SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1998 Commission file number 0-7928
COMTECH TELECOMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
Delaware 3665 11-2139466
(State of Incorporation) (Primary Standard Industrial (IRS Employer
Classification Code) Identification No.)
105 Baylis Road, Melville, New York 11747
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (516) 777-8900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share Shares Outstanding
Title of each class as of October 26, 1998
2,672,004
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The Registrant hereby indicates by check mark whether it (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant (based upon the closing bid price quoted on NASDAQ) is approximately
$24,048,036 (as of October 26, 1998).
-------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the document listed below have been incorporated by
reference into the indicated Part of this Annual Report on Form 10-K:
Proxy Statement for Annual Part III
Meeting of Shareholders to be held
December 15, 1998
<PAGE>
PART I
ITEM 1. BUSINESS
General
Comtech Telecommunications Corp. (the "Company"), a Delaware corporation,
is principally engaged in the design, development and manufacture of high
technology electronic products and systems. The Company's communications
products are used worldwide for voice, data, facsimile and video transmissions
at microwave frequencies in satellite, over-the-horizon microwave, terrestrial
line-of-sight and wireless telecommunications. The Company's solid state high
power amplifiers are used in electronic defense, wireless communications,
electromagnetic compatibility and susceptibility testing, and high power test
instrumentation applications. The Company sells its products directly to
end-users, as well as to subcontractors and prime contractors which incorporate
such products in full system installations.
The Company has been in operation since 1967 and currently offers a broad
product line of solid state high power amplifiers, satellite communication earth
station uplink and downlink equipment and systems, and over-the horizon
microwave communication systems. It sells its products to many of the world's
providers of telecommunication services, of high power electronic test systems
and of defense systems, including domestic and foreign common carriers and
telephone companies, defense systems, medical and automotive equipment
producers, electromagnetic compatibility and susceptibility system suppliers,
oil and gas companies (for communicating with offshore platforms) private and
wireless networks, broadcasters, cable television operators, utilities and
municipal, state and national governments. The Company works closely with
customers and potential customers to develop product lines in market niches
where it believes that it can become a leading supplier. It believes that this
strategy is best effected through decentralized operating units and operating
units that can respond quickly to changing market and customer requirements.
The Company's products are based primarily on microwave and radio
frequency technologies, with many of the same basic technological concepts being
applied across the Company's product lines. In the last decade, the Company's
products have increasingly incorporated digital microwave technology. The
Company believes its expertise in satellite, over-the horizon microwave and
wireless telecommunications and solid state high power amplification provides a
solid base for the development of future products and services, including new
instrumentation and communications products and systems.
Comtech has four operating units, Comtech Antenna Systems, Inc. ("CASI"),
Comtech Communications Corp. ("CCC"), Comtech PST Corp. ("CPST") and Comtech
Systems, Inc. ("CSI").
CASI is a supplier of fiberglass and metal antenna products used in
satellite and over-the horizon communication systems. CCC designs and
manufactures satellite communications products including frequency converters,
modems, VSAT transceivers, solid state power amplifiers and satellite ground
station subsystems. CPST supplies state-of-the-art high power solid state
amplifiers for the electronic defense, wireless communication and high power
test instrument systems. CSI designs, manufactures and installs over-the-horizon
and terrestrial line-of-sight communications systems and equipment for defense
and commercial applications for communicating with offshore oil and gas
platforms.
Telecommunications Overview
Telecommunications Market. The demand for telecommunications is increasing
worldwide as emerging economies seek to modernize and as increasingly
information-intensive markets introduce new telecommunications services. The
telecommunications industry has expanded rapidly during the last decade due to
both technological advances and regulatory changes. Regulatory initiatives
continue to enhance competition in telecommunications, thereby opening new
markets and services as well as providing incentives for the development of new
products. Examples of these changes include the development of advanced digital
communications, the assignment of radio frequencies to wireless telephone
services and the development of private satellite networks. Advances in
technology have lowered per-unit communications costs, increased product
reliability, and encouraged a proliferation of new and enhanced communications
products and services.
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Transmission Technology Options. Customers for telecommunications
equipment must weigh the relative costs and advantages of the six presently
available transmission technologies: copper cable, fiber optic cable, high
frequency radio systems, wireless microwave systems, over-the-horizon microwave
systems and satellite systems. Rarely is a complete communications network or
system based solely on one of these technologies. Transmission is normally
routed through a combination of technologies, each employed where most
cost-effective. The Company's products are used in satellite, over-the-horizon
and wireless microwave communications.
Copper cable, the traditional transmission medium most familiar to
consumers, is being replaced and supplemented by the other media,
particularly for high-volume and long distance transmissions where it has
substantial capacity, cost and reliability limitations.
Fiber optic cable is best suited to high-volume, point-to-point, short-or
long-distance links where its advantages - capacity, quality and security
- justify the long lead time and high cost to equip and install a network.
High frequency radio systems ("HF") employ long wavelengths which are
propagated beyond line-of-sight distances either by surface waves
traveling along the earth's perimeter or by skywave reflection of the
transmitted waves off different layers of the ionosphere. Communications
using HF surface wave propagation are reliable to distances of 300 miles
and skywave propagation can support communication ranges of from 50 to
6,000 miles. Skywave propagation is, however, subject to the variations in
height and density of the ionospheric layers. Such variations are diurnal,
seasonal, and cyclical, with the occasional added impact of solar flare
disturbances and magnetic storms. Improvements in modern technology and
the use of adaptive frequency management techniques that enhance
propagation prediction have greatly increased HF communication reliability
and data throughput. HF radio is used as a prime military and defense
communications means for short and medium range applications.
Wireless and line-of-sight microwave communications systems, generally
used for point-to-point communications, employ signals with extremely
short wave-lengths which travel only in line-of-sight paths over
relatively short distances, generally under 30 miles, can be quickly and
easily installed, require relatively low initial capital investment, and
can be upgraded and expanded over time. There are a wide variety of
microwave communication systems offering different frequencies, modulation
techniques (analog, digital, or spread spectrum), and data transmission
capacities.
Over-the-horizon microwave communication systems ("OTH") transmit signals
over distances from 30 to 400 miles by reflection of the transmitted
signals off the troposphere, an atmospheric layer located approximately
seven miles above the earth's surface. The net effect is that the signal
is reflected by a large number of scattering particles in the troposphere,
which in turn directs a portion of the transmitted signal energy well
beyond line-of-sight. Typically, reliable communications OTH links require
the use of multiple transmitters (frequency diversity), multiple antennas
(space diversity), or other forms of explicit diversity such as
polarization or angle diversity. These systems, which use microwave
technology, are well suited for rapid introduction of service in remote
areas or where other communication alternatives are unavailable because of
terrain problems, such as large bodies of water, mountains, etc. Such
systems offer a high level of reliability and security and are
particularly suited to defense and commercial voice and data communication
applications. In addition, they have special purpose point-to-point
commercial applications, such as communications to offshore gas and oil
platforms and along pipelines or railroads.
Satellite communications systems have grown and diversified in response to
demand for efficient and accurate long-distance voice and video
communication and digital information exchange. In a satellite
communication system, information is relayed to and from microwave
transmitting and receiving stations on the ground by means of a low earth
orbit (LEO), medium earth orbit (MEO), or geostationary earth orbit (GEO)
satellite which is generally placed in an equatorial orbit 22,300 miles
above the earth's equator. Satellite communication systems are
particularly useful where long-range, high capacity and high quality
point-to-point or point-to-multipoint communication is desirable. As few
as three GEO satellites can provide global communications coverage. These
systems, which use microwave technology, are well suited for rapid
introduction of service in remote areas or where communication
alternatives are unavailable, such as mobile, shipboard or military
applications.
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Amplifier Technology Overview
Included in the Company's products are solid state high power amplifiers.
Amplifiers are a class of electronic apparatus that reproduce signals with
greater power, current or voltage amplitude. Indispensable in the world of
signal processing, amplifiers can be as tiny as a microchip for a hearing aid or
as massive as a multi-story building for transmitting radio signals to submerged
submarines or to outer space. Although the majority of amplifier applications
are satisfied by solid-state transistor and integrated circuit technology,
vacuum tubes still play an important role in the very high power microwave
applications.
Amplifiers can be separated into three groups: DC amplifiers, audio
frequency amplifiers, and radio frequency amplifiers. Each group can, in turn be
segregated into the general categories of small signal amplifiers and the higher
power large signal amplifiers. Small signal amplifiers in all three groups
employ solid-state technologies to create flexible, easily implemented
microelectronic building blocks, and are produced by established semiconductor
manufacturers as either catalog products or custom devices for special
applications specified by end-item products suppliers.
The Company's solid-state high power amplifiers are in the category of
large signal amplifiers in the microwave and radio frequency spectrum. Large
signal amplifiers are used in wireless telecommunications, defense systems and
instrumentation applications, where they are employed to amplify microwave or
radio frequency ("RF") energy for the emission of signals. Other applications
are as power supply sources of RF energy for lasers and for the cyclotrons used
in atomic physics. Solid-state transistor technology dominates the field at
output power levels up to 3000 watts for frequencies up to 2500 Mhz. At
frequencies higher than 12,000 MHz, electron tube technology continues to be the
most economical means of achieving high power at acceptable instantaneous
bandwidths. For applications that require both high power and narrow bandwidths,
electron tubes are still used at frequencies extending down to the commercial
broadcast bands. Because of their greater instantaneous bandwidths, greater
reliability and generally smaller size, however, solid-state amplifiers are
constantly being sought as replacements for vacuum tube amplifiers for all
applications throughout the useable frequency spectrum.
In telecommunications, solid-state high power amplifiers are used to
amplify signals for radiation from transmitting antennas in satellite or other
wireless telecommunications systems. They are also used to amplify signals in
defense and airport radar and electronic jamming systems. In the laboratory,
solid-state high power amplifiers are used to test the performance of high power
microwave and wireless electronic system components by simulating operating
environment conditions.
Solid-state high power amplifiers are also used in electromagnetic
compatibility and susceptibility testing. The proliferation of electronic
systems in products such as automobiles, computers, wireless telephones, radios,
televisions, medical equipment, sound amplifiers, aircraft and other products
has led to increasingly serious problems with electromagnetic interference.
Manufacturers, therefore, test these electronic systems for electromagnetic
compatibility and susceptibility. For example, such testing may be used to
determine whether the various electronic systems in a commercial aircraft are
likely to be affected by the use of laptop computers or video games by
passengers in flight.
Narrative Description of Business
The Company's product designs are based on both analog and digital
microwave technologies. Digital microwave technology can significantly enhance
performance. The Company has invested significant resources in developing its
technological expertise, and works closely with customers and potential
customers to develop product lines in market niches where it believes its
technical expertise in solid-state high power amplification and
telecommunication technologies can enable it to become a leading supplier.
The Company operates through individual operating units, each of which
maintains its own sales, marketing, product development and manufacturing
functions. The Company believes that this organizational structure allows the
key personnel of each operating unit, to be more responsive to their particular
markets and customers. Brief descriptions of the Company's operating units
follow.
3
<PAGE>
Comtech Antenna Systems, Inc. ("CASI")
CASI, located in St. Cloud, Florida, designs and manufactures a wide
variety of fiberglass and aluminum antennas for over-the-horizon microwave and
satellite communication applications, including distributed network programming,
cable and broadcast television, radio and other forms of information and
entertainment distribution. CASI designs antennas for specific types of
telecommunications systems and, typically, sells standardized products to
independent distributors, prime contractors and end user customers. CASI's
antenna product line includes fixed and mobile antenna systems and specialized
multi-beam satellite antenna systems that are capable of receiving signals
simultaneously from many independent satellites located up to 60 degrees apart.
Comtech Communications Corp. ("CCC")
CCC, located in Tempe, Arizona, designs and manufactures equipment used in
commercial and defense satellite communications applications. The equipment
includes modems, frequency up converters and down converters, solid state power
amplifiers and satellite VSAT transceivers which incorporate the frequency
converters and solid state high power technologies. These products comprise a
broad range of receiving and transmitting equipment offering a variety of
state-of-the-art technical capabilities with respect to performance, degree of
complexity and value.
Comtech PST Corp. ("CPST")
CPST, headquartered in Melville, New York, designs, develops and
manufactures solid state high power amplifiers for defense, wireless
communications, and for instrumentation systems. It sells its products to
domestic and foreign commercial users, governmental agencies and prime
contractors. CPST is an innovative supplier of solid state high power amplifiers
and related power processing equipment, which products also replace amplifiers
using vacuum tube systems.
Comtech Systems, Inc. ("CSI")
CSI, headquartered in St. Cloud, Florida, designs, manufactures and
installs telecommunication systems and equipment for domestic and international
applications. CSI supplies telecommunication systems incorporating equipment
manufactured by it, other Comtech operating units and third parties.
CSI's product line consists primarily of equipment for over-the-horizon
microwave systems and networks. CSI has a turnkey capability that ranges from
system and network planning through equipment and system training and operation
and maintenance programs. CSI's products and services are marketed to oil and
gas companies and other commercial users, foreign defense commands, and other
system prime contractors. The Company believes that CSI's products, which employ
adaptive modem digital transmission technology, offer high speed data benefits
over the traditional analog over-the-horizon microwave products offered by most
of its competitors.
