Back to GetFilings.com
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, 2003
|_| 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|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES: |X| NO: |_|
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 September 15, 2003 was
approximately $339,512,000.
The number of shares of the registrant's common stock outstanding on September
15, 2003 was 13,950,803.
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 9,
2003 Part III
INDEX
PART I
ITEM 1. BUSINESS 1
Industry Background 1
Corporate Strategies 1
Competitive Strengths 2
Telecommunications Transmission Business Segment 3
Mobile Data Communications Business Segment 4
RF Microwave Amplifier Business Segment 5
Key Products, Systems and Services 6
Acquisitions 6
Sales, Marketing and Customer Support 7
Backlog 8
Manufacturing and Service 8
Research and Development 8
Intellectual Property 8
Competition 9
Employees 9
Regulatory Matters 9
ITEM 2. PROPERTIES 10
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS 11
Dividends 11
Recent Sales of Unregistered Securities 11
Approximate Number of Equity Security Holders 11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 13
Overview 13
Critical Accounting Policies 14
i
Results of Operations 15
Comparison of Fiscal 2003 and 2002 15
Comparison of Fiscal 2002 and 2001 17
Liquidity and Capital Resources 18
Recent Accounting Pronouncements 19
Forward-Looking Statements and Risk Factors 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK 26
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE 26
ITEM 9A. CONTROLS AND PROCEDURES 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF REGISTRANT 27
ITEM 11. EXECUTIVE COMPENSATION 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS 27
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS 27
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 27
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULE AND REPORTS ON FORM 8-K 27
SIGNATURES 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
We design, develop, produce and market innovative products, systems and services
for advanced communications solutions. We conduct our business through three
complementary segments: telecommunications transmission, mobile data
communications and RF microwave amplifiers. We offer niche product lines where
we believe we have technological, engineering, systems design or other expertise
that differentiate our product offerings. We believe we are leaders in the
market segments that we serve.
Industry Background
The telecommunications industry has experienced dramatic changes since our
founding in 1967 during the infancy of satellite and other wireless
communications. Beyond initial requirements related to increasing the number of
available voice circuits, the communications market has developed higher level
needs around secure voice, video and data transmission at high throughput levels
across a wide variety of land, air and sea environments.
The following factors have played out with other macroeconomic developments to
fuel advanced communications growth over the last decade:
o Global development of information-intensive economies. Businesses
have a growing need for additional bandwidth to communicate by
voice, video and data with their customers and employees around the
world and are increasingly reliant upon Internet and multimedia
applications. We expect demand for bandwidth to grow in both
developed and developing countries.
o Developing countries upgrading their commercial and defense
communication systems. Many developing countries that had previously
not committed significant resources to or placed a high priority on
developing and upgrading their communications systems are now doing
so. A significant number of these countries do not have the
resources, or have large geographic population 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 systems to meet the requirements for
communication services in these countries.
o Military transformation to information based, network-centric
warfare. Particularly in the U.S., militaries are increasingly
reliant on information and communications technology to provide
critical advantages in both battlefield, support and logistics
operations. Having greater situational awareness, defined by
knowledge of the location and strength of friendly and unfriendly
forces during battle, can increase the likelihood of success during
a conflict. The recent Iraqi conflict demonstrated the benefits of
advanced satellite tracking and messaging communications services.
Stretched battle and supply lines used satellite communications to
span distances that normal radio communications could not cover.
Despite the recent downturn in the global economy, we have benefited from the
foregoing trends in communications across our three business segments by
focusing internal and customer funded research and development resources to
produce secure, scalable and reliable technologies to meet evolving market
needs.
Corporate Strategies
We manage our business with the following principal corporate strategies:
Seek leadership positions in niche products, systems and services - We
seek to establish innovative niche product, system and service offerings
across our three complementary business segments. By offering niche
products, systems and services, we believe we can distinguish our
offerings from our competitors and avoid commodity-based pricing thereby
increasing our sales and profitability.
Identify and participate in emerging technologies that complement our
product portfolio - Technologies used in our products are subject to rapid
development and frequent change. We work closely with our customers to
identify new technologies and develop new applications, thereby seeking to
ensure that we
1
satisfy and exceed their expectations. We enhance existing products and
develop new products and technologies through internally funded and
customer funded research and development.
Operate flexible business segments to maximize responsiveness to our
customers - We conduct our business in three complementary business
segments which operate through individual operating units, each of which
has its own sales, marketing, product development and manufacturing
strategies. This allows each of our business segments to maintain a high
level of focus and customer attentiveness. As appropriate and as guided by
corporate senior management, our businesses capitalize on synergies that
exist between them with respect to manufacturing, technology, sales,
marketing and customer support.
Strengthen our diversified and balanced customer base - We have developed
relationships with domestic customers, international customers, various
agencies of the U.S. government and foreign governments and strive to
maintain a diversified and balanced customer base. We expect to continue
to build and strengthen these relationships by anticipating and
recognizing our customers' needs and providing them with on-time and
cost-effective solutions. We believe this diversified and balanced
customer base allows us to quickly respond to technology changes, dynamic
market changes and specific industry conditions.
Pursue acquisitions and investments in complementary businesses and
technologies - To the extent acquisitions or investments in complementary
businesses and technologies help us achieve our corporate strategies, we
selectively evaluate and pursue them.
Competitive Strengths
As a result of the successful execution of our principal corporate strategies,
we have established the following competitive strengths:
Leadership Positions in All Three Business Segments - In our
telecommunications transmission segment, we believe we are the leading
provider of over-the-horizon microwave systems, satellite earth station
modems and integrated circuits incorporating Turbo Product Code ("TPC")
forward error correction technology. In our mobile data communications
segment, we are the sole supplier of the U.S. Army's logistics command's
Movement Tracking System and have recently expanded our position into
other U.S. Army battlefield command and control applications. In our RF
microwave amplifiers segment, we are one of the largest independent
suppliers of broadband, high-power, high performance RF microwave
amplifiers.
Reputation as an Innovative Leader with Emphasis on Research and
Development - We have established a leading position in our fields through
internal and customer funded research and development activities. We
believe we were the first company to begin full-scale deployment of TPC in
digital satellite earth station modems, which can reduce satellite
transponder lease costs or increase satellite earth station modem data
throughput by up to 60%. Our field-proven over-the-horizon microwave
systems utilize our 8 megabit per second adaptive digital modem, which we
believe to be significantly faster than those of our competitors. Our
mobile data communications system is the leading satellite-based mobile
data communication system used by the U.S. Army that operates in the
L-band frequency range for real-time messaging and location tracking of
mobile assets.
Ability to Leverage Our High Volume Manufacturing Center - Our high volume
technology manufacturing center located in Tempe, Arizona, utilizes
state-of-the-art design and production techniques, including analog,
digital and RF microwave production, hardware assembly and full-service
engineering. All three of our business segments utilize this manufacturing
center for certain high volume production which allows them to secure
larger volume contracts on a more cost-effective basis than they would
otherwise be able to obtain.
Diverse Customer Base with Long-Standing Relationships - We have
established long-standing relationships with key domestic and
international system and network suppliers in the satellite, defense and
aerospace industries, as well as the U.S. government and foreign
governments. Our products are in service around the globe and we continue
to expand our geographic distribution as we continue to be recognized for
our ability to develop new technologies and meet stringent program
requirements.
Successful Acquisition Track Record - We have demonstrated that we can
successfully integrate acquired businesses, achieve increased efficiencies
and capitalize on market and technological synergies. We believe that our
disciplined approach in identifying, integrating and capitalizing on
acquisitions provides us with a proven platform for additional growth.
2
Our Three Business Segments
We conduct our business through three complementary business segments:
telecommunications transmission, mobile data communications and RF microwave
amplifiers. This allows each of our business segments to maintain a high level
of focus and customer attentiveness. As appropriate and as guided by corporate
senior management, our businesses capitalize on synergies that exist between
them with respect to manufacturing, technology, sales, marketing and customer
support. Financial information about our business segments can be found in note
11 to the consolidated financial statements on page F-20.
Telecommunications Transmission Segment
Overview
Our telecommunications transmission segment, which is our largest business
segment, provides sophisticated equipment and systems for satellite,
over-the-horizon microwave and wireless line-of-sight telecommunications
systems. Our telecommunications transmission products are used in a wide variety
of commercial and defense applications including the transmission of voice,
video and data over the Internet (such as voice over IP and broadband video),
long distance telephone, broadcast, cable and highly secure defense
applications.
The following are the key products and systems, along with related markets and
applications, for our telecommunications transmission segment:
Satellite Earth Station Equipment and Systems. We provide customers a one-stop
shopping approach by offering a broad range of communications equipment,
including modems, frequency converters, power amplifiers and transceivers that
are used in commercial and government satellite applications. We believe we are
the leading provider of satellite earth station modems. Our modems incorporate
TPC, an advanced form of forward error correction. We believe we were the first
company to offer TPC in satellite earth station modems which can significantly
reduce satellite transponder lease costs or increase satellite earth station
modem data throughput by up to 60%. Our time division multiple access ("TDMA")
and single channel per carrier ("SCPC") based communication products and
software enable our customers to utilize satellite network bandwidth management
techniques to more cost-effectively enable, among others, applications such as
video teleconferencing, distance learning, telemedicine and Internet content
delivery.
Over-the-Horizon Microwave Systems. We design, develop, produce and market
over-the-horizon microwave communications equipment and systems that can
transmit signals over unfriendly or inaccessible terrain from 30 to 600 miles by
reflecting the transmitted signals off the troposphere, an atmospheric layer
located approximately seven miles above the earth's surface. Over-the-horizon
microwave systems are a cost-effective alternative to satellite systems since
they do not require the leasing of satellite transponder space. The reliability
and security of these systems make them well suited for defense applications
involving communications over unfriendly terrain requiring a span of greater
than 30 miles and offshore oil platforms which are located more than twenty
miles off shore.
Forward Error Correction and Data Compression Technology. We design, develop and
market forward error correction integrated circuits and data compression
technology solutions which allow for more efficient transmission of voice, video
and data in wireless communication channels. As noted above, our patented
forward error correction technology, TPC, is included in our digital satellite
earth station modems. We are currently exploring applications for our TPC
technology in our over-the-horizon microwave systems and other wireless
applications. Our data compression technology solutions are used by leading
manufactures of copiers and data storage products.
Business Strategies
Our telecommunications transmission segment business strategies are as follows:
Expand Leadership Position in Satellite Earth Station Market - Our satellite
earth station modems, which incorporate leading technology such as TPC, have
established us as a leading provider to domestic and international commercial
satellite systems and network customers, as well as the government. With our
one-stop shopping approach, we are well-positioned for increased demand that we
anticipate will be driven by the need for the U.S. government and emerging
countries to upgrade and build their communication systems, and the long-term
growth of internet traffic, including voice over IP, data, video and broadband
transmissions.
3
Capitalize on Increased Demand for Over-the-Horizon Microwave Systems and
Upgrades - As the leading supplier in this niche product line, we anticipate
capitalizing on increased demand for these secure systems and demand for
upgrades to a large domestic and international installed base of older systems.
Continue to Develop Technology for Efficient Satellite Bandwidth Utilization -
As demand for satellite bandwidth continues to increase, technological advances
will be needed to provide bandwidth solutions for our customers. We intend to
continue to develop next generation advances of our TPC technology and believe
this will have important utility in responding to the increasing demand for
satellite bandwidth utilization, particularly by U.S. military, security and
intelligence agencies. In addition, we intend to continue to develop our
Internet and TDMA and SCPC based software and products which enable customers to
utilize bandwidth management techniques to enable, among others, applications
such as video teleconferencing, distance learning, telemedicine and Internet
content delivery.
Mobile Data Communications Segment
Overview
Our mobile data communications segment provides satellite-based mobile tracking
and messaging services and mobile satellite transceivers primarily for defense
applications, including logistics, support and battlefield command and control.
Our system provides location, tracking and near real-time messaging with mobile
assets. These services are provided through leased satellite capacity, utilizing
our network, mobile transceivers and satellite earth station gateways. Our
system and mobile transceivers can be used on a variety of vehicles, including
trucks, jeeps, tanks and helicopters and allow communication globally using the
L-Band satellite frequency.
The following are the key applications in which our products and services are
currently utilized:
The U.S. Army's Movement Tracking System - We believe we are the leading
provider of mobile tracking and messaging systems to the U.S. Army. In 1999, we
were awarded a contract for the U.S. Army logistics command's Movement Tracking
System ("MTS"). This contract allows for the purchase of up to $418.2 million of
equipment and tracking and messaging services over an eight-year period, and is
open to other government agencies to procure their tracking and messaging
requirements. Through July 31, 2003, we have received orders aggregating $71.5
million under the MTS contract. The contract can be terminated by the U.S. Army
at any time and orders are subject to unpredictable funding and deployment
decisions.
