SECURITIES AND EXCHANGE COMMISSION
WASHINGTON , D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-7928
COMTECH TELECOMMUNICATIONS CORP.
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2139466
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
105 Baylis Road
Melville, New York
(Address of Principal Executive Offices)
11747
(Zip Code)
Registrant's telephone number, including area code (631) 777-8900
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
Series A Junior Participating Cumulative Preferred Stock par value
$.10 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES: |X| NO: |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, computed by reference to the closing sales
price as quoted on the Nasdaq National Market on October 20, 2000 was
approximately $105,427,702.
DOCUMENTS INCORPORATED BY REFERENCE.
Certain portions of the document listed below have been incorporated by
reference into the indicated Part of this Annual Report on Form 10-K:
Proxy Statement for Annual Meeting
of Shareholders to be held December 12, 2000 Part III
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INDEX
PART I
ITEM 1. BUSINESS 1
Overview 1
Recent Developments 4
Telecommunications Transmission Business Segment 4
RF Microwave Amplifier Business Segment 6
Mobile Data Communications Services Business Segment 6
Sales, Marketing and Customer Support 7
Backlog 7
Manufacturing and Service 8
Research and Development 8
Patents and Licenses 8
Competition 9
Key Personnel/Employees 9
Compliance with Federal, State and Local Environment 9
Protection Laws
ITEM 2. PROPERTIES 10
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE 10
OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON 10
EQUITY AND RELATED STOCKHOLDER MATTERS
Dividends 11
Approximate Number of Equity Security Holders 11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 11
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 13
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview 13
Results of Operations 15
Comparison of Fiscal 2000 and 1999 15
Comparison of Fiscal 1999 and 1998 17
Liquidity and Capital Resources 18
Year 2000 Compliance 19
Risk Factors 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE 25
DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND 25
SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH 25
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS 25
OF REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN 26
BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND 26
RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT 26
SCHEDULE AND REPORTS ON FORM 8-K
SIGNATURE 28
SUBSIDIARIES 29
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
AND SCHEDULE
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Note: As used in this Annual Report on Form 10-K, the terms "Comtech,"
"we" and "our company" mean Comtech Telecommunications Corp., Comtech's
subsidiaries and Comtech's predecessor corporation.
All shares and per share information has been adjusted to reflect the
three-for-two stock split that occurred in July 1999. See Comtech's Form 8-K
dated July 6, 1999.
PART I
ITEM 1. BUSINESS
Overview
We design, develop, produce and market sophisticated wireless
telecommunications transmission products and solid state high power broadband
amplifiers for commercial and government purposes. Our products are used in
point-to-point and point-to-multipoint telecommunications transmission and
reception applications such as satellite communications, over-the-horizon
microwave systems, cellular telephone systems and cable and broadcast
television. Our broadband amplifier products are also used in cellular and PCS
instrumentation testing and certain defense systems.
We have expanded our business to offer satellite mobile data
communications services. This business recently won a contract from the U.S.
Army which, subject to government funding and deployment decisions, provides for
the purchase of up to $418.2 million in mobile terminal units and global message
communications services over an eight year period. We believe our mobile data
communications products and services will afford the company important
competitive advantages as we endeavor to expand this business with other
government agencies and into commercial markets.
Revenue growth over the past five years has been driven by the global
expansion of telecommunications services such as satellite systems, cable
television, cellular telephone systems, PCS telephony and the Internet. We meet
the high performance requirements of our customers by drawing upon proprietary
expertise in key microwave amplification and transmission technologies developed
over more than 33 years of operations.
A majority of our sales in fiscal 2000 were of products developed by us
within the last 5 years, including, for example, linear amplifiers sold to
cellular and PCS telephony system manufacturers for testing their systems'
amplifiers, and turbo codec modems sold to satellite systems integrators and
service providers for use in voice, data, video and fax transmission. Our
internally funded and customer funded research and development expenses
aggregated $6.9 million, $3.8 million and $1.7 million in fiscal 2000, 1999 and
1998, representing 10.4%, 10.0% and 5.6% of our net sales in those fiscal years