FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-26589, eff. 4/12/89)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
Form 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended October 31, 1998
------------------------------------------------------
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------------- --------------------
Commission File Number: 0-7928
---------------------------------------------------
COMTECH TELECOMMUNICATIONS CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2139466
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
105 Baylis Road, Melville, New York 11747
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(516) 777-8900
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
|X| Yes |_| No
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDING DURING
THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
|_| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, Par Value $.10 Per Share -
2,776,404 shares outstanding as of 12/08/98.
- --------------------------------------------------------------------------------
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
INDEX
Page
No.
----
PART I FINANCIAL INFORMATION
Consolidated Balance Sheets -- 3
October 31, 1998 (unaudited) and
July 31, 1998
Consolidated Statements of Operations -- 4
Three Months Ended October 31, 1998
and 1997 (unaudited)
Consolidated Statements of Cash Flows -- 5
Three Months Ended October 31, 1998 and 1997
(unaudited)
Notes to Consolidated Financial Statements 6-7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-9
PART II OTHER INFORMATION 10
Signature Page 11
Exhibit 11.0 Computation of Earnings Per
Common Share 12
2
<PAGE>
PART I
FINANCIAL INFORMATION
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, 1998 July 31, 1998
---------------- -------------
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 2,927,000 $ 2,724,000
Restricted cash 22,000 22,000
Accounts receivable, less allowance for doubtful
accounts of $281,000 at October 31, 1998
and $170,000 at July 31, 1998 5,577,000 5,932,000
Inventories, net 6,586,000 6,135,000
Prepaid expenses and other current assets 350,000 276,000
------------ ------------
Total current assets 15,462,000 15,089,000
Property, plant and equipment, net 4,442,000 4,314,000
Intangible assets 1,877,000 --
Other assets 307,000 307,000
------------ ------------
Total assets $ 22,088,000 $ 19,710,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current installments of long-term debt (including
payable to related party of $294,000 at October 31,
1998 and $309,000 at July 31, 1998) $ 750,000 $ 804,000
Notes payable 250,000 --
Accounts payable 3,319,000 2,588,000
Accrued expenses and other current liabilities 3,281,000 2,780,000
------------ ------------
Total current liabilities 7,600,000 6,172,000
Long-term debt, less current installments
(including payable to related party of
$741,081 at October 31, 1998 and $817,260
at July 31, 1998) 1,287,000 1,445,000
------------ ------------
Total liabilities 8,887,000 7,617,000
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 2,772,404
shares at October 31, 1998 and 2,672,004 shares
at July 31, 1998 277,000 267,000
Additional paid-in capital 22,885,000 22,189,000
Accumulated deficit (9,617,000) (10,011,000)
------------ ------------
13,545,000 12,445,000
Less:
Treasury stock (55,000 shares at October 31, 1998
and July 31, 1998) (184,000) (184,000)
Deferred compensation expense (160,000) (168,000)
------------ ------------
13,201,000 12,093,000
Total liabilities and stockholders' equity $ 22,088,000 $ 19,710,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
October 31,
(Unaudited)
-----------------------------
1998 1997
----------- -----------
Net sales $ 8,735,000 $ 5,934,000
----------- -----------
Operating costs and expenses:
Cost of sales 6,019,000 4,040,000
Selling, general and administrative 1,720,000 1,428,000
Research and development 526,000 268,000
----------- -----------
Total operating costs and expenses 8,265,000 5,736,000
----------- -----------
Operating income 470,000 198,000
Other (expenses) income:
Interest expense (52,000) (78,000)
Interest income 19,000 6,000
Other income 2,000 3,000
----------- -----------
Income before provision for income taxes 439,000 129,000
Provision for income taxes 45,000 25,000
----------- -----------
Net income $ 394,000 $ 104,000
=========== ===========
Earnings per share:
Basic $ .15 $ .04
Diluted .14 .04
=========== ===========
Weighted average number of common
and common equivalent shares
outstanding - Basic computation 2,617,013 2,595,404
=========== ===========
Potential dilutive common shares 230,649 77,503
Weighted average number of common and
common equivalent shares outstanding
assuming dilution - Diluted computation 2,847,662 2,672,907
=========== ===========
See accompanying notes to consolidated financial statements
4
<PAGE>
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
October 31,