Battlefield Command & Control Applications - In February 2003, we announced a
$23.5 million contract with a major U.S. prime contractor for satellite-based
mobile tracking and messaging systems and services. This contract involves the
integration of our mobile satellite transceivers into the U.S. Army's Force XXI
Battle Command, Brigade and Below ("FBCB2") command and control systems. Our
efforts include the supply of mobile satellite transceivers, the lease of
satellite capacity, the supply and operation of the satellite packet data
network and network gateways, and associated systems support and maintenance.
Commercial Applications - We believe that our satellite-based mobile tracking
and messaging services and products may be useful to domestic and international
transportation companies, private fleets and heavy equipment fleets throughout
the world. We believe that these commercial customers may be able to utilize our
products and services to track the location of their vehicles and to communicate
with them en route and better manage their information and operations. Although
we currently have little experience in this market, we intend to fully evaluate
this market for our products and services.
Business Strategies
Our mobile data communications segment business strategies are as follows:
Continue to Capitalize on Opportunities with the U.S. Army - Although fiscal
2003 was a record year for both the MTS contract funding and the recent command
and control battlefield application awards, the number of logistic and combat
vehicles we have equipped (as a percentage of the total number of vehicles the
U.S. Army deploys) is relatively small. For example, the U.S. Army logistics
commands have identified a need to equip approximately 41,000 vehicles, of which
only approximately 8,000 have been equipped as of July 31, 2003. Accordingly, we
will actively work with the U.S. Army in maximizing funding for these
opportunities.
Leverage our Current Installed Base into other Military Commands - In light of
the integration of our mobile satellite transceivers into the U.S. Army's FBCB2
command and control systems used in Iraq and Afghanistan, as well as the related
use of our products by the U.S. Army's logistics command, we believe that there
are a number of
4
opportunities with other military commands. The U.S. Army Reserve has received
funding to purchase some of our products and services under the MTS contract and
we are in early discussions with a number of different military services.
Explore the Emerging Market for Commercial Satellite-Based Mobile Data
Applications - Commercial markets for satellite-based mobile data communications
include land mobile applications, remote sensing, utility, maritime and aviation
applications. Although the market for commercial satellite-based mobile data
applications is extremely competitive, we believe the performance of our system
in the military setting may establish our system as an attractive choice for
users in commercial markets.
RF Microwave Amplifier Segment
Overview
We are one of the largest independent companies designing, developing,
manufacturing and marketing solid-state high power, broadband amplifiers in the
microwave and RF spectrums. Our amplifiers reproduce signals with greater power,
current or voltage amplitude and are extremely complex and critical to the
performance of the systems into which they are incorporated. We sell our
amplifiers to domestic and foreign commercial and government users. The
following are the principal markets and applications for our amplifiers:
Defense - U.S. and foreign military customers use our amplifiers in a variety of
telecommunications systems (such as transmitting and boosting signals),
electronic warfare systems (such as simulation and jamming radar and in
identification friend or foe ("IFF") systems). We believe that ongoing
heightened security concerns are resulting in increased interest in our
amplifier products and that the performance and quality of our amplifiers should
enable us to capitalize on increased defense spending.
Medical and Health - Our amplifiers are key components in oncology treatment
systems and allow doctors to give patients who are suffering from cancer higher
doses of radiation while focusing closer on the tumors, thereby avoiding damage
to healthy tissue. Our amplifiers are also used in electronic pasteurization
systems which use RF energy to kill bacteria.
Satellite communications - Our amplifiers are used to amplify signals for voice,
data and fax transmission for air-to-satellite-to-ground communications. For
example, our amplifiers, when incorporated as part of an aircraft satellite
communication system, can provide passengers with e-mail, internet access and
video conferencing. Although sales in this product line continue to be
negatively impacted by the events of September 11, 2001 and its aftermath, we
remain optimistic about our prospects for long-term growth within this market.
Instrumentation and testing - Manufacturers need to test electronic systems for
electromagnetic compatibility and susceptibility to interference using
high-power broadband 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.
Telecommunication suppliers use our amplifiers to test the performance of high
power microwave and wireless electronic system components used in cellular and
PCS networks.
Business Strategies
We manage our RF microwave amplifier segment with the following principal
strategies:
Continue to Penetrate the Market for Outsourced Amplifier Production - Because
solid-state high-power, broadband amplifiers are important to the performance of
the larger systems into which they are incorporated, most companies prefer to
manufacture these amplifiers in-house. We believe that our focus on and
expertise in designing and manufacturing solid-state high-power, broadband
amplifiers, as well as our high volume manufacturing capability, make us a
cost-effective and technologically superior alternative to such in-house
manufacturing. Customers, among others, who currently outsource only a small
percentage of their in-house amplifier work to us, include Rockwell Collins,
Raytheon, Thales, Lockheed Martin, Northrop Grumman and Siemens Medical Systems.
Expand Marketing and Sales Efforts in the Defense Market - We believe there are
a number of long-term opportunities in the defense and military markets,
particularly for amplifiers used in electronic warfare such as IFF systems, and
that we can increase our share of this market by pursuing partnering with
existing and new prime contractors.
5
Enhance Position as Innovative Supplier by Increasing Research and Development -
We will continue to pursue customer funded research and development to fuel new
product development, as well as continue our internally funded research and
development activities. We expect this emphasis on research and development to
enhance our existing product line, develop new capabilities and solidify and
strengthen our position in our principal markets.
Key Products, Systems and Services
- -----------------------------------------------------------------------------------------------------------------------------
Business Products/Systems Representative End-User
Segment and Services Customers Applications
- -----------------------------------------------------------------------------------------------------------------------------
Telecommunications Satellite earth station Satellite systems integrators, Commercial and defense
transmission equipment and systems service providers and defense applications including the
including: analog and contractors such as Intelsat, transmission of voice, video and
digital modems, frequency PanAmSat, Globecom and Hughes data over the Internet, broadband,
converters, power Network Systems long distance telephone, broadcast
amplifiers, transceivers and and cable, distance learning and
satellite bandwidth U.S. and foreign governments telemedicine
utilization software
- -----------------------------------------------------------------------------------------------------------------------------
Over-the-horizon microwave Military customers, primarily Highly secure defense
systems foreign governments and applications, such as transmission
related prime manufacturers, of sensitive military data, and
and oil companies such as commercial applications such as
ExxonMobil and BP Amoco the transmission of voice and data
to and from oil platforms which
are located more than twenty miles
offshore
- -----------------------------------------------------------------------------------------------------------------------------
Forward error correction Satellite and wireless Enables more efficient
technology such as Turbo equipment providers and transmission of voice, video and
Product Codec (TPC) leading manufacturers of data in wireless communication
copier and data storage channels
Data compression technology products, such as Konica and
Sony
- -----------------------------------------------------------------------------------------------------------------------------
Mobile data Mobile data tracking and U.S. Army logistics command Two-way satellite based mobile
communications messaging services for tracking, messaging services (U.S.
mobile assets Prime contractors to the U.S. Army's MTS), battlefield command
Armed Forces and control applications (FBCB2)
Mobile satellite transceivers and commercial applications such
as fleet tracking and messaging
- -----------------------------------------------------------------------------------------------------------------------------
RF microwave amplifiers Solid-state high-power, Domestic and international Defense applications including
broadband RF microwave defense customers, related communications, radar, jamming and
amplifiers prime contractors and system identification friend or foe (IFF)
suppliers such as Raytheon and and commercial applications such
Thales as medical applications (oncology
treatment systems), satellite
Medical equipment companies communications (including
such as Siemens Medical air-to-satellite-to-ground
Systems communications) and
instrumentation (to test
Aviation industry system electronic systems)
providers such as Rockwell
Collins
- -----------------------------------------------------------------------------------------------------------------------------
Acquisitions
We have made acquisitions during the past several years and have followed a
disciplined approach in identifying, executing and capitalizing on these
acquisitions.
6
In July 2000, we acquired EF Data, the satellite communications division of
Adaptive Broadband Corporation, for approximately $54.2 million in cash. We
combined this operation with our then existing Arizona based satellite earth
station equipment operations, which resulted in enhanced product offerings,
distribution reach and market presence. The combined operations are part of our
telecommunications transmission segment.
In April 2001, we acquired certain assets and product lines of MPD Technologies,
Inc. for $12.7 million. The acquisition expanded our product offerings, customer
base, market and applications in the RF microwave amplifier segment. Products
acquired included amplifiers utilized in oncology treatment systems, satellite
air-to-ground communications, as well as a wide range of defense applications.
We combined this operation with our then existing New York-based operation in
our RF microwave amplifiers segment.
In July 2002, we acquired certain assets and product lines and assumed certain
liabilities of Advanced Hardware Architectures, Inc. for $6.4 million in cash.
The acquisition allowed us to design, develop and market forward error
correction integrated circuits and data compression technology solutions which
allow for more efficient transmission of voice, video and data in wireless
communication channels. Products acquired included the patented forward error
correction technology, TPC, which is included on a chip in our digital satellite
earth station modems. We are currently exploring applications for TPC in our
over-the-horizon microwave systems and other wireless applications. We also
extended our diversified customer base by acquiring certain data compression
technology solutions that are used by leading manufacturers of copiers and data
storage products. This operation is part of our telecommunications transmission
segment.
In March 2003, we acquired certain Internet and TDMA-based software for $0.4
million in cash. The acquisition expanded our product line offering in our
satellite earth station equipment and systems market. The software enables our
customers to utilize bandwidth management techniques to enable applications such
as video teleconferencing, distance learning, telemedicine and Internet content
delivery. This operation is part of our telecommunications transmission segment.
Sales, Marketing and Customer Support
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. We intend to continue to expand international marketing efforts by
engaging additional independent sales representatives, distributors and
value-added resellers and by establishing additional Comtech foreign sales
offices. As appropriate and as guided by corporate senior management, our three
business segments capitalize on manufacturing, technology, sales, marketing and
customer support synergies between them.
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.
Over-the-horizon microwave systems, mobile data tracking and messaging products
and services and a portion of our solid-state high-power, broadband RF microwave
amplifier product line have long sales cycles. Once a product is designed into a
system, customers may be reluctant to change the incumbent supplier due to the
extensive qualification process and potential redesign required in using
alternative sources. Accordingly, senior management is actively involved in key
aspects of relations with our major customers.
Our international sales (including sales to prime contractors' international
customers) represented approximately 39.7% 41.2% and 46.2% of total net sales in
fiscal 2003, 2002 and 2001, respectively.
Domestic commercial sales represented approximately 16.1%, 25.0% and 30.7% of
our total net sales in fiscal 2003, 2002 and 2001, respectively. The balance of
our sales were to the U.S. government (including sales to prime contractors to
the U.S. government) and represented 44.2%, 33.8% and, 23.1% of our total net
sales in fiscal 2003, 2002 and 2001, respectively.
In fiscal 2003, sales to one customer, a prime contractor, represented 19.8% of
our total net sales. There were no customers in fiscal 2002 or 2001, other than
the U.S. government, that represented 10% or more of our total net sales.
7
Backlog
Our backlog as of July 31, 2003 and 2002 was approximately $100.1 million and
$44.1 million, respectively. We expect that a majority of the backlog as of July
31, 2003 will be recognized as sales during fiscal 2004. We received advance
payments aggregating approximately $2.5 million as of July 31, 2003 in
connection with orders included in the backlog at that date. At July 31, 2003,
approximately 34.9% of the backlog consisted of U.S. government contracts,
subcontracts and government funded programs, approximately 52.7% consisted of
orders for use by foreign customers (including sales to prime contractors'
international customers) and approximately 12.4% 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 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 satellite earth station equipment, forward error
correction product lines and a portion of our RF microwave amplifier business
operate under short lead times and usually generate sales out of inventory.
Manufacturing and Service
Our manufacturing operations consist principally of the assembly and testing of
electronic products that 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 consider our facilities to be well maintained and adequate for current and
planned production requirements. All of our manufacturing facilities, including
those that serve the military market, must comply with stringent customer
specifications. We employ formal quality management programs and other training
programs, including the International Standard Organization's (ISO-9000) quality
procedure registration programs.
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 sub-contractors.
Research and Development
We reported internal research and development expenses of $12.8 million, $11.0
million and $10.2 million in fiscal 2003, 2002 and 2001, respectively,
representing 7.4%, 9.3% and 7.5% 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 contracts, and such expenditures are not included in our research and
development expenses for financial reporting purposes. During fiscal 2003, 2002
and 2001, we were reimbursed by customers for such activities in the amounts of
$3.7 million, $2.0 million and $1.7 million, respectively. Our aggregate
research and development expenditures (internal and customer funded) were $16.5
million, $13.0 million and $11.9 million or 9.5%, 11.0% and 8.7% of total net
sales in fiscal 2003, 2002 and 2001, respectively.
