and services and may continue to
do so in the future. Competitors continue to offer new value added
products and services, which we may be unable to match on a timely
or cost effective basis. Increased competition may impact margins
throughout the industry. We anticipate that new competitors will
enter the mobile data communications market in the future.
o All satellite communications are subject to the risk that a
satellite or ground station failure or a natural disaster may
interrupt service. Interruptions in service could have a material
adverse effect on our results of operations. With respect to U.S.
satellite service, satellite network providers have arranged to
provide back-up satellite and ground station service for each other
in the event of catastrophic failure.
o We believe that we own or have licensed all intellectual property
rights necessary for the operation of our mobile data communications
services business as currently contemplated. If our terminals or
services are found to infringe on protected technology, we could be
required to redesign our terminals, license the protected
technology, and/or pay damages or other compensation to the
infringed party. If we are unable to license protected technology
used in our terminals or if we were required to redesign our
terminals, we could be prohibited from making and selling our
terminals or providing mobile data communications services.
Due to many factors, including the amount of business represented by large
contracts, our operating results are difficult to forecast and may be volatile.
We have experienced, and will experience in the future, significant fluctuations
in sales and operating results from quarter to quarter. One reason for this is
that a significant portion of our business - primarily the over-the-horizon
microwave systems and other products of our telecommunications transmission
business segment and a portion of our RF microwave amplifier business segment -
is derived from a limited number of relatively large customer
20
contracts, the timing of which cannot be predicted. While we generally recognize
income on contracts when the products are shipped, income is recognized on the
percentage-of-completion method when the performance of a contract will extend
beyond a 12-month period. Our net sales and operating results also may vary
significantly from period to period because of the following factors: product
mix sold; fluctuating market demand; price competition; new product
introductions by our competitors; fluctuations in foreign currency exchange
rates; unexpected changes in delivery of components or subsystems; political
instability; regulatory developments; and general economic conditions.
Accordingly, you should not rely on period-to-period comparisons as indications
of our future performance because these comparisons may not be meaningful.
Our dependence on international sales may adversely affect us.
Sales for use by international customers (including sales to prime contractors'
international customers) represented approximately 41.2%, 46.2% and 71.4%, of
our total net sales for the fiscal years ended July 31, 2002, 2001 and 2000,
respectively. Approximately 33.9% of our backlog at July 31, 2002 consisted of
orders for use by foreign customers. We expect that international sales will
continue to be a substantial portion of our total sales. These sales expose us
to certain risks, including barriers to trade, fluctuations in foreign currency
exchange rates (which may make our products less price competitive), political
and economic instability, availability of suitable export financing, tariff
regulations, and other U.S. and foreign regulations that may apply to the export
of our products and the generally greater difficulties of doing business abroad.
We attempt to reduce the risk of doing business in foreign countries by seeking
subcontracts with large systems suppliers, contracts denominated in U.S.
dollars, advance payments and irrevocable letters of credit in our favor.
Foreign defense contracts generally contain provisions relating to termination
at the convenience of the government. In addition, certain of our products and
systems may require licenses from U.S. government agencies for export from the
United States, and some of our products are not permitted to be exported. We
cannot be sure of our ability to gain any licenses that may be required to
export our products, and failure to receive required licenses could materially
reduce our ability to sell our products outside the United States.
Our dependence on component availability, subcontractor availability and
performance and key suppliers may adversely affect us.
We do not generally maintain a substantial inventory of components and
subsystems. We obtain certain components and subsystems from a single source or
a limited number of sources, but believe that most components and subsystems are
available from alternative suppliers and subcontractors. A significant
interruption in the delivery of such items, however, could have a material
effect on our business and results of operations.
Our backlog is subject to customer cancellation or modification.
We currently have a backlog of orders, mostly under contracts that the customer
may modify or terminate. We cannot assure you that our backlog will result in
net sales.
Our sales to the U.S. government are subject to funding and other risks.
We sell our products and services to agencies of the U.S. government or to
contractors or subcontractors under contracts with U.S. agencies. These sales
accounted for approximately 33.8%, 23.1% and 8.8% of our total net sales in
fiscal 2002, 2001 and 2000, respectively. As is customary for government sales,
these sales are subject to various risks. These risks include the ability of the
U.S. government to:
o Change government policy which could reduce our business;
o Terminate existing contracts for its convenience; and
o Audit our contract-related costs and fees, including allocated
indirect costs.
A reduction in government agency budgets could cause us to experience declining
net sales, increased pressure on operating margins and, in certain cases, net
losses. The loss or significant cutback of a large program in which we
participate, such as the mobile data communications services U.S. Army contract,
could also materially adversely affect our future results of operations.
All of our U.S. government contracts can be terminated by the U.S. government
for its convenience. Termination for convenience provisions provide only for our
recovery of costs incurred or committed, settlement expenses and
21
profit on work completed prior to termination. In addition to the right of the
U.S. government to terminate, U.S. government contracts are conditioned upon the
continuing approval by Congress of the necessary spending. Congress usually
appropriates funds for a given program on a fiscal-year basis even though
contract performance may take more than one year. Consequently, at the beginning
of a major program, the contract is usually not fully funded, and additional
monies are normally committed to the contract only if, as and when
appropriations are made by Congress for future fiscal years.
The U.S. government may review our costs and performance on their contracts, as
well as our accounting and general business practices. Based on the results of
such audits, the U.S. government may adjust our contract-related costs and fees,
including certain financing costs, goodwill, portions of research and
development costs, and certain marketing expenses, which may not be reimbursable
under U.S. government contracts.
We obtain U.S. government contracts through a competitive bidding process. We
cannot assure you that we will continue to win competitively awarded contracts
or that awarded contracts will generate sufficient net sales to result in
profitability.
Acquisitions and strategic investments may divert our resources and management
attention; results may fall short of expectations.
We intend to continue pursuing selected acquisitions of and investments in
businesses, technologies and product lines as a key component of our growth
strategy. Any future acquisition or investment may result in the use of
significant amounts of cash, potentially dilutive issuances of equity
securities, incurrence of debt and amortization expenses related to intangible
assets. Acquisitions involve numerous risks, including:
o difficulties in the integration and assimilation of the operations,
technologies, products and personnel of an acquired business;
o diversion of management's attention from other business concerns;
and
o potential loss of key employees or customers of any acquired
business.
Our fixed price contracts subject us to risk.
Almost all of our products and services are sold under fixed price contracts.
This means that we bear the risk of unanticipated technological, manufacturing,
supply or other problems, price increases or increases in the cost of
performance.
Our markets are highly competitive.
The markets for our products are highly competitive. We cannot assure you that
we will be able to successfully compete or that our competitors will not develop
new technologies and products that are more commercially effective than our own.
We expect the Department of Defense's increased use of commercial off-the-shelf
products and components in military equipment will encourage new competitors to
enter the market. Also, although the implementation of advanced
telecommunications services is in its early stages in many developing countries,
we believe competition may intensify as businesses and foreign governments
realize the market potential of telecommunications services. Many of our
competitors have financial, technical, marketing, sales and distribution
resources greater than ours.
The loss of key technical or management personnel could adversely affect our
business.
Our success depends on the continued contributions of key technical management
personnel, including the key management at each of our subsidiaries. Many of our
key personnel, particularly the key engineers of our subsidiaries, would be
difficult to replace, and are not subject to employment or noncompetition
agreements. Our growth and future success will depend in large part upon our
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
we believe that we have been successful to date in recruiting and keeping key
personnel, we may not be successful in attracting and retaining the personnel we
will need to continue to grow and operate profitably. Also, the management
skills that have been appropriate for us in the past may not continue to be
appropriate if we continue to grow and diversify.
22
Our success also depends to a significant extent upon our President and Chief
Executive Officer, Fred Kornberg. The loss of the services of Mr. Kornberg could
have a material adverse effect on us. We have entered into an employment
contract with Mr. Kornberg.
Protection of our intellectual property is limited; we are subject to the risk
of third party claims of infringement.
Our businesses rely in large part upon our proprietary scientific and
engineering "know-how" and production techniques. Historically, patents have not
been an important part of our protection of our intellectual property rights.
However, patents are important to protecting our intellectual property rights in
Comtech AHA's TPC chips and Comtech Systems' 8mbs adaptive modem. We rely upon
the laws of unfair competition, restrictions in licensing agreements and
confidentiality agreements to protect our intellectual property. We limit access
to and distribution of our proprietary information. These efforts allow us to
rely upon the knowledge and experience of our management and technical personnel
to market our existing products and to develop new products. The departure of
any of our key management and technical personnel, the breach of their
confidentiality and non-disclosure obligations to us or the failure to achieve
our intellectual property objectives may have a material adverse effect on our
business, financial condition and results of operations.
Our ability to compete successfully and achieve future revenue growth will
depend, in part, on our ability to protect our proprietary technology and
operate without infringing upon the rights of others. We may fail to do so. In
addition, the laws of certain countries in which our products are or may be sold
may not protect our products and intellectual property rights to the same extent
as the laws of the United States.
Our operations are subject to environmental regulation.
We are subject to a variety of local, state and federal governmental regulations
relating to the storage, discharge, handling, emission, generation, manufacture
and disposal of toxic or other hazardous substances used to manufacture our
products, particularly in the fabrication of fiberglass antennas by our Comtech
Antenna Systems, Inc. subsidiary. We believe that we are currently in
compliance, in all material respects, with such regulations and that we have
obtained all necessary environmental permits to conduct our business.