-----------------------------
(unaudited)
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 394,000 $ 104,000
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 345,000 286,000
Amortization of deferred compensation 8,000 17,000
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable 556,000 (190,000)
Inventories (36,000) (1,224,000)
Prepaid expenses and other current assets (74,000) 17,000
Other assets 8,000 (5,000)
Accounts payable (72,000) 480,000
Notes payable -- 395,000
Accrued expenses and other current liabilities (278,000) 44,000
----------- -----------
Net cash provided by (used in) operating activities 851,000 (76,000)
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (265,000) (35,000)
Payment for business acquisitions net of cash acquired (173,000) --
----------- -----------
Net cash used in investing activities (438,000) (35,000)
----------- -----------
Cash flows from financing activities:
Principal payments on long-term debt (212,000) (250,000)
Exercise of stock options 2,000 --
----------- -----------
Net cash used in financing activities (210,000) (250,000)
Net increase (decrease) in cash and cash equivalents 203,000 (361,000)
Cash and cash equivalents at beginning of period 2,746,000 1,364,000
----------- -----------
Cash and cash equivalents at end of period $ 2,949,000 $ 1,003,000
=========== ===========
Supplemental cash flow disclosure:
Cash paid during the period for:
Interest $ 52,000 $ 78,000
Income taxes 133,000 25,000
</TABLE>
Non cash items:
In the first quarter of fiscal 1999, non cash items include the issuance of a
$250,000 note payable and the issuance of common stock valued at $704,000 in
connection with the acquisitions of two businesses. In the first quarter of
fiscal 1998, the Company entered into new capital lease obligations in the
amount of $400,000.
See accompanying notes to consolidated financial statements.
5
<PAGE>
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) General
The accompanying consolidated financial statements for the three months
ended October 31, 1998 and 1997 are unaudited. In the opinion of management, the
information furnished reflects all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
unaudited interim periods. The results of operations for the three months ended
October 31, 1998 are not necessarily indicative of the results of operations to
be expected for the full year.
(2) Accounts Receivable
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
October 31, 1998 July 31, 1998
---------------- -------------
<S> <C> <C>
Accounts receivable from commercial customers $2,924,000 $4,302,000
Unbilled receivables (including retainages) on
contracts-in-progress 2,497,000 1,531,000
Amounts receivable from the United States
government and its agencies 437,000 269,000
---------- ----------
5,858,000 6,102,000
Less allowance for doubtful accounts 281,000 170,000
---------- ----------
Accounts receivable, net $5,577,000 $5,932,000
========== ==========
</TABLE>
(3) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
October 31, 1998 July 31, 1998
---------------- -------------
<S> <C> <C>
Raw materials and components $4,241,000 $3,365,000
Work-in-process 4,296,000 4,932,000
---------- ----------
8,537,000 8,297,000
Less:
Progress payments 1,016,000 1,333,000
Inventory reserves 935,000 829,000
---------- ----------
Inventories - net $6,586,000 $6,135,000
========== ==========
</TABLE>
(4) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
October 31, 1998 July 31, 1998
---------------- -------------
<S> <C> <C>
Customer advances and deposits $ 177,000 $ 652,000
Accrued wages and benefits 1,770,000 1,068,000
Accrued commissions 449,000 452,000
Other 885,000 608,000
---------- ----------
$3,281,000 $2,780,000
========== ==========
</TABLE>
6
<PAGE>
(5) Long-Term Debt
Long-term debt consists of the following:
October 31, 1998 July 31, 1998
---------------- -------------
Obligations under capital leases $2,037,000 $2,249,000
Less current installments 750,000 804,000
---------- ----------
$1,287,000 $1,445,000
========== ==========
(6) Acquisitions
In the first quarter of fiscal 1999, the Company acquired the assets and
assumed certain liabilities of two businesses. The acquisitions are being
accounted for using the purchase method of accounting with the operations of
these businesses being consolidated with those of the Company from their
respective dates of acquisition. The excess of the purchase price over the net
book value of the net assets acquired and liabilities assumed approximates
$1,877,000, which has been included in intangible assets in the accompanying
consolidated balance sheet.
(7) Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share". The statement requires companies to present basic
and diluted earnings per share ("EPS"), instead of primary and fully diluted EPS
that were previously required. 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. All
EPS figures for prior periods reported have been restated.