Sales, Marketing and Customer Support
The Company's sales and marketing efforts are handled independently by
each operating unit. The Company's sales and marketing strategies vary with
particular markets served, and include direct sales (sales, marketing and
engineering personnel), sales through independent representatives, value-added
resellers or a combination of the foregoing. Operating units have also entered
into sales distribution agreements for certain products with distributors.
Unlike sales representatives, who merely find customers for the Company on a
commission basis, distributors purchase products from the Company for resale.
The Company intends to continue to expand its domestic and international
marketing efforts through both independent sales representatives and
distributors.
Relationships with customers are established and maintained by management,
technical and marketing personnel. The Company's strategy includes a commitment
to provide ongoing customer support for its systems and equipment. This support
involves providing direct access to engineering staff or trained technical
representatives to resolve technical or operational problems.
4
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The Company's sales of over-the-horizon microwave communications,
satellite communications and solid state high power amplifier products
internationally represented approximately 46%, 57% and 56% of total net sales in
the fiscal years ended July 31, 1998, 1997 and 1996, respectively. Such
international sales are expected to continue to increase due to the global
expansion of telecommunications and microwave instrumentation and the Company
expects that international sales will remain a substantial proportion of its
total sales.
Sales to one customer in fiscal 1998 and to a different customer in fiscal
1997, represented 12.2% and 10.2% of consolidated net sales, respectively. There
were no customers in fiscal 1996 for which sales amounted to over 10%.
International sales expose the Company to certain risks, including
barriers to trade, fluctuations in foreign currency exchange rates (which may
make the Company's products less price competitive), political and economic
instability, availability of suitable export financing, export license
requirements, tariff regulations, and other United States and foreign
regulations that may apply to the export of the Company's products, as well as
the generally greater difficulties of doing business abroad. The Company
attempts to reduce the risk of doing business in foreign countries by seeking
contracts denominated in United States dollars, advance payments and irrevocable
letters of credit in its favor.
Although the percentage of the Company's total net sales to agencies of
the United States or to contractors or subcontractors under contracts with
United States agencies ("U.S. government sales") has fluctuated over the past
three years, such sales remain significant, accounting for approximately 20%,
17% and 20% of total net sales for the fiscal years ended July 31, 1998, 1997
and 1996, respectively. These sales are subject to various risks, regulatory
provisions applicable to government contracts, including, among other things,
unpredictable reductions in funds available for the Company's projects and
contract termination at the convenience of the government. Government contracts
are generally less profitable than contracts with private industry but typically
provide progress payment funding.
The Company's domestic commercial sales ("domestic sales") represented
approximately 34%, 26% and 24% of net sales in the fiscal years ended July 31,
1998, 1997 and 1996, respectively.
Compliance with Federal, State and Local Environment Protection Laws
There is no material effect on the Company's capital expenditures,
earnings or competitive position resulting from compliance with Federal, state
or local environment protection laws.
Backlog
The Company's backlog as of July 31, 1998 and 1997 was approximately
$15,452,000 and $14,724,000, respectively. Substantially all of the backlog as
of July 31, 1998 is expected to be recognized as sales during the fiscal year
ending July 31, 1999. The Company had received progress billings and advance
payments aggregating approximately $652,000 as of July 31, 1998 in connection
with orders included in the backlog at that date. Approximately 30% of that
backlog consisted of United States government contracts, subcontracts and
government funded programs, approximately 46% consisted of orders with foreign
customers and approximately 24% consisted of orders with domestic commercial
customers.
All of the contracts in the Company's backlog are subject to cancellation
at the convenience of the customer or for default in the event that the Company
is unable to complete the contract.
Variations in backlog from time to time are attributable in part to the
timing of the Company's preparation and submission of contract proposals, the
timing of contract awards and the delivery schedules on specific contracts. As a
result, management believes its backlog at any point in the fiscal year is not
necessarily indicative of the total sales anticipated for any particular future
period. CASI's business, as well as a significant portion of CPST's and CCC's
businesses, operate under a short lead time and usually generate sales out of
inventory.
5
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Manufacturing
The Company's manufacturing operations consist principally of the assembly
and testing of electronic products designed by the Company and built by it from
purchased fabricated parts, printed circuits and electronic components and, in
the case of CASI, the casting of fiberglass antennas. The Company employs formal
quality management programs and other training programs, including International
Standards Organization's (ISO 9000) quality procedure registration programs.
CPST operating unit has been qualified for ISO 9001 and the Company is in the
process of qualifying its other operating units.
The Company's ability to deliver its products to customers on a timely
basis is dependent in part upon the availability and timely delivery by
subcontractors and suppliers of the components and subsystems that are used by
the Company in manufacturing its products. Electronic components and raw
materials used in the Company's products are generally obtained from independent
suppliers. Some components are standard items and are available from a number of
suppliers. Others are manufactured to the Company's specifications by
subcontractors. The Company obtains certain components and subsystems from a
single source or a limited number of sources. The Company believes that most
components and equipment are available from existing or alternative suppliers
and subcontractors. A significant interruption in the delivery of such items
could have a material adverse effect on the Company's business and results of
operations.
Research and Development
The technology used in the Company's products is subject to rapid
development and frequent change, and the Company's business position is in large
part contingent upon the continuous refinement of its scientific and engineering
expertise and the development, either through internal research and development
or acquisitions of new or enhanced products and technologies.
Research and development expenses were $1,319,000, $1,023,000 and $741,000
in the fiscal years ended 1998, 1997 and 1996, respectively, representing 4.4%,
4.1% and 3.5% of total net sales, respectively, for such periods.
A portion of the Company's research and development efforts is related to
specific contracts and is recoverable under such contracts, and such
expenditures are not included in research and development expenses for financial
reporting purposes. During the fiscal years ended July 31, 1998, 1997 and 1996,
the Company was reimbursed by customers for such activities in the amounts of
$356,000, $436,000 and $516,000, respectively, representing 1.2%, 1.8% and 2.5%,
respectively, of total net sales.
The Company obtains customer funding for research and development where
possible to adapt the Company's basic technology to specialized customer
requirements.
Patents and Licenses
Although the Company owns or holds licenses for a number of patents,
patents and licenses have been of substantially less significance in the
Company's business than have been its scientific and engineering know-how,
production techniques, the timely application of its technology and the design
development and marketing capabilities of its personnel. The Company relies on
the laws of unfair competition, restrictions in licensing agreements and
confidentiality agreements to protect such knowledge and techniques.
6
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Competition
The Company's business is highly competitive and characterized by rapid
technological change. In addition, the number of potential customers for the
Company's products is limited. The Company's growth and financial position
depends, among other things, on its ability to keep pace with such changes and
developments and to respond to the sophisticated requirements of an increasing
variety of electronic equipment users. Many of the Company's competitors are
substantially larger, have significantly greater financial, marketing and
operating resources and broader product lines than does the Company. A
significant technological breakthrough by others, including smaller competitors
or new companies, could have a material adverse effect on the Company's
business. In addition, certain of the Company's customers have technological
capabilities in the Company's product areas and could choose to replace the
Company's products with their own.
The Company believes that competition in its markets is based primarily on
price, product performance, reputation, delivery times and customer support. The
Company believes that, due to its organizational structure and proprietary
know-how, it has the ability to develop, produce and to deliver equipment on a
cost-effective basis faster than many of its competitors.
Key Personnel/Employees
The Company operates through a number of operating units, an
organizational structure which the Company believes fosters responsiveness to
specific markets and customers. The Company's success is dependent upon the
continued contributions of its key management personnel, including the key
management at each of its operating units and depends to a significant extent
upon its President and Chief Executive Officer. Many of the Company's key
personnel, particularly the key engineers, would be difficult to replace, and
are not subject to employment or non-competition agreements. The Company's
growth and future success will depend in large part upon its ability to attract
and retain highly qualified engineering, sales and marketing personnel.
Competition for such personnel from other companies, academic institutions,
government entities and other organizations is intense. Although the Company has
been successful to date in recruiting and retaining key personnel, there can be
no assurance that the Company will be successful in attracting and retaining the
personnel it requires in order to continue to grow and operate profitably. Also,
there can be no assurance that management skills which have been appropriate for
the Company in the past will continue to be appropriate if the Company continues
to grow and diversify.
At July 31, 1998, the Company had 216 employees, 114 of whom were engaged
in production and production support, 63 in research and development and other
engineering support and 39 in marketing and administrative functions. None of
the employees are represented by a labor union. The Company believes that its
employee relations are good.
Disclosure Regarding Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides for forward
looking statements. Certain information in Items 1,2,3,7 and 8 of this Form 10-K
include information that is forward looking, such as the Company's anticipated
sales levels, its anticipated liquidity and capital requirements and the results
of legal proceedings. The matters referred to in forward looking statements
could be affected by the risks and uncertainties involved in the Company's
business. These risks and uncertainties include, but are not limited to, the
effect of economic and market conditions, unpredictable reductions in funding
for government defense expenditures, and the risks associated with international
sales, including fluctuations in foreign currency exchange rates, political and
economic instability, availability of suitable export financing, export license
requirements, tariff regulations and other U.S. and foreign regulations that may
apply to the export of the Company's products, as well as certain other risks
described above in this Item under "Backlog," "Competition" and "Key
Personnel/Employees" and below in Item 3 in "Legal Proceedings" and in Item 7 in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Subsequent written and oral forward looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements in this paragraph and elsewhere in this
Form 10-K.
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ITEM 2. PROPERTIES
The Company's corporate offices are located in a portion of the 46,000
square foot facility on 2 acres of land in Melville, New York which also houses
CPST.
The Company leases this facility in Melville, New York from a partnership
controlled by the Company's Chairman, Chief Executive Officer and President. The
lease, as amended, provides for the Company's exclusive use of the premises as
they now exist for an initial term of ten years through December 27, 2001. The
Company has the option to extend the term of the lease for an additional
ten-year period and a right of first refusal in the event of a sale of the
facility. The base annual rental under the lease is subject to adjustments. The
Company believes that the terms of this lease are not less advantageous to the
Company than those that would have been available to the Company from an
unrelated party.
The Company leases the 32,000 square foot facility on 8 acres of land used
by CASI and CSI in St. Cloud, Florida from a Florida Land Trust, controlled by
the Company's Vice President and Chief Financial Officer. The lease provides for
the Company's exclusive use of the premises as they now exist for a term
expiring September 30, 2003. The base annual rental under the lease is subject
to adjustments. The Company believes that the terms of this lease are not less
advantageous to the Company than those that would have been available to the
Company from an unrelated party.
The Company leases a 20,000 sq. ft. building in Tempe, Arizona for its
Comtech Communications Corp. operating unit. The lease provides for the
exclusive use of the premises as they now exist for a term of three years
through April 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to certain legal actions which arise out of the
normal course of business. It is management's belief that the outcome of these
actions will not have a material effect on the Company's consolidated financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to stockholders during the fourth quarter of the
fiscal year ended July 31, 1998.
8
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market System
under the symbol "CMTL". The following table sets forth the range of high and
low closing sales prices for the Common Stock, as reported by NASDAQ. Such
prices do not include retail markups, markdowns, or commissions.
Common Stock
------------
High Low
---- ---
Fiscal Year Ending 7-31-97
First Quarter $3 5/16 $2 3/4
Second Quarter 4 3/8 2 1/2
Third Quarter 4 1/4 3
Fourth Quarter 4 1/8 3
Fiscal Year Ending 7-31-98
First Quarter 5 1/8 3 1/2
Second Quarter 4 19/32 4 1/4
Third Quarter 9 1/16 6
Fourth Quarter 9 3/4 6 1/4
Fiscal Year Ending 7-31-99
First Quarter 9 1/2 5
(through October 26, 1998)
Dividends
The Company has never paid a cash dividend on its Common Stock and the
Company's Board of Directors intends to continue this policy for the foreseeable
future. Earnings, if any, will be used to finance the development and expansion
of the Company's business.