Nevertheless, the failure to comply with current or future regulations could
result in the imposition of substantial fines, suspension of production,
alteration of our manufacturing processes or cessation of operations that could
materially adversely affect our business, financial condition and results of
operations.
Our stock price is volatile.
The stock market in general, and the stock prices of technology-based companies
in particular, have experienced extreme volatility that often has been unrelated
to the operating performance of any specific public companies. The market price
of our common stock has fluctuated significantly in the past and is likely to
fluctuate significantly in the future as well. Factors that may have a
significant impact on the market price of our stock include:
o future announcements concerning us or our competitors;
o receipt or non-receipt of substantial orders for products and
services;
o results of technological innovations;
o new commercial products;
o changes in recommendations of securities analysts;
o government regulations;
o proprietary rights or product or patent litigation;
o changes in market conditions generally, particularly in the market
for small cap stocks; and
o limited public float.
Shortfalls in our revenues or earnings in any given period relative to the
levels expected by securities analysts could immediately, significantly and
adversely affect the trading price of our common stock.
We have never declared or paid cash dividends.
We have never declared or paid a cash dividend and do not intend to declare any
cash dividends on our common stock in the foreseeable future.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
money market funds and short-term U.S. treasury securities. Under its current
policies, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report, Consolidated Financial Statements, Notes to
Consolidated Financial Statements and related financial schedule are listed in
the Index to Consolidated Financial Statements and Schedule 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 and officers of the Company is
incorporated by reference to the Proxy Statement of the Company for the Annual
Meeting of Stockholders to be held December 10, 2002 (the "Proxy Statement")
which will be filed with the Securities and Exchange Commission no more than 120
days after the close of its fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference to the
Proxy Statement, which will be filed with the Securities and Exchange Commission
no more than 120 days after the close of its fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding securities authorized for issuance under equity
compensation plans and certain information regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
Proxy Statement, which will be filed with the Securities and Exchange Commission
no more than 120 days after the close of its fiscal year.
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.
ITEM 14. CONTROLS AND PROCEDURES
Not applicable.
24
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE 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.
(b) No reports on Form 8-K have been filed during the fourth quarter of
the fiscal year ended July 31, 2002.
(c) Exhibit index
Exhibit
- ------- Incorporated By
Number Description of Exhibit Reference to Exhibit
------ ---------------------- --------------------
3(a) Certificate of Incorporation of the Registrant Exhibit 3(a) of the Registrant's 1987 Form 10-K
3(b) Amendment of the Certificate of Incorporation effecting the Exhibit 3(b) to the Registrant's 1991 Form 10-K
5 to 1 reverse stock split
3(c) Amended and restated By-Laws of the Registrant Exhibit 3(c) of Registrant's 1998 Form 10-K
3(d) Amendment to the Certificate of Incorporation increasing Exhibit 3(d) to the Registrant's 1994 Form 10-K
authorized shares to 12 million
3(e) Amendment to the Certificate of Incorporation increasing the Exhibit 3(e) to Registrant's 1998 Form 10-K
authorized shares to 17 million
3(f) Form of Certificate of Designation of the Series A Junior Exhibit 4(1) to the Registrant's Form 8-A/A dated
Participating Preferred Stock December 23, 1998
3(g) Amendment to the Certificate of Incorporation increasing the Exhibit 3(g) to Registrant's 2000 Form 10-K
authorized shares to 32 million
4(a) Rights Agreement dated as of December 15, 1998 between the Exhibit 4(1) to the Registrant's Form 8-A/A dated
Registrant and American Stock Transfer and Trust Company, as December 23, 1998
Rights Agent
10(a) Amended and restated Employment Agreement dated October 9, Exhibit 10(a) to the Registrant's 2001 Form 10-K
2001 between the Registrant and Fred Kornberg
10(b) Lease and amendment thereto on the Melville Facility Exhibit 10(k) to the Registrant's 1992 Form 10-K
10(c) Amended and restated 1993 Incentive Stock Option Plan Appendix A to the Registrant's Proxy Statement dated
November 3, 1997
10(d) Time Accelerated Restricted Stock Purchase Agreements between Exhibit 10(f) to the Registrant's 1999 Form 10-K
Registrant and Principals of Comtech Mobile Datacom Corp.
operating unit
10(e) Movement Tracking System Contract between Comtech Mobile Exhibit 10(g) to the Registrant's 1999 Form 10-K
Datacom Corp. and U.S. Army's CECOM Acquisition Center dated
June 24, 1999 (certain portions of this agreement have been
omitted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment)
25
Exhibit
- ------- Incorporated By
Number Description of Exhibit Reference to Exhibit
------ ---------------------- --------------------
10(f) License Agreement between Vistar Telecommunications Inc. and Exhibit 10(h) to the Registrant's 1999 Form 10-K
Comtech Mobile Datacom Corp. dated August 31, 1999 (certain
portions of this agreement have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request
for confidential treatment)
10(g)(1) 2000 Stock Incentive Plan Appendix A to the Registrant's Proxy Statement
dated November 8, 1999
10(g)(2) Amendment to the 2000 Stock Incentive Plan Appendix A to the Registrant's Proxy Statement
dated November 6, 2000
10(g)(3) Amendment to the 2000 Stock Incentive Plan
10(h) Asset Purchase Agreement between the Registrant, Comtech/AHA
Acquisition Corp. and Advanced Hardware Architectures, Inc.
10(i)(1) Loan and Security Agreement between the Registrant and The Exhibit 10(k) to the Registrant's 2000 Form 10-K
Teachers' Retirement System of Alabama, The Employees' Retirement
System of Alabama, The Alabama Heritage Trust Fund, PEIRAF -
Deferred Compensation Plan and State Employee'' Health Insurance
Fund, dated July 7, 2000
10(i)(2) Amendment to the Loan and Security Agreement between the Registrant Exhibit 10(i)(2) to the Registrant's 2001 Form
and The Teachers' Retirement System of Alabama, The Employees' 10-K
Retirement System of Alabama, The Alabama Heritage Trust Fund,
PEIRAF - Deferred Compensation Plan and State Employees' Health
Insurance Fund, dated April 30, 2001
10(j) Asset Purchase Agreement between the Registrant and MPD Exhibit 2.1 to the Registrant's Form 8-K dated
Technologies, Inc., dated March 2, 2001 April 30, 2001
10(k) 2001 Employee Stock Purchase Plan Appendix B to the Registrant's Proxy Statement
dated November 6, 2000
21 Subsidiaries of the Registrant
23 Consent of KPMG LLP
99.1 Certifications of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certifications of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002
Exhibits to this Annual Report on Form 10-K are available from the Company upon
request and payment to the Company for the cost of reproduction.
26
SIGNATURE
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
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 16, 2002 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
---------------------------- ------------------------------------
October 16, 2002 /s/ Fred Kornberg Chairman of the Board
- ---------------------------------- ---------------------------- Chief Executive Officer and President
(Date) Fred Kornberg (Principal Executive Officer)
October 16, 2002 /s/ Robert G. Rouse Senior Vice President and
- ---------------------------------- ---------------------------- Chief Financial Officer
(Date) Robert G. Rouse (Principal Financial and Accounting
Officer)
October 16, 2002 /s/ George Bugliarello Director
- ---------------------------------- ----------------------------
(Date) George Bugliarello
October 16, 2002 /s/ Richard L. Goldberg Director
- ---------------------------------- ----------------------------
(Date) Richard L. Goldberg
October 16, 2002 /s/ Edwin Kantor Director
- ---------------------------------- ----------------------------
(Date) Edwin Kantor
October 16, 2002 /s/ Ira Kaplan Director
- ---------------------------------- ----------------------------
(Date) Ira Kaplan
October 16, 2002 /s/ Gerard R. Nocita Director
- ---------------------------------- ----------------------------
(Date) Gerard R. Nocita
27
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
I, Fred Kornberg, certify that:
1. I have reviewed this Annual Report on Form 10-K of Comtech
Telecommunications Corp. ("Registrant");
2. Based on my knowledge, this Annual Report does not contain any
untrue statements of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented
in this Annual Report.
Date: October 16, 2002 /s/ Fred Kornberg
---------------------------------------
Fred Kornberg
Chief Executive Officer and President
EXPLANATORY NOTE REGARDING CERTIFICATION: Representations 4, 5 and 6 consistent
with the Transition Provisions of SEC Exchange Act Release No. 34-46427 have
been omitted from this Certification for the Annual Report on Form 10-K since
this Annual Report on Form 10-K covers a period ending before the Effective Date
of such Release.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the accompanying Annual Report on Form 10-K of Comtech
Telecommunications Corp. (the "Company") for the fiscal year ended July 31, 2002
(the "Annual Report"), I, Fred Kornberg, Chief Executive Officer and President
of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that the information contained in the Annual
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: October 16, 2002 /s/ Fred Kornberg
---------------------------------------
Fred Kornberg
Chief Executive Officer and President
28
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
I, Robert G. Rouse, certify that:
1. I have reviewed this Annual Report on Form 10-K of Comtech
Telecommunications Corp. ("Registrant");
2. Based on my knowledge, this Annual Report does not contain any
untrue statements of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented
in this Annual Report.