Intellectual Property
We rely upon trade secrets, technical know-how and continuing technological
innovation to develop and maintain our competitive position. The products we
sell require a large amount of engineering design and manufacturing expertise.
The majority of these technological capabilities, however, are not protected by
patents and licenses. We rely on the expertise of our employees and our learned
experiences in both the design and manufacture of our products and the delivery
of our services.
8
Some of our telecommunications transmission technology is protected by patents,
which are significant to protecting our proprietary technology. We have been
issued several U.S. patents relating to forward error correction technology that
is utilized in our turbo product codec satellite modems. The earliest of these
patents expires in 2012.
Competition
Our businesses are highly competitive and characterized by rapid technological
change. A significant technological breakthrough by others, including new
companies or our customers, could have a material adverse effect on our
business. 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 and transmission technologies.
Certain 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. The principal competitors in our
telecommunications transmission segment include ViaSat, Inc., Radyne ComStream
Corporation, Miteq, Inc. and Marconi Corporation plc. The principal competitors
in our mobile data communications segment include Qualcomm, Inc., Aether
Systems, Inc., and EMS Technologies, Inc. The principal competitors in our RF
microwave amplifier segment include Herley Industries, Inc., Zeta (a division of
Integrated Defense Technologies, Inc.) and ARKalmus. In addition, certain of our
customers, such as prime contractors who currently outsource their engineering
and manufacturing requirements to us, have technological capabilities in our
product areas and could choose to replace our products with their own.
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
flexible organizational structure and proprietary know-how, we believe we have
the ability to develop, produce and deliver equipment on a cost-effective basis
faster than many of our competitors.
Employees
At July 31, 2003, we had 689 employees, 361 of whom were engaged in production
and production support, 195 in research and development and other engineering
support and 133 in marketing and administrative functions. None of our employees
are represented by a labor union. We believe that our employee relations are
good.
Regulatory Matters
We are subject to a variety of local, state and federal governmental
regulations. Our products, which are incorporated into wireless communications
systems, must comply with various government regulations, including those of the
Federal Communications Commission. Our manufacturing facilities, which may
store, handle, emit, generate and dispose hazardous substances to manufacture
our products, are subject to a variety of local, state and federal regulations,
including those issued by the Environmental Protection Agency. Our international
sales are subject to U.S. and foreign regulations and may require licenses from
U.S. government agencies or require the payment of certain tariffs. Our
financial reporting, corporate governance, public disclosure and compliance
practices are governed by laws such as the Sarbanes Oxley Act of 2002 and
various rules and regulations issued by the Securities and Exchange Commission.
As a U.S. government contractor and subcontractor, we are subject to a variety
of rules and regulations, such as the Federal Acquisitions Regulations.
To date, we have incurred costs in connection with compliance with these
regulations in the normal course of business. We have not experienced material
changes to our earnings, capital expenditures or competitive position caused by
unexpected expenditures in connections with complying with such regulations.
9
ITEM 2. PROPERTIES
Our corporate offices are located in a portion of a 46,000-square foot
engineering and manufacturing facility on more than two acres of land in
Melville, New York. This facility is primarily used by our RF microwave
amplifier segment. 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 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 customary
adjustments.
Although primarily used for our satellite earth station product lines which are
part of our telecommunications transmission segment, all three of our business
segments utilize a 113,000-square foot, high volume manufacturing center located
in Tempe, Arizona. This manufacturing center utilizes state-of-the-art design
and production techniques, including analog, digital and RF microwave
production, hardware assembly and full service engineering. The lease for this
facility expires in February 2006 and we have the option to extend the term of
the lease for an additional five-year period.
Our telecommunication transmission segment leases an additional four facilities
in Orlando, Florida, St. Cloud, Florida, Pullman, Washington, and Fremont,
California, aggregating 194,500 square feet. Our mobile data communications
segment leases a 12,000 square foot facility in Germantown, Maryland. All of
these facilities, which are primarily utilized for manufacturing, engineering
and general office use, are located in the United States and all are leased from
unrelated third parties. The lease terms for these facilities are generally for
multi-year periods and we believe that we will be able to renew these leases or
find comparable facilities elsewhere. In addition, we operate two small offices
in Asia and Africa.
ITEM 3. LEGAL PROCEEDINGS
We are subject to certain 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, 2003.
10
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, as adjusted to
reflect the three-for-two stock split effected in July 2003. Such prices do not
include retail markups, markdowns, or commissions.
Common Stock
------------
High Low
---- ---
Fiscal Year Ended 7-31-02
First Quarter $ 10.97 8.33
Second Quarter 9.22 7.43
Third Quarter 8.60 5.50
Fourth Quarter 7.15 4.21
Fiscal Year Ended 7-31-03
First Quarter 6.08 3.83
Second Quarter 7.93 4.88
Third Quarter 9.71 5.89
Fourth Quarter 23.60 9.67
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.
Recent Sales of Unregistered Securities
On July 16, 2003, we sold 2.1 million shares of our common stock to a limited
number of accredited investors in a private placement transaction for an
aggregate price of approximately $40.6 million (or $19.33 per share). We used a
portion of the net proceeds of $38.2 million from the sale of shares to prepay
long-term debt and will use the balance for other corporate purposes.
The securities offered and sold in the private placement were not registered
with the SEC and were sold without registration in reliance upon the exemption
from securities registration afforded by the provisions of Regulation D under
the Securities Act of 1933, as amended. We registered for resale the shares sold
in the private placement by filing a registration statement with the SEC on July
28, 2003. On August 18, 2003, that registration statement became effective.
In addition to the private placement, we sold, in the aggregate, 54,736 shares
of our common stock to holders of warrants who exercised purchase rights during
fiscal 2003. These warrants for the purchase of shares of our common stock were
issued in connection with our acquisition of Mobile Datacom Corporation in
September, 1998 and were issued with an exercise price of $4.38 per share.
Approximate Number of Equity Security Holders
As of September 15, 2003 there were approximately 678 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 2003 and 2002.
11
Years Ended July 31,
(In thousands, except per share amounts)
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
Consolidated Statement of
Operations Data:
Net sales $ 37,886 66,444 135,931 119,357 174,035
Cost of sales 26,405 45,942 87,327 78,780 114,317
-------- -------- -------- -------- --------
Gross profit 11,481 20,502 48,604 40,577 59,718
Expenses:
Selling, general and administrative 6,554 12,058 22,707 22,512 28,045
Research and development 2,022 2,644 10,190 11,041 12,828
In-process research and development -- 10,218 -- 2,192 --
Amortization of intangibles 78 230 2,552 1,471 2,039
-------- -------- -------- -------- --------
8,654 25,150 35,449 37,216 42,912
-------- -------- -------- -------- --------
Operating income (loss) 2,827 (4,648) 13,155 3,361 16,806
Other expenses (income):
Interest expense 204 381 4,015 3,061 2,803
Interest income (65) (1,511) (2,303) (452) (275)
Other (income) expense, net (39) 201 841 (28) --
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes 2,727 (3,719) 10,602 780 14,278
Provision (benefit) for income taxes (3,754) 85 3,888 (368) 4,569
-------- -------- -------- -------- --------
Income (loss) from continuing
operations 6,481 (3,804) 6,714 1,148 9,709
Discontinued operations:
Loss from operations of discontinued
segment (less applicable income
tax benefit of $79 in 2000 and
$320 in 1999) (622) (137) -- -- --
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) $ 5,265 (3,941) 6,714 1,148 9,709
======== ======== ======== ======== ========
Basic income (loss) per share:
Income (loss) from continuing
operations $ 1.04 (0.45) 0.61 0.10 0.85
Loss from discontinued operations (0.19) (0.01) -- -- --
-------- -------- -------- -------- --------
Basic income (loss) $ 0.85 (0.46) 0.61 0.10 0.85
======== ======== ======== ======== ========
Diluted income (loss) per share:
Income (loss) from continuing
operations $ 0.94 (0.45) 0.57 0.10 0.80
Loss from discontinued operations (0.17) (0.01) -- -- --
-------- -------- -------- -------- --------
Diluted income (loss) $ 0.77 (0.46) 0.57 0.10 0.80
======== ======== ======== ======== ========
Weighted average number of common
shares outstanding -
Basic 6,214 8,495 11,022 11,192 11,445
Potential dilutive common shares 646 -- 843 516 748
-------- -------- -------- -------- --------
Weighted average number of common
and common equivalent shares
outstanding assuming dilution -
Diluted 6,860 8,495 11,865 11,708 12,193
======== ======== ======== ======== ========
Other Consolidated Operating Data:
Backlog at period-end $ 38,637 50,538 50,094 44,121 100,142
New orders 61,071 78,345 135,487 113,384 230,056
Research and development expenditures
- internal and customer funded 3,801 6,916 11,846 13,070 16,504
12
As of July 31,
(In thousands)
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
Consolidated Balance Sheet Data:
Total assets $ 29,847 126,031 146,988 126,586 164,250
Working capital 10,192 65,267 67,089 51,577 74,801
Long-term debt -- 37,900 42,000 28,683 --
Long-term capital lease obligations 959 908 2,157 1,294 393
Stockholders' equity 18,357 57,782 65,565 67,288 117,568
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We design, develop, produce and market innovative products, systems and services
for advanced communications solutions. We conduct our business through three
complementary segments: telecommunications transmission, mobile data
communications and RF microwave amplifiers. We offer niche product lines where
we believe we have technological, engineering, systems design or other expertise
that differentiate our product offerings. We believe we are leaders in the
market segments that we serve.
Our telecommunications transmission segment, which is our largest business
segment, provides sophisticated products and systems for satellite,
over-the-horizon microwave and wireless line-of-sight telecommunication systems.
Our mobile data communications segment provides satellite-based mobile tracking
and messaging services and mobile satellite transceivers primarily for defense
applications, including logistics, support and battlefield command and control.
Our RF microwave amplifier segment designs, manufactures and markets solid-state
high power, broadband RF microwave amplifier products. All of our products and
services are used in a variety of commercial and defense applications by
domestic and international customers.
A substantial portion of our sales may be derived from a limited number of
relatively large customer contracts, the timing of revenues from which cannot be
predicted. Quarterly sales and operating results may be significantly affected
by one or more of such contracts. Accordingly, we can experience significant
fluctuations in sales and operating results from quarter to quarter.
We generally recognize income on contracts only when the products are shipped.
However, when the performance of a contract will extend beyond a 12-month
period, revenue is recognized on the percentage-of-completion method. Profits
expected to be realized on contracts are based on total estimated sales value as
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.
Since our contract with the U.S. Army for the Movement Tracking System is for an
eight-year period, revenue recognition is based on the percentage-of-completion
method. The gross margin is based on the estimated sales and expenses for the
entire eight-year contract. The amount of revenue recognized has been limited to
the amount of funded orders received from the U.S. Army. The portion of such
orders representing prepaid service time revenue is being deferred until the
service time is used by the customer. Significant changes in the estimates used
to derive the gross profit margin can materially impact our operating results
and financial condition in future periods (see Critical Accounting Policies
below for more information).
Our gross profit is affected by a variety of factors, including the mix of
products, systems and services sold, production efficiency, price competition
and general economic conditions.
13
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.
In July 2000, we acquired the business of EF Data, the satellite communications
division of Adaptive Broadband Corporation, for $54.2 million in 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. We combined this operation with our existing Arizona-based
satellite earth station equipment operations, which resulted in enhanced product
offerings, distribution reach and market presence. The combined operations are
part of our telecommunications transmission segment.
In April 2001, we acquired certain assets and product lines of MPD Technologies,
Inc. for $12.7 million in 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. We combined this operation with
our existing New York-based operation, which resulted in expanded product
offerings, customer base, and market presence. The combined operations are part
of our RF microwave amplifiers segment.
In July 2002, we acquired certain assets and assumed certain liabilities of
Advanced Hardware Architectures, Inc. ("AHA") for $6.4 million in 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. The results of operations in our telecommunications
transmission segment include the AHA related business commencing on August 1,
2002.
Critical Accounting Policies
We consider 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 our largest contracts, including our contract with the U.S. Army for the
Movement Tracking System, are accounted for using the percentage-of-completion
method. We have been engaged in the production and delivery of goods and
services on a continual basis under contractual arrangements for many years.
Historically, we have demonstrated an ability to accurately estimate revenues
and expenses relating to our long-term contracts. However, there exist inherent
risks and uncertainties in estimating revenues and expenses, particularly on
larger or longer-term contracts. If we do not accurately estimate the total
sales and related costs on such contracts, the estimated gross margins may be
significantly impacted or losses may need to be recognized in future periods.
Any such resulting reductions in margins or contract losses could be material to
our results of operations and financial position.