Approximate Number of Equity Security Holders
As of October 26, 1998, there were approximately 850 holders of the
Company's Common Stock. Such number of record owners was determined from the
Company shareholders' records and does not include beneficial owners of the
Company's Common Stock held in the names of various security holders, dealers
and clearing agencies.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Year Ended July 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net sales $ 30,114 $ 24,746 $ 20,916 $ 16,455 $ 14,873
Cost of sales 21,330 17,670 14,819 12,096 12,226
-------- -------- -------- -------- --------
Gross profit 8,784 7,076 6,097 4,359 2,647
Expenses:
Selling, general and administrative 6,013 5,415 5,015 4,658 4,706
Research and development 1,319 1,023 741 1,036 760
-------- -------- -------- -------- --------
7,332 6,438 5,756 5,694 5,466
-------- -------- -------- -------- --------
Operating earnings (loss) 1,452 638 341 (1,335) (2,819)
Other expenses (income):
Interest expense 234 284 302 341 279
Interest income (36) (33) (60) (171) (253)
Other income (30) (151) -- (20) --
-------- -------- -------- -------- --------
Earnings (loss) before
provision for income taxes 1,284 538 99 (1,485) (2,845)
Provision for income taxes 180 54 27 17 25
-------- -------- -------- -------- --------
Net earnings (loss) $ 1,104 $ 484 $ 72 $ (1,502) $ (2,870)
======== ======== ======== ======== ========
Net earnings (loss) per share:
Basic $ .42 $ .19 $ .03 $ (.58) $ (1.14)
======== ======== ======== ======== ========
Diluted $ .40 $ .19 $ .03 $ (.58) $ (1.14)
======== ======== ======== ======== ========
Weighted average number common
shares outstanding -- Basic computation 2,601 2,582 2,591 2,590 2,519
Potential dilutive common shares 176 22 70 -- --
Weighted average number of common
and common equivalent shares
outstanding assuming dilution -
Diluted computation 2,777 2,604 2,661 2,590 2,519
Consolidated Balance Sheet
Data:
Total assets $ 19,710 $ 17,960 $ 16,629 $ 16,783 $ 18,289
Working capital 8,918 7,930 7,797 7,681 9,447
Long-term debt, less current
installments 1,445 1,310 1,875 2,277 2,535
Stockholders' equity 12,093 10,878 10,301 10,081 11,446
</TABLE>
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income
and expense items expressed as a percentage of the Company's net sales:
Fiscal Year
Ended July 31
-----------------------------
1998 1997 1996
---- ---- ----
Net sales 100% 100% 100%
Gross Margin 29.2 28.6 29.1
Selling, general and administrative 20 21.9 24.0
expenses
Research and development expenses 4.4 4.1 3.5
Operating income 4.8 2.6 1.6
Interest expense, net .8 (1.0) (1.2)
Income before income taxes 4.3 2.2 .5
Net income 3.7 2.0 .3
Comparison of the Fiscal Years 1998 and 1997
Results of Operations
Net Sales Consolidated net sales were $30,114,000 and $24,746,000 for the fiscal
years ended July 31, 1998 and 1997, respectively, representing an increase of
$5,368,000 or 21.7%. This increase was due primarily to increased domestic and
U.S. government sales of high power amplifiers at CPST and increased
international sales of over-the-horizon microwave equipment at CSI, partially
offset by decreased international sales of satellite communication products at
CCC. International sales decreased by approximately $184,000 or 1%, representing
46% and 57% of total net sales for fiscal 1998 and 1997, respectively. Domestic
sales increased by $2,872,000 or 61% representing 34% and 26% of total net sales
and U.S. government sales increased by $1,680,000 or 40% representing 20% and
17% of total net sales for fiscal 1998 and 1997, respectively. International and
domestic sales are expected to increase in the foreseeable future due to the
growing worldwide demand for wireless and satellite telecommunications and the
Company's expanded line of product offerings to meet these demands. U.S.
government sales are anticipated to remain substantially at the same level for
the foreseeable future. Sales to one customer in fiscal 1998 and sales to a
different customer in fiscal 1997 represented 12.2% and 10.2% of consolidated
net sales for fiscal 1998 and 1997, respectively. The Company has a wide
customer base and is usually not dependent on any one customer for revenues.
Gross Margins Gross profit was $8,784,000 and $7,076,000 for fiscal 1998 and
1997, respectively, representing an increase of $1,708,000. The primary reason
for this increase was a net increase in sales volume in fiscal 1998. Gross
profit, as a percentage of net sales, was 29.2% and 28.6%. The Company's gross
profit may be affected by a variety of factors, including the mix of products,
systems and equipment sold; production, reliability or quality problems; and
price competition. Gross margins are expected to remain relatively stable for
the foreseeable future.
Selling, General and Administrative Selling, general and administrative expenses
were $6,013,000 and $5,415,000 in fiscal 1998 and 1997, respectively,
representing an increase of $598,000 or 11%. This increase was due primarily to
the increased expenses required to support the higher level of sales in the
fiscal 1998 period, including higher bid and proposal expenses, sales
commissions, marketing personnel expenses and other administrative expenses. As
a percentage of sales, however, these expenses decreased to 20% in fiscal 1998,
from 21.9% in fiscal 1997.
Research and Development Research and development expenses were $1,319,000 and
$1,023,000 in fiscal years ended July 31, 1998 and 1997, respectively,
representing an increase of $296,000 or 28.9%. Research and development as a
percentage of net sales were 4.4% and 4.1%. This increase was primarily due to
increased expenses for general product improvements and for the development of a
CSAT transceiver and VSAT modem at CCC and a complement of additional product
offerings to the "fly-away" and "quick deployment" antenna product lines at
CASI.
Whenever possible, the Company seeks customer funding for research and
development to adapt the Company's products to specialized customer
requirements. During the fiscal years ended July 31, 1998 and 1997, the Company
11
<PAGE>
was reimbursed $356,000 and $436,000, respectively, which amounts are not
reflected in the reported research and development expenses.
Operating Income As a result of the foregoing factors, the Company had operating
income of $1,452,000 in fiscal 1998 as compared to operating income of $638,000
in fiscal 1997, representing an increase of $814,000 or 127.6%.
Interest Expenses Interest expense was $234,000 and $284,000 in the fiscal years
ended July 31, 1998 and 1997, respectively. Interest expense in both years was
substantially due to interest associated with the Company's capital lease
obligations.
Interest Income Interest income for the fiscal years ended July 31, 1998 and
1997 was $36,000 and $33,000, respectively. This increase was due primarily to
the increase in the amount of cash available to invest in the fiscal 1998
period. Interest income in fiscal 1997 included approximately $14,000 that was
received from a customer for extended payment terms.
Other Income The Company had other income of $30,000 and $151,000 in fiscal 1998
and 1997, respectively. Other income in fiscal 1998 was primarily due to the
gain on a foreign currency exchange rate and to the sale of scrap materials. In
fiscal 1997, the primary components were the result of a gain on the sale of a
Company owned storage facility, the sale of fully depreciated equipment, a
finders fee the Company earned and the write off of other miscellaneous items.
Provision for Income Taxes The provision for income taxes was $180,000 and
$54,000 in fiscal 1998 and 1997, respectively. This is composed of $45,000 and
$20,000 for federal income tax and $135,000 and $34,000 for state income taxes
for fiscal 1998 and 1997, respectively. The Company has NOL carryforwards to
offset Corporate federal income tax and is generally only subject to the
alternative minimum tax, when applicable. The Company believes its tax benefits
are subject to 100% valuation allowance due to earnings fluctuations inherent in
the Company's operations and the potential limitations on utilization of loss
and credit carryforwards pursuant to Sections 382 and 383 of the Internal
Revenue Code of 1986.
Comparison of the Fiscal Years 1997 and 1996
Result of Operations
Net Sales. Net sales were $24,746,000 and $20,916,000 for the fiscal years ended
July 31, 1997 and 1996, respectively, representing an increase of $3,830,000 or
18.3%. This increase was due primarily to increased sales at CPST and CCC
subsidiaries both internationally and domestically. International sales
represented approximately 57% and 56% and domestic sales represented
approximately 26% and 24% of the total net sales for fiscal 1997 and 1996,
respectively. International and domestic sales are expected to increase in the
foreseeable future due to the growing worldwide demand for wireless and
satellite telecommunications. U.S. government sales represented approximately
17% and 20% of the total net sales for fiscal 1997 and 1996, respectively. The
Company anticipates that such sales will remain substantially at the same level
for the foreseeable future.
Gross Margin. Gross profit was $7,076,000 and $6,097,000 for fiscal 1997 and
1996, respectively, representing an increase of $979,000. The primary reason for
this increase was an increase in sales volume in fiscal 1997 at CPST and CCC
subsidiaries. Gross profit, as a percentage of net sales, was 28.6% and 29.1%
for fiscal 1997 and 1996, respectively. This decrease was primarily the result
of provisions on two products for slow moving and obsolete inventory of $466,000
which was partially offset by higher gross margin percentages at CPST and CCC
subsidiaries. The fiscal 1996 gross profits reflects a gain of $149,000 on the
settlement of a claim arising from an earlier acquisition.
Selling, General and Administrative. Selling, general and administrative
expenses were $5,415,000 and $5,015,000 in fiscal 1997 and 1996, respectively,
representing an increase of $400,000. This increase was due primarily to the
increase in administrative expenses required to support the higher level of
sales in the fiscal 1997 period. As a percentage of sales however, these
expenses decreased to 21.9% in fiscal 1997 from 24% in fiscal 1996.
Research and Development. Research and development expenses were $1,023,000 and
$741,000 in fiscal years ended July 31, 1997 and 1996, respectively,
representing an increase of $282,000 or 3.8%. Research and development expenses
as a percentage of net sales were 4.1% and 3.5% in fiscal 1997 and 1996,
respectively. This increase was
12
<PAGE>
primarily due to increased expenses for general product improvement and expanded
product development at our CCC subsidiary.
Whenever possible, the Company seeks customer-funding for research and
development to adapt the Company's products to specialized customer
requirements. During the fiscal years ended July 31, 1997 and 1996, the Company
was reimbursed $436,000 and $516,000, respectively, which amounts are not
reflected in the reported R&D expenses.
Operating Earnings. As a result of the foregoing factors, the Company had
operating income of $638,000 in fiscal 1997 compared to operating income of
$341,000 in fiscal 1996.
Interest Expense. Interest expense was $284,000 and $302,000 in the fiscal years
ended July 31, 1997 and 1996, respectively. Interest expense in both years was
substantially due to interest associated with the Company's capital lease
obligations.
Interest Income. Interest income for the fiscal years ended July 31, 1997 and
1996 was $33,000 and $60,000, respectively. This decrease was due primarily to
the decrease in the amount of cash available to invest in the fiscal 1997
period.
Other Income. The Company had other income of $151,000 in fiscal 1997 and no
income classified as other income in fiscal 1996. The primary components for
fiscal 1997 were the result of a gain on the sale of a Company owned storage
facility, the sale of fully depreciated equipment, a finders fee the Company
earned and the write-off of other miscellaneous items.
Provision for Income Taxes. The provision for income taxes was $54,000 and
$27,000 in fiscal 1997 and 1996, respectively. For fiscal 1997, the Company's
tax liability was composed of $20,000 for federal income tax and $34,000 for
state income tax. For fiscal 1996, the Company did not incur any federal income
tax and the state income tax was $27,000. The Company has NOL carryforwards to
offset federal income tax and is generally only subject to the alternative
minimum tax, when applicable. The Company believes its tax benefits are subject
to 100% valuation allowance due to earnings fluctuations inherent in the
Company's operations and the potential limitations on utilization of loss and
credit carryforwards pursuant to Sections 382 and 383 of the Internal Revenue
Code of 1986.
Liquidity and Capital Resources
The Company's cash and cash equivalents position increased by $1,450,000 from
$1,274,000 at July 31, 1997 to $2,724,000 at July 31, 1998. Restricted cash,
which is securing standby letters of credit, decreased from $90,000 at July 31,
1997 to $22,000 at July 31, 1998. Operating activities provided net cash of
$2,572,000 while investing activities and financing activities used net cash of
$312,000 and $810,000, respectively.
The increase in accounts receivable, net of the additional amount added to the
allowance for doubtful accounts of $68,000, was $381,000. The primary reason for
this net increase was the higher volume of sales. The Company reviews its
allowance for doubtful accounts periodically and believes that it is sufficient
based on past experience and the Company's credit standards. Generally, foreign
customers are required to secure their obligations by letter of credit.
The decrease in inventory, net of a reduction of reserves of $127,000, was
$421,000. 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 Company's
order backlog. The Company does have some product lines which require a more
competitive delivery response to customers' requirements and require the Company
to provide for a level of "off-the-shelf" equipment. The only other general
inventory that the Company maintains is for basic components which are common
for most of its products. Inventory reserves are reviewed on an ongoing basis
and adjustments are made as needed.
Accounts payable decreased by $277,000 primarily due to the timing differences
in incurring the expenses. Accrued expenses and other current liabilities
increased by $479,000 primarily due to increased customer deposits, higher
accrued commissions, an increase in accrued income taxes and higher accrued
wages and benefits.
13
<PAGE>
During fiscal 1998, the Company made leasehold improvements and purchases of
equipment of $1,519,000, of which $1,207,000 was financed by capital leases. All
of the Company's long term debt consists of capital leases for its facilities
and equipment.
The Company has a $6,000,000 secured credit facility from Republic National Bank
of New York. The line of credit, which is to be used for working capital
requirements, is for a term of one year and bears interest on borrowings of 1/2%
over the bank's Reference Rate. A component of this facility is the
administration by Republic of $1,000,000 of loans under the Working Capital
Guarantee Program of the Export-Import Bank of the United States. This program
provides the lender a 90% guarantee on qualifying loans made to the Company for
export related contracts. During fiscal 1998, the Company took advances in the
aggregate of $1,900,000 which were totally repaid by July 31, 1998. The credit
facility expires December 31, 1998. The Company expects to renew the facility.