Date: October 16, 2002 /s/ Robert G. Rouse
---------------------------------------
Robert G. Rouse
Senior Vice President and Chief
Financial Officer
EXPLANATORY NOTE REGARDING CERTIFICATION: Representations 4, 5 and 6 consistent
with the Transition Provisions of SEC Exchange Act Release No. 34-46427 have
been omitted from this Certification for the Annual Report on Form 10-K since
this Annual Report on Form 10-K covers a period ending before the Effective Date
of such Release.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the accompanying Annual Report on Form 10-K of Comtech
Telecommunications Corp. (the "Company") for the fiscal year ended July 31, 2002
(the "Annual Report"), I, Robert G. Rouse, Senior Vice President and Chief
Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
the Annual Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 and that the information contained in the
Annual Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date: October 16, 2002 /s/ Robert G. Rouse
---------------------------------------
Robert G. Rouse
Senior Vice President and Chief
Financial Officer
29
SUBSIDIARIES
The following is a list of the subsidiaries of the Company as of October 11,
2002:
Subsidiary State of Incorporation
- ---------- ----------------------
Telecommunications Transmission Business Segment
Comtech Antenna Systems, Inc. Delaware
Comtech EF Data Corp. Delaware
Comtech Systems, Inc. Delaware
Comtech AHA Corporation Delaware
RF Microwave Amplifier Business Segment
Comtech PST Corp. New York
Mobile Data Communications Services Business Segment
Comtech Mobile Datacom Corp. Delaware
30
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedule
Page
----
Independent Auditors' Report F-2
Consolidated Financial Statements:
Balance Sheets at July 31, 2002 and 2001 F-3
Statements of Operations for each of the years in the
three-year period ended July 31, 2002 F-4
Statements of Stockholders' Equity for each of the years
in the three-year period ended July 31, 2002 F-5
Statements of Cash Flows for each of the years in
the three-year period ended July 31, 2002 F-6, F-7
Notes to Consolidated Financial Statements F-8 to F-25
Additional Financial Information Pursuant to the Requirements
of Form 10-K:
Schedule II - Valuation and Qualifying Accounts and Reserves S-1
Schedules not listed above have been omitted because they are either not
applicable or the required information has been provided elsewhere in the
consolidated financial statements or notes thereto.
F-1
KPMG
Independent Auditors' Report
The Board of Directors and Stockholders
Comtech Telecommunications Corp.:
We have audited the consolidated financial statements of Comtech
Telecommunications Corp. and subsidiaries as listed in the accompanying index.
In connection with our audits of the consolidated financial statements, we also
audited the consolidated financial statement schedule 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 auditing standards generally accepted
in the United States of America. 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, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended July 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
Melville, New York
October 15, 2002
F-2
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 2002 and 2001
Assets 2002 2001
------------- -------------
Current assets:
Cash and cash equivalents $ 15,510,000 36,205,000
Accounts receivable, less allowance for doubtful accounts of $795,000
in 2002 and $845,000 in 2001 27,435,000 27,374,000
Inventories, net 33,996,000 36,732,000
Prepaid expenses and other current assets 1,407,000 1,151,000
Deferred tax asset - current 2,492,000 2,634,000
------------- -------------
Total current assets 80,840,000 104,096,000
Property, plant and equipment, net 11,889,000 11,778,000
Goodwill and other intangibles with indefinite lives, net of accumulated
amortization of $1,648,000 17,726,000 17,657,000
Intangibles with definite lives, net of accumulated amortization of
$2,681,000 in 2002 and $1,210,000 in 2001 12,902,000 10,162,000
Other assets, net 661,000 569,000
Deferred tax asset - non-current 2,568,000 2,726,000
------------- -------------
Total assets $ 126,586,000 146,988,000
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ -- 5,900,000
Current installments of capital lease obligations (including payable to
related party of $155,000 in 2001) 1,062,000 1,097,000
Accounts payable 9,529,000 11,014,000
Accrued expenses and other current liabilities 11,859,000 13,615,000
Deferred service revenue 4,343,000 2,073,000
Income taxes payable 2,470,000 3,308,000
------------- -------------
Total current liabilities 29,263,000 37,007,000
Long-term debt, less current installments 28,683,000 42,000,000
Capital lease obligations, less current installments 1,294,000 2,157,000
Other long-term liabilities 58,000 259,000
------------- -------------
Total liabilities 59,298,000 81,423,000
Stockholders' equity:
Preferred stock, par value $.10 per share; shares authorized and unissued
2,000,000 -- --
Common stock, par value $.10 per share; authorized 30,000,000 shares,
issued 7,602,921 shares in 2002 and 7,511,105 shares in 2001 760,000 751,000
Additional paid-in capital 67,883,000 67,490,000
Accumulated deficit (825,000) (1,973,000)
------------- -------------
67,818,000 66,268,000
Less:
Treasury stock (93,750 shares in 2002 and 82,500 shares in 2001) (185,000) (184,000)
Deferred compensation (345,000) (519,000)
------------- -------------
Total stockholders' equity 67,288,000 65,565,000
------------- -------------
Total liabilities and stockholders' equity $ 126,586,000 146,988,000
============= =============
Commitments and contingencies
See accompanying notes to consolidated financial statements.
F-3
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended July 31, 2002, 2001 and 2000
2002 2001 2000
------------- ------------- -------------
Net sales $ 119,357,000 135,931,000 66,444,000
Cost of sales 78,780,000 87,327,000 45,942,000
------------- ------------- -------------
Gross profit 40,577,000 48,604,000 20,502,000
Expenses:
Selling, general and administrative 22,512,000 22,707,000 12,058,000
Research and development 11,041,000 10,190,000 2,644,000
In-process research and development 2,192,000 -- 10,218,000
Amortization of intangibles 1,471,000 2,552,000 230,000
------------- ------------- -------------
37,216,000 35,449,000 25,150,000
------------- ------------- -------------
Operating income (loss) from continuing operations 3,361,000 13,155,000 (4,648,000)
Other expenses (income):
Interest expense 3,061,000 4,015,000 381,000
Interest income (452,000) (2,303,000) (1,511,000)
Other, net (28,000) 841,000 201,000
------------- ------------- -------------
Income (loss) from continuing operations before income taxes 780,000 10,602,000 (3,719,000)
Provision (benefit) for income taxes (368,000) 3,888,000 85,000
------------- ------------- -------------
Income (loss) from continuing operations 1,148,000 6,714,000 (3,804,000)
Discontinued operations (Note 13):
Loss from operations of discontinued segment (net of
applicable income tax benefit of $79,000) -- -- (137,000)
------------- ------------- -------------
Net income (loss) $ 1,148,000 6,714,000 (3,941,000)
============= ============= =============
Basic income (loss) per share:
Income (loss) from continuing operations $ 0.15 0.91 (0.67)
Loss from discontinued operations -- -- (0.02)
------------- ------------- -------------
Basic income (loss) $ 0.15 0.91 (0.69)
============= ============= =============
Diluted income (loss) per share:
Income (loss) from continuing operations $ 0.15 0.85 (0.67)
Loss from discontinued operations -- -- (0.02)
------------- ------------- -------------
Diluted income (loss) $ 0.15 0.85 (0.69)
============= ============= =============
Weighted average number of common shares outstanding -
Basic 7,461,000 7,348,000 5,663,000
Potential dilutive common shares 344,000 562,000 --
------------- ------------- -------------
Weighted average number of common and common equivalent
shares outstanding assuming dilution -
Diluted 7,805,000 7,910,000 5,663,000
============= ============= =============
See accompanying notes to consolidated financial statements.