In addition, most government contracts have termination for convenience clauses
that provide the customer with the right to terminate the contract at any time.
Such terminations could impact the assumptions regarding total contract revenues
and expenses utilized in recognizing profit under the percentage-of-completion
method of accounting. Changes to these assumptions could materially impact our
results of operations and financial position. Historically, we have not
experienced material terminations of our long-term contracts.
14
We also address customer acceptance provisions in assessing our ability to
perform our contractual obligations under long-term contracts. Our inability to
perform on our long-term contracts could materially impact our results of
operations and financial position. Historically, we have been able to perform on
our long-term contracts.
Impairment of Intangible Assets. As of July 31, 2003, our company's intangible
assets, including goodwill, aggregated $29.1 million. In assessing the
recoverability of goodwill and other intangibles, we must make various
assumptions regarding estimated future cash flows and other factors in
determining the fair values of the respective assets. If these estimates or
their related assumptions change in the future, we may be required to record
impairment charges for these assets in future periods. Any such resulting
impairment charges could be material to our results of operations.
Provisions for Excess and Obsolete Inventory. We regularly review inventory
quantities on hand and record a provision for excess and obsolete inventory
based on historical and future usage trends. Several factors may influence the
sale and use of our inventories, including decisions to exit a product line,
technological change and new product development. These factors could result in
a change in the amount of excess and obsolete inventory on hand. Additionally,
our estimates of future product demand may prove to be inaccurate, in which case
we may have understated or overstated the provision required for excess and
obsolete inventory. In the future, if we determine that our inventory was
overvalued, we would be required to recognize such costs in our financial
statements at the time of such determination. Any such charges could be material
to our results of operations and financial position.
Allowance for Doubtful Accounts. We perform ongoing credit evaluations of our
customers and adjust credit limits based upon customer payment history and
current creditworthiness, as determined by our review of our customers' current
credit information. Generally, we will require cash in advance or payment
secured by irrevocable letters of credit before an order is accepted from an
international customer that we do not do business with regularly. In addition,
we seek to obtain insurance for certain international customers that we have
determined could be a credit risk. However, we are not able to obtain
irrevocable letters of credit or credit insurance in all instances. We
continuously monitor collections and payments from our customers and maintain an
allowance for doubtful accounts based upon our historical experience and any
specific customer collection issues that we have identified. While such credit
losses have historically been within our expectations and the allowances
established, we cannot guarantee that we will continue to experience the same
credit loss rates that we have in the past. Measurement of such losses requires
consideration of historical loss experience, including the need to adjust for
current conditions, and judgments about the probable effects of relevant
observable data, including present economic conditions such as delinquency rates
and financial health of specific customers. Changes to the estimated allowance
for doubtful accounts could be material to our results of operations and
financial position.
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,
--------------------------------------------------------------
2003 2002 2001
------------------ ------------------ ------------------
Net sales 100.0% 100.0% 100.0%
Gross margin 34.3 34.0 35.8
Selling, general and administrative expenses 16.1 18.9 16.7
Research and development expenses 7.4 9.3 7.5
Amortization of intangibles 1.2 1.2 1.9
Operating income 9.7 2.8 9.7
Interest expense (income), net 1.5 2.2 1.3
Income before income taxes 8.2 0.7 7.8
Net income 5.6 1.0 4.9
Comparison of Fiscal 2003 and 2002
Net Sales. Consolidated net sales were $174.0 million and $119.4 million for
fiscal 2003 and 2002, respectively, representing an increase of $54.6 million or
45.7%. The increase was driven by significant growth in our telecommunications
transmission and mobile data communications segments, as described below.
Sales from our telecommunications transmission segment were $102.6 million in
fiscal 2003, as compared to sales of $78.6 million in fiscal 2002, an increase
of $24.0 million or 30.5%. The sales growth in this segment resulted from (i)
incremental sales of our over-the-horizon microwave systems in connection with
two large contract awards
15
in fiscal 2003, (ii) sales relating to AHA which we purchased in July 2002 and
(iii) increased sales of our satellite earth station products. Our
telecommunications transmission segment represented 59.0% of total net sales in
fiscal 2003 as compared to 65.9% in fiscal 2002.
Mobile data communications segment sales increased $30.1 million, or 167.2%,
from $18.0 million in fiscal 2002 to $48.1 million in fiscal 2003. The sales
growth in this segment was the result of higher sales of our Movement Tracking
System to the U.S. Army, as well as sales to a major U.S. prime contractor that
is providing a battle command application to the U.S. Army. Our mobile data
communications segment represented 27.6% of total net sales in fiscal 2003 as
compared to 15.0% in fiscal 2002.
Sales from our RF microwave amplifier segment were $23.3 million in fiscal 2003
versus $22.8 million in fiscal 2002. The 2.2% increase was the result of strong
defense related sales partially offset by weakness in our commercial product
lines, such as our commercial aviation product line. Our RF microwave amplifier
segment represented 13.4% of total net sales in fiscal 2003 as compared to 19.1%
in fiscal 2002.
In fiscal 2003, one customer, a prime contractor, represented 19.8% of total net
sales. In fiscal 2002, no customer, other than the U.S. government, represented
more than 10% of total net sales. International sales represented 39.7% and
41.2% of total net sales in fiscal 2003 and 2002, respectively. Domestic
commercial sales represented 16.1% and 25.0% of total net sales in fiscal 2003
and 2002, respectively. Sales to the U.S. government (including prime
contractors to the U.S. government) represented 44.2% and 33.8% of total net
sales in fiscal 2003 and 2002, respectively.
Gross Profit. Gross profit was $59.7 million and $40.6 million in fiscal 2003
and 2002, respectively, representing an increase of $19.1 million. The increase
was primarily due to the higher sales levels in fiscal 2003 as compared to
fiscal 2002.
Gross margin, as a percentage of net sales, was 34.3% and 34.0% in fiscal 2003
and 2002, respectively. Although fiscal 2003 contained a significantly higher
proportion of mobile data communications segment sales, which generally are at
lower gross margins than our other businesses, the overall increase in sales
resulted in greater operating efficiencies and overhead absorption.
Included in cost of sales for fiscal 2003 and 2002, respectively, are provisions
for excess and obsolete inventory of $2.5 million and $1.7 million. As discussed
above under "Critical Accounting Policies - Provisions for Excess and Obsolete
Inventory", we regularly review our inventory and record a provision,
approximately $2.1 million and $1.7 million for fiscal 2003 and 2002,
respectively, for excess and obsolete inventory based on historical usage and
future usage assumptions. The provision for fiscal 2003 also includes $0.4
million relating to certain product line discontinuances in our
telecommunications transmission segment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $28.0 million and $22.5 million in fiscal 2003 and
2002, respectively, representing an increase of $5.5 million. The increase was
due to the addition of AHA, as well as higher expenses relating to the higher
sales and profit levels in fiscal 2003. As a percentage of net sales, selling,
general and administrative expenses were 16.1% and 18.9% in fiscal 2003 and
2002, respectively.
Research and Development Expenses. Research and development expenses were $12.8
million and $11.0 million in fiscal 2003 and 2002, respectively. Approximately
$11.6 million and $10.2 million of such amounts, respectively, related to our
telecommunications transmission segment. As an investment for the future, we are
continually enhancing our existing products and developing new products and
technologies. Whenever possible, we seek customer funding for research and
development to adapt our products to specialized customer requirements. During
fiscal 2003 and 2002, customers reimbursed us $3.7 million and $2.0 million,
respectively, which amounts are not reflected in the reported research and
development expenses, but are included in sales with the related estimated costs
included in cost of sales.
In-Process Research and Development. In connection with the purchase of certain
assets and liabilities of AHA in fiscal 2002, we recorded a charge of $2.2
million for the write-off of in-process research and development in fiscal 2002.
There was no in-process research and development expense in fiscal 2003.
Amortization of Intangibles. Amortization of intangibles was $2.0 million and
$1.5 million in fiscal 2003 and 2002, respectively. The increase was primarily
the result of the amortization related to intangibles with definite lives we
acquired in connection with the acquisition of AHA.
16
Operating Income. Operating income in fiscal 2003 and 2002 was $16.8 million and
$3.4 million, respectively. The increase was the result of the higher sales and
gross profit, discussed above, partially offset by higher operating expenses.
Operating income in our telecommunications transmission segment increased from
$5.3 million in fiscal 2002 to $14.2 million in fiscal 2003 as a result of
higher sales, as discussed above, combined with increased operating efficiencies
and overhead absorption. In addition, fiscal 2002 operating income included a
$2.2 million charge for in-process research and development. Our mobile data
communications segment's operating income increased from $0.2 million in fiscal
2002 to $5.2 million in fiscal 2003 as a result of the significant increase in
sales, as discussed above. Operating income in our RF microwave amplifier
segment increased from $1.2 million in fiscal 2002 to $1.8 million in fiscal
2003 as a result of a more favorable product mix in fiscal 2003. Unallocated
expenses increased from $3.3 million in fiscal 2002 to $4.4 million in fiscal
2003 as a result of higher incentive compensation expense, as well as increased
costs in connection with recent corporate governance regulations.
Interest Expense. Interest expense decreased to $2.8 million in fiscal 2003 from
$3.1 million in fiscal 2002. The decrease was the result of a partial debt
prepayment during the first quarter of fiscal 2002. In addition, we prepaid the
balance of our long-term debt in July 2003.
Interest Income. Interest income was $0.3 million and $0.5 million in fiscal
2003 and 2002, respectively. The decrease was primarily the result of lower
interest rates in fiscal 2003.
Provision for Income Taxes. The effective tax rate of 32% for fiscal 2003
reflects the tax benefits of among other items, research and experimentation tax
credits. The research and experimentation tax credits in fiscal 2002 more than
offset the tax expense on the lower level of pre-tax income, resulting in a tax
benefit of $0.4 million.
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. There were no customers in fiscal 2002 or
2001 which constituted 10% or more of our total net sales other than the U. S.
governement. 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
17
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.
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 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. 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.
Liquidity and Capital Resources
Our cash and cash equivalents position increased to $48.6 million at July 31,
2003 from $15.5 million at July 31, 2002.
Net cash provided by operating activities was $26.8 million in fiscal 2003. Such
amount reflects (i) net income of $9.7 million, plus the impact of non-cash
items such as depreciation, amortization and provisions for inventory and bad
debt reserves aggregating $9.0 million and (ii) changes in working capital
balances, most notably an increase in deferred service revenue of $6.8 million
relating to our Movement Tracking System contract with the U.S. Army.
Net cash used in investing activities in fiscal 2003 was $4.3 million. Cash of
$4.3 million was used for capital expenditures and $0.1 million was used for the
purchase of a technology license. In March 2003, we acquired certain satellite
bandwidth control technology for $0.4 million in cash and established Comtech
Vipersat Networks, Inc. These uses of cash were offset by $0.6 million we
received in connection with the final adjustment to the AHA purchase price.
Net cash provided by financing activities was $10.6 million. In July 2003, we
sold 2,100,000 shares of our common stock in a private placement transaction.
Aggregate proceeds from the sale, net of related costs, were $38.2 million. We
utilized the proceeds to prepay the balance of our long-term debt. The entire
$28.7 million of long-term debt outstanding as of July 31, 2002 was repaid in
fiscal 2003. In addition, we made principal payments on capital lease
18
obligations aggregating $1.1 million. We also received proceeds of $2.2 million
in connection with stock option and warrant exercises and employee stock
purchase plan shares.
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,
2003 will materially adversely affect our liquidity.
At July 31, 2003 we had contractual cash obligations to repay debt related to
capital lease obligations and to make payments under operating leases. Payments
due under these long-term obligations are as follows:
Obligations due by fiscal years (in thousands)
2005 2007
and and After
Total 2004 2006 2008 2008
------- ----- ----- ----- -----
Capital lease obligations $ 1,292 899 364 29 --
Operating lease commitments 15,504 7,617 4,658 1,396 1,833
------- ----- ----- ----- -----
Total contractual cash obligations $16,796 8,516 5,022 1,425 1,833
======= ===== ===== ===== =====
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, 2003, the balance of these agreements was $4.7 million.
Cash we have pledged against such agreements aggregating $4.3 million has been
classified as restricted cash in the consolidated balance sheet.
We believe that our cash and cash equivalents will be sufficient to meet our
operating cash requirements for the foreseeable future. In the event that we
identify a significant acquisition that requires additional cash, we would seek
to borrow funds or raise additional equity capital.
Recent Accounting Pronouncements
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 adoption did not have
a material impact on our consolidated financial statements.
In November 2002, the FASB issued Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires certain guarantees to be
recorded at fair value regardless of the probability of the loss. The adoption
did not have a material impact on our consolidated financial statements.