Year 2000 Compliance
Management has initiated a company-wide program and has developed a formal plan
of implementation to prepare the Company for the Year 2000. This includes taking
actions designed to ensure that the Company's information technology ("IT")
systems, products and infrastructure are Year 2000 compliance and that its
customers, suppliers and service providers have taken similar action. The
Company is in the process of evaluating its internal issues - all of its IT
systems, products, equipment and other facilities systems. At this time,
Management believes that the Company does not have any internal problem other
than to upgrade some of its software to available new releases which are Year
2000 compliant. With respect to its external issues - customers, suppliers and
service providers, the Company is surveying them primarily through written
correspondence. Despite the efforts to survey customers, suppliers and service
providers, Management cannot be certain as to the actual Year 2000 readiness of
these third parties. To the extent any of its suppliers or service providers are
not Year 2000 ready, the Company believes that it will be able to obtain other
suppliers or service providers without a significant interruption to its
business. To date, the Company has not formulated a Year 2000 contingency plan.
Based upon responses to its inquiries, the Company will determine the need for a
contingency plan by the end of the first quarter of 1999. The Company
anticipates completing its Year 2000 project in early calendar 1999.
Management currently believes that the costs related to the Corporation's
compliance with the Year 2000 issue should not have a material adverse effect on
its consolidated financial position, results of operations or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report, Consolidated Financial Statements, Notes to
Consolidated Financial Statements and related financial schedule are listed in
the index to Consolidated Financial Statements and Schedule annexed hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Certain information concerning the directors and officers of the Company
is incorporated by reference to the Proxy Statement of the Company for the
Annual Meeting of Stockholders to be held December 15, 1998 (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 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.
14
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the Company's Proxy Statement which
will be filed with the Securities and Exchange Commission no later than 120 days
after the close of its fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated by reference to the Company's Proxy Statement which will be filed
with the Securities and Exchange Commission no more than 120 days after the
close of its fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. and 2. Financial Statements and Financial Statement Schedule
The Financial Statements filed as part of this report are listed in the
accompanying Index to Consolidated Financial Statements and Schedule.
(b) No reports on Form 8-K have been filed during the fourth quarter of
the fiscal year ended July 31, 1998.
(c) Exhibit Index
Exhibit Incorporated By
Number Description of Exhibit Reference to Exhibit
------ ---------------------- --------------------
3(a) Certificate of Incorporation of Exhibit 3(a) of the
the Registrant Registrant's 1987
Form 10-K
3(b) Amendment of the Certificate of Exhibit 3(b) to the
Incorporation affecting the 5 to 1 Registrant's 1991
reverse stock split Form 10-K
3(c) Amended and restated By-Laws of Exhibit 3(c) of
the Registrant Registrant's 1998
Form 10-K
3(d) Amendment to the Certificate of Exhibit 3(d) to the
Incorporation increasing Registrant's 1994
authorized shares to 12 million Form 10-K
3(e) Amendment to the Certificate of Exhibit 3(e) to
Incorporation increasing the Registrant's 1998
amortized shares to 15 million Form 10-K
10(a) Amended and restated Employment Exhibit 10(a) of the
Agreement dated January 14, 1998 Registrant's 1998
between the Registrant and Fred Form 10-K
Kornberg
10(b) 1982 Incentive Stock Option and Exhibit A to the
Appreciation Plan Registrant's Proxy
Statement dated
October 29, 1982
10(c) Lease and amendment thereto on the Exhibit 10(k) to the
Melville Facility Registrant's 1992
Form 10-K
10(d) Amended and restated 1993 Appendix A to the
Incentive Stock Option Plan Registrant's Proxy
Statement dated
November 3, 1997
15
<PAGE>
Exhibit Incorporated By
Number Description of Exhibit Reference to Exhibit
------ ---------------------- --------------------
10(e) Time Accelerated Restricted Stock Exhibit 10(j) to the
Purchase Agreements between Registrant's 1994
Registrant and Principals of Form 10-K
Comtech Communications Corp.
operating unit
21 Operating units of the Company Exhibit 21 to the
Registrant's 1998
Form 10-K
23 Consent of KPMG Peat Marwick LLP Exhibit 23 to the
Registrant's 1998
Form 10-K
27 Financial Data Schedule Exhibit 27 to the
Registrant's 1998
Form 10K
Exhibits to this Annual Report on Form 10-K are available upon request for
a fee to the Company of $25.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMTECH TELECOMMUNICATIONS CORP.
October 21, 1998 By: /s/ Fred Kornberg
- ---------------- ----------------------------------------
(Date) Fred Kornberg, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title
--------- -----
October 21, 1998 /s/ Fred Kornberg Chairman of the Board
- ---------------- --------------------------- Chief Executive Officer
(Date) Fred Kornberg and President
(Principal Executive Officer)
October 21, 1998 /s/ J. Preston Windus, Jr. Vice President,
- ---------------- --------------------------- Chief Financial Officer
(Date) J. Preston Windus, Jr. and Secretary
October 21, 1998 /s/ George Bugliarello Director
- ---------------- ---------------------------
(Date) George Bugliarello
October 21, 1998 /s/ Richard L. Goldberg Director
- ---------------- ---------------------------
(Date) Richard L. Goldberg
October 21, 1998 /s/ Gerard R. Nocita Director
- ---------------- ---------------------------
(Date) Gerard R. Nocita
October 21, 1998 /s/ John B. Payne III Director
- ---------------- ---------------------------
(Date) John B. Payne III
October 21, 1998 /s/ Sol S. Weiner Director
- ---------------- ---------------------------
(Date) Sol S. Weiner
17
<PAGE>
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, 1998 and 1997 F-3
Statements of Operations for each of the years in the
three-year period ended July 31, 1998 F-4
Statements of Stockholders' Equity for each of the years
in the three-year period ended July 31, 1998 F-5
Statements of Cash Flows for each of the years in the
three-year period ended July 31, 1998 F-6, F-7
Notes to Consolidated Financial Statements F-8 - F-18
Additional Financial Information Pursuant to the Requirements
of Form 10-K:
Schedule II - Valuation and Qualifying Accounts and Reserves S-1
Exhibit 11 - Computation of Earnings Per Share E-1
Schedules not listed above have been omitted because they are either not
applicable or the required information has been given elsewhere in the
consolidated financial statements or notes thereto.
F-1
<PAGE>
[Letterhead of KPMG Peat Marwick LLP]
Independent Auditors' Report
The Board of Directors and Stockholders
Comtech Telecommunications Corp.:
We have audited the consolidated balance sheets of Comtech Telecommunications
Corp. and subsidiaries as of July 31, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended July 31, 1998. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule II as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Comtech
Telecommunications Corp. and subsidiaries as of July 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended July 31, 1998 in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule II, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Melville, New York
September 18, 1998
F-2
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,724,000 1,274,000
Restricted cash 22,000 90,000
Accounts receivable, less allowance for doubtful
accounts of $170,000 in 1998 and $102,000 in 1997 5,932,000 5,551,000
Inventories, net 6,135,000 6,556,000
Prepaid expenses and other current assets 276,000 231,000
------------ -----------
Total current assets 15,089,000 13,702,000
Property, plant and equipment, net 4,314,000 3,898,000
Other assets 307,000 360,000
------------ -----------
$ 19,710,000 17,960,000
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt (including payable to
related party of $309,000 in 1998 and $386,000 in 1997) $ 804,000 606,000
Accounts payable 2,588,000 2,865,000
Accrued expenses and other current liabilities 2,780,000 2,301,000
------------ -----------
Total current liabilities 6,172,000 5,772,000
Long-term debt, less current installments (including
payable to related party of $817,260 in 1998 and
$1,126,000 in 1997) 1,445,000 1,310,000
------------ -----------
Total liabilities 7,617,000 7,082,000
------------ -----------
Stockholders' equity:
Preferred stock, par value $.10 per share; shares
authorized and unissued 2,000,000 -- --
Common stock, par value $.10 per share; authorized
15,000,000 shares; issued and outstanding, 2,672,004
shares in 1998 and 2,650,404 shares in 1997 267,000 265,000
Additional paid-in capital 22,189,000 22,127,000
Accumulated deficit (10,011,000) (11,115,000)
------------ -----------
12,445,000 11,277,000
Less:
Treasury stock (55,000 shares in 1998 and 1997) (184,000) (184,000)
Deferred compensation (168,000) (215,000)
------------ -----------
12,093,000 10,878,000
------------ -----------
Commitments and contingencies $ 19,710,000 17,960,000
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended July 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 30,114,000 24,746,000 20,916,000
------------ ------------ ------------
Costs and expenses:
Cost of sales 21,330,000 17,670,000 14,819,000
Selling, general and administrative 6,013,000 5,415,000 5,015,000
Research and development 1,319,000 1,023,000 741,000
------------ ------------ ------------
28,662,000 24,108,000 20,575,000
------------ ------------ ------------
Operating income 1,452,000 638,000 341,000
Other expenses (income):
Interest expense 234,000 284,000 302,000
Interest income (36,000) (33,000) (60,000)
Other (30,000) (151,000) -
------------ ------------ ------------
Income before provision for income taxes 1,284,000 538,000 99,000
Provision for income taxes 180,000 54,000 27,000
------------ ------------ ------------
Net income $ 1,104,000 484,000 72,000
============ ============ ============
Earnings per share:
Basic $ 0.42 0.19 0.03
Diluted $ 0.40 0.19 0.03
Weighted average number of common
shares outstanding - Basic computation 2,601,000 2,582,000 2,591,000
============ ============ ============
Potential dilutive common shares 176,000 22,000 70,000
------------ ------------ ------------
Weighted average number of common and common
equivalent shares outstanding assuming dilution -
Diluted computation 2,777,000 2,604,000 2,661,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended July 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common stock Additional Treasury stock
-------------------- paid-in Accumulated ------------------ Deferred
Shares Amount capital deficit Shares Amount compensation
------ ------ ------- ------- ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance July 31, 1995 2,605,344 $261,000 $22,230,000 $(11,671,000) 15,000 $(180,000) $(553,000)
Realized loss on sale of securities -- -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- -- 137,000
Stock options exercised 2,000 -- 5,000 -- -- -- --
Net income -- -- -- 72,000 -- -- --
--------- -------- ----------- ------------ ------ --------- ---------
Balance July 31, 1996 2,607,344 261,000 22,235,000 (11,599,000) 15,000 (180,000) (416,000)
Amortization of deferred compensation -- -- -- -- -- -- 43,000
Termination of unvested restricted shares
issued pursuant to employee stock award
agreement -- -- (211,000) -- -- -- 158,000
Purchase of Treasury shares -- -- -- -- 40,000 (4,000) --
Stock options exercised 43,060 4,000 103,000 -- -- -- --
Net income -- -- -- 484,000 -- -- --
--------- -------- ----------- ------------ ------ --------- ---------
Balance July 31, 1997 2,650,404 265,000 22,127,000 (11,115,000) 55,000 (184,000) (215,000)
Amortization of deferred compensation -- -- -- -- -- -- 47,000
Stock options exercised 21,600 2,000 62,000 -- -- -- --
Net income -- -- -- 1,104,000 -- -- --
--------- -------- ----------- ------------ ------ --------- ---------
Balance July 31, 1998 2,672,004 $267,000 $22,189,000 $(10,011,000) 55,000 $(184,000) $(168,000)
========= ======== =========== ============ ====== ========= =========
</TABLE>
Stockholders'
Other equity
----- ------
Balance July 31, 1995 $(6,000) $10,081,000
Realized loss on sale of securities 6,000 6,000
Amortization of deferred compensation -- 137,000
Stock options exercised -- 5,000
Net income -- 72,000
------- -----------
Balance July 31, 1996 -- 10,301,000
Amortization of deferred compensation -- 43,000
Termination of unvested restricted shares
issued pursuant to employee stock award
agreement -- (53,000)
Purchase of Treasury shares -- (4,000)
Stock options exercised -- 107,000
Net income -- 484,000
------- -----------
Balance July 31, 1997 -- 10,878,000
Amortization of deferred compensation -- 47,000
Stock options exercised -- 64,000
Net income -- 1,104,000
------- -----------
Balance July 31, 1998 $ -- $12,093,000
======= ===========
See accompanying notes to consolidated financial statements.