F-4
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended July 31, 2002, 2001 and 2000
Accumulated
Common Stock Additional Other
------------ Paid-in Comprehensive Accumulated
Shares Amount Capital Income Deficit
------ ------ ------- ------ ------
Balance July 31, 1999 4,471,368 $ 447,000 $ 23,801,000 $ -- $ (4,746,000)
Amortization of deferred compensation -- -- -- -- --
Stock issued in acquisition of Hill
Engineering 30,000 3,000 368,000 -- --
Stock options exercised 188,117 18,000 404,000 -- --
Unrealized loss on securities net of
reclassification adjustment -- -- -- (113,000) --
Warrants exercised 14,691 1,000 (1,000) -- --
Shares issued in connection with public
offering 2,645,000 266,000 42,168,000 -- --
Net loss -- -- -- -- (3,941,000)
------------ ------------ ------------ ------------ ------------
Balance July 31, 2000 7,349,176 735,000 66,740,000 (113,000) (8,687,000)
Amortization of deferred compensation -- -- -- -- --
Unrealized loss on securities net of
reclassification adjustment -- -- -- 113,000 --
Stock options exercised 97,146 10,000 265,000 -- --
Employee stock purchase plan shares
purchased 14,112 1,000 157,000 -- --
Warrants exercised 50,671 5,000 328,000 -- --
Net income -- -- -- -- 6,714,000
------------ ------------ ------------ ------------ ------------
Balance July 31, 2001 7,511,105 751,000 67,490,000 -- (1,973,000)
Amortization of deferred compensation -- -- -- -- --
Termination of unvested restricted
shares issued pursuant to employee
stock award agreement -- -- (52,000) -- --
Stock options exercised 59,048 6,000 167,000 -- --
Employee stock purchase plan shares
purchased 26,419 2,000 237,000 -- --
Warrants exercised 6,349 1,000 41,000 -- --
Net income -- -- -- -- 1,148,000
------------ ------------ ------------ ------------ ------------
Balance July 31, 2002 7,602,921 $ 760,000 $ 67,883,000 $ -- $ (825,000)
============ ============ ============ ============ ============
Treasury Stock
-------------- Deferred Stockholders' Comprehensive
Shares Amount Compensation Equity Income
------ ------ ------------ ------ ------
Balance July 31, 1999 82,500 $ (184,000) $ (961,000) $ 18,357,000 $ 5,265,000
Amortization of deferred compensation -- -- 252,000 252,000 --
Stock issued in acquisition of Hill
Engineering -- -- -- 371,000 --
Stock options exercised -- -- -- 422,000 --
Unrealized loss on securities net of
reclassification adjustment -- -- -- (113,000) (113,000)
Warrants exercised -- -- -- -- --
Shares issued in connection with public
offering -- -- -- 42,434,000 --
Net loss -- -- -- (3,941,000) (3,941,000)
------------ ------------ ------------ ------------ ------------
Balance July 31, 2000 82,500 (184,000) (709,000) 57,782,000 (4,054,000)
Amortization of deferred compensation -- -- 190,000 190,000 --
Unrealized loss on securities net of
reclassification adjustment -- -- -- 113,000 113,000
Stock options exercised -- -- -- 275,000 --
Employee stock purchase plan shares
purchased -- -- -- 158,000 --
Warrants exercised -- -- -- 333,000 --
Net income -- -- -- 6,714,000 6,714,000
------------ ------------ ------------ ------------ ------------
Balance July 31, 2001 82,500 (184,000) (519,000) 65,565,000 6,827,000
Amortization of deferred compensation -- -- 122,000 122,000 --
Termination of unvested restricted
shares issued pursuant to employee
stock award agreement 11,250 (1,000) 52,000 (1,000) --
Stock options exercised -- -- -- 173,000 --
Employee stock purchase plan shares
purchased -- -- -- 239,000 --
Warrants exercised -- -- -- 42,000 --
Net income -- -- -- 1,148,000 1,148,000
------------ ------------ ------------ ------------ ------------
Balance July 31, 2002 93,750 $ (185,000) $ (345,000) $ 67,288,000 $ 1,148,000
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-5
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, 2002, 2001 and 2000
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 1,148,000 6,714,000 (3,941,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss from discontinued operations -- -- 137,000
Loss on sale of marketable investment securities -- 990,000 88,000
Depreciation and amortization 5,230,000 6,575,000 2,149,000
Write-off of in-process research and development 2,192,000 -- 10,218,000
Provision for bad debt allowance 269,000 39,000 --
Provision for inventory reserves 1,698,000 264,000 244,000
Deferred income tax expense (benefit) 300,000 580,000 (1,298,000)
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable 300,000 (3,059,000) (2,111,000)
Inventories 1,199,000 (8,132,000) (4,580,000)
Prepaid expenses and other current assets 451,000 (568,000) (412,000)
Other assets 140,000 (335,000) (293,000)
Accounts payable (2,030,000) (246,000) 3,048,000
Accrued expenses and other current liabilities (2,736,000) (1,846,000) 3,059,000
Deferred service revenue 2,270,000 2,073,000 --
Income taxes payable (838,000) 1,859,000 1,449,000
Other liabilities (201,000) (108,000) 367,000
------------ ------------ ------------
Net cash provided by continuing operations 9,392,000 4,800,000 8,124,000
Net cash used by discontinued operations -- -- (151,000)
------------ ------------ ------------
Net cash provided by operating activities 9,392,000 4,800,000 7,973,000
------------ ------------ ------------
Cash flows from investing activities:
Purchases of marketable investment securities -- (1,330,000) (37,015,000)
Proceeds from sale of marketable securities -- 19,221,000 18,000,000
Purchases of property, plant and equipment (3,081,000) (2,776,000) (1,185,000)
Purchase of technology license (91,000) (563,000) --
Payment for business acquisitions, net of cash received (7,055,000) (3,682,000) (63,138,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities (10,227,000) 10,870,000 (83,338,000)
------------ ------------ ------------
Cash flows from financing activities:
Borrowings under line of credit facility -- -- 1,000,000
Repayments of borrowings under line of credit facility -- -- (1,000,000)
Borrowings under loan agreement -- 10,000,000 40,000,000
Repayment of borrowings under loan agreement (19,217,000) (2,100,000) --
Principal payments on capital lease obligations (1,097,000) (718,000) (800,000)
Proceeds from issuance of common stock, net 239,000 158,000 42,434,000
Proceeds from exercises of stock options and warrants 215,000 608,000 422,000
------------ ------------ ------------
Net cash provided by (used in) financing activities (19,860,000) 7,948,000 82,056,000
------------ ------------ ------------
(Continued)
F-6
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, 2002, 2001 and 2000
2002 2001 2000
------------ ---------- ----------
Net increase (decrease) in cash and cash equivalents $(20,695,000) 23,618,000 6,691,000
Cash and cash equivalents at beginning of period 36,205,000 12,587,000 5,896,000
------------ ---------- ----------
Cash and cash equivalents at end of period $ 15,510,000 36,205,000 12,587,000
============ ========== ==========
Supplemental cash flow disclosure
Cash paid during the period for:
Interest $ 3,099,000 3,898,000 134,000
============ ========== ==========
Income taxes $ 237,000 1,425,000 500,000
============ ========== ==========
Non cash investing and financing activities:
Acquisition of property, equipment and technology license
through capital leases $ 199,000 2,456,000 567,000
============ ========== ==========
Capital stock issued in connection with business acquisition $ -- -- 371,000
============ ========== ==========
See accompanying notes to consolidated financial statements.
F-7
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 31, 2002 and 2001
(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
We design, develop, produce and market sophisticated products and
systems that are used by telecommunications and defense companies
and service providers in a broad range of applications.
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.
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 U.S. dollars, advance payments and
irrevocable letters of credit in its favor.
(c) Revenue Recognition
Revenue on long-term, fixed price contracts are generally recorded
based on the relationship of total costs incurred to date to total
projected final costs or, alternatively, as deliveries are made.
Revenues on other contract orders are recognized under the units of
delivery method. Under this method, revenues 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.
Provision for anticipated losses on uncompleted contracts is made in
the period in which such losses are determined.
Revenue not associated with long-term contracts is recognized when
the earnings process is complete, generally upon shipment or
customer acceptance.
(d) Cash and Cash Equivalents
Cash equivalents are temporary cash investments with a maturity of
three months or less when purchased. Cash equivalents at July 31,
2002 and 2001 amounted to $8,990,000 and $27,412,000, respectively.
These investments are carried at cost, which approximates market.
F-8
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(e) Statement of Cash Flows
The Company acquired equipment and a technology license financed by
capital leases in the amounts of $199,000, $2,456,000, and $567,000
in 2002, 2001 and 2000, respectively.
(f) Marketable Investment Securities
Marketable investment securities at July 31, 2000 consisted of a
mutual fund investment classified as available-for-sale and recorded
at fair value. Such investment securities were sold in fiscal 2001.
Unrealized holding gains and losses, net of the related tax effect
on these available-for-sale securities, are excluded from earnings
and are reported as a component of accumulated other comprehensive
income until realized. Realized gains and losses from the sale of
available-for-sales securities are determined on a specific
identification basis.
(g) Inventories
Work-in-progress 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 are
stated at the lower of cost or market, computed on the first-in,
first-out ("FIFO") method.
(h) Long-Lived Assets
The Company's plant and equipment, which are 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.
Goodwill represents the excess cost of a business acquisition over
the fair value of the net assets acquired. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets", goodwill is no longer
amortized. See Note 15 for further discussion regarding amortization
of goodwill. The Company periodically reviews goodwill, considering
factors such as projected cash flows and revenue and earnings
multiples, to determine whether the carrying value of the goodwill
is impaired. If the goodwill is deemed to be impaired, the
difference between the carrying amount reflected in the financial
statements and the estimated fair value is recognized as an expense
in the period in which the impairment occurs. The Company defines
its reporting units to be the same as its business segments.
The Company assesses the recoverability of the carrying value of its
other long-lived assets, including identifiable intangible assets
with finite useful lives, whenever events or changes in
circumstances indicate that the carrying amount of the assets may
not be recoverable. The Company evaluates the recoverability of such
assets based upon the expectations of undiscounted cash flows from
such assets. If the sum of the expected future undiscounted cash
flows were less than the carrying amount of the asset, a loss would
be recognized for the difference between the fair value and the
carrying amount.
(i) 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. In fiscal 2002, 2001 and 2000, the
Company was reimbursed by customers for such activities in the
amount of $2,029,000, $1,656,000 and $4,272,000 respectively.
F-9
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(j) 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.
(k) Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with
SFAS No. 128, "Earnings per Share". Basic EPS is computed based on
the weighted average number of shares outstanding. Diluted EPS
reflects the dilution from potential common stock issuable pursuant
to the exercises of stock options and warrants, if dilutive,
outstanding during each period.
(l) Financial Instruments
The Company believes that the book value of its current monetary
assets and liabilities approximates fair value as a result of the
short-term nature of such assets and liabilities. The Company
further believes that the fair market value of its capital lease
obligations does not differ materially from the carrying value. As a
result of the higher interest rate on the Company's long-term debt
as compared to current interest rates on similar debt, management
believes the fair market value of its long-term debt is
approximately $1.2 million higher than its carrying value.
(m) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect 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.
(n) Reclassifications
Certain reclassifications have been made to previously reported
consolidated financial statements to conform to the 2002
presentation.
(o) Accounting for Stock-Based Compensation
The Company records compensation expense for employee stock options
only if the current market price of the underlying stock exceeds the
exercise price on the date of the grant. The Company has elected not
to implement the fair value based accounting method for employee
stock options of SFAS No. 123, "Accounting for Stock-Based
Compensation", but has elected to disclose the pro forma net income
per share for employee stock option grants made beginning in fiscal
1996 as if such method had been used to account for stock-based
compensation cost as described in SFAS No. 123.
