<PAGE>
FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-26589, eff. 4/12/89)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
Form 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended October 31, 1996
-----------------------------------------------------
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
----------------- ------------------------
Commission File Number: 0-7928
----------------------------------------------------
COMTECH TELECOMMUNICATIONS CORP.
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(Exact name of registrant as specified in its charter)
Delaware 11-2139466
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
105 Baylis Road, Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
(516) 777-8900
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(X) Yes ( ) No
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDING DURING
THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
( ) Yes ( ) No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, Par Value $.10 Per Share - 2,637,384 shares outstanding as of
10/31/96.
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1
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
--------------------------------
INDEX
-----
Page
No.
----
PART I FINANCIAL INFORMATION
Consolidated Balance Sheets - 3
October 31, 1996 (unaudited) and
July 31, 1996
Consolidated Statements of Operations - 4
Three Months Ended
October 31, 1996 and 1995 (unaudited)
Consolidated Statements of Cash Flows - 5
Three Months Ended October 31, 1996 and 1995
(unaudited)
Notes to Consolidated Financial Statements (unaudited) 6-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
PART II OTHER INFORMATION 12
Exhibit 11.0 Computation of Earnings (Loss) Per
Common Share 13
Signature Page 14
2
<PAGE>
PART I
------
FINANCIAL INFORMATION
---------------------
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
October 31, 1996 July 31, 1996
----------------- --------------
(unaudited)
ASSETS:
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,118,000 $ 1,840,000
Restricted cash 69,000 220,000
Accounts receivable, less allowance
for doubtful
accounts of $28,000 at October
31, 1996
and July 31, 1996 4,452,000 3,467,000
Inventories, net 6,981,000 6,527,000
Prepaid expenses and other current 134,000 196,000
assets ------------ ------------
Total current assets 12,754,000 12,250,000
------------ ------------
Property, plant and equipment, net 3,787,000 3,996,000
Other assets 365,000 383,000
------------ ------------
Total assets $ 16,906,000 $ 16,629,000
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current installments of long-term
debt (including
payable to related party of
$359,000 at October 31,
1996 and $351,000 at July 31, $ 602,000 $ 642,000
1996)
Accounts payable 2,430,000 2,037,000
Accrued expenses and other current 1,736,000 1,774,000
liabilities ------------ ------------
Total current liabilities 4,768,000 4,453,000
------------ ------------
Long-term debt, less current
installments
(including payable to related
party of $1,504,000
at October 31, 1996 and
$1,512,000 at July 31,
1996) 1,753,000 1,875,000
------------ ------------
Total liabilities 6,521,000 6,328,000
------------ ------------
Stockholders' equity:
Preferred stock, par value $.10 per
share; shares
authorized and unissued 2,000,000 --- ---
Common stock, par value $.10 per
share; authorized
10,000,000 shares; issued and
outstanding 2,637,384
shares at October 31, 1996 and 263,000 261,000
$2,605,344 at July 31, 1996
Additional paid-in capital 22,245,000 22,235,000
Accumulated deficit (11,518,000) (11,599,000)
------------ ------------
10,990,000 10,897,000
Less:
Treasury stock (15,000 shares) (180,000) (180,000)
Deferred compensation expense (425,000) (416,000)
------------ ------------
10,385,000 10,301,000
Total liabilities and stockholders' $ 16,906,000 $ 16,629,000
equity ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
October 31,
(Unaudited)
-------------------
1996 1995
---- ----
Net sales $5,188,000 $4,456,000
---------- ----------
Operating costs and expenses:
<S> <C> <C>
Cost of sales 3,807,000 3,142,000
Selling, general and administrative 1,071,000 1,204,000
Research and development 229,000 235,000
---------- ----------
Total operating costs and expenses 5,107,000 4,581,000
---------- ----------
Operating income (loss) 81,000 (125,000)
Other (expenses) income:
Interest expense (76,000) (71,000)
Interest income 9,000 17,000
Other income 72,000 ----
---------- ----------
Income (loss) before provision
for income taxes 86,000 (179,000)
Provision for income taxes 5,000 7,000
---------- ----------
Net income (loss) $ 81,000 $ (186,000)
---------- ----------
Income (loss) per share $.03 $(.07)
---------- ----------
Weighted average number of common
and common equivalent shares
outstanding 2,622,384 2,590,344
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
October 31,
-------------------
(unaudited)
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 81,000 $ (186,000)
Adjustments to reconcile net income
(loss)
to net cash provided by (used in)
operating activities:
Gain on sale of property (72,000)
Depreciation and amortization 259,000 236,000
Amortization of deferred compensation (62,000) 36,000
Changes in assets and liabilities:
Accounts receivable (858,000) (69,000)
Inventories (454,000) (695,000)
Prepaid expenses and other current 62,000 109,000
assets
Other assets (2,000) --
Accounts payable 393,000 327,000
Accrued expenses and other current (38,000) 364,000
liabilities ---------- -----------
Net cash (used in) provided by (691,000) 122,000
operating activities ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases or property, plant and (85,000) (100,000)
equipment ---------- -----------
Net cash used in investing (85,000) (100,000)
activities ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (162,000) (143,000)
Exercise of stock options 65,000 --
---------- -----------
Net cash used in financing (97,000) (143,000)
activities
Net decrease in cash and cash (873,000) (121,000)
equivalents
Cash and cash equivalents at beginning 2,060,000 2,044,000
of period ---------- -----------
Cash and cash equivalents at end of $1,187,000 $1,923,,000
period ---------- -----------
Supplemental cash flow disclosure:
- ----------------------------------
Cash paid during the period for:
Interest $ 76,000 $ 71,000
Income Taxes $ 5,000 $ 7,000
</TABLE>
Non-cash investing activities: Sale of facility for approximately $127,000.