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,104,000 484,000 72,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on sale of property -- (72,000) --
Depreciation and amortization 1,159,000 1,065,000 992,000
Provision for bad debts, net 68,000 74,000 --
Provision for (reduction of) inventory reserves (127,000) 466,000 (71,000)
Amortization of deferred compensation, net 47,000 (10,000) 137,000
Gain on settlement of claim -- -- (165,000)
Loss on sale of securities -- -- 6,000
Changes in assets and liabilities:
Restricted cash securing letter of credit obligations 68,000 130,000 (195,000)
Accounts receivable (449,000) (2,158,000) 1,023,000
Inventories 548,000 (495,000) (1,445,000)
Prepaid expenses and other current assets (45,000) (35,000) 90,000
Other assets (3,000) (48,000) 2,000
Notes payable -- -- (85,000)
Accounts payable (277,000) 828,000 143,000
Accrued expenses and other current liabilities 479,000 527,000 84,000
----------- ----------- -----------
Net cash provided by operating activities 2,572,000 756,000 588,000
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (312,000) (903,000) (404,000)
Net proceeds from sale of marketable investment securities -- -- 275,000
Sale of property, plant and equipment -- 127,000 --
----------- ----------- -----------
Net cash used in investing activities (312,000) (776,000) (129,000)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings under line of credit facility 1,900,000 1,150,000 750,000
Repayments of borrowings under line of credit facility (1,900,000) (1,150,000) (750,000)
Principal payments on long-term debt (874,000) (649,000) (643,000)
Proceeds from issuance of common stock:
Purchase of treasury stock -- (4,000) --
Stock options 64,000 107,000 5,000
----------- ----------- -----------
Net cash used in financing activities (810,000) (546,000) (638,000)
----------- ----------- -----------
</TABLE>
(Continued)
F-6
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents $1,450,000 (566,000) (179,000)
Cash and cash equivalents at beginning of period 1,274,000 1,840,000 2,019,000
---------- ---------- ----------
Cash and cash equivalents at end of period $2,724,000 1,274,000 1,840,000
========== ========== ==========
Supplemental cash flow disclosure
Cash paid during the period for:
Interest $ 234,000 284,000 302,000
========== ========== ==========
Income taxes $ 22,000 38,000 27,000
========== ========== ==========
</TABLE>
Non-Cash Items
The Company entered into new capitalized lease agreements in the amount of
$1,207,000, $48,000 and $292,000 during the fiscal years ended July 31, 1998,
1997 and 1996, respectively.
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 31, 1998 and 1997
(1) Summary of Significant Accounting and Reporting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Comtech Telecommunications Corp. and its subsidiaries (the
Company), all of which are wholly-owned. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) Nature of Business
The Company is engaged in the design, development, manufacture and
installation, for commercial and government applications, of high
technology communications and radio frequency and microwave
amplifier equipment.
The Company's business is highly competitive and characterized by rapid
technological change. In addition, the number of potential customers
for the Company's products is limited. The Company's growth and
financial position depends, 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 United States dollars, advance payments and
irrevocable letters of credit in its favor.
(c) Revenue Recognition
Sales on long-term, fixed price contracts, including pro-rata profits, are
generally recorded based on the relationship of total costs incurred
to date to total projected final costs or, alternatively, as
progress billings or deliveries are made. Sales under cost
reimbursement contracts are recorded as costs are incurred.
Sales on other contract orders are recognized under the units of delivery
method. Under this method, sales are recorded as units are delivered
with the related cost of sales recognized on each shipment based
upon a percentage of estimated final contract costs. Contract costs
include material, direct labor, manufacturing overhead and other
direct costs. Retainages and estimated earnings in excess of amounts
billed on certain multi-year programs are reported as unbilled
receivables.
(Continued)
F-8
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Sales not associated with long-term contracts are generally recognized
when the earnings process is complete, generally upon shipment or
customer acceptance.
Provision for anticipated losses on uncompleted contracts are made in the
period in which such losses are determined.
(d) Cash and Cash Equivalents
Cash equivalents consist of highly liquid direct obligations of the
United States Government with a maturity at acquisition of three
months or less. These investments are carried at cost plus accrued
interest, which approximates market. The Company had $22,000 and
$90,000 of restricted cash securing letter of credit obligations
with a financial institution at July 31, 1998 and 1997,
respectively.
(e) Statement of Cash Flows
The Company acquired equipment financed by capital leases in the amounts
of $1,207,000, $48,000 and $292,000 in 1998 1997 and 1996,
respectively.
(f) Inventories
Workin process inventory reflects all accumulated production costs, which
are comprised of direct production costs and overhead, reduced by
amounts attributable to units delivered. These inventories are
reduced to their estimated net realizable value by a charge to cost
of sales in the period such excess costs are determined.
Raw materials and components and work-in-process inventory associated
with short-term contracts and purchase orders are stated at the
lower of cost or market, computed on the first-in, first-out (FIFO)
method.
(g) Long-Lived Assets
The Company's plant and equipment, recorded at cost, are depreciated or
amortized over their estimated useful lives (building and
improvements - 40 years, equipment - three to eight years) under the
straight line method. Capitalized values of properties under leases
are amortized over the life of the lease or the estimated life of
the asset, whichever is less. The Company reviews its long-lived
assets for impairment whenever events or circumstances indicate that
the carrying amount of an asset may not be recoverable. If the sum
of the expected cash flows, undiscounted and without interest, is
less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the asset
exceeds its fair value.
(h) Other Assets
Included in other assets at July 31, 1998 and 1997 is approximately
$350,000 less accumulated amortization which related to an
intellectual property rights agreement, which is being amortized
over the eight year term of the agreement. At July 31, 1998 and
1997, accumulated amortization related to this purchased technology
was approximately $190,000 and $146,000, respectively. The Company
assesses the recoverability of the intangible asset by determining
whether the amortization of purchased technology over its remaining
life can be recovered through undiscounted future operating cash
flows from product sales utilizing the technology.
(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.
(Continued)
F-9
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(j) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(k) Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with the
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share". Basic earnings per share are computed based on
the weighted average number of shares outstanding. Diluted EPS
reflects the maximum dilution from potential common stock issuable
pursuant to the exercise of stock options and warrants, if dilutive,
outstanding during each period.
(l) Financial Instruments
Management of the Company believes that the book value of its monetary
assets and liabilities, approximates fair value as a result of the
short-term nature of such assets and liabilities. Management further
believes that the fair market value of long-term debt relating to
capital leases does not differ materially from carrying value.
(m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amount of assets and
liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results may
differ from those estimates.
(n) Accounting for Stock-Based Compensation
The Company records compensation expense for employee stock options only
if the current market price of the underlying stock exceeds the
exercise price on the date of the grant. The Company has elected not
to implement the fair value based accounting method for employee
stock options of SFAS No. 123, "Accounting for Stock-Based
Compensation", but has elected to disclose the pro forma net
earnings per share for employee stock option grants made beginning
in fiscal 1996 as if such method had been used to account for
stock-based compensation cost as described in SFAS No. 123.
(o) Reporting Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards
(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 nonowner 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
(Continued)
F-10
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(o) Reporting Comprehensive Income (continued)
pension liability adjustments. Comprehensive and other comprehensive
income must be reported on the face of annual financial statements
or in the case of interim reporting, the footnote approach may be
utilized. The Company's operations did not give rise to items
includible in comprehensive income which were not already included
in net income. Accordingly, the Company's comprehensive income is
the same as its net income for all periods presented.
(2) Accounts Receivable
Accounts receivable consist of the following at July 31, 1998 and 1997:
1998 1997
---------- ----------
Accounts receivable from commercial customers $4,302,000 4,416,000
Unbilled receivables (including retainages) on
contracts-in-progress 1,531,000 384,000
Amounts receivable from the United States
government and its agencies 269,000 853,000
---------- ----------
6,102,000 5,653,000
Less allowance for doubtful accounts 170,000 102,000
---------- ----------
Accounts receivable, net $5,932,000 5,551,000
========== ==========
In the opinion of management, substantially all of the unbilled balances
will be billed and collected during fiscal 1999.
(3) Inventories
Inventories consist of the following at July 31, 1998 and 1997:
1998 1997
---------- ----------
Raw materials and components $3,365,000 2,276,000
Work-in-process 4,932,000 6,025,000
---------- ----------
8,297,000 8,301,000
Less:
Progress payments 1,333,000 789,000
Reserve for anticipated losses on
contracts and inventory reserves 829,000 956,000
---------- ----------
Inventories, net $6,135,000 6,556,000
========== ==========
(4) Property, Plant and Equipment
Property, plant and equipment consists of the following:
1998 1997
----------- -----------
Equipment $ 8,918,000 8,636,000
Leasehold improvements 352,000 322,000
Facilities financed by capital lease 3,365,000 3,365,000
Equipment financed by capital lease 3,802,000 2,595,000
----------- -----------
16,437,000 14,918,000
Less accumulated depreciation and
amortization 12,123,000 11,020,000
----------- -----------
$ 4,314,000 3,898,000
=========== ===========
(Continued
F-11
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Property, Plant and Equipment (Continued)
Depreciation and amortization expense on property, plant and equipment
amounted to approximately $1,103,000, $994,000 and $912,000 for the
years ended July 31, 1998, 1997 and 1996, respectively.
(5) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at
July 31, 1998 and 1997:
1998 1997
---------- ----------
Customer advances and deposits $ 652,000 406,000
Accrued wages and benefits 1,068,000 937,000
Accrued commissions 452,000 413,000
Other 608,000 545,000
---------- ----------
$2,780,000 2,301,000
========== ==========
(6) Short-Term Borrowings
In December 1997, the Company obtained a new $6,000,000 secured credit
facility from Republic National Bank of New York. The line of credit
which is to be used for working capital requirements is for a term
of one year and bears interest on borrowings of 1-1/2% over the
bank's Reference Rate (9% at July 31, 1998). There were no
borrowings outstanding at July 31, 1998. A component of this
facility is the administration by Republic of $1,000,000 of loans
under the Working Capital Guarantee Program of the Export-Import
Bank of the United States. This program provides the lender a 90%
guarantee on qualifying loans made to the Company for export related
contracts.
(7) Long-Term Debt
Long-term debt consists of the following at July 31, 1998 and 1997:
1998 1997
---------- ----------
Obligations under capital leases $2,249,000 1,916,000
Less current installments 804,000 606,000
---------- ----------
$1,445,000 1,310,000
========== ==========
The obligations under capital leases relate to the St. Cloud, Florida
and Melville, New York facilities, as well as certain equipment, the
net carrying value of which was $2,517,000 and $1,958,000 at July
31, 1998 and 1997, respectively.
(Continued)
F-12
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Future minimum lease payments under capital leases as of July 31, 1998
are:
Years ending July 31,:
1999 $1,044,000
2000 737,000
2001 553,000
2002 220,000
2003 43,000
----------
Total minimum lease payments 2,597,000
Less amounts representing interest
(at rates varying from 6.8% to 10.8%) 348,000
----------
2,249,000
Less current installments 804,000
----------
Obligations under capital leases, net
of current installments $1,445,000
==========
In September 1988, the Company sold and simultaneously leased back its
St. Cloud, Florida facility. The buyer/ lessor is a partnership in
which one of the Company's officers is a general partner. The lease
is for a ten-year period and provides for annual rentals of
approximately $205,000 for fiscal 1998, subject to annual
adjustment. For financial reporting purposes, the Company has
capitalized this lease at inception in the amount of $840,000, net
of deferred interest of $492,000. The outstanding balance at July
31, 1998 and 1997 approximated $22,000 and $146,000, respectively.
The Company exercised a five year renewal option commencing October
1, 1998.
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 is for a ten-year period and provides for annual rentals of
approximately $439,000 for fiscal 1998, subject to annual
adjustments equal to the lesser of 5% or the change in the Consumer
Price Index. For financial reporting purposes, the Company has
capitalized this lease at inception in the amount of $2,450,000, net
of deferred interest of $1,345,000. The outstanding balance at July
31, 1998 and 1997 approximated $1,105,000 and $1,366,000,
respectively.
(8) Income Taxes
Theprovision for income taxes included in the accompanying consolidated
statements of operations consists of the following:
Year ended July 31,
-------------------
1998 1997 1996
-------- ------ ------
Federal $ 45,000 20,000 --
State and local 135,000 34,000 27,000
-------- ------ ------
$180,000 54,000 27,000
======== ====== ======
(Continued)
F-13
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The provision for income taxes was $180,000, $54,000 and $27,000 for
fiscal 1998, 1997 and 1996, respectively and differed from the
amounts computed by applying the U.S. Federal income tax rate of 34%
as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax
expense (recovery) $ 437,000 34.0% $ 183,000 34.0% $ 34,000 34.0%
Increase (reduction) in income
taxes resulting from:
Change in the beginning
of the year valuation
allowance for deferred
tax assets (93,000) (7.2) 264,000 49.6 (50,000) (50.5)
Utilization of tax benefit
carryforward (299,000) (23.3) (430,000) (79.9) -- --
State and local income tax,
net of Federal benefit 135,000 10.5 34,000 6.3 27,000 27.0
Other 3,000 -- 16,000 16.2
--------- ---- --------- ---- -------- ----
Effective tax rate $ 180,000 14.0% $ 54,000 10.0% $ 27,000 27.0%
========= ==== ========= ==== ======== ====
</TABLE>
As of July 31, 1998, the Company has net operating loss carryforwards
of approximately $11,900,000 for income tax purposes which expire in
various amounts through July 2011.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at July 31, 1998 and 1997 are
presented below. There are no temporary differences that give rise
to deferred tax liabilities.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts receivable $ 60,000 35,000
Inventory reserve 496,000 572,000
Plant and equipment, principally due to capitalized
leases and differences in depreciation 27,000 101,000
Compensated absences, principally due to accrual
for financial reporting purposes 331,000 312,000
Deferred compensation 154,000 141,000
Net operating loss carryforwards 3,726,000 4,025,000
Investment tax credit carryforwards 440,000 440,000
Alternative minimum tax credit carryforwards 87,000 87,000
----------- ----------
Total gross deferred tax assets 5,321,000 5,713,000
Less valuation allowance (5,321,000) (5,713,000
----------- ----------
Net deferred tax assets $ -- --
=========== ==========
</TABLE>
(Continued)
F-14
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The valuation allowance for deferred tax assets as of August 1, 1997 was
$5,713,000. The change in the total valuation allowance for the year
ended July 31, 1998 was a $392,000 decrease. In assessing the
realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary
differences become deductible. Management considers projected future
taxable income and tax planning strategies in making this
assessment. In order to fully realize the deferred tax asset, the
Company will need to generate future taxable income of approximately
$15,650,000. 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.