(p) Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive
Income," which requires companies to report all changes in equity
during a period, except those resulting from investment by owners
and distribution to owners, for the period in which they are
recognized. Comprehensive income is the total of net income and all
other non-owner changes in equity (or other comprehensive income)
such as unrealized gains/losses on securities classified as
available-for-sale, foreign currency translation adjustments and
minimum pension liability adjustments.
F-10
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Acquisitions
In January 2000, the Company acquired certain assets and assumed certain
liabilities of Hill Engineering Inc. ("Hill") in exchange for 50,000
shares of the Company's common stock. Such shares were issued and placed
in escrow and will be released to the sellers as follows: (i) 30,000
shares on January 21, 2001; (ii) 10,000 shares on January 31, 2001
assuming Hill meets certain profit goals; and (iii) 10,000 shares on
January 31, 2002 also assuming Hill meets certain profit goals. Since
neither of such profit goals were met, if Hill does not meet cumulative
profit goals by January 31, 2005, the 20,000 escrow shares will be
returned to the Company. The acquisition has been accounted for as a
purchase. The purchase price amounted to approximately $371,000, which
principally represents the fair value of the initial 30,000 shares of
common stock issued to Hill. The remaining 20,000 shares will be recorded
at fair value on the date if and when the profit goals are met. This
business operates in the RF microwave amplifiers segment. The accompanying
consolidated financial statements reflect this acquisition at the fair
value of the assets acquired ($652,000) and liabilities assumed ($871,000)
and include the operations of Hill from the date of acquisition.The excess
of the purchase price over the net assets acquired of approximately
$606,000 is included in goodwill and other intangibles with indefinite
lives in the accompanying consolidated balance sheet. See Note 15 for
discussion regarding the Company's adoption of SFAS No. 142, including the
amortization of goodwill. The operations of Hill are not material to the
operations of the Company. Pro forma results of operations were not
provided as their effect on the consolidated operations was not material.
In July 2000, the Company acquired the business of EF Data, the satellite
communications division of Adaptive Broadband Corporation, at an adjusted
cost of $54,158,000. The preliminary cash purchase price of $61,500,000
was partially financed with $40 million supplied through institutional
secured borrowings. Direct acquisition costs amounted to $1,696,000.Based
upon the acquisition agreement, an adjustment to the purchase price in the
amount of $9,038,000 was due the Company. This amount was received by the
Company in September 2000. The acquisition was accounted for under the
purchase method of accounting. The cost of the acquisition has been
allocated to the assets and the liabilities assumed based on their
estimated fair values at the date of the acquisition. The purchase price
allocation reflects $930,000 of adjustments for pre-acquisition
contingencies recorded in fiscal 2001. The excess of the cost over the
fair value of the net assets acquired amounted to approximately
$26,818,000, of which $10,218,000 was allocated to in-process research and
development and was expensed as of the acquisition date, $7,508,000 was
recorded as purchased technology which is being amortized over seven
years, $3,577,000 was recorded as other purchased intangibles which were
being amortized over five to seven years and $5,515,000 was recorded as
goodwill. See Note 15 for discussion regarding the Company's adoption of
SFAS No. 142, including the amortization of goodwill. The in-process
research and development charge is included in the accompanying
consolidated statement of operations for the year ended July 31, 2000. The
acquisition cost was allocated as follows (in thousands):
Historical book value of net assets acquired $27,340
Adjustments to record assets and liabilities at fair value:
Fair value of in-process research and development 10,218
Fair value of existing technology 7,508
Fair value of assembled workforce 2,835
Fair value of customer base 742
Excess of the purchase price over the fair value of net assets 5,515
-------
$54,158
=======
An independent third-party appraiser was used to assess and value the
purchased in-process research and development, existing technology,
assembled workforce and customer base from the acquisition. The valuation
of existing technology and in-process research and development was
determined for products under development, based upon the estimated future
revenues to be earned upon commercialization of the products. The
percentage of the cash flows allocated to the purchased in-process
research and development was derived from the estimated percentage
complete for each of the projects. These cash flows were discounted back
to their net present value. The resulting projected net cash flows from
such projects reflects management's estimates of revenues and operating
profits related to such projects. The workforce and customer base
valuation was based upon replacement cost.
F-11
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The operating results of EF Data have been included in the consolidated
statements of operations from the acquisition date (July 10, 2000). The
Company's unaudited pro forma results for fiscal year 2000 assuming the
merger occurred on August 1, 1999 is as follows:
(in thousands, except per share amounts)
2000
--------
Net revenues $153,479
Net income 187
Basic income per share 0.03
Diluted income per share 0.03
Weighted average shares 5,663
Weighted average shares assuming dilution 6,280
These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of
operations that actually would have resulted had the merger been in effect
August 1, 1999, or the future results of operations.
In April 2001, the Company acquired certain assets and product lines of
MPD Technologies, Inc. for $12,718,000 including transaction costs of
$764,000. The acquisition was accounted for under the purchase method of
accounting. Accordingly, the Company has recorded the assets purchased and
the liabilities assumed based upon the estimated fair values at the date
of acquisition. The excess of the purchase price over the fair values of
the net assets acquired was approximately $9,791,000 of which $1,800,000
was allocated to customer base which was being amortized over eight years,
$1,800,000 was allocated to existing technology which is being amortized
over six years and $6,191,000 was allocated to goodwill. See Note 15 for
discussion regarding the Company's adoption of SFAS No. 142, including the
amortization of goodwill. The purchase price of $12,718,000 was financed
through $10 million of institutional secured borrowings and the balance
from internal company funds. The acquisition cost was allocated as follows
(in thousands):
Historical book value of net assets acquired $ 2,927
Adjustments to record assets and liabilities at fair value:
Fair value of existing technology 1,800
Fair value of customer base 1,800
Excess of the purchase price over the fair value of net assets 6,191
-------
$12,718
=======
An independent third-party appraiser was used to assess and value the
existing technology and customer base from the acquisition. The valuation
of existing technology was determined for products acquired, based upon
the estimated future revenues to be earned from the products. The customer
base valuation was based upon replacement cost.
The operating results of MPD Technologies have been included in the
consolidated statements of operations from the acquisition date (April 30,
2001). The Company's unaudited pro forma results for fiscal years 2000 and
2001 assuming the merger occurred on August 1, 1999 and August 1, 2000 are
as follows:
(in thousands, except per share amounts)
2000 2001
-------- -------
Net revenues $ 88,848 153,485
Net income (loss) (6,117) 7,104
Basic income (loss) per share (1.08) 0.97
Diluted income (loss) per share (1.08) 0.90
Weighted average shares 5,663 7,348
Weighted average shares assuming dilution 5,663 7,910
F-12
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of
operations that actually would have resulted had the merger been in effect
August 1, 1999 and August 1, 2000, or the future results of operations.
On July 31, 2002, the Company acquired certain assets and assumed certain
liabilities of Advanced Hardware Architectures, Inc. ("AHA") for
$6,985,000, including transaction costs of $185,000. The purchase price is
subject to adjustment based on AHA's net tangible assets as of July 31,
2002. The acquisition was accounted for under the purchase method of
accounting. Accordingly, the Company has recorded the assets purchased and
the liabilities assumed based upon the estimated fair values at the date
of acquisition. The excess of the purchase price over the fair values of
the net assets acquired was approximately $6,312,000 of which $2,192,000
was allocated to in-process research and development and was expensed as
of the acquisition date, $4,032,000 was allocated to existing and core
technology and trade name and is being amortized over nine years and
$88,000 was allocated to order backlog and is being amortized over six
months. The in-process research and development charge is included in the
accompanying consolidated statement of operations for the year ended July
31, 2002. The acquisition cost was allocated as follows (in thousands):
Historical book value of net assets acquired $ 673
Adjustments to record assets and liabilities at fair value:
Fair value of in-process research and development 2,192
Fair value of existing and core technology and trade name 4,032
Fair value of order backlog 88
------
$6,985
======
An independent third-party appraiser was used to assess and value the
in-process research and development, existing technology, core technology,
trade name and order backlog. The valuation of the in-process research and
development and existing technology was based on the value of the cash
flows that the asset can be expected to generate in the future. The
valuation of the core technology and trade name was based on the
capitalization of the royalties saved because the Company owns the asset.
The valuation of the order backlog was based on the replacement cost
approach.
Sales and income for fiscal 2002 and 2001 relating to the AHA assets
acquired would not have been material to the Company's results of
operations for those periods.
(3) Accounts Receivable
Accounts receivable consists of the following at July 31, 2002 and 2001:
2002 2001
----------- ----------
Accounts receivable from commercial customers $15,424,000 18,336,000
Unbilled receivables (including retainages) on contracts-in-progress 9,304,000 5,939,000
Amounts receivable from the United States government and its agencies 3,502,000 3,944,000
----------- ----------
28,230,000 28,219,000
Less allowance for doubtful accounts 795,000 845,000
----------- ----------
Accounts receivable, net $27,435,000 27,374,000
=========== ==========
In the opinion of management, substantially all of the unbilled balances
will be billed and collected during fiscal 2003.