Cash was received in subsequent period.
See accompanying notes to consolidated financial statements.
5
<PAGE>
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
-------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(1) General
The accompanying consolidated financial statements for the three
months ended October 31, 1996 and 1995 are unaudited. In the opinion of
management, the information furnished reflects all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
results for the unaudited interim periods. The results of operations for the
three months ended October 31, 1996 are not necessarily indicative of the
results of operations to be expected for the full year.
(2) Marketable Investment Securities
At October 31, 1996, investments are comprised principally of
commercial debt obligations and United States Treasury obligations. The Company
utilizes the services of a financial institution to administer its cash
management short term investment program within parameters established by the
Company. The Registrant classifies its debt and marketable equity securities as
available-for-sale securities that are principally being held for an unspecified
period of time, as such, the Registrant may consider selling them to meet
liquidity needs or as part of the Registrant's risk management program.
Available-for-sale securities are recorded at fair value. Dividend
and interest income are recognized when earned. Realized gains and losses are
included in earnings and are derived using the specific identification method
for determining the cost of securities sold. Unrealized gains and losses are
excluded from earnings and are reported as a separate component of stockholders'
equity until realized.
(3) Accounts Receivable
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
October 31, 1996 July 31, 1996
---------------- -------------
<S> <C> <C>
Accounts receivable from commercial $3,641,000 $2,079,000
customers
Unbilled receivables (including
retainages) on
contracts-in-progress 476,000 689,000
Amounts receivable from the United
States Government
and its agencies 236,000 727,000
Other 127,000 --
---------- ----------
4,480,000 3,495,000
Less allowance for doubtful accounts 28,000 28,000
---------- ----------
Accounts receivable, net $4,452,000 $3,467,000
---------- ----------
(4) Inventories
Inventories consist of the following:
October 31, 1996 July 31, 1996
---------------- -------------
Raw materials and components $1,933,000 $1,754,000
Work-in-process 5,919,000 5,414,000
---------- ----------
7,852,000 7,168,000
Less:
Progress payments 374,000 151,000
Inventory reserves 497,000 490,000
---------- ----------
Inventories - net $6,981,000 $6,527,000
---------- ----------
</TABLE>
6
<PAGE>
(5) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
October 31, 1996 July 31, 1996
---------------- -------------
<S> <C> <C>
Customer advances and deposits $ 322,000 $ 208,000
Accrued wages and benefits 766,000 680,000
Accrued commissions 265,000 355,000
Other 383,000 531,000
---------- ----------
$1,736,000 $1,774,000
---------- ----------
(6) Long-Term Debt
Long-term debt consists of the following:
October 31, 1996 July 31, 1996
---------------- -------------
Obligations under capital leases $2,355,000 $2,517,000
Less current installments 602,000 642,000
---------- ----------
$1,753 000 $1,875,000
---------- ----------
(7) Income Taxes
</TABLE>
For the three months ended October 31, 1996 and 1995, the provision
for income taxes was $5,000 and $7,000, respectively.
The provision for income taxes included in the accompanying
consolidated financial statements of operations consisted entirely of estimated
state and local income tax.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at July 31, 1996 are presented below. There
are no temporary differences that give rise to deferred tax liabilities.