In November 2002, the Emerging Issues Task Force ("EITF") finalized EITF Issue
00-21, "Revenue Arrangements with Multiple Deliverables," which provides
guidance on the timing and method of revenue recognition for sales arrangements
that include the delivery of more than one product or service. EITF Issue 00-21
is effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption did not have a material impact on
our consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation as originally provided by SFAS
No. 123 "Accounting for Stock-Based Compensation." Additionally, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 in both annual and interim
financial statements. Comtech adopted the disclosure portion of this statement
during fiscal 2003. The adoption did not have any impact on Comtech's
consolidated financial statements. The FASB recently indicated that it will
eventually require stock-based employee compensation to be recorded as a charge
to earnings. We will monitor the FASB's progress on the issuance of a new
standard and its impact on our consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which addresses consolidation by
business enterprises of variable interest entities that either: (1) do not have
sufficient equity investment at risk to permit the entity to finance its
activities without additional subordinated
19
financial support, or (2) the equity investors lack an essential characteristic
of a controlling financial interest. We do not expect that the adoption of FIN
46 will have a material effect on our consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," to address
decisions reached by the Derivatives Implementation Group, developments in other
Board projects that address financial instruments, and implementation issues
related to the definition of a derivative. We do not expect that the adoption of
SFAS No. 149 will have a material impact on our consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. This statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. We do not expect that
the adoption of this standard will have a material effect on our consolidated
financial statements.
Forward-Looking Statements and Risk Factors
This Form 10-K contains "forward-looking statements" including statements
concerning the future of our industry, product development, business strategy,
continued acceptance of our products, market growth, and dependence on
significant customers. These statements can be identified by the use of
forward-looking terminology such as "may," "expect," "anticipate," "estimate,"
"continue," or other similar words. When considering forward looking statements,
you should keep in mind the risk factors and other cautionary statements in this
Form 10-K. The risk factors noted below and other factors noted throughout this
Form 10-K could cause our actual results to differ significantly from those
contained in any forward-looking statement.
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 of our telecommunications transmission business segment, a
portion of our RF microwave amplifier business segment and the majority of our
mobile data communications segment - is derived from a limited number of
relatively large customer contracts, the timing of which cannot be predicted.
While we generally recognize revenue on contracts when the products are shipped,
revenue 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 business, results of operations, liquidity and financial position depend on
our ability to maintain our level of government business.
The recent slowdown in our commercial business, particularly in the
telecommunications and aviation sectors, has increased our dependence on U.S.
government business. Our sales to the U.S. government (including sales to prime
contractors to the U.S. government) accounted for approximately 44.2%, 33.8% and
23.1% of our total net sales for the fiscal years ended 2003, 2002 and 2001,
respectively. We expect such business to represent a significant portion of our
revenues for the foreseeable future. U.S. government business exposes us to
various risks, including:
o unexpected contract or project terminations or suspensions;
o unpredictable order placements, reductions or cancellations;
o reductions in government funds available for our projects due to
government policy changes, budget cuts and other spending
priorities;
o penalties arising from post-award contract audits;
o cost audits in which the value of our contracts may be reduced;
20
o higher-than-expected final costs, particularly relating to software
and hardware development, for work performed under contracts where
we commit to specified deliveries for a fixed price; and
o unpredictable cash collections of unbilled receivables that may be
subject to acceptance of contract deliverables by the customer and
contract close-out procedures, including government approval of
final indirect rates.
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 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 may not be 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 certain contracts,
as well as our accounting and general business practices. Based on the result of
such audits, the U.S. government may adjust our contract-related costs and fees.
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.
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, results of
operations and financial condition.
Our dependence on international sales may adversely affect us.
Sales for use by international customers (including sales to prime contractors'
international customers) represented approximately 39.7%, 41.2% and 46.2% of our
total net sales for the fiscal years ended July 31, 2003, 2002 and 2001,
respectively. Approximately 52.7% of our backlog at July 31, 2003 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, exposure to public
health epidemics (such as Severe Acute Respiratory Syndrome ("SARS")),
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 or
milestone payments and irrevocable letters of credit in our favor. However, we
may not be able to reduce the economic risk of doing business in foreign
countries, in all instances.
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.
21
A slowing economy and continued reduction in telecommunications equipment and
systems spending may negatively affect our revenues, profitability and the
recoverability of our assets, including intangible assets.
Since the second half of fiscal 2001, our revenues from commercial customers
have been negatively affected by the uncertain economic environment both in the
overall market, and more specifically in the telecommunications and aviation
sectors. 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, profitability and the recoverability of our
assets, including intangible assets, particularly in our telecommunications
transmission and RF microwave amplifier segments, which are exposed to the
telecommunications and aviation sectors.
Our mobile data communications business is subject to risk.
Although fiscal 2003 sales and earnings increased significantly over prior
years, our mobile data communications business has a relatively limited
operating history compared to our other business segments. It is subject to all
of the risks inherent in the operation of a new business enterprise. 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:
o Although the U.S. Army contract obligates us to provide satellite
services and hardware, including mobile satellite transceivers and
computers, 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 could be subject to unpredictable
funding and deployment decisions. Through July 31, 2003, we have
received orders for $71.5 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 or licensing 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 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
that expires on June 30, 2005 with a satellite network operator,
Mobile Satellite Ventures, for satellite coverage in North America,
Central America and the northern rim of South America. We have
leases with other vendors for satellite coverage in other parts of
the world as required by 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, Inc. 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. This could impact
our entry into the commercial market in a significant way.
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 impact on our business, results of operations and financial
condition. At present, one of our satellite providers, is operating
without a full in-orbit back-up capability in the event of a failure
of one of its two satellites
22
in operation. Should we be obliged to restore service on another
system in the event of a satellite failure, our costs would increase
and could have an adverse effect on our business, results of
operation, liquidity and financial position.
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 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
adverse impact on our business, results of operations and financial condition.
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.
Adverse regulatory changes could impair our ability to sell products.
Our products are incorporated into wireless communications systems that must
comply with various government regulations, including those of the Federal
Communications Commission ("FCC"). Regulatory changes, including changes in the
allocation and availability of frequency spectrum, and in the military standards
and specifications that define the current satellite networking environment,
could materially harm our business by (1) restricting development efforts by us
and our customers, (2) making our current products less attractive or obsolete,
or (3) increasing the opportunity for additional competition.
Changes in, or our failure to comply with, applicable regulations could
materially harm our business. In addition, the increasing demand for wireless
communications has exerted pressure on regulatory bodies world wide to adopt new
standards and reassign bandwidth for these products and services. The reduced
number of available frequencies for other products and services and the time
delays inherent in the government approval process of new products and services
have caused and may continue to cause our customers to cancel, postpone or
reschedule their installation of communications systems including their
satellite, over-the-horizon microwave, or terrestrial line-of-sight microwave
communication systems. This, in turn, could have a material adverse effect on
our sales of products to our customers.
We face risks from the uncertainty of prevailing economic and political
conditions.
Current global political and economic conditions are uncertain. As a result, it
is difficult to estimate the level of expansion, if any, for the global or U.S.
economies generally or the markets in which we participate. Because our
budgeting and forecasting process relies on estimates of growth in the markets
we serve, the current economic environment renders estimates of future income
and expenses even more difficult than usual to formulate. The future direction
of the domestic and global economies and political environment could have a
material adverse impact on our business, results of operations and financial
condition.
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 or in process research
and development charges related to intangible assets. Acquisitions involve
numerous risks, including:
23
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.
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 corporate and operating unit 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.
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.
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. 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 impact
on our business, results of operations and financial condition.
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.
We believe that we own or have licensed all intellectual property rights
necessary for the operation of our businesses as currently contemplated. If the
technology we use is found to infringe on protected technology, we could be
required to change our business practices, 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 business or if we were
required to change our business practices, we could be prohibited from making
and selling our products or providing certain telecommunications services.
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
24
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 have a material adverse impact
on our business, results of operations and financial condition.
Recently enacted and proposed changes in securities laws and regulations are
likely to increase our costs.
The Sarbanes-Oxley Act of 2002 that became law in July 2002 requires changes in
some of our corporate governance, public disclosure and compliance practices.
The Act also requires the SEC to promulgate new rules on a variety of subjects.
In addition to final rules and rule proposals already made, the Nasdaq National
Market has proposed revisions to its requirements for companies, such as us,
that are listed on the Nasdaq National Market. We expect these developments to
increase our legal and financial compliance costs. We expect these developments
to make it more difficult and more expensive for us to obtain director and
officer liability insurance, and we may be required to accept reduced coverage
or incur substantially higher costs to obtain coverage. These developments could
make it more difficult for us to attract and retain qualified members of our
board of directors, particularly to serve on our audit committee, and qualified
executive officers. We are presently evaluating and monitoring regulatory
developments and cannot estimate the timing or magnitude of additional costs we
could incur as a result.
Terrorist attacks and threats, and government responses thereto, and threats of
war elsewhere may negatively impact all aspects of our operations, revenues,
costs and stock price.
The terrorist attacks in the United States and against United States' interests
overseas, the U.S. government's response thereto, and threats of war may
negatively affect our business, financial condition and results of operations.
Any escalation in these events or similar or future events may disrupt our
operations or those of our customers and may affect the availability of
materials needed to manufacture our products or the means to transport those
materials to manufacturing facilities and finished products to customers. In
addition, these events have had and could continue to have an adverse impact on
the U.S. and world economy in general.
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 company. 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 economic conditions generally, particularly in the
telecommunications sector;
o changes in market conditions generally, particularly in the market
for small cap stocks; and
o limited public float.
Shortfalls in our sales 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.
Provisions in our corporate documents, stockholder rights plan, and Delaware law
could delay or prevent a change in control of Comtech.
We have taken a number of actions that could have the effect of discouraging,
delaying or preventing a merger or acquisition involving Comtech that our
stockholders may consider favorable. For example, we have adopted a
25
stockholder rights plan that could cause substantial dilution to a stockholder,
and substantially increase the cost paid by a stockholder, who attempts to
acquire us on terms not approved by our board of directors. This could prevent
us from being acquired. In addition, our certificate of incorporation grants the
board of directors the authority to fix the rights, preferences and privileges
of and issue up to 2,000,000 shares of preferred stock without stockholder
action. Although we have no present intention to issue shares of preferred
stock, such an issuance of any class or series of our preferred stock could have
rights which would adversely affect the voting power of the common stock or
which could delay, defer, or prevent a change in control of Comtech. In
addition, we are subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, this statute provides
that except in certain limited circumstances a corporation shall not engage in
any "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, for purposes of Section 203 of the Delaware General
Corporation Law, an "interested stockholder" is a person who, together with
affiliates, owns, or within three years did own, 15% or more of the
corporation's voting stock. This provision could have the effect of delaying or
preventing a change in control of Comtech.
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 on its available cash balances.
The Company's long-term debt was at fixed rates. As such, the Company's earnings
and cash flows were not sensitive to changes in interest rates. The Company
prepaid its long-term debt in full in July 2003.
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.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this Annual Report on Form 10-K, an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures was carried out by the Company under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures have been designed and are
being operated in a manner that provides reasonable assurance that the
information required to be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms. A
system of controls, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the system of controls are met, and no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected.
26
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 9, 2003 (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. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services 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.
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) Reports on Form 8-K
Form 8-K dated June 5, 2003 - Item 9 - Press release announcing
Results of Operations for the
quarter ended April 30, 2003
Form 8-K dated June 18, 2003 - Item 7 - Three-for-Two Stock Split
Form 8-K dated July 16, 2003 - Item 7 - Announcement of Private
Placement of Common Stock
Form 8-K dated July 17, 2003 - Item 7 - Completion of Private
Placement of Common Stock
(c) Exhibit index
27
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 Exhibit 3(b) to the Registrant's 1991 Form 10-K
the 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 Exhibit 3(e) to Registrant's 1998 Form 10-K
the 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
Participating Preferred Stock dated December 23, 1998
3(g) Amendment to the Certificate of Incorporation increasing Exhibit 3(g) to Registrant's 2000 Form 10-K
the 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
American Stock Transfer and Trust Company, as Rights Agent Registrant and dated December 23, 1998
10(a) Amended and restated Employment Agreement dated June 2, Exhibit 10(a) to the Registrant's Form 10-Q
2003, between the Registrant and Fred Kornberg for quarter ended April 30, 2003
10(b) Amended and restated Employment Agreement dated June 2, Exhibit 10(b) to the Registrant's Form 10-Q
2003, between the Registrant and Robert G. Rouse for quarter ended April 30, 2003
10(c) Lease and amendment thereto on the Melville Facility Exhibit 10(k) to the Registrant's 1992 Form 10-K
10(d) Amended and restated 1993 Incentive Stock Option Plan Appendix A to the Registrant's Proxy Statement
dated November 3, 1997
10(e) Time Accelerated Restricted Stock Purchase Agreements Exhibit 10(f) to the Registrant's 1999 Form 10-K
between Registrant and Principals of Comtech Mobile
Datacom Corp. operating unit
10(f) 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)
10(g) License Agreement between Vistar Telecommunications Inc. Exhibit 10(h) to the Registrant's 1999 Form 10-K
and 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(h)(1) 2000 Stock Incentive Plan Appendix A to the Registrant's Proxy Statement
dated November 8, 1999
10(h)(2) Amendment to the 2000 Stock Incentive Plan Appendix A to the Registrant's Proxy Statement
dated November 6, 2000
10(h)(3) Amendment to the 2000 Stock Incentive Plan Exhibit 10(g)(3) to the Registrant's 2002 Form
10-K
10(h)(4) Amendment to the 2000 Stock Incentive Plan
10(i) Asset Purchase Agreement between the Registrant, Exhibit 10(h) to the Registrant's 2002 Form 10-K
Comtech/AHA Acquisition Corp. and Advanced Hardware
Architectures, Inc.