F-13
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Inventories
Inventories consist of the following at July 31, 2002 and 2001:
2002 2001
----------- -----------
Raw materials and components $15,920,000 18,718,000
Work-in-process and finished goods 21,365,000 20,294,000
----------- -----------
37,285,000 39,012,000
Less:
Reserve for anticipated losses on contracts
and inventory reserves 3,289,000 2,280,000
----------- -----------
Inventories, net $33,996,000 36,732,000
=========== ===========
(5) Property, Plant and Equipment
Property, plant and equipment consists of the following at July 31, 2002
and 2001:
2002 2001
----------- -----------
Equipment $24,481,000 22,681,000
Leasehold improvements 2,030,000 1,964,000
Facilities financed by capital lease -- 2,450,000
Equipment financed by capital lease 2,345,000 2,146,000
----------- -----------
28,856,000 29,241,000
Less accumulated depreciation and amortization 16,967,000 17,463,000
----------- -----------
$11,889,000 11,778,000
=========== ===========
Depreciation and amortization expense on property, plant and equipment
amounted to approximately $3,527,000, $3,711,000, and $1,562,000, for the
years ended July 31, 2002, 2001 and 2000, respectively.
(6) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at
July 31, 2002 and 2001:
2002 2001
----------- -----------
Customer advances and deposits $ 2,173,000 2,089,000
Accrued wages and benefits 2,918,000 3,663,000
Accrued commissions 1,125,000 1,021,000
Accrued warranty 2,975,000 4,336,000
Other 2,668,000 2,506,000
----------- -----------
$11,859,000 13,615,000
=========== ===========
(7) Capital Lease Obligations
Capital lease obligations consist of the following at July 31, 2002 and
2001:
2002 2001
----------- -----------
Obligations under capital leases $ 2,356,000 3,254,000
Less current installments 1,062,000 1,097,000
----------- -----------
$ 1,294,000 2,157,000
=========== ===========
The obligations under capital leases which related to the Melville, New
York facility were included in fiscal 2001 only. The balance of the
capital lease obligations in both years related to certain equipment and a
technology license. The net carrying value of assets under capital lease
was $3,207,000 and $3,789,000 at July 31, 2002 and 2001, respectively.
F-14
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Future minimum lease payments under capital leases as of July 31, 2002
are:
Years ending July 31,
2003 $1,214,000
2004 946,000
2005 254,000
2006 159,000
2007 30,000
----------
Total minimum lease payments 2,603,000
Less amounts representing interest (at rates varying from 6.55% to 9.5%) 247,000
----------
2,356,000
Less current installments 1,062,000
----------
Obligations under capital leases, net of current installments $1,294,000
==========
In December 1991, the Company and a partnership controlled by the
Company's Chairman, Chief Executive Officer and President entered into an
agreement in which the Company leases from the partnership its corporate
headquarters and Melville production facility. The lease was for an
initial term of ten years. For financial reporting purposes, the Company
capitalized the lease at inception in the amount of $2,450,000, net of
deferred interest of $1,345,000. In December 2001, the Company exercised
its option for an additional ten-year period. For financial reporting
purposes, the lease for the extension period is an operating lease. The
annual rentals, of approximately $482,000 for fiscal 2002, are subject to
annual adjustments equal to the lesser of 5% or the change in the Consumer
Price Index.
(8) Long-term Debt
In July 2000, in connection with the acquisition of EF Data, the Company
entered into a secured loan agreement with The Teachers' Retirement System
of Alabama, The Employees' Retirement System of Alabama, the Alabama
Heritage Trust Fund, PEIRAF - Deferred Compensation Plan, and State
Employees' Health Insurance Fund which provided a term loan in the amount
of $40,000,000, expiring on June 30, 2005. Costs incurred to obtain the
financing amounted to $289,000 and are included in other assets, net of
amortization, in the accompanying consolidated balance sheet. Borrowings
under the term loan are evidenced by promissory notes and are secured by
all of the Company's assets. The principal amount of the loan outstanding
bears interest at the per annum rate of 9.25%. The loan agreement contains
restrictive covenants, which, among other things, requires the Company to
maintain certain financial ratios. At July 31, 2002, the Company was in
compliance with such covenants. In August 2001, the Company made a partial
principal prepayment of $19,217,000 against the loans, in addition to
scheduled principal payments in fiscal 2001 aggregating $2,100,000.
In April 2001, in connection with the acquisition of MPD Technologies, the
Company borrowed an additional $10,000,000 from the Teachers' Retirement
System of Alabama, The Employees' Retirement System of Alabama and PEIRAF
- Deferred Compensation Plan. Costs incurred to obtain the financing
amounted to $164,000 and are included in other assets, net of
amortization, in the accompanying consolidated balance sheet. The loan
which is evidenced by promissory notes and is secured by all of the
Company's assets, bears interest on the principal amount outstanding at
the per annum rate of 8.50%. The loan requires interest only payments
through June 2005 at which time the entire principal is due and is subject
to the same restrictive covenants discussed above.
F-15
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Future minimum debt payments as of July 31, 2002 are:
Years ended July 31,
2003 $ --
2004 9,833,000
2005 18,850,000
-----------
Total minimum debt payments 28,683,000
Less current installments --
-----------
Long-term debt, less current installments $28,683,000
===========
(9) Income Taxes
The provision (benefit) for income taxes on continuing operations included
in the accompanying consolidated statements of operations consists of the
following:
Year ended July 31,
-------------------
2002 2001 2000
----------- --------- ----------
Federal - current $ (706,000) 2,834,000 1,004,000
Federal - deferred 306,000 503,000 (1,204,000)
State and local - current 38,000 474,000 446,000
State and local - deferred (6,000) 77,000 (161,000)
----------- --------- ----------
$ (368,000) 3,888,000 85,000
=========== ========= ==========
The provision (benefit) for income taxes on income from continuing
operations differed from the amounts computed by applying the U.S. Federal
income tax rate of 34% as a result of the following:
2002 2001 2000
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Computed "expected" tax expense $ 265,000 34.0% 3,605,000 34.0% (1,338,000) (34.0%)
Increase (reduction) in income taxes
resulting from:
Change in the beginning of the
year valuation allowance
for deferred tax assets 100,000 12.8 (300,000) (2.8) 1,623,000 41.2
Generation of research and
experimentation credits:
Current year (400,000) (51.3) -- -- -- --
Prior years (416,000) (53.4) -- -- -- --
State and local income taxes,
net of Federal benefit 21,000 2.7 363,000 3.4 188,000 4.8
Other 62,000 8.0 220,000 2.1 (388,000) (9.8)
---------- ---------- ---------- ---------- ---------- ----------
$ (368,000) (47.2%) 3,888,000 36.7% 85,000 2.2%
========== ========== ========== ========== ========== ==========
F-16
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at
July 31, 2002 and 2001 are presented below.
2002 2001
------------ ------------
Deferred tax assets:
Allowance for doubtful accounts receivable $ 95,000 98,000
Intangibles 4,673,000 4,796,000
Inventory and warranty reserves 1,226,000 1,303,000
Plant and equipment, principally due to capitalized leases
and differences in depreciation -- 481,000
Compensation and commissions, principally due to
accrual for financial reporting purposes 736,000 423,000
Deferred compensation 211,000 116,000
Other 226,000 243,000
Alternative minimum tax credit carryforward 209,000 --
Less valuation allowance (2,200,000) (2,100,000)
------------ ------------
Total deferred tax assets 5,176,000 5,360,000
Deferred tax liabilities:
Plant and equipment, principally due to capitalized leases
and differences in depreciation (116,000) --
----------- ------------
Net deferred tax assets $ 5,060,000 5,360,000
============ ============
The Company provides for income taxes under the provisions of SFAS
No. 109, "Accounting for Income Taxes". SFAS 109 requires an asset
and liability based approach in accounting for income taxes. In
assessing the realizability of deferred tax assets and liabilities,
management considers whether it is more likely than not that some
portion or all of them will not be realized. As of July 31, 2002 and
2001, the Company's deferred tax asset has been offset by a
valuation allowance related to the extended write off period of
in-process research and development from the acquisitions of EF Data
and AHA. The Company must generate approximately $19,600,000 of
taxable income to fully utilize its deferred tax assets. Management
believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize the
net deferred tax assets.
(10) Stockholders' Equity
(a) Common Stock Offering
In February and March 2000, the Company sold an aggregate of
2,645,000 shares of its common stock in a public offering resulting
in net proceeds to the Company of $42,434,000.
(b) Stock Option, Stock Purchase and Warrant Agreements
The Company has stock option and stock purchase plans and warrant
agreements as follows:
1993 Incentive Stock Option Plan - The 1993 Incentive Stock Option
Plan, as amended, provides for the granting to key employees and
officers of incentive and non-qualified stock options to purchase up
to 1,042,500 shares of the Company's common stock at prices
generally not less than the fair market value at the date of grant
with the exception of anyone who, prior to the grant, owns more than
10% of the voting power, the exercise price cannot be less than 110%
of the fair market value. In addition, it provided formula grants to
non-employee members of the Board of Directors. The term of the
options may be no more than ten years. However, for incentive stock
options granted to any employee who, prior to the granting of the
option, owns stock representing more than 10% of the voting power,
the option term may be no more than five years. As of July 31, 2002,
the Company had granted incentive stock options representing the
right to purchase an aggregate of 1,086,515 shares at prices ranging
between $1.50 - $11.94 per share, of which 140,468 options were
canceled and 544,540 are outstanding at July 31, 2002.To date,
401,507 shares have been exercised. Outstanding awards have been
transferred to the 2000 Stock
F-17
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Incentive Plan. The terms applicable to these awards prior to the
transfer continue to apply. The plan was terminated by the Board of
Directors in December 1999 due to the approval by the shareholders
of the 2000 Stock Incentive Plan.