7
<PAGE>
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain information contained in this Quarterly Report on Form 10-Q,
including, without limitation, information appearing under Part I, Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are believed to be forward-looking statements (within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934). Factors set forth in the Company's Annual Report on Form
10-K, filed October 29, 1998, or in the Company's other Securities and Exchange
Commission filings, could affect the Company's actual results and could cause
the Company's actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company in this
Quarterly Report on Form 10-Q.
Recent Developments
During the first quarter of fiscal 1999, the Company formed two new wholly owned
subsidiaries. Comtech Wireless, Inc. ("CWI") which is located in Woodbridge, New
Jersey will design and manufacture Wireless Local Loop Systems for the rural and
remote telephony market. Comtech Mobile Datacom Corp. ("CMDC") which is located
in Germantown, Maryland will provide satellite based packet data communication
services between remote mobile and fixed assets and home base using an open
architecture asset tracking system. CMDC will focus on transportation and energy
markets, both commercial and governement and will serve customers in the U.S.
and elsewhere as satellite resources which offer global reach are deployed over
the next few years.
In October 1998, the Company's operating unit, CSI, was awarded a contract for
approximately $42.5 million by a major U.S. Prime Contractor. The contract is
for design, engineering and production of sheltered communication terminals
consisting of Comtech digital over-the-horizon and line-of-sight microwave
radios and integrated UHF/VHF and HF radios for use in a foreign country. The
terminals, configured for mobile deployment, are scheduled for delivery over the
next 30 months.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31,
1998 AND OCTOBER 31, 1997
Net Sales. Net sales were $8,735,000 and $5,934,000 for the three months ended
October 31, 1998 and 1997, respectively, representing an increase of $2,801,000
or 47.2%. This increase was primarily due to a higher volume of sales of
over-the-horizon products at CSI.
Gross Margin. Gross profit was $2,716,000 or 31.1% of net sales for the three
months ended October 31, 1998 as compared to $1,894,000 or 31.9% of net sales
for the same period in fiscal 1998. Higher gross profits in the fiscal 1999
period were due primarily to the higher sales volume. Lower gross profit margins
were due primarily to the mix of products sold in each period.
Selling, General and Administrative. Selling, general and administrative
expenses were $1,720,000 and $1,428,000 for the three months ended October 31,
1998 and 1997, respectively, representing an increase of $292,000. This increase
was primarily due to a higher level of expenses required to support the
increased sales volume including personnel expenses, sales commissions and
bonuses, travel and advertising. As a percentage of sales, these expenses
decreased from 24.1% in fiscal 1998 to 19.7% for the same period in fiscal 1999.
Research and Development. Research and development expenses were $526,000 and
$268,000 for the three months ended October 31, 1998 and 1997, respectively,
representing an increase of $258,000 or 96.3%. This increase is primarily due to
continuing new product development and general product improvement.
Results from Operations. As a result of the foregoing factors, the Company had
operating income of $470,000 for the three months ended October 31, 1998 as
compared to $198,000 for the comparable prior year period.
Interest Expense. Interest expense was $52,000 and $78,000 for the three months
ended October 31, 1998 and 1997, respectively, representing a decrease of
$26,000. Interest expense for both periods was substantially due to interest
associated with the Company's capital lease obligations.
Interest Income. Interest income was $19,000 and $6,000 for the three months
ended October 31, 1998 and 1997, respectively. This increase was due primarily
to the increase in the amount of cash available to invest in the fiscal 1999
period.
Provision for Income Taxes. The provision for income taxes was $45,000 and
$25,000 for the three months ended October 31, 1998 and 1997, respectively,
which principally relates to state income taxes. The Company has NOL
carryforwards to offset Corporate federal income tax and is, until those
carryforwards are fully utilized, 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 operation and the potential limitations on utilization of loss and
credit carryforwards pursuant to Sections 382 and 383 of the Internal Revenue
Code of 1986.
8
<PAGE>
LIQUITY AND CAPITAL RESOURCES
For the three month period ended October 31, 1998, the Company's cash and cash
equivalent position increased by $203,000 from $2,746,000 at July 31, 1998 to
$2,949,000 at October 31, 1998. Operating activities provided $851,000 of cash
and investing and financing activities used $438,000 and $210,000 of cash,
respectively. During the period, the Company formed two new wholly owned
subsidiaries which acquired the assets and assumed certain liabilities of two
other companies. The total consideration for these acquisitions was
approximately $1,150,000 which was financed by a cash payment of $200,000, a
promissory note of $250,000 and the balance through the issuance of restricted
stock and warrants. The balances at October 31, 1998 include the assets and
liabilities of these acquisitions.