(9) Stockholders' Equity
(a) Option and Warrant Plans and Agreements
The Company has several option and warrant plans and agreements.
1982 Incentive Stock Option Plan - The 1982 Incentive Stock Option and
Appreciation Plan provided for the granting to key employees and
officers of incentive stock options to purchase up to 160,000 shares
of the Company's common stock through September 29, 1992 at prices
not less than the fair market value of such shares on the date the
option is granted. The Plan expired on September 29, 1992. Options
granted to purchase an aggregate of 31,120 shares remain
outstanding.
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
695,000 shares of the Company's common stock at prices generally not
less than the fair market value at the date of grant with the
exception of anyone who, prior to the grant, owns more than 10% of
the voting power, the exercise price cannot be less than 110% of the
fair market value. In addition, it provides formula grants to
non-employee members of the Board of Directors. The term of the
options may be no more than ten years except for incentive stock
options granted to any employee who, prior to the granting of the
option, owns stock representing more than 10% of the voting power,
the option term may be no more than five years. The Plan expires in
2002, unless terminated earlier by the Board of Directors under
conditions specified in the Plan. As of July 31, 1998, the Company
had granted incentive stock options representing the right to
purchase an aggregate of 592,510 shares at prices ranging between
$2.25-$9.13 per share, of which 44,400 options were canceled and
541,010 are outstanding. To date, 7,100 shares have been exercised.
Warrant Issued to PMCC Acquisition Corp. - Pursuant to a settlement of the
litigation arising from the sale of the Company's former Premier
Microwave Division, the Company issued to PMCC Acquisition
Corporation a warrant to purchase 100,000 shares of the Company's
common stock at an exercise price of $8.40. For financial reporting
purposes, this warrant was valued at $50,000. The warrants are
exercisable for a period of five years, commencing August 1, 1993
and shares purchased through the exercise of this warrant contain
both voting and transferability restrictions. The warrant expired
unexercised.
(Continued)
F-15
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Underwriter Warrants - Pursuant to the Company's common stock offering
completed in July 1993, the Underwriter received warrants to
purchase 100,000 shares of common stock at a price of 140% of the
offering price, or $9.80, for a term of four years beginning on July
14, 1994. The warrants expired unexercised.
(b) Option Activity
The following table sets forth summarized information concerning the
Company's stock options:
Number Weighted
of average option
shares price
------ -----
Outstanding at July 31, 1995 205,180 $3.72
Granted 47,300 3.45
Expired/canceled (7,900) 5.22
Exercised (2,000) 2.35
-------
Outstanding at July 31, 1996 242,580 3.63
Granted 29,000 3.24
Expired/canceled (14,540) 4.28
Exercised (43,060) 2.47
-------
Outstanding at July 31, 1997 213,980 3.82
Granted 388,750 4.49
Expired/canceled (9,000) 3.20
Exercised (21,600) 3.00
-------
Outstanding at July 31, 1998 572,130 3.98
======= ====
Options exercisable at
July 31, 1998 95,816 4.07
------- ----
Options available for
grant at July 31, 1998 146,890
-------
(c) Stock-Based Compensation Plans
The Company has two stock option plans, the 1982 Incentive Stock Option
Plan and the 1993 Incentive Stock Option Plan. The Company accounts
for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for
these plans been determined consistent with FASB Statement No. 123,
the Company's net income and earnings per share would have been
reduced to the following pro forma amounts:
1998 1997
---------- -------
Net income As reported $1,104,000 484,000
Pro forma $ 817,000 475,000
Net income As reported Basic $ .42 .19
per share Diluted $ .40 .19
Pro forma - Basic $ .31 .18
Diluted $ .29 .18
F-16
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Pro forma net earnings reflect only options granted in 1998 and 1997.
Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma
net earnings amounts presented above because compensation cost is
reflected over the option's vesting period and compensation cost for
options granted prior to August 1, 1995 was not considered.
The Company may grant options for up to 695,000 shares under the 1993
Incentive Stock Option Plan. This Plan replaced the 1982 Incentive
Stock Option Plan. Options to purchase an aggregate of 572,130 and
213,980 shares of common stock remained outstanding at the end of
1998 and 1997 respectively. Under both plans, the option exercise
price equals the stock's closing market price on the date of grant,
except in the case of incentive stock options, for optionees who,
prior to the grant, owned more than 10% of the voting power, the
exercise price cannot be less than 110% of the market value. The
term of the options may be no more than ten years, except in the
case of incentive stock options, for optionees owning more than 10%
of the voting stock, the term may be no more than five years.
The options outstanding as of July 31, 1998 are summarized in ranges as
follows:
Weighted Number of Weighted
Range of average options average
exercise price exercise price outstanding remaining life
-------------- -------------- ----------- --------------
$2.25 - 3.99 3.06 119,680 7 years
4.00 - 6.99 4.47 427,450 9 years
7.00 - 9.99 7.72 25,000 5 years
The per share weighted-average fair value of stock options granted
during 1998 and 1997 was $3.45 and $2.51, respectively, on the date
of grant using the Black Scholes option - pricing model with the
following weighted-average assumptions:
1998 - expected dividend yield of 0%, risk free interest rate of 6%,
expected volatility of 63.32% and an expected option life of 10
years.
1997 - expected dividend yield of 0%, risk free interest rate of 6%,
expected volatility of 64.49% and an expected option life of 10
years.
(d) Restricted Common Stock
In February 1994, a total of 120,000 restricted shares of the Company's
common stock were granted by the Board of Directors to the principal
officers of the Company's operating unit, CCC, at a cost of $.10 per
share. The award relates to services to be provided over future
years and, as a result, the stock awards are subject to certain
restrictions which may be removed earlier upon CCC attaining certain
business plan milestones, as provided in the agreement, but no later
than ten years from the date of the award. The excess of market
value over cost of the shares awarded of $633,000 was recorded as
deferred compensation and is being amortized to expense over a ten
year period subject to the aforementioned accelerated provisions, if
appropriate, as evaluated on an annual basis. The deferred
compensation is reflected as a reduction of stockholder's equity in
the accompanying balance sheets. During fiscal 1997, 40,000 of such
shares were terminated due to the termination of an officer's
employment prior to vesting.
F-17
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Segment and Principal Customer Information
For the purposes of segment reporting, management considers Comtech to
operate in one industry, the communications equipment industry.
Sales to one customer in fiscal 1998 and a different customer in fiscal
1997 represented 12.2% and 10.2% of the consolidated net sales,
respectively. There was no customer in fiscal 1996 for which sales
amounted to over 10%.
During the fiscal years ended July 31, 1998, 1997 and 1996, approximately
20%, 17% and 20%, respectively, of the Company's net sales resulted
from contracts with the United States government and its agencies.
Export sales comprised 46%, 57% and 56% of net sales in fiscal 1998,
1997 and 1996, respectively.
(11) Commitments and Contingencies
(a) Operating Leases
The Company is obligated under noncancellable operating lease
agreements. At July 31, 1998, the future minimum lease payments
under operating leases are as follows:
1999 $196,000
2000 195,000
2001 131,000
2002 7,000
--------
$529,000
========
Lease expense charged to operations was $140,000, $123,000 and $122,000 in
fiscal 1998, 1997 and 1996, respectively.
(b) United States Government Contracts
Certain of the Company's contracts are subject to audit by applicable
governmental agencies. Until such audits are completed, the ultimate
profit on these contracts cannot be determined; however, it is
management's belief that the final contract settlements will not
have a material adverse effect on the Company's consolidated
financial condition.
(c) Litigation
The Company is subject to certain legal actions which arise out of the
normal course of business. It is management's belief that outcome of
these actions will not have a material adverse effect on the
Company's consolidated financial position.
(12) Subsequent Events
Subsequent to July 31, 1998, the Company established two new wholly-owned
subsidiaries, Comtech Wireless, Inc. and Comtech Mobile Datacom Corp. to
acquire the assets and assume certain liabilities of two other entities
for total consideration of approximately $1,150,000
F-18
<PAGE>
Schedule II
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended July 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
-----------------------
(1) (2)
Charged to
Balance at Charged to other Transfers Balance at
beginning cost and accounts - (deductions) end of
Description of period expenses describe describe period
----------- --------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts-
accounts receivable:
Year ended July 31,:
1998 $102,000 96,000(C) -- (28,000)(D) 170,000
1997 28,000 85,000(C) -- (11,000)(D) 102,000
1996 137,000 -- -- (109,000)(D) 28,000
Inventory reserves:
Year ended July 31,:
1998 $956,000 127,000(B) -- -- 829,000
1997 490,000 466,000(A) -- -- 956,000
1996 567,000 (77,000)(B) -- -- 490,000
</TABLE>
(A) Increase in reserves for contract and other adjustments.
(B) Reduction of excess reserves for contract and other adjustments.
(C) Increase of allowance for doubtful accounts.
(D) Write-off of uncollectible receivables.
S-1
AMENDED AND RESTATED
BY-LAWS
OF
COMTECH TELECOMMUNICATIONS CORP.
(A Delaware Corporation)
ARTICLE I
Offices
The Corporation shall maintain a registered office in the State of
Delaware as required by law. The Corporation may also have offices at other
places, within and without the State of Delaware.
ARTICLE II
Stockholders
Section 1. Annual meetings of stockholders shall be held once in each year
at such times and such places, within or without the State of Delaware, as may
be fixed from time to time by the Board of Directors.
Section 2. Except as otherwise required by statute or the Corporation's
Certificate of Incorporation, special meetings of stockholders may be called by
the Board of Directors, the Chairman of the Board or by any officer instructed
by the Board of Directors to call such meetings. Special meetings of
stockholders shall be held on such dates and at such times and such places,
within or without the State of Delaware, as shall be stated in the notices of
such meetings. Notice of any special meeting shall state the purpose or purposes
for which the meeting is to be held and no other business shall be transacted
except as stated in such notice.
Section 3. The holders of a majority of the issued and outstanding shares
of the capital stock of the Corporation entitled to vote thereat, present in
person or represented by proxy, shall constitute a quorum for the transaction of
business at all meetings of stockholders.
<PAGE>
Section 4. Except as otherwise required by statute, the Corporation's
Certificate of Incorporation or these By-Laws, all matters coming before any
meeting of stockholders shall be decided by the vote of the holders of a
majority of the shares of capital stock of the Corporation present in person or
represented by proxy at such meeting and voting thereon, a quorum being present.
Section 5. The Board of Directors, or, if the Board shall not have made
the appointment, the Chairman presiding at any meeting of stockholders, shall
have power to appoint two or more persons to act as inspectors, to receive,
canvass and report the votes cast by the stockholders at such meeting.
Section 6. The Chairman of the Board, or in his absence, the President,
shall preside at all meetings of stockholders; and in their absence, the Board
of Directors may appoint a person to act as Chairman of the meeting.
Section 7. The Secretary or an Assistant Secretary shall act as secretary
at all meetings of stockholders; and in their absence, the chairman of the
meeting shall appoint a person to act as secretary of the meeting.
Section 8. Only persons who are nominated in accordance with the
procedures set forth in this section shall be eligible to serve as directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at an annual meeting of stockholders (a) by or at the direction of
the Board of Directors or (b) by or on behalf of a stockholder of the
Corporation, or a duly authorized proxy for such stockholder, who is a
stockholder of record at the time of giving notice provided for in this
paragraph and who shall be entitled to vote for the election of Directors at the
meeting. Any nominations not made by or at the direction of the Board of
Directors must be made pursuant to a notice in writing to the Secretary of the
Corporation delivered or mailed to, and received at the principal executive
offices of the Corporation not fewer than 90 days or more than 120 days prior to
the anniversary date of the immediately preceding annual meeting; provided,
however, that in the event the annual meeting with respect to which such notice
is to be tendered is not held within 30 days
2
<PAGE>
before or after such anniversary date, notice by the stockholder to be timely
must be received not earlier than 90 days prior to such annual meeting and not
later than 60 days prior to such annual meeting; and further provided, however,
that, notwithstanding the foregoing, with respect to the first annual meeting of
stockholders after June 30, 1998, such notice by the stockholder must be
received at the principal executive offices of the Corporation prior to the
close of business on the tenth day following the date on which notice of the
meeting was first given or made to stockholders generally. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or reelection as a director, all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934 (including such
person's written consent to being named as a nominee and to serving as a
director, if elected); and (b) as to the stockholder giving the notice (i) the
name and address, as they appear on the Corporation's books, of such
stockholder, (ii) the class and number of shares of stock of the Corporation
beneficially owned by such stockholder and represented by proxy and (iii) a
description of all arrangements or understandings between such stockholder and
any other person or persons (including their names) in connection with such
nomination and any material interest of such stockholder in such nomination. At
the request of the Board of Directors, any person nominated by the Board of
Directors for election as a director shall furnish to the Secretary of the
Corporation that information required to be set forth in a stockholder's notice
of nomination that pertains to the nominee. If the Board of Directors shall
determine, based on the facts, that a nomination was not made in accordance with
the above procedures, the Chairman of the meeting shall so declare to the
meeting and the defective nomination shall be disregarded.