<TABLE>
<CAPTION>
Deferred tax assets: 1996
----
<S> <C>
Allowances for doubtful accounts $ 10,000
receivable
Inventories, principally due to
additional costs inventoried
for tax purposes pursuant to the Tax 374,000
Reform act of 1986
Plant and equipment, principally due to
capitalized interest
and differences in depreciation 156,000
Compensated absences, principally due
to accrual for financial
reporting purposes 213,000
Deferred compensation 144,000
Net operating loss carryforwards 4,294,000
Investment tax credit carryforwards 440,000
Alternative minimum tax credit 87,000
carryforwards -----------
Total gross deferred tax 5,718,000
assets
Less valuation allowance (5,718,000)
-----------
Net deferred tax assets $
---
-----------
</TABLE>
The valuation allowance for deferred tax assets as of July 31, 1996
was $5,718,000. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
7
<PAGE>
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers projected future taxable
income and tax planning strategies in making this assessment. In order to fully
realize the deferred tax asset, the Company will need to generate future taxable
income of approximately $16,500,000. Based upon the level of historical taxable
income and projections for future taxable income over the periods which the
deferred tax assets are deductible, management believes it is more likely than
not the Company will not realize the benefits of these deferred tax assets and
has fully reserved the deferred asset.
(8) Earnings Per Share
Earnings per share are based on the weighted average number of common
and common equivalent shares (if dilutive) outstanding during each year.
8
<PAGE>
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
-------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
---------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31,
- ------------------------------------------------------------------------------
1996 AND OCTOBER 31, 1995
- -------------------------
Net Sales. Net sales were $5,188,000 and $4,456,000 for the three months ended
October 31, 1996 and 1995, respectively, representing an increase of $732,000,
or 16.4%. This was due primarily to a higher level of sales of solid state
amplifier and antenna products at the Comtech Microwave Products Corp. and
Comtech Antenna Systems, Inc. subsidiaries, respectively, partially offset by
lower sales at the other subsidiaries.
Gross Margin. Gross profit was $1,381,000 or 26.6% of net sales for the three
months ended October 31, 1996 compared to $1,314,000 or 29.5% for the same
period in fiscal 1996. Higher gross profits in the fiscal 1997 period were due
primarily to the higher sales volume. Lower gross margins, as a percentage of
sales, in the fiscal 1997 period were due primarily to lower average sales
prices on our converter product line.
Selling, General and Administrative. Selling, general and administrative
expenses were $1,071,000 or 20.6% of net sales for the three months ended
October 31, 1996 compared to $1,204,000 or 27% of net sales for the same period
in fiscal 1996. The reduction was partially due to the forefeiture of certain
benefits by a former employee relating to a stock option plan, which resulted in
a reduction of approximately $79,000 to the administrative expenses for this
period. Additionally, there were lower marketing and advertising expenses
incurred in the three months of fiscal 1997 compared to the same period in
fiscal 1996.
Research and Development. Research and development expenses were $229,000 and
$235,000 for the three months ended October 31, 1996 and 1995, respectively.
These expenses, in both periods, were primarily incurred at the Comtech
Communications Corp. subsidiary as they continue selected product improvements
and the development of additional products to expand their product offerings..
Operating Income. As a result of the foregoing factors, the Company had
operating income of $81,000 for the three months ended October 31, 1996 compared
to an operating loss of $125,000 for the comparable prior period.
Interest Expense. Interest expense was $76,000 and $71,000 for the three months
ended October 31, 1996 and 1995, respectively. Interest expense for both
periods was attributable largely to interest associated with the Company's
capital lease obligations.
Interest Income. Interest income was $9,000 and $17,000 for the three months
ended October 31, 1996 and 1995, respectively. This decrease was due primarily
to the decrease in the amount of cash available to invest in the fiscal 1997
period.
Other Income. Other income in the fiscal 1997 period was the result of a gain
on the sale of a company owned storage facility. The sale resulted in a gain of
$72,000 over the net book carrying value of this facility.
Provision for Income Taxes. The provision for income taxes was $5,000 and
$7,000 for the three months ended October 31, 1996 and 1995, respectively, which
principally relates to state income taxes. The Company files on a consolidated
basis for federal income tax purposes and is not expected to incur federal taxes
for these periods due to losses incurred in earlier periods. The Company
believes its tax benefits are subject to a 100% valuation allowance due to
earnings fluctuations inherent in the Company's operations and the potential
limitations on utilization of loss and credit carryforwards pursuant to Sections
382 and 383 of the Internal Revenue Code of 1986.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
For the three month period ended October 31, 1996, the Company's cash and cash
equivalent position decreased by $873,000 from $2,060,000 at July 31, 1996 to
$1,187,000 at October 31, 1996.
Operating activities used a net of $691,000. Accounts receivable were
$4,452,000 at October 31, 1996 as compared to $3,467,000 at July 31, 1996,
representing an increase of $985,000. This increase was primarily the result of
the timing of shipments. Included in these balances were $476,000 at October
31, 1996 and $689,000 at July 31, 1996 for unbilled accounts receivable for
sales recorded on a percentage-of-completion basis. The portion of accounts
receivable represented by unbilled amounts will vary at any time as a function
of the volume of contracts being performed by the Company that are accounted for
on a percentage-of-completion basis. The Company believes that its allowance
for doubtful accounts is sufficient based on past experience and the Company's
credit standards. The Company generally requires international customers to
secure their obligations by letter of credit. The amount of $127,000 included
at October 31, 1996 as other receivables pertains to the amount due the Company
in connection with the sale of a Company owned storage facility.