2000 Stock Incentive Plan - The 2000 Stock Incentive Plan, as
amended, provides for the granting to all employees and consultants
of the Company (including prospective employees and consultants)
non-qualified stock options, stock appreciation rights, restricted
stock, performance shares, performance units and other stock-based
awards. In addition, employees of the Company are eligible to be
granted incentive stock options. Non-employee directors of the
Company are eligible to receive non-discretionary grants of
nonqualified stock options subject to certain limitations. The
aggregate number of shares of common stock which may be issued may
not exceed 1,100,000 plus the shares that were transferred to the
Plan relating to outstanding awards that were previously granted
under the 1982 Incentive Stock Option Plan and the 1993 Incentive
Stock Option Plan. The Stock Option Committee of the Board of
Directors, consistent with the terms of the Plan, will determine the
types of awards to be granted, the terms and conditions of each
award and the number of shares of common stock to be covered by each
award. Grants of incentive and non-qualified stock options may not
have a term exceeding ten years or no more than five years in the
case of an incentive stock option granted to a stockholder who owns
stock representing more than 10% of the voting power. As of July 31,
2002, the Company had granted incentive stock options representing
the right to purchase an aggregate of 669,700 shares at prices
ranging between $9.35 - $17.84 of which 50,500 options were canceled
and 619,200 are outstanding at July 31, 2002. There have been no
exercises. All options granted have been incentive stock options at
prices equal to the fair market value of the stock on the date of
grant.
Warrants Issued Pursuant to Acquisition - In connection with an
acquisition in fiscal 1999, the Company issued warrants to the
acquiree's owners and creditors to purchase 150,000 shares of the
Company's common stock at an exercise price of $6.57. The warrants,
which contain transferability restrictions, are exercisable for a
period of five years commencing September 24, 1998, and shares
purchased through the exercise of these warrants contain voting
restrictions. Through fiscal 2002, warrants to purchase 87,020
shares were exercised.
Employee Stock Purchase Plan - The Comtech Telecommunications Corp.
2001 Employee Stock Purchase Plan ("The Purchase Plan") was approved
by the shareholders on December 12, 2000. Pursuant to the Purchase
Plan, 300,000 shares of the Company's common stock will be reserved
for issuance. The Purchase Plan is intended to provide eligible
employees of the Company the opportunity to acquire common stock in
the Company at 85% of fair market value at date of issuance through
participation in the payroll-deduction based employee stock purchase
plan. Through fiscal 2002, the Company issued 40,531 shares of its
common stock to participating employees in connection with the
Purchase Plan.
F-18
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(c) Option Activity
The following table sets forth summarized information concerning the
Company's stock options:
Weighted average
Number of shares exercise price
---------------- --------------
Outstanding at July 31, 1999 904,395 $ 3.40
Granted 109,500 12.02
Expired/canceled (40,268) 5.69
Exercised (189,949) 2.71
---------- ----------
Outstanding at July 31, 2000 783,678 4.65
Granted 434,700 12.62
Expired/canceled (21,400) 9.05
Exercised (98,950) 3.13
---------- ----------
Outstanding at July 31, 2001 1,098,028 7.86
Granted 183,000 13.79
Expired/canceled (59,700) 9.38
Exercised (57,588) 2.98
---------- ----------
Outstanding at July 31, 2002 1,163,740 $ 8.95
========== ==========
Options exercisable at
July 31, 2002 433,380 $ 6.33
========== ==========
Options available for grant
at July 31, 2002 571,710
==========
The options outstanding as of July 31, 2002 are summarized in ranges
as follows:
Range of exercise Weighted average Number of options Weighted average
price exercise price outstanding remaining life
----------------- ----------------- ----------------- ----------------
$1.50 - 3.99 $ 2.97 391,140 5 years
4.00 - 7.50 6.48 113,100 6 years
7.51 - 12.00 11.19 297,000 8 years
12.01 - 17.84 14.34 362,500 9 years
(d) Stock-Based Compensation Plans
The Company accounts for its stock option plans under APB Opinion
No. 25, under which no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent with
SFAS No. 123, the Company's net income (loss) and income (loss) per
share would have been reduced to the following pro forma amounts:
2002 2001 2000
---------- --------- ----------
Net income (loss) As reported $1,148,000 6,714,000 (3,941,000)
Pro forma $ 628,000 5,818,000 (4,617,000)
Net income (loss)
per share As reported Basic $ 0.15 0.91 (0.69)
Diluted $ 0.15 0.85 (0.69)
Pro forma Basic $ 0.08 0.79 (0.82)
Diluted $ 0.08 0.74 (0.82)
F-19
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The per share weighted-average fair value of stock options granted
during 2002, 2001 and 2000 was $6.48, $9.07 and $9.14, respectively,
on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions:
2002 - expected dividend yield of 0%, risk-free interest rate of
4.29%, expected volatility of 54.10% and an expected option life of
5 years.
2001 - expected dividend yield of 0%, risk-free interest rate of
5.16%, expected volatility of 72.94% and an expected option life of
5 years.
2000 - expected dividend yield of 0%, risk-free interest rate of
6.04%, expected volatility of 82.74% and an expected option life of
5 years.
(e) Restricted Common Stock
In February 1994, a total of 180,000 restricted shares of the
Company's common stock were granted by the Board of Directors to the
principal officers of one of the Company's operating units, Comtech
Communications Corp, ("CCC"), at a cost of $.10 per share. The award
related to services to be provided over future years and, as a
result, the stock awards were subject to certain restriction which
could 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 was 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 was reflected as a reduction of stockholders' equity in
the accompanying consolidated balance sheet. In July 2000, the
Company combined the operations of CCC with Comtech EF Data and the
principal officers of CCC were made principal officers of the
combined companies. The remaining unamortized balance of $136,000 of
deferred compensation was expensed in fiscal 2000.
In October 1998, a total of 225,000 restricted shares of the
Company's common stock were granted by the Board of Directors to the
principal officers and employees of the Company's new subsidiary,
Comtech Mobile Datacom Corp. ("CMDC"), 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 CMDC attaining certain business
plan milestones, as provided in the agreement, but no later than ten
years from the date of the award. These awards also automatically
vest upon the employees' retirement or termination of employment by
the Company without cause. The excess of market value over cost of
the shares awarded of $1,041,000 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 stockholders' equity in
the accompanying consolidated balance sheets.
(11) Segment and Principal Customer Information
Reportable operating segments are determined based on the Company's
management approach. The management approach, as defined by SFAS No.
131, is based on the way that the chief operating decision-maker
organizes the segments within an enterprise for making operating
decisions and assessing performance. While the Company's results of
operations are primarily reviewed on a consolidated basis, the chief
operating decision-maker also manages the enterprise in three
segments: (i) Telecommunications Transmission, (ii) RF Microwave
Amplifiers and (iii) Mobile Data Communications Services.
Telecommunications Transmission products include modems, frequency
converters, satellite VSAT transceivers and antennas and
over-the-horizon microwave communications products and systems. RF
Microwave Amplifier products include high-power amplifier products
that use the microwave and radio frequency spectrums. Mobile Data
Communications Services include two-way messaging links between
mobile platforms or remote sites and user headquarters using
satellite, terrestrial microwave or Internet links. Unallocated
assets consist principally of cash, deferred tax assets and
intercompany receivables. Unallocated losses result from such
corporate expenses as legal, accounting and executive. Intersegment
sales in fiscal 2002 by the telecommunications transmission segment
to the RF microwave amplifiers
F-20
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
segment were $3,250,000 at approximately break-even. Intersegment
sales in fiscal 2000 and 2001 were not material. Fiscal 2002 and
2000 operating income in the telecommunications transmission segment
includes in-process research and development charges of $2,192,000
and $10,218,000, respectively.
(in thousands)
Mobile Data
Fiscal 2002 Telecommunications RF Microwave Communications Un-
- ----------- Transmission Amplifiers Services Allocated Total
------------ ---------- -------- --------- -----
Net sales $78,613 22,822 17,922 -- 119,357
Operating income (loss) 5,250 1,209 207 (3,305) 3,361
Interest income 99 3 5 345 452
Interest expense 2,157 904 -- -- 3,061
Depreciation and amortization 3,718 1,188 194 130 5,230
Expenditure for long-lived assets,
including intangibles 8,640 930 510 14 10,094
Total assets 62,738 25,564 19,308 18,976 126,586
(in thousands)
Mobile Data
Fiscal 2001 Telecommunications RF Microwave Communications Un-
- ----------- Transmission Amplifiers Services Allocated Total
------------ ---------- -------- --------- -----
Net sales $ 106,348 16,385 13,198 -- 135,931
Operating income (loss) 17,051 (470) (191) (3,235) 13,155
Interest income 211 8 4 2,080 2,303
Interest expense 3,728 287 -- -- 4,015
Depreciation and amortization 4,995 1,159 229 192 6,575
Expenditure for long-lived assets,
including intangibles 4,506 11,895 142 128 16,671
Total assets 64,116 25,067 16,596 41,209 146,988
(in thousands)
Mobile Data
Fiscal 2000 Telecommunications RF Microwave Communications Un-
- ----------- Transmission Amplifiers Services Allocated Total
------------ ---------- -------- --------- -----
Net sales $53,311 10,968 2,165 -- 66,444
Operating income (loss) 254 52 (2,350) (2,604) (4,648)
Interest income -- -- -- 1,511 1,511
Interest expense 282 99 -- -- 381
Depreciation and amortization 974 763 159 253 2,149
Expenditure for long-lived assets,
including intangibles 27,166 1,356 286 5 28,813
Total assets 68,018 9,693 4,286 44,034 126,031
In fiscal 2002, sales to the U.S. Army by our mobile data
communications segment represented 13.2% of total net sales. Sales
to one customer in fiscal 2000 represented 43.1% of total net sales.