28
Exhibit Incorporated By
Number Description of Exhibit Reference to Exhibit
------ ---------------------- --------------------
10(j)(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
Employees' Health Insurance Fund, dated July 7, 2000
10(j)(2) Amendment to the Loan and Security Agreement between the Exhibit 10(i)(2) to the Registrant's 2001 Form
Registrant and The Teachers' Retirement System of Alabama, 10-K
The Employees' Retirement System of Alabama, The Alabama
Heritage Trust Fund, PEIRAF - Deferred Compensation Plan
and State Employees' Health Insurance Fund, dated April
30, 2001
10(k) Asset Purchase Agreement between the Registrant and MPD Exhibit 2.1 to the Registrant's Form
Technologies, Inc., dated March 2, 2001 8-K dated April 30, 2001
10(l) 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
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to
Section 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.
29
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.
September 23, 2003 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
---------------------------- ---------------------------
September 23, 2003 /s/Fred Kornberg Chairman of the Board
- --------------------------- ----------------------------- Chief Executive Officer and President
(Date) Fred Kornberg (Principal Executive Officer)
September 23, 2003 /s/Robert G. Rouse Senior Vice President and
- --------------------------- ----------------------------- Chief Financial Officer
(Date) Robert G. Rouse (Principal Financial and Accounting Officer)
September 23, 2003 /s/George Bugliarello Director
- --------------------------- -----------------------------
(Date) George Bugliarello
September 23, 2003 /s/Richard L. Goldberg Director
- --------------------------- -----------------------------
(Date) Richard L. Goldberg
September 23, 2003 /s/Edwin Kantor Director
- --------------------------- -----------------------------
(Date) Edwin Kantor
September 23, 2003 /s/Ira Kaplan Director
- --------------------------- -----------------------------
(Date) Ira Kaplan
September 23, 2003 /s/Gerard R. Nocita Director
- --------------------------- -----------------------------
(Date) Gerard R. Nocita
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, 2003 and 2002 F-3
Statements of Operations for each of the years in
the three-year period ended July 31, 2003 F-4
Statements of Stockholders' Equity for each of the
years in the three-year period ended July 31, 2003 F-5
Statements of Cash Flows for each of the years
in the three-year period ended July 31, 2003 F-6, F-7
Notes to Consolidated Financial Statements F-8 to F-23
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
[LETTERHEAD OF KPMG LLP]
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 the consolidated
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and the consolidated 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 consolidated financial position of Comtech
Telecommunications Corp. and subsidiaries as of July 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended July 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related consolidated 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.
KPMG LLP
Melville, New York
September 18, 2003
F-2
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 2003 and 2002
Assets 2003 2002
------------- ------------
Current assets:
Cash and cash equivalents $ 48,617,000 15,510,000
Restricted cash 4,288,000 --
Accounts receivable, less allowance for doubtful accounts of $912,000
in 2003 and $795,000 in 2002 26,696,000 27,435,000
Inventories, net 34,048,000 33,996,000
Prepaid expenses and other current assets 1,742,000 1,407,000
Deferred tax asset - current 5,699,000 2,492,000
------------- ------------
121,090,000 80,840,000
Property, plant and equipment, net 12,328,000 11,889,000
Goodwill and other intangibles with indefinite lives 17,726,000 17,726,000
Intangibles with definite lives, net of accumulated amortization of
$4,720,000 in 2003 and $2,681,000 in 2002 11,353,000 12,902,000
Other assets, net 390,000 661,000
Deferred tax asset - non-current 1,363,000 2,568,000
------------- ------------
Total assets $ 164,250,000 126,586,000
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of capital lease obligations $ 899,000 1,062,000
Accounts payable 11,527,000 9,529,000
Accrued expenses and other current liabilities 13,267,000 9,686,000
Customer advances and deposits 2,491,000 2,173,000
Deferred service revenue 11,160,000 4,343,000
Income taxes payable 6,945,000 2,470,000
------------- ------------
46,289,000 29,263,000
Long-term debt, less current installments -- 28,683,000
Capital lease obligations, less current installments 393,000 1,294,000
Other long-term liabilities -- 58,000
------------- ------------
Total liabilities 46,682,000 59,298,000
Stockholders' equity:
Preferred stock, par value $.10 per share; shares authorized and unissued
2,000,000 -- --
Common stock, par value $.10 per share; authorized 30,000,000 shares,
issued 14,020,769 shares in 2003 and 11,404,382 shares in 2002 1,402,000 1,140,000
Additional paid-in capital 107,573,000 67,503,000
Retained earnings (accumulated deficit) 8,884,000 (825,000)
------------- ------------
117,859,000 67,818,000
Less:
Treasury stock (140,625 shares) (185,000) (185,000)
Deferred compensation (106,000) (345,000)
------------- ------------
Total stockholders' equity 117,568,000 67,288,000
------------- ------------
Total liabilities and stockholders' equity $ 164,250,000 126,586,000
============= ============
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, 2003, 2002 and 2001
2003 2002 2001
------------- ------------ ------------
Net sales $ 174,035,000 119,357,000 135,931,000
Cost of sales 114,317,000 78,780,000 87,327,000
------------- ------------ ------------
Gross profit 59,718,000 40,577,000 48,604,000
Expenses:
Selling, general and administrative 28,045,000 22,512,000 22,707,000
Research and development 12,828,000 11,041,000 10,190,000
In-process research and development -- 2,192,000 --
Amortization of intangibles 2,039,000 1,471,000 2,552,000
------------- ------------ ------------
42,912,000 37,216,000 35,449,000
------------- ------------ ------------
Operating income 16,806,000 3,361,000 13,155,000
Other expenses (income):
Interest expense 2,803,000 3,061,000 4,015,000
Interest income (275,000) (452,000) (2,303,000)
Other, net -- (28,000) 841,000
------------- ------------ ------------
Income before provision (benefit) for income taxes 14,278,000 780,000 10,602,000
Provision (benefit) for income taxes 4,569,000 (368,000) 3,888,000
------------- ------------ ------------
Net income $ 9,709,000 1,148,000 6,714,000
============= ============ ============
Net income per share:
Basic $ 0.85 0.10 0.61
============= ============ ============
Diluted $ 0.80 0.10 0.57
============= ============ ============
Weighted average number of common shares outstanding -
Basic 11,445,000 11,192,000 11,022,000
Potential dilutive common shares 748,000 516,000 843,000
------------- ------------ ------------
Weighted average number of common and common equivalent
shares outstanding assuming dilution -
Diluted 12,193,000 11,708,000 11,865,000
============= ============ ============
See accompanying notes to consolidated financial statements.
F-4
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended July 31, 2003, 2002 and 2001
Common Stock Accumulated Retained Treasury Stock
------------ Additional Other Earnings --------------
Paid-in Comprehensive (Accumulated
Shares Amount Capital Income Deficit) Shares Amount
------ ------ ------- ------ -------- ------ ------
Balance July 31, 2000 11,023,764 $ 1,102,000 $ 66,373,000 $ (113,000) $(8,687,000) 123,750 $(184,000)
Amortization of deferred
compensation -- -- -- -- -- -- --
Unrealized loss on securities net
of reclassification adjustment -- -- -- 113,000 -- -- --
Stock options exercised 145,719 15,000 260,000 -- -- -- --
Employee stock purchase plan
shares issued 21,168 2,000 156,000 -- -- -- --
Warrants exercised 76,007 8,000 325,000 -- -- -- --
Net income -- -- -- -- 6,714,000 -- --
---------- ----------- ------------- ----------- ----------- -------- ---------
Balance July 31, 2001 11,266,658 1,127,000 67,114,000 -- (1,973,000) 123,750 (184,000)
Amortization of deferred
compensation -- -- -- -- -- -- --
Termination of unvested restricted
shares issued pursuant to
employee stock award agreement -- -- (52,000) -- -- 16,875 (1,000)
Stock options exercised 88,572 8,000 165,000 -- -- -- --
Employee stock purchase plan
shares issued 39,629 4,000 235,000 -- -- -- --
Warrants exercised 9,523 1,000 41,000 -- -- -- --
Net income -- -- -- -- 1,148,000 -- --
---------- ----------- ------------- ----------- ----------- -------- ---------
Balance July 31, 2002 11,404,382 1,140,000 67,503,000 -- (825,000) 140,625 (185,000)
Amortization of deferred
compensation -- -- -- -- -- -- --
Shares issued in connection with
private placement, net of
related costs 2,100,000 210,000 37,981,000 -- -- -- --
Stock options exercised and
related income tax benefit 421,395 42,000 1,649,000 -- -- -- --
Employee stock purchase plan
shares issued 40,256 4,000 206,000 -- -- -- --
Warrants exercised 54,736 6,000 234,000 -- -- -- --
Net income -- -- -- -- 9,709,000 -- --
---------- ----------- ------------- ----------- ----------- -------- ---------
Balance July 31, 2003 14,020,769 $ 1,402,000 $ 107,573,000 $ -- $ 8,884,000 140,625 $(185,000)
========== =========== ============= =========== =========== ======== =========
Deferred Stockholders' Comprehensive
Compensation Equity Income
------------ ------ ------
Balance July 31, 2000 $ (709,000) $ 57,782,000
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 issued -- 158,000 --
Warrants exercised -- 333,000 --
Net income -- 6,714,000 6,714,000
------------ ------------- ----------
Balance July 31, 2001 (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 52,000 (1,000) --
Stock options exercised -- 173,000 --
Employee stock purchase plan
shares issued -- 239,000 --
Warrants exercised -- 42,000 --
Net income -- 1,148,000 1,148,000
------------ ------------- ----------
Balance July 31, 2002 (345,000) 67,288,000 1,148,000
==========
Amortization of deferred
compensation 239,000 239,000 --
Shares issued in connection with
private placement, net of
related costs -- 38,191,000 --
Stock options exercised and
related income tax benefit -- 1,691,000 --
Employee stock purchase plan
shares issued -- 210,000 --
Warrants exercised -- 240,000 --
Net income -- 9,709,000 9,709,000
------------ ------------- ----------
Balance July 31, 2003 $ (106,000) $ 117,568,000 $9,709,000
============ ============= ==========
See accompanying notes to consolidated financial statements.