Inventory levels of materials and work-in-process, net of progress payments and
reserves were $6,981,000 at October 31, 1996 and $6,527,000 at July 31, 1996,
representing an increase of $454,000. This increase was primarily due to the
additional inventory required to address the increased backlog at October 31,
1996. The Company generally operates on a job-order cost basis, that is, costs
are incurred as work-in-process inventory for specific contracts or "jobs" and,
accordingly, inventory levels will vary as a function of the status of the
Company's order backlog. The Company does have some product lines which require
a more competitive response to customers requirements and require the company to
provide for a level of "off-the-shelf" equipment. The only other general
inventory that the Company maintains is for basic components which are common
for most of its products.
Accounts payable increased by $393,000, from July 31, 1996 to October 31, 1996,
primarily as a result of higher sales and the timing of the purchases.
Investing activities used $97,000 of cash. The Company used $162,000 of cash
for principal payments of long-term debt and the Company received $65,000 as
proceeds from the exercise of employee incentive stock options.
In October 1996, the Company sold a storage facility it owned for approximately
$127,000. The Company determined that this facility was no longer needed. The
Company recognized a $72,000 profit from the sale which is included as other
income. The sales price of approximately $127,000 is included in accounts
receivable as the cash was received in mid November.
From time to time the Company utilizes short-term bank financing to
fund its working capital requirements. At the present time, the Company has a
$4.5 million credit facility with a financial institution. The line, which
bears interest at 1% over the prime rate, is to be secured at the time of
borrowing by collateral satisfactory to the financial institution. This credit
facility expires on January 31, 1997. The Company is presently negotiating with
financial institutions for a future facility. Additionally the Company has
obtained a preliminary $1 million commitment from the Export-Import Bank of the
United States, for a guarantee under the Working Capital Guarantee Program.
This program provides to the lender, a 90% guarantee on qualifying loans made to
the Company for export related contracts. This line is presently being
finalized with the lender. The Company has in the past and continues to place a
high emphasis on cash collections as well as seeking progress and advance
payments on contracts when appropriate. The Company's cash balances may
fluctuate from time to time due to the timing of contract deliveries and
collection cycles.
The Company believes that its current cash position, funds generated from
operations and funds available from its current credit facility, collectively,
would be adequate to meet the Company's cash requirements.
10
<PAGE>
The Company's cash investments consist of highly liquid interest bearing
commercial grade securities and certificates of deposit.
11
<PAGE>
PART II
-------
OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 11.0
The following exhibit is annexed hereto:
Computation of Earnings (Loss) per Common Share - Page 14
12
<PAGE>
Exhibit 11.0
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
-------------------------------------------------
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
-----------------------------------------------
(Unaudited)
Three Months Ended Three Months Ended
October 31, October 31,
1996 1995
---- ----
Net income (loss) $ 81,000 $ (186,000)
- ---------------- ---------- ----------
Computation of weighted average
number of common equivalent
shares outstanding during the period:
Weighted average number of
common shares 2,637,384 2,605,344
Weighted average shares assumed to be
issued upon exercise of common
stock option --- ---
Less Treasury Stock (15,000) (15,000)
---------- ----------
Weighted average number of common
and common equivalent shares
outstanding during the period 2,622,384 2,590,344
---------- ----------
Income (loss) per share: $ .03 $ (.07)
- ------------------------ ---------- ----------
13
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMTECH TELECOMMUNICATIONS CORP.
--------------------------------
(Registrant)
Date: December 13, 1996 By: s/Fred Kornberg
-----------------------------
Fred Kornberg
Chairman of the Board
Chief Executive Officer
and President
Date: December 13, 1996 By: s/J. Preston Windus, Jr.
----------------------------
J. Preston Windus, Jr.
Chief Financial Officer
Vice President and Secretary
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FORM 10-Q 10/31/96 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 1187
<SECURITIES> 0
<RECEIVABLES> 4480
<ALLOWANCES> 28
<INVENTORY> 6981
<CURRENT-ASSETS> 12754
<PP&E> 14053
<DEPRECIATION> 10266
<TOTAL-ASSETS> 16906
<CURRENT-LIABILITIES> 4768
<BONDS> 0
263
0
<COMMON> 0
<OTHER-SE> 10122
<TOTAL-LIABILITY-AND-EQUITY> 16906
<SALES> 5188
<TOTAL-REVENUES> 5188
<CGS> 3807
<TOTAL-COSTS> 5107
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> 86
<INCOME-TAX> 5
<INCOME-CONTINUING> 81
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