Accounts receivable decreased from July 31, 1998 by $355,000 due primarily to
the timing of the shipments and the subsequent collection of the related
receivable. The allowance for doubtful accounts increased by $111,000. The
Company reviews its allowance for doubtful accounts periodically and believes it
is sufficient based on past experience and the Company's credit standards.
Net inventories increased by $451,000, primarily due to the higher backlog of
orders. 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.
Intangible assets at October 31, 1998 of $1,877,000 consists of "good will" as a
result of the acquisitions referred to above.
Accounts payable increased by $731,000 primarily due to the increase of
inventory purchases. The increase of $501,000 in accrued expenses and other
current liabilities was primarily due to increases in accrued wages and
benefits. Property plant and equipment increased by $985,000 accounted for by
purchases of $265,000 and the balance related to the acquisitions. Long term
debt (including current installments) decreased by $212,000 due to payments
made.
From time to time, the Company utilizes short-term bank financing to fund its
working capital requirements. The Company has a $6,000,000 credit facility from
Republic National Bank of New York which bears interest on borrowings of 1/2%
over the Bank's Reference Rate. A component of this facility is a $1,000,000
line under the Working Capital Guarantee Program of the Export-Import Bank of
the United States. This program provides the lender a 90% guarantee on qualified
loans made to the Company for export related contracts. There were no borrowings
outstanding at October 31, 1998.
The Company believes that its current cash position, funds generated from
operations and funds available from the credit facility, collectively, would be
adequate to meet the Company's foreseeable cash requirements.
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 compliant and that its
customers, suppliers and service providers - have taken similar action. At this
time, management believes that the Company does not have any significant
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. However there can be no assurance that
such interruption will not have a material adverse effect on the Company. To
date, the Company has not formulated a Year 2000 contingency plan. The Company
is reviewing responses to its inquiries and will determine the need for a
contingency plan upon completion of this review. 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.
9
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11.0
The following exhibit is annexed hereto:
Computation of Earnings per Common Share - Page 12
10
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMTECH TELECOMMUNICATIONS CORP.
(Registrant)
Date: December 15, 1998 By: /s/ Fred Kornberg
-------------------------------------
Fred Kornberg
Chairman of the Board
Chief Executive Officer
and President
Date: December 15, 1998 By: /s/ Gail Segui
-------------------------------------
Gail Segui
Secretary and Treasurer
11
Exhibit 11.0
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(Unaudited)
Three Months Ended
October 31
---------------------------
1998 1997
---------- ----------
Net earnings $ 394,000 $ 104,000
========== ==========
Computation of weighted average
number of common and common equivalent
shares outstanding during the period:
Weighted average number of
common shares 2,672,013 2,650,404
Less: Treasury shares 55,000 55,000
---------- ----------
Weighted average number of common
shares outstanding 2,617,013 2,595,404
Potential dilutive common shares 230,649 77,503
---------- ----------
Weighted average number of common and
common equivalent shares outstanding
assuming dilution 2,847,662 2,672,907
========== ==========
Earnings per share:
Basic $ .15 $ .04
Diluted .14 .04
========== ==========
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Consolidated
Financial Statements Form 10-Q 10/31/98 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 2,949
<SECURITIES> 0
<RECEIVABLES> 5,858
<ALLOWANCES> 281
<INVENTORY> 6,586
<CURRENT-ASSETS> 15,462
<PP&E> 16,493
<DEPRECIATION> 12,051
<TOTAL-ASSETS> 22,088
<CURRENT-LIABILITIES> 7,600
<BONDS> 0
0
0
<COMMON> 277
<OTHER-SE> 12,924
<TOTAL-LIABILITY-AND-EQUITY> 22,088
<SALES> 8,735
<TOTAL-REVENUES> 8,735
<CGS> 6,019
<TOTAL-COSTS> 8,265
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52
<INCOME-PRETAX> 439
<INCOME-TAX> 45
<INCOME-CONTINUING> 394
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 394
<EPS-PRIMARY> .42
<EPS-DILUTED> .40
</TABLE>