F-5
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, 2003, 2002 and 2001
2003 2002 2001
------------ ----------- -----------
Cash flows from operating activities:
Net income $ 9,709,000 1,148,000 6,714,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on sale of marketable investment securities -- -- 990,000
Depreciation and amortization 6,258,000 5,230,000 6,575,000
Write-off of in-process research and development -- 2,192,000 --
Provision for doubtful accounts 246,000 269,000 39,000
Provision for inventory reserves 2,521,000 1,698,000 264,000
Deferred income tax expense (benefit) (2,002,000) 300,000 580,000
Changes in assets and liabilities, net of effects of
acquisitions:
Restricted cash securing letter of credit obligations (4,288,000) -- --
Accounts receivable 493,000 300,000 (3,059,000)
Inventories (2,793,000) 1,199,000 (8,132,000)
Prepaid expenses and other current assets (500,000) 451,000 (568,000)
Other assets 69,000 140,000 (335,000)
Accounts payable 1,998,000 (2,030,000) (246,000)
Accrued expenses and other current liabilities 3,540,000 (2,820,000) (2,589,000)
Customer advances and deposits 318,000 84,000 743,000
Deferred service revenue 6,817,000 2,270,000 2,073,000
Income taxes payable 4,475,000 (838,000) 1,859,000
Other liabilities (58,000) (201,000) (108,000)
------------ ----------- -----------
Net cash provided by operating activities 26,803,000 9,392,000 4,800,000
------------ ----------- -----------
Cash flows from investing activities:
Purchases of marketable investment securities -- -- (1,330,000)
Proceeds from sale of marketable securities -- -- 19,221,000
Purchases of property, plant and equipment (4,317,000) (3,081,000) (2,776,000)
Purchase of technology licenses (75,000) (91,000) (563,000)
Payment for business acquisitions (440,000) (7,055,000) (12,720,000)
Cash received in connection with business acquisitions 551,000 -- 9,038,000
------------ ----------- -----------
Net cash (used in) provided by investing activities (4,281,000) (10,227,000) 10,870,000
------------ ----------- -----------
Cash flows from financing activities:
Borrowings under loan agreement -- -- 10,000,000
Repayment of borrowings under loan agreement (28,683,000) (19,217,000) (2,100,000)
Principal payments on capital lease obligations (1,064,000) (1,097,000) (718,000)
Proceeds from issuance of common stock, net 38,191,000 -- --
Proceeds from exercises of stock options, warrants and employee
stock purchase plan shares 2,141,000 454,000 766,000
------------ ----------- -----------
Net cash provided by (used in) financing activities 10,585,000 (19,860,000) 7,948,000
------------ ----------- -----------
(Continued)
F-6
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, 2003, 2002 and 2001
2003 2002 2001
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents $33,107,000 (20,695,000) 23,618,000
Cash and cash equivalents at beginning of period 15,510,000 36,205,000 12,587,000
----------- ----------- ----------
Cash and cash equivalents at end of period $48,617,000 15,510,000 36,205,000
=========== =========== ==========
Supplemental cash flow disclosure
Cash paid during the period for:
Interest $ 2,884,000 3,099,000 3,898,000
=========== =========== ==========
Income taxes $ 2,096,000 237,000 1,425,000
=========== =========== ==========
Non cash investing activities:
Acquisition of property, equipment and technology license
through capital leases $ -- 199,000 2,456,000
=========== =========== ==========
See accompanying notes to consolidated financial statements.
F-7
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 31, 2003 and 2002
(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 innovative products, systems
and services for advanced communications solutions.
The Company's business is highly competitive and characterized by
rapid technological change. 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 not associated with long-term contracts is recognized when
the earnings process is complete, upon shipment or customer
acceptance.
Revenue on long-term contracts is accounted for under the
percentage-of-completion method of accounting. These contracts
relate to the design, development, manufacturing or modification of
complex electronic equipment to customer's specifications or
services relating to the performance of such contracts.
Revenue recognition on long-term contracts under the
percentage-of-completion method is based on the relationship of
total costs incurred to total projected costs, or, alternatively,
based on output measures, such as units delivered. Provision for
anticipated losses on uncompleted contracts is made in the period in
which such losses are determined.
The Company has historically demonstrated an ability to estimate
contract revenues and expenses in applying the
percentage-of-completion method of accounting. However, there exist
risks and uncertainties in estimating future revenues and expenses,
particularly on larger or longer-term contracts. Changes to such
estimates could have a material effect on the Company's consolidated
financial position and results of operations.
Revenue recognized in excess of amounts billable under long-term
contracts accounted for under the percentage-of-completion method of
accounting are recorded as unbilled receivables in the accompanying
consolidated balance sheets. Unbilled receivables are billable upon
various events, including the
F-8
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
attainment of performance milestones, delivery of hardware,
submission of progress bills based on time and materials, or
completion of the contract.
In the case of our mobile data communications segment's contract
with the U.S. Army, we utilize the percentage-of-completion method
and estimate total contract revenues, which are subject to annual
funding appropriations. However, we do not recognize revenue, and
record unbilled receivables, until we receive fully funded orders.
Most government contracts have termination for convenience clauses
that provide the customer with the right to terminate the contract
at any time. Historically, the Company has not experienced material
contract terminations or write-offs of unbilled receivables.
The Company addresses customer acceptance provisions in assessing
its ability to perform its contractual obligations under long-term
contracts. Historically, the Company has been able to perform on its
long-term contracts.
(d) Cash and Cash Equivalents
Cash equivalents are temporary cash investments with a maturity of
three months or less when purchased. Cash equivalents, primarily
U.S. treasury securities with a maturity of three months or less, at
July 31, 2003 and 2002 amounted to $40,981,000 and $8,990,000,
respectively. These investments are carried at cost, which
approximates market.
(e) Statement of Cash Flows
The Company acquired equipment and a technology license financed by
capital leases in the amounts of $199,000, and $2,456,000 in 2002
and 2001, 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-process inventory reflects all accumulated production costs,
which are comprised of direct production costs and overhead, reduced
by amounts attributable to units delivered. These inventories are
reduced to their estimated net realizable value by a charge to cost
of sales in the period such excess costs are determined.
Raw materials and components and finished goods 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
F-9
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Intangible Assets", goodwill is no longer amortized. See Note 14 for
further discussion regarding amortization of goodwill. The Company
periodically, at least on an annual basis, 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 2003, 2002 and 2001, the
Company was reimbursed by customers for such activities in the
amount of $3,676,000, $2,029,000 and $1,656,000 respectively.
(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. Stock options to purchase 713,000,
642,000 and 157,000 shares for fiscal 2003, 2002 and 2001,
respectively, were not included in the EPS calculation because their
effect would have been anti-dilutive.
(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.
(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.
F-10
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(n) Reclassifications
Certain reclassifications have been made to previously reported
consolidated financial statements to conform to the fiscal 2003
presentation.
(o) Accounting for Stock-Based Compensation
The Company accounts for its stock option plans under the intrinsic
value method of APB Opinion No. 25, and as a result no compensation
cost has been recognized. Had compensation cost for these plans been
determined consistent with SFAS No. 123, the Company's net income
and income per share would have been reduced to the following pro
forma amounts:
2003 2002 2001
---------- ---------- ----------
Net income, as reported $9,709,000 1,148,000 6,714,000
Less: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (629,000) (520,000) (896,000)
---------- ---------- ----------
Pro forma net income $9,080,000 628,000 5,818,000
========== ========== ==========
Net income per share:
As reported Basic $ 0.85 0.10 0.61
Diluted $ 0.80 0.10 0.57
Pro forma Basic $ 0.79 0.06 0.53
Diluted $ 0.74 0.05 0.49
The per share weighted average fair value of stock options granted
during 2003, 2002 and 2001 was $2.83, $4.32 and $6.05, respectively,
on the date of grant. These fair values were determined using the
Black Scholes option-pricing model with the following weighted
average assumptions: 2003 - expected dividend yield of 0%, risk free
interest rate of 3.32%, expected volatility of 56.59% and an
expected option life of 5 years; 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.
(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.
(2) Acquisitions
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 recorded the
assets purchased and the liabilities assumed based upon their
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 14 for
discussion regarding the Company's adoption of SFAS No. 142,
including the amortization of goodwill. The acquisition cost was
allocated as follows (in thousands):
F-11
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 year 2001 assuming the merger occurred on August 1, 2000 is
as follows:
(in thousands, except per share amounts)
2001
--------
Net revenues $153,485
Net income 7,104
Basic income per share 0.65
Diluted income per share 0.60
Weighted average shares 11,022
Weighted average shares assuming dilution 11,865
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, 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 was subject to adjustment based on AHA's net tangible
assets as of July 31, 2002. In January 2003, the purchase price was
finalized and the Company received $551,000, net of related costs.
The acquisition was accounted for under the purchase method of
accounting. Accordingly, the Company recorded the assets purchased
and the liabilities assumed based upon their 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 was 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.
F-12
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
The following table includes the specific nature and fair value
allocated to each significant in-process research and development
project acquired, as well as significant appraisal assumptions used
as of the acquisition date and the current project status.
Fair % of Fiscal Year
Market Estimated Original Cash Flows Project
Entity Specific Nature Value Efforts Anticipated Discount Projected To Status as of
Acquired of R&D Projects Allocated Complete Completion Date Rate Commence July 31, 2003
-------- --------------- --------- -------- --------------- ---- -------- -------------
AHA Technology for high speed
modem chip #1 $ 1,228 51% December 2004 40% 2005 On-hold
Technology for high speed
modem chip #2 964 79% December 2004 30% 2005 On-hold
--------
Total $ 2,192
========
Our purchased in-process research and development efforts are
complex and unique in light of the nature of the technology, which
is generally state-of-the-art. Risks and uncertainties associated
with completing the projects in-process include the availability of
skilled engineers, the introduction of similar technologies by
others, changes in market demand for the technologies and changes in
industry standards effecting the technology. The in-process research
and development projects acquired are on-hold due to changes in
market conditions. However, the underlying technology in these chips
is being used in other research and development projects. The
Company does not believe that the failure to complete either or both
of the projects will have a material impact on the Company's
consolidated results of operations.
(3) Accounts Receivable
Accounts receivable consist of the following at July 31, 2003 and
2002:
2003 2002
----------- ----------
Accounts receivable from commercial customers $10,952,000 15,424,000
Unbilled receivables (including retainages) on contracts-in-progress 10,084,000 9,304,000
Amounts receivable from the United States government and its agencies 6,572,000 3,502,000
----------- ----------
27,608,000 28,230,000
Less allowance for doubtful accounts 912,000 795,000
----------- ----------
Accounts receivable, net $26,696,000 27,435,000
=========== ==========
The amount of retainages included in unbilled receivables was
$778,000 at July 31, 2002. In the opinion of management,
substantially all of the unbilled balances will be billed and
collected within one year.
(4) Inventories
Inventories consist of the following at July 31, 2003 and 2002:
2003 2002
----------- ----------
Raw materials and components $16,431,000 15,920,000
Work-in-process and finished goods 22,716,000 21,365,000
----------- ----------
39,147,000 37,285,000
Less:
Reserve for anticipated losses on contracts and inventory reserves 5,099,000 3,289,000
----------- ----------
Inventories, net $34,048,000 33,996,000
=========== ==========
F-13
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Inventories directly related to long-term contracts were $13,742,000
and $8,461,000 at July 31, 2003 and 2002, respectively.
(5) Property, Plant and Equipment
Property, plant and equipment consists of the following at July 31,
2003 and 2002:
2003 2002
----------- ----------
Equipment $28,855,000 24,481,000
Leasehold improvements 2,170,000 2,030,000
Equipment financed by capital lease 2,140,000 2,345,000
----------- ----------
33,165,000 28,856,000
Less accumulated depreciation and amortization 20,837,000 16,967,000
----------- ----------
$12,328,000 11,889,000
=========== ==========
Depreciation and amortization expense on property, plant and
equipment amounted to approximately $3,915,000, $3,527,000, and
$3,711,000, for the years ended July 31, 2003, 2002 and 2001,
respectively.
(6) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the
following at July 31, 2003 and 2002:
2003 2002
----------- ---------
Accrued wages and benefits $ 5,724,000 2,918,000
Accrued commissions 1,993,000 1,125,000
Accrued warranty 3,139,000 2,975,000
Other 2,411,000 2,668,000
----------- ---------
$13,267,000 9,686,000
=========== =========
Changes in the Company's product warranty liability during the years
ended July 31, 2003 and 2002 were as follows:
Twelve months ended July 31,
----------------------------
2003 2002
----------- ----------
Balance at beginning of period $ 2,975,000 4,336,000
Provision for warranty obligations 2,593,000 2,338,000
Charges incurred (2,429,000) (3,699,000)
----------- ----------
Balance at end of period $ 3,139,000 2,975,000
=========== ==========
(7) Capital Lease Obligations
Capital lease obligations consist of the following at July 31, 2003
and 2002:
2003 2002
---------- ---------
Obligations under capital leases $1,292,000 2,356,000
Less current installments 899,000 1,062,000
---------- ---------
$ 393,000 1,294,000
========== =========
Capital lease obligations in both years related to certain equipment
and a technology license. The net carrying value of assets under
capital lease was $2,531,000 and $3,207,000 at July 31, 2003 and
2002, 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,
2003 are:
Years ending July 31,
2004 $ 965,000
2005 256,000
2006 135,000
2007 30,000
---------
Total minimum lease payments 1,386,000
Less amounts representing interest (at rates ranging from 6.55% to 9.5%) 94,000
---------
1,292,000
Less current installments 899,000
---------
Obligations under capital leases, net of current installments $ 393,000
=========
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 $490,000 for fiscal 2003, 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 an acquisition, 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 were included in other
assets, net of amortization, in the accompanying consolidated
balance sheet. Borrowings under the term loan were evidenced by
promissory notes and were secured by all of the Company's assets.
The principal amount of the loan outstanding bore interest at the
per annum rate of 9.25%. The loan agreement contained restrictive
covenants, which, among other things, required the Company to
maintain certain financial ratios. In fiscal 2002, the Company made
a partial principal prepayment of $19,217,000 against the loan, in
addition to scheduled principal payments in fiscal 2001 aggregating
$2,100,000. The Company prepaid the remainder of the loan in fiscal
2003.