ARTICLE III
Board of Directors
Section 1. The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors.
3
<PAGE>
Section 2. Regular meetings of the Board of Directors shall be held on
such dates and at such times and such places, within or without the State of
Delaware, as shall be fixed from time to time by the Board.
Section 3. Special meetings of the Board of Directors may be called by the
Chairman of the Board and shall be called by the Chairman of the Board or the
Secretary upon a request in writing by any two directors. Notice shall be given
of the date, time and place of each special meeting by mailing the same at least
three days before the meeting or by telephoning, telegraphing or delivering
personally the same before the meeting to each director. Except as otherwise
specified in the notice thereof, or as required by statute, any and all business
may be transacted at any special meeting of the Board of Directors.
Section 4. The Chairman of the Board shall preside at all meetings of the
Board of Directors; and in his absence, the Board of Directors may appoint any
other person to act as chairman of the meeting. Less than a quorum of the Board
may adjourn any meeting from time to time until a quorum shall be present,
whereupon the meeting may be held, as adjourned, without further notice.
ARTICLE IV
Committees
Section 1. The Corporation shall have an Executive Committee, an Audit
Committee and a Compensation Committee, each of which shall have such powers of
the Board of Directors, not prohibited by statute, as the Board shall from time
to time authorize. Each such committee shall consist of two or more directors.
Section 2. The Board of Directors may, by resolution passed by a majority
of the whole Board, designate from among its own members such other committees
as the Board may determine. Each such committee shall have such powers of the
Board of Directors, not prohibited by statute, as the Board shall from time to
time authorize.
4
<PAGE>
Section 3. A majority of a committee shall constitute a quorum for the
transaction of business. Each committee shall keep regular minutes of its
meetings and shall report the same to the Board of Directors when requested. The
Board of Directors may discharge any committee or any member thereof either with
or without cause at any time.
Section 4. In the case of the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not constituting a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in place
of such absent or disqualified member.
ARTICLE V
Officers
Section 1. The Board of Directors shall elect the following officers:
Chairman of the Board of Directors, President, Treasurer and Secretary and such
other officers as it may from time to time determine.
Section 2. The term of office of the officers shall be for one year and
until their respective successors are elected and qualified. The Board of
Directors may remove any officer either with or without cause at any time.
Section 3. The officers of the Corporation shall each have such powers and
duties as generally pertain to their respective offices, as well as such other
powers and duties as from time to time may be conferred by the Board of
Directors. The Chairman of the Board shall be the chief executive officer of the
Corporation, shall possess, except as prohibited by statute, the same power to
sign on behalf of and bind the Corporation as is possessed by the President, and
shall, during the absence or disability of the President, exercise all the
powers and discharge all the duties of the President. The President shall be the
chief operating officer of the Corporation and shall have general supervision of
the daily operations of the Corporation.
5
<PAGE>
Section 4. Unless otherwise ordered by the Board of Directors, the
Chairman of the Board, the President or the Secretary shall have full power and
authority on behalf of the Corporation to attend and to vote at any meetings of
stockholders of any corporation in which this Corporation may hold stock, and
may exercise on behalf of this Corporation any and all of the rights and powers
incident to the ownership of such stock at any such meeting, and shall have
power and authority to execute and deliver proxies, waivers and consents on
behalf of the Corporation in connection with the exercise by the Corporation of
the rights and powers incident to the ownership of such stock. The Board of
Directors may from time to time confer like powers upon any other person or
persons.
ARTICLE VI
Capital Stock
Section 1. Certificates for stock of the Corporation shall be in such form
as the Board of Directors may from time to time prescribe.
Section 2. The Board of Directors shall have power to appoint one or more
transfer agents and/or registrars for the transfer and/or registration of
certificates for shares of stock of any class or series and may require that
stock certificates shall be countersigned and/or registered by one or more of
such transfer agents and/or registrars.
Section 3. Shares of capital stock of the Corporation shall be
transferable on the books of the Corporation only by the holder of record
thereof in person or by his duly authorized attorney, upon surrender and
cancellation of certificates for a like number of shares, with an assignment or
power of transfer endorsed thereon or delivered therewith, duly executed, and
with such proof of the authenticity of the signature and of authority to
transfer, and of payment of transfer taxes, as the Corporation or its agents may
require.
Section 4. In case any certificate for the capital stock of the
Corporation shall be lost, stolen or destroyed, the Corporation may require such
proof of the fact and such indemnity to be given to it and/or to its transfer
agent and/or registrar, if any, as it shall deem necessary or advisable.
6
<PAGE>
Section 5. The Corporation shall be entitled to treat the holder of record
of any share or shares of stock as the holder thereof in fact, and shall not be
bound to recognize any equitable or other claim to or interest in such shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise expressly provided by law.
ARTICLE VII
Indemnification
Section 1. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer or employee of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer or employee of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement, actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 2. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer or employee of the Corporation, or is or was serving at the request of
the Corporation as a director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise,
7
<PAGE>
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Corporation unless and only to
the extent that the Court of Chancery of Delaware or the court in which such
action or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the Court of Chancery or such other court shall deem proper.
Section 3. To the extent that a director, officer or employee of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 1 and 2 of this Article VII,
or in defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith.
Section 4. Any indemnification under Sections 1 and 2 of this Article VII
(unless ordered by a court) shall be made by the Corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer or employee is proper in the circumstances because he has met the
applicable standard of conduct set forth in said Sections 1 and 2. Such
determination shall be made (1) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (2) if such quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders.
Section 5. Expenses incurred in defending a civil, criminal,
administrative or investigative action, suit or proceeding, or threat thereof,
may be paid by the Corporation in advance of the final disposition of such
action, suit or proceeding as authorized by the Board of Directors in the
specific case upon receipt of an undertaking by or on behalf of the director,
officer or employee to repay such
8
<PAGE>
amount unless it shall ultimately be determined that he is entitled to be
indemnified by the Corporation as authorized in this Article VII.
Section 6. The indemnification provided by this Article VII shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any By-Law agreement, vote of stockholders or disinterested
directors, statute, court decision, insurance policy or otherwise, now or
hereafter in effect, and shall continue as to a person who has ceased to be a
director, officer or employee and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 7. The Corporation may purchase and maintain insurance on behalf
of any person who is or was a director, officer or employee of the Corporation,
or is or was serving at the request of the Corporation as a director, officer or
employee of another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of this Article VII or of the General Corporation law of the
State of Delaware.
Section 8. For purposes of this Article VII, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, officer or employee of the Corporation
which imposes duties on, or involves services by, such director, officer or
employee with respect to any employee benefit plan, its participants or
beneficiaries; and a person who acting in good faith and in a manner he
reasonably believes to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this Article
VII.
ARTICLE VIII
Miscellaneous
9
<PAGE>
Section 1. The seal of the Corporation shall be circular in form and shall
contain the name of the Corporation and the year and state of incorporation.
Section 2. The Board of Directors shall have power to fix, and from time
to time change, the fiscal year of the Corporation.
ARTICLE IX
Amendment
The Board of Directors shall have the power to adopt, alter and repeal the
By-Laws of the Corporation at any regular or special meeting of the Board,
subject to the power of the stockholders to alter or repeal any By-Law adopted
or altered by the Board of Directors. By-Laws may be adopted, altered or
repealed by the stockholders by the vote of the holders of a majority of the
outstanding shares entitled to vote thereon provided that notice of the proposed
adoption, alteration or repeal shall have been given in the notice of such
meeting of stockholders.
10
Exhibit 3(e)
PAGE 1
State of Delaware
Office of the Secretary of State
--------------------------------
I EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "COMTECH TELECOMMUNICATIONS CORP.", FILED IN THIS OFFICE ON THE FIFTH DAY OF
JANUARY, A.D., 1998, AT 9 O'CLOCK A.M.
[SEAL]
/s/ Edward J. Freel
[SEAL] -----------------------------------------
Edward J. Freel, Secretary of State
2113228 8100 AUTHENTICATION: 8854182
981005583 DATE: 01-08-98
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
COMTECH TELECOMMUNICATIONS CORP.
It is hereby certified that:
1. The name of the corporation is Comtech Telecommunications Corp.
(the "Corporation").
2. The certificate of incorporation of the Corporation is hereby
amended by deleting paragraph (a) of Article FOURTH thereof and replacing in
lieu and instead thereof a new paragraph (a) of Article FOURTH, to read as
follows:
"FOURTH: (a) the aggregate number of shares which the Corporation
shall have authority to issue is Seventeen Million (17,000,000)
shares, of which Fifteen Million (15,000,000) shares shall be Common
Stock, par value ten cents ($.10) ("Common Stock"), and Two Million
(2,000,000) shares shall be Preferred Stock, par value ten cents
($.l0) ("Preferred Stock")."
3. The Board of Directors of the Corporation unanimously adopted a
resolution proposing and declaring the advisability of the foregoing amendment
to the certificate of incorporation, and recommended the adoption of such
amendment by the stockholders of the Corporation.
4. The stockholders of the Corporation, at an annual meeting of
stockholders held on December 16, 1997, approved the foregoing amendment to the
certificate of incorporation of the Corporation.
5. The amendment of the certificate of incorporation herein
certified has been duly adopted in accordance with the provisions of the Section
242 of the General Corporation Law of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, Comtech Telecommunications Corp. has caused this
Certificate of Amendment to be executed in its corporate name by its President
and attested by its Secretary this 16th day of December, 1997.
COMTECH TELECOMMUNICATIONS CORP.
By: /s/ Fred Kornberg
-------------------------------------
FRED KORNBERG,
Chairman, Chief Executive Officer and
President
Attest:
/s/ J. Preston Windus, Jr.
- -------------------------------
J. PRESTON WINDUS, JR.,
Secretary
Exhibit 10(a)
AGREEMENT dated January 14, 1998 between Comtech Telecommunications
Corp. (the "Company") and Fred Kornberg ("Kornberg").
Kornberg is presently Chairman of the Board of Directors, President
and Chief Executive Officer of the Company and is employed pursuant to an
Agreement dated August 20, 1992 (the "Employment Agreement"). The Company and
Kornberg desire to extend the term of Kornberg's employment and effect certain
other changes.
Accordingly, the Company and Kornberg hereby amend and restate the
Employment Agreement to read in its entirety as follows:
1. The Company hereby employs Kornberg as general manager and chief
executive officer of its business for the period (hereinafter referred to as the
"Employment Period") commencing the date hereof and, except as otherwise
provided in Paragraph 6 hereof, terminating on August 31, 2003; provided,
however, that the Employment Period shall be automatically extended (subject to
Paragraph 6) for successive two-year periods unless either party hereto gives
notice of non-extension to the other at least six months in advance of the then
scheduled termination date. Kornberg shall have supervision over the business
and affairs of the Company and its subsidiaries, shall report and be responsible
only to the Board of Directors of the Company, and shall have powers and
authority superior to those of any other officer or employee of the Company or
any of its subsidiaries. Kornberg accepts such employment and agrees to devote
his full time and effort to the business and affairs of the
<PAGE>
Company and, subject to his election as such, to serve as a director and as
Chairman of the Board and President of the Company. He shall not be required to
relocate his residence or to perform services which would make the continuance
of such residence inconvenient to him.
2. The Company shall pay to Kornberg, for all services rendered by
him during the Employment Period, compensation as follows:
(a) Salary ("Base Salary") at the annual rate of $240,000,
commencing the date hereof, plus such additional amounts, if any, as the Board
of Directors may from time to time determine, payable in accordance with the
Company's current practice.
(b) Incentive compensation ("Incentive Compensation") for each
fiscal year in which any part of the Employment Period falls in an amount (not
to exceed Kornberg's Base Salary for such fiscal year) equal to 3.5 % of the
Company's Pre-Tax Income for each such fiscal year, plus such additional
amounts, if any, as the Board of Directors may from time to time determine;
provided, however, that if the Employment Period terminates other than at the
end of a fiscal year, Incentive Compensation shall be based upon the Company's
Pre-Tax Income for the then current fiscal year through the most recent fiscal
quarter ended prior to such termination. For purposes of this Paragraph 2(b):
(i) The Company's "Pre-Tax Income" for any fiscal year
or period shall be the consolidated earnings of the Company and its subsidiaries
for such fiscal year or period, as determined by the independent accounting firm
employed by the Company as its regular auditors in accordance with generally
accepted accounting principles applied on a consistent basis, before (i) any
extraordinary item, (ii) provision for federal, state or municipal
-2-
<PAGE>
income taxes thereon and (iii) provision for any Incentive Compensation payable
to Kornberg hereunder.