Such sales were made from the telecommunications transmission
business segment. No customer represented more than 10% of sales in
fiscal 2001. During fiscal 2002, 2001 and 2000, approximately 33.8%,
23.1% and 8.8%, respectively, of the Company's net sales resulted
from contracts with the United States government and its agencies.
Export sales comprised 41.2%, 46.2% and 71.4% of net sales in fiscal
2002, 2001 and 2000, respectively. Export sales include sales to
domestic companies for inclusion in products, which will be sold to
international customers.
F-21
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) Commitments and Contingencies
(a) Operating Leases
The Company is obligated under noncancellable operating lease
agreements. At July 31, 2002, the future minimum lease payments
under operating leases are as follows:
2003 $ 3,484,000
2004 3,175,000
2005 2,957,000
2006 1,514,000
2007 820,000
Thereafter 2,409,000
-----------
Total $14,359,000
===========
Lease expense charged to operations was $3,318,000, $2,236,000 and
$474,000 in fiscal 2002, 2001 and 2000, 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 position or results of operations.
(c) Litigation
In or about December 2000, two former employees, Shiv Verma and
Robert Levin, commenced an action in the United States District
Court, District of New Jersey, against the Company and others
asserting, among other things, breach of certain restricted stock
agreements and seeking unspecified monetary damages, specific
performance of the restricted stock agreements, including the
issuance of an aggregate 225,000 shares of the Company's common
stock for a purchase price of $.10 per share, and other relief. The
Company asserted defenses against the claims and interposed certain
counterclaims and third-party claims against NJL, Inc., a company
then controlled by Mr. Verma.
In April 2002, Mr. Levin dismissed his claims against the Company,
and the Company in return dismissed its counterclaims against him,
without payment of any monies by either party, with both the Company
and Mr. Levin executing general releases. On July 22, 2002, the
District Judge dismissed Verma's complaint with prejudice and the
Company's counterclaims against Verma without prejudice. On August
8, 2002, the Company voluntarily dismissed its third-party claims
against defendant NJL, Inc., without prejudice. As a result, there
are no claims or counterclaims pending by or against any party to
the action, and the case has been closed on the Court's docket.
We are subject to certain other legal actions, which arise, in the
normal course of business. We believe that the outcome of these
actions will not have a material effect on our consolidated
financial position or results of operations.
(d) Employment Contract
Mr. Kornberg, the Company's Chairman of the Board of Directors,
Chief Executive Officer and President is employed pursuant to an
agreement, which was amended and restated in October 2001, which
provides, among other things, for his employment until 2003 at a
current base compensation of $395,000 per annum and incentive
compensation equal to 3.5% of the Company's pre-tax income plus such
additional amounts, if any, as the Board of Directors may from time
to time determine. The employment period is automatically extended
for successive two year periods unless either party gives notice of
non-extension at
F-22
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
least six months in advance of the scheduled termination date. The
agreement also provides for payment to Mr. Kornberg in the event of
a change in control of the Company.
(13) Discontinued Operations
In early fiscal 1999, the Company acquired the assets and assumed
certain liabilities of Comtech Wireless, Inc. ("CWI"). Based upon
CWI's disappointing fiscal 1999 results of operations and its
uncertain future prospects, effective July 31, 1999, the Board of
Directors approved a plan to liquidate CWI by January 31, 2000.
Costs and expenses, and cash flows associated with CWI have been
excluded from the respective captions in the accompanying statements
of operations and statements of cash flows.
During fiscal 2000, the Company liquidated the operations of CWI and
recorded a loss of $137,000 net of applicable income taxes.
(14) Stockholder Rights Plan
On December 15, 1998, the Company's Board of Directors approved the
adoption of a stockholder rights plan in which one stock purchase
right ("Right") was distributed as a dividend on each outstanding
share of the Company's common stock to stockholders of record at the
close of business on January 4, 1999. Under the plan, the Rights
will be exercisable only if triggered by a person or group's
acquisition of 15% or more of the Company's common stock. If
triggered, each Right, other than Rights held by the acquiring
person or group, would entitle its holder to purchase a specified
number of the Company's common shares for 50% of their market value
at that time. Unless a 15% acquisition has occurred, the Rights may
be redeemed by the Company at any time prior to the termination date
of the plan.
This Right to purchase common stock at a discount will not be
triggered by a person or group's acquisition of 15% or more of the
common stock pursuant to a tender or exchange offer which is for all
outstanding shares at a price and on terms that Comtech's Board of
Directors determines (prior to acquisition) to be adequate and in
the best interest of the Company and its stockholders. The Rights
will expire on December 15, 2008.
(15) Accounting for Business Combinations, Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 141, "Business Combinations", and SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 specifies the
criteria that intangible assets acquired in a business combination
must meet to be recognized and reported apart from goodwill. SFAS
No. 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of
SFAS No. 142. This pronouncement also requires that intangible
assets with estimable useful lives be amortized over their
respective estimated useful lives and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of".
The Company adopted the provisions of SFAS No. 141 effective July 1,
2001 and SFAS No. 142 effective August 1, 2001. As of July 31, 2001,
$4,609,000 of intangibles, net of accumulated amortization of
$768,000, were reclassified as intangibles with indefinite lives.
F-23
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets", we discontinued the amortization of goodwill and intangible
assets with indefinite lives as of the beginning of fiscal 2002. A
reconciliation of previously reported net income and earnings per
share to the amounts adjusted for the exclusion of amortization of
goodwill and intangible assets with indefinite lives, net of the
related income tax effect, follows:
(in thousands, except per share amounts)
2001 2000
--------- -------
Reported net income (loss) $ 6,714 (3,941)
Exclude amortization of goodwill and intangible assets with
indefinite lives, net of income taxes 889 168
--------- -----
Adjusted proforma net income (loss) $ 7,603 (3,773)
Basic earnings (loss) per share:
As reported $ 0.91 (0.69)
Adjusted proforma $ 1.03 (0.67)
Diluted earnings (loss) per share:
As reported $ 0.85 (0.69)
Adjusted proforma $ 0.96 (0.67)
Intangibles with definite lives arising from acquisitions as of July
31, 2002 are as follows:
Gross Carrying Accumulated Net
Amount Amortization Book Value
-------------- ------------ -----------
Existing technology $11,851,000 2,582,000 9,269,000
Core Technology 1,315,000 -- 1,315,000
Technology license 2,154,000 99,000 2,055,000
Trade name 175,000 -- 175,000
Order backlog 88,000 -- 88,000
----------- ----------- -----------
Total $15,583,000 2,681,000 12,902,000
=========== =========== ===========
Amortization expense for the twelve months ended July 31, 2002, 2001
and 2000 was $1,471,000, $2,552,000 and $230,000, respectively. The
estimated amortization expense for the fiscal years ending July 31,
2003, 2004, 2005, 2006 and 2007 is $2,016,000, $1,928,000,
$1,928,000, $1,928,000 and $1,792,000, respectively.
Intangibles with indefinite lives by reporting unit as of July 31,
2002 are as follows:
Telecommunications transmission $ 7,870,000
RF microwave amplifiers 8,422,000
Mobile data communications services 1,434,000
-----------
$17,726,000
===========
F-24
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(16) Unaudited Quarterly Financial Data
The following is a summary of unaudited quarterly operating results
(amount in thousands, except per share data):
Fiscal 2002 First Quarter Second Quarter Third Quarter Fourth Quarter Total
----------- ------------- -------------- ------------- -------------- -------
Net sales $ 31,045 30,525 29,262 28,525 119,357
Gross profit 10,805 9,119 9,898 10,755 40,577
Net income 902 148 409 (311)** 1,148**
Diluted income per share $0.11 0.02 0.05 (0.04) 0.15*
Fiscal 2001 First Quarter Second Quarter Third Quarter Fourth Quarter Total
----------- ------------- -------------- ------------- -------------- -------
Net sales $ 39,846 33,111 32,322 30,652 135,931
Gross profit 13,108 12,656 12,343 10,497 48,604
Net income 2,007 1,872 1,527 1,308 6,714
Diluted income per share $0.25 0.24 0.19 0.16 0.85*
* Income per share information for the full fiscal year may not equal the
total of the quarters within the year as a result of (i) a loss in a
quarter or the full year, and (ii) rounding.
** Includes pre-tax in-process research and development charge in the fourth
quarter of fiscal 2002 of $2,192,000.
F-25
Schedule II
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended July 31, 2002, 2001 and 2000
Column A Column B Column C Additions Column D Column E
------------- -------------- ---------------------------------------- -------------- -------------
(1) (2)
Balance at Charged to other Transfers
beginning of Charged to cost accounts - (deductions) Balance at
Description period and expenses describe describe end of period
------------- -------------- ----------------- ------------------ -------------- --------------
Allowance for doubtful accounts -
accounts receivable:
Year ended July 31,
2002 $ 845,000 269,000 (C) -- (319,000)(D) $ 795,000
2001 806,000 39,000 (C) -- - 845,000
2000 145,000 -- -- 661,000 (E) 806,000
Inventory reserves:
Year ended July 31,
2002 $ 2,280,000 1,698,000 (A) -- (689,000)(B) $ 3,289,000
2001 2,529,000 264,000 (A) -- (513,000)(B) 2,280,000
2000 1,170,000 244,000 (A) -- 1,115,000 (E) 2,529,000
(A) Increase in reserves for obsolete and slow moving inventory and losses on
contracts.
(B) Write-off of inventory.
(C) Increase in allowance for doubtful accounts.
(D) Write-off of uncollectible receivables.
(E) Acquired in acquisitions.
S-1