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 were included in other assets, net of amortization, in the
accompanying consolidated balance sheet. The loan which was
evidenced by promissory notes and was secured by all of the
Company's assets, bore interest on the principal amount outstanding
at the per annum rate of 8.50%. The loan required interest only
payments through June 2005 at which time the entire principal was
due and was subject to the same restrictive covenants discussed
above. The Company prepaid the loan in fiscal 2003.
F-15
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes
The provision (benefit) for income taxes included in the
accompanying consolidated statements of operations consists of the
following:
Year ended July 31,
-------------------
2003 2002 2001
----------- ---------- ----------
Federal - current $ 6,185,000 (706,000) 2,834,000
Federal - deferred (1,894,000) 306,000 503,000
State and local - current 386,000 38,000 474,000
State and local - deferred (108,000) (6,000) 77,000
----------- ---------- ----------
$ 4,569,000 (368,000) 3,888,000
=========== ========== ==========
The provision (benefit) for income taxes differed from the amounts
computed by applying the U.S. Federal income tax rate as a result of
the following:
2003 2002 2001
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Computed "expected" tax expense $ 4,997,000 35.0% 265,000 34.0% 3,605,000 34.0%
Increase (reduction) in income taxes resulting from:
Change in the beginning of the
year valuation allowance
for deferred tax assets (350,000) (2.4) 100,000 12.8 (300,000) (2.8)
Generation of research and
experimentation credits:
Current year (400,000) (2.8) (400,000) (51.3) -- --
Prior years -- -- (416,000) (53.4) -- --
Extraterritorial income
exclusion (286,000) (2.0) -- -- -- --
State and local income taxes,
net of Federal benefit 181,000 1.3 21,000 2.7 363,000 3.4
Other 427,000 2.9 62,000 8.0 220,000 2.1
----------- -------- ---------- --------- ----------- --------
$ 4,569,000 32.0% (368,000) (47.2%) 3,888,000 36.7%
=========== ======== ========== ========= =========== ========
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at
July 31, 2003 and 2002 are presented below.
2003 2002
----------- ----------
Deferred tax assets:
Allowance for doubtful accounts receivable $ 181,000 95,000
Intangibles 4,606,000 4,673,000
Inventory and warranty reserves 2,854,000 1,226,000
Compensation and commissions, principally due to
accrual for financial reporting purposes 2,187,000 736,000
Deferred compensation 248,000 211,000
Other 477,000 226,000
Alternative minimum tax credit carryforward -- 209,000
Less valuation allowance (1,850,000) (2,200,000)
----------- ----------
Total deferred tax assets 8,703,000 5,176,000
Deferred tax liabilities:
Plant and equipment, principally due to capitalized leases
and differences in depreciation (1,641,000) (116,000)
----------- ----------
Net deferred tax assets $ 7,062,000 5,060,000
=========== ==========
F-16
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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, 2003 and
2002, 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 $27,900,000 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) Stock Split
In July 2003, the Company completed a three-for-two stock split,
which was effected in the form of a 50% stock dividend. All share
and per share information in the consolidated financial statements
and notes thereto has been adjusted to reflect the stock split.
(b) Private Placement of Common Stock
In July 2003, the Company sold 2,100,000 shares of its common stock
in a private placement transaction. The aggregate proceeds to the
Company were $38,191,000, net of related costs of $2,402,000. The
Company agreed to register these shares with the Securities and
Exchange Commission within 120 days of the date of the sale. The
shares were registered in August 2003.
(c) 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 1,563,750 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, in which case 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, 2003, the Company had granted incentive stock options
representing the right to purchase an aggregate of 1,629,773 shares
at prices ranging between $1.00 - $7.96 per share, of which 220,377
options were canceled and 475,725 are outstanding at July 31, 2003.
To date, 933,671 shares have been exercised. Outstanding awards have
been transferred to the 2000 Stock 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 2,025,000 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-
F-17
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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, 2003, the Company had granted
incentive stock options representing the right to purchase an
aggregate of 1,510,050 shares at prices ranging between $4.70 -
$11.89 of which 160,950 options were canceled and 1,259,130 are
outstanding at July 31, 2003. As of July 31, 2003, 89,970 incentive
stock options have been exercised. 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 225,000 shares of the
Company's common stock at an exercise price of $4.38. 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 2003, warrants to purchase 185,271
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, 450,000 shares of the Company's common stock were 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 2003, the Company issued 101,052 shares of its
common stock to participating employees in connection with the
Purchase Plan.
(d) 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, 2000 1,175,517 $ 3.10
Granted 652,050 8.41
Expired/canceled (32,100) 6.03
Exercised (148,425) 2.09
---------- ----------
Outstanding at July 31, 2001 1,647,042 5.24
Granted 274,500 9.19
Expired/canceled (89,550) 6.25
Exercised (86,382) 1.99
---------- ----------
Outstanding at July 31, 2002 1,745,610 5.97
Granted 505,500 5.51
Expired/canceled (94,875) 7.66
Exercised (421,380) 3.77
---------- ----------
Outstanding at July 31, 2003 1,734,855 $ 6.27
========== ==========
Options exercisable at
July 31, 2003 525,750 $ 5.98
========== ==========
Options available for grant
at July 31, 2003 821,940
==========
F-18
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The options outstanding as of July 31, 2003 are summarized in ranges
as follows:
Range of Weighted average Number of options Weighted average
exercise price exercise price outstanding remaining life
---------------- ------------------ ------------------- ------------------
$ 1.00 - 2.99 $ 2.01 334,650 4 years
3.00 - 5.00 4.77 105,675 6 years
5.01 - 8.00 6.33 820,230 8 years
8.01 - 11.54 9.51 474,300 8 years
(e) Restricted Common Stock
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 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. 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 provide satellite-based mobile tracking and messaging
hardware and related services. Unallocated assets consist
principally of cash, deferred tax assets and intercompany
receivables. Unallocated losses result from such corporate expenses
as legal, accounting and executive.
Corporate management defines and reviews segment profitability based
on the same allocation methodology as presented in the segment data
tables. Inter-segment sales in fiscal 2003 and 2002 by the
telecommunications transmission segment to the RF microwave
amplifiers segment were $ 3,617,000 and $3,250,000 respectively. In
fiscal 2003, inter-segment sales by the telecommunications
transmission segment to the mobile data communications segment were
$14,858,000. Inter-segment sales in fiscal 2001 were not material.
Inter-segment sales have been eliminated from the tables below.
Substantially all of the Company's long-lived assets are located in
the United States. Fiscal 2002 operating income in the
telecommunications transmission segment includes in-process research
and development charges of $2,192,000.
F-19
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands)
Fiscal 2003 Telecommunications RF Microwave Mobile Data
Transmission Amplifiers Communications Un-Allocated Total
------------------ ------------ -------------- ------------ -----
Net sales $ 102,634 23,322 48,079 -- 174,035
Operating income (loss) 14,219 1,745 5,202 (4,360) 16,806
Interest income 10 1 -- 264 275
Interest expense 1,863 940 -- -- 2,803
Depreciation and amortization 4,498 1,184 319 257 6,258
Expenditure for long-lived assets,
including intangibles 3,623 427 682 75 4,807
Total assets 65,105 20,462 21,244 57,439 164,250
(in thousands)
Fiscal 2002 Telecommunications RF Microwave Mobile Data
Transmission Amplifiers Communications Un-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)
Fiscal 2001 Telecommunications RF Microwave Mobile Data
Transmission Amplifiers Communications Un-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 fiscal 2003, sales to one customer, a prime contractor,
represented 19.8% of our net sales. There were no customers in
fiscal 2002 or 2001, other than the U.S. government, that
represented 10% or more of our net sales. During fiscal 2003, 2002
and 2001, approximately 44.2%, 33.8% and 23.1%, respectively, of the
Company's net sales resulted from contracts with the U.S. government
or prime contractors to the U.S. government. Direct and indirect
sales to an African country in fiscal 2003 represented 10.2% of net
sales. International sales comprised 39.7%, 41.2% and 46.2% of net
sales in fiscal 2003, 2002 and 2001, respectively. International
sales include sales to domestic companies for inclusion in products,
which will be sold to international customers.
F-20
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 including satellite lease expenditures relating to our
mobile data communications segment contracts. At July 31, 2003, the
future minimum lease payments under operating leases are as follows:
2004 $ 7,617,000
2005 2,986,000
2006 1,672,000
2007 820,000
Thereafter 2,409,000
-----------
Total $15,504,000
===========
Lease expense charged to operations was $2,558,000, $2,381,000 and
$1,724,000 in fiscal 2003, 2002 and 2001, respectively. Lease
expense excludes satellite lease expenditures incurred of
approximately $10,043,000, $937,000 and $512,000 in fiscal 2003,
2002 and 2001, respectively, relating to our mobile data
communications segment contracts.
(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
We are subject to certain 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 Contracts
The Company has employment agreements with Mr. Kornberg, its
Chairman of the Board, Chief Executive Officer and President, and
Mr. Rouse, its Senior Vice President and Chief Financial Officer.
Mr. Kornberg's agreement which was amended and restated in June 2003
provides, among other things, for his employment until July 31, 2008
at a current base compensation of $475,000 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 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.
Mr. Rouse's agreement which was amended and restated in June 2003
provides, among other things, for his employment until July 31, 2005
at a current base compensation of $285,000 per annum and incentive
compensation equal to 1.5% 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 one year periods unless either party gives notice of
non-extension at least three months in advance of the scheduled
termination date. The agreement also provides for payment, in
certain circumstances, to Mr. Rouse in the event of a change in
control of the Company.
F-21
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) 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.
(14) 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, consisting of assembled workforce and
customer base, net of accumulated amortization of $768,000, were
reclassified as intangibles with indefinite lives. The customer base
was reclassified since it could not be sold, transferred, licensed,
rented or exchanged by itself or in combination with a related
contract, asset or liability.
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
------
Reported net income $6,714
Exclude amortization of goodwill and intangible assets with
indefinite lives, net of income taxes 889
------
Adjusted proforma net income $7,603
======
Basic earnings per share:
As reported $0.61
Adjusted proforma $0.69
Diluted earnings per share:
As reported $0.57
Adjusted proforma $0.64
F-22
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Intangibles with definite lives arising from acquisitions as of July
31, 2003 and 2002 are as follows:
2003 2002
----------------------------------- ----------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Existing technology $12,266,000 4,261,000 11,851,000 2,582,000
Core technology 1,315,000 146,000 1,315,000 --
Technology license 2,229,000 206,000 2,154,000 99,000
Trade name 175,000 19,000 175,000 --
Order backlog 88,000 88,000 88,000 --
----------- --------- ---------- ---------
Total $16,073,000 4,720,000 15,583,000 2,681,000
=========== ========= ========== =========
Amortization expense for the years ended July 31, 2003, 2002 and
2001 was $2,039,000, $1,471,000 and $2,552,000, respectively. The
estimated amortization expense for the fiscal years ending July 31,
2004, 2005, 2006, 2007 and 2008 is $2,012,000, $2,012,000,
$2,012,000 $1,876,000 and $640,000, respectively.
Intangibles with indefinite lives by reporting unit as of July 31,
2003 are as follows:
Telecommunications transmission $ 7,870,000
RF microwave amplifiers 8,422,000
Mobile data communications services 1,434,000
-----------
$17,726,000
===========
(15) Unaudited Quarterly Financial Data
The following is a summary of unaudited quarterly operating results
(amounts in thousands, except per share data):
Fiscal 2003 First Quarter Second Quarter Third Quarter Fourth Quarter Total
------------- -------------- ------------- -------------- -----
Net sales $ 31,273 42,326 48,753 51,683 174,035
Gross profit 11,677 13,543 16,491 18,007 59,718
Net income 799 1,853 3,470 3,587 9,709
Diluted income per share $ 0.07 0.16 0.29 0.27 0.80*
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 $ 0.08 0.01 0.03 (0.03) 0.10*
* 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-23
Schedule II
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended July 31, 2003, 2002 and 2001
Column A Column B Column C Additions Column D Column E
-------- -------- ----------------------------------- -------- --------
(1) (2)
Balance at Charged to Charged to Transfers Balance at
beginning cost and other accounts (deductions) end of
Description of period expenses - describe describe period
------------- -------------- --------------- ----------------- ------------
Allowance for doubtful accounts -
accounts receivable:
Year ended July 31,
2003 $ 795,000 246,000 (C) -- (129,000) (D) $ 912,000
2002 845,000 269,000 (C) -- (319,000) (D) 795,000
2001 806,000 39,000 (C) -- -- 845,000
Inventory reserves:
Year ended July 31,
2003 $ 3,289,000 2,521,000 (A) -- (711,000) (B) $ 5,099,000
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
(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.
S-1