(ii) Fifty percent of the Incentive Compensation payable
with respect to any fiscal year shall be paid to Kornberg promptly after
completion of the Company's audited year-end financial statements for such
fiscal year, or promptly after completion of the relevant unaudited quarterly
statements, as the case may be. The balance of such Incentive Compensation
amount shall be paid on the first anniversary of such initial 50%. If Kornberg
voluntarily terminates his employment with the Company other than as permitted
by Section 6(b) of this Agreement, or if the Company terminates his employment
for cause as defined in paragraph 6(a) hereof, Kornberg shall forfeit his right
to receive any Incentive Compensation accrued but unpaid in accordance with this
Section 2(b)(ii).
3. During the Employment Period, Kornberg shall be entitled to
participate in, and receive benefits in accordance with, the Company's employee
benefit plans and programs at the time maintained by the Company for its
executives, subject to the provisions of such plans and programs.
4. During the Employment Period, Kornberg shall be entitled to
receive reimbursement for all expenses reasonably incurred by him in connection
with his duties hereunder in accordance with the usual procedures of the
Company.
5. (a) The Company shall obtain (subject to Kornberg's insurability)
and keep in full force and effect during the Employment Period, at its own cost
and expense,
-3-
<PAGE>
insurance covering Kornberg's life in the amount of $1 million plus such
additional amounts, if any, as the Board of Directors may from time to time
determine, payable to his estate or such other person or persons as he may from
time to time direct.
(b) In addition to the insurance provided for in Paragraph
5(a) hereof, the Company, in its discretion, and at its own cost and expense,
may also obtain insurance covering Kornberg's life in such amount as it
considers advisable, and Kornberg agrees to cooperate fully to enable the
Company to obtain such insurance.
6. The Employment Period may be terminated only as follows:
(a) By action of the Board of Directors of the Company, upon
notice to Kornberg, if during the Employment Period Kornberg shall fail to
render the services provided for hereunder for a continuous period of 12 months
because of his physical or mental disability, or for cause, which shall mean the
commission of acts of willful malfeasance or gross negligence materially and
adversely affecting the Company's business.
(b) By Kornberg, on ten days notice to the Company, at any
time during the Employment Period after a Change in Control of the Company, as
defined in Paragraph 7(d) hereof, occurs.
7. If Kornberg terminates the Employment period in accordance with
-4-
<PAGE>
Paragraph 6(b) hereof, the following provisions shall apply:
(a) Subject to Paragraph 7(c) hereof, the Company shall pay to
Kornberg, within 30 days after the effective date of the termination (the
"Effective Date"), a lump sum equal to:
(i) the greater of (x) Kornberg's Base Salary, at the
rate in effect at the time such notice is given, for the full unexpired term of
the Employment Period, or (y) three times Kornberg's Base Salary then in effect;
plus
(ii) the amount of any Incentive Compensation accrued
with respect to any fiscal year ended prior to the Effective Date but unpaid;
plus
(iii) if and to the extent Kornberg so elects, an amount
equal to (x) the number of shares of Common Stock of the Company subject to
unexercised options held by Kornberg at the Effective Date, multiplied by (y)
the difference between the weighted average exercise price of such options and
the per share fair market value of the Common Stock at the Effective Date,
against surrender to the Company of all options (and any related stock
appreciation rights) relating to the Common Stock held by Kornberg at the
Effective Date and elected by him to be treated in accordance with this Section.
The per share fair market value of the Common Stock as of a date, for purposes
of this provision, shall be the mean of the high and low bid and asked prices of
the Common Stock, if then traded in the over-the-counter market, or the mean of
the high and low closing prices of the Common Stock, if then traded on the
National Market System of the National Association of Securities Dealers
-5-
<PAGE>
Automated Quotations System or on a national securities exchange, for the 30
days immediately preceding the relevant date.
(b) For the full unexpired term of the Employment Period, the
Company shall continue Kornberg's participation in each employee benefit plan
(including, without limitation, life insurance and medical plans and including,
to the extent allowed, amending such plans) in which Kornberg was entitled to
participate immediately prior to the Effective Date as if he continued to be
employed by the Company hereunder. If the terms of any benefit plan of the
Company may not under Section 401(a) or other similar provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), permit continued participation by
Kornberg, the Company will arrange to provide to Kornberg benefits substantially
equivalent to, as to time and amount, and no less favorable than, on an
after-tax basis, the benefits he would have been entitled to receive under such
plan if he had been continuously employed by the Company for the full unexpired
term of the Employment Period. Kornberg shall have the option to have assigned
to him, at no cost and with no apportionment of prepaid premiums, any assignable
insurance policies owned by the Company and relating specifically to Kornberg.
(c) Notwithstanding any other provision of this Agreement, the
amounts payable to Kornberg under Paragraph 7(a) shall be equal to whichever of
the following amounts shall result in the greater after-tax payment to Kornberg,
after application of
-6-
<PAGE>
all federal, state and local taxes applicable to such payments:
(i) the amount otherwise payable under Paragraph 7(a)
without regard to this Paragraph 7(c); and
(ii) the amount payable in (i) above, reduced by the
total amounts payable under Paragraph 7(a) and (b) to the extent included as
parachute payments under Section 280G(b)(2) of the Code, but only to the extent
such amounts included as parachute payments exceed 299% of Kornberg's "Base
Amount," as defined in Section 280G(b)(3)(A) and (d)(1) and (2) of the Code.
The calculation of after-tax payments under this paragraph 7(c)
shall be made by independent public accountants selected by Kornberg and
consented to by the Company, which consent shall not be unreasonably withheld.
The fees and expenses of such accountants shall be borne by the Company.
(d) Except as provided below, for purposes of this Employment
Agreement a Change in Control shall be deemed to have occurred if:
(i) an event that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14a promulgated under the
1934 Act, as in effect on the date hereof, occurs; or
-7-
<PAGE>
(ii) any person or group of persons acting in concert
becomes the beneficial owner of 30% or more of the Company's outstanding voting
securities or securities convertible into such amount of voting securities; or
(iii) within two years after a tender offer or exchange
offer, or as the result of a merger, consolidation, sale of substantially all of
the Company's assets or a contested election of the Board of Directors, or any
combination of such transactions, the persons who were directors of the Company
prior to the transaction do not constitute a majority of the Board of Directors
of the Company or its successor; provided, however, that no such event shall be
deemed to constitute a Change in Control if such event is approved by two-thirds
of the Prior Directors of the Company and the Successor Directors (each as
hereafter defined), if any, voting together. For purposes of this Agreement,
Prior Directors are those directors of the Company in office immediately prior
to such event, and Successor Directors are successors to Prior Directors who
were recommended to succeed Prior Directors by a majority of the Prior Directors
then in office.
8. Kornberg agrees that during the Employment Period and for a
period of two years thereafter, he will not, in any manner, directly or
indirectly, engage in any business which competes with the business in which the
Company is presently engaged or may be engaged at any time during the Employment
Period, and he will not directly or indirectly own, manage, operate, join,
control or participate in the ownership, management, operation or control of, or
be employed by, or connected in any manner with, any corporation, firm or
business that is so engaged; provided, however, that nothing herein contained
shall prohibit
-8-
<PAGE>
Kornberg from owning not more than five per cent of the outstanding stock of any
publicly held corporation.
9. (a) In order to induce Kornberg to enter into this Agreement, the
Company agrees that if it breaches this Agreement, Kornberg shall have no
further obligations hereunder and shall be under no duty to seek other
employment or otherwise mitigate his damages, and the Company shall pay Kornberg
the following amounts as liquidated damages in lieu of any further obligations
hereunder:
(i) An amount equal to 85% of his total Base Salary, at
the rate in effect at the time of such breach, for the full unexpired term of
the Employment Period, such amount to be made payable within 10 days after such
breach; plus
(ii) An amount equal to his Incentive Compensation for
the full fiscal year in which the breach occurs;
(iii) If and to the extent Kornberg elects to receive
such amount, an amount equal to that which would be payable under Paragraph
7(a)(iii) hereof if Kornberg had terminated this Agreement pursuant to Paragraph
6(b) as of the date of such breach, provided however, that if a Change in
Control of the Company has occurred at any time prior to the date of such
breach, Kornberg shall be entitled to receive as liquidated damages amounts and
benefits equal to the amounts and benefits he would have been entitled to
receive pursuant to Paragraph 7 hereof (including Paragraph 7(c)) if he had
terminated the Employment Period effective on the date of breach.
-9-
<PAGE>
(b) Kornberg shall be entitled to reasonable attorney's fees
and disbursements in any action to recover any amounts due him or obtain other
relief under this Agreement or in any action relating to a breach by the Company
of this Employment Agreement.
10. Any offer, notice, request or other communication hereunder
shall be in writing and shall be deemed to have been duly given if hand
delivered or mailed by registered or certified mail, return receipt requested,
addressed to the respective address of each party hereinafter set forth, or to
such other address as each party may designate by a notice pursuant hereto,
which change of address notice shall be effective upon receipt thereof:
If to the Company: Comtech Telecommunications Corp.
105 Baylis Road
Melville, New York 11747
Attention: Secretary
If to Kornberg: Mr. Fred Kornberg
17 Palatine Court
Syosset, New York 11788
11. If any provision of this Agreement shall be held for any reason
to be unenforceable, the remainder of this Agreement shall nevertheless remain
in full force and effect.
12. This Agreement, including, without limitation, the provisions of
this Paragraph 12, shall be binding upon and inure to the benefit of, and shall
be deemed to refer with equal force and effect to, any corporate or other
successor to the Company which shall acquire, directly or indirectly, by merger,
consolidation, purchase or otherwise, all or
-10-
<PAGE>
substantially all of the assets or business of the Company. This Agreement shall
not be assignable by the Company or any such successor, except to the corporate
or other successor referred to in the preceding sentence. Kornberg may not
assign, pledge or encumber his interest in this Agreement without the written
consent of the Company. This Agreement shall be binding upon and inure to the
benefit of Kornberg, his heirs and personal representatives.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the day and year first written above.
COMTECH TELECOMMUNICATIONS CORP.
By: /s/ J. Preston Windus, Jr.
-------------------------------------
Authorized Signatory
Approval of Chairman
of the Compensation
Committee of the
Board of Directors
/s/ George Bug[ILLEGIBLE] /s/ Fred Kornberg
- ------------------------- -------------------------------------
Fred Kornberg
-11-
Exhibit 11
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Computation of Earnings Per Share
Years ended July 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Year ended July 31,
-------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Net income $1,104,000 484,000 72,000
========== ========= =========
Computation of weighted average number of common
and common equivalent shares outstanding during
the period:
Weighted average number of common shares 2,656,000 2,637,000 2,606,000
Weighted average shares assumed to be issued
upon exercise of common stock options 176,000 22,000 70,000
Less treasury stock (55,000) (55,000) (15,000)
---------- --------- ---------
Weighted average number of common and
common equivalent shares outstanding
during the period 2,777,000 2,604,000 2,661,000
========== ========= =========
Net income per share:
Basic $ .42 .19 .03
Diluted $ .40 .19 .03
</TABLE>
E-1
SUBSIDIARIES
The following is a list of the active subsidiaries of the Company as of October
26, 1998:
Subsidiary State of Incorporation
---------- ----------------------
Comtech PST Corp. New York
Comtech Systems, Inc. Delaware
Comtech Antenna Systems, Inc. Delaware
Comtech Communications Corp. Delaware
Comtech Wireless, Inc. New York
Comtech Mobile Datacom Corp. Delaware
[LOGO] KPMG Peat Marwick LLP
Independent Auditors' Consent
The Board of Directors
Comtech Telecommunications Corp.:
We consent to incorporation by reference in the Registration Statement (No.
2-89857) on Form S-8 of Comtech Telecommunications Corp. of our report dated
September 18, 1998, relating to the consolidated balance sheets of Comtech
Telecommunications Corp. and subsidiaries as of July 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows and related schedule II for each of the years in the three-year period
ended July 31, 1998, which report appears in the July 31, 1998 annual report on
Form 10-K of Comtech Telecommunications Corp. and subsidiaries.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Melville, New York
September 18, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Consolidated
Financial Statements Form 10K July 31, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 2,746
<SECURITIES> 0
<RECEIVABLES> 6,034
<ALLOWANCES> 102
<INVENTORY> 6,135
<CURRENT-ASSETS> 15,089
<PP&E> 16,438
<DEPRECIATION> 12,124
<TOTAL-ASSETS> 19,710
<CURRENT-LIABILITIES> 6,172
<BONDS> 0
267
0
<COMMON> 0
<OTHER-SE> 11,826
<TOTAL-LIABILITY-AND-EQUITY> 19,710
<SALES> 30,114
<TOTAL-REVENUES> 30,114
<CGS> 21,330
<TOTAL-COSTS> 28,662
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 234
<INCOME-PRETAX> 1,284
<INCOME-TAX> 180
<INCOME-CONTINUING> 1,140
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,104
<EPS-PRIMARY> .42
<EPS-DILUTED> .40
</TABLE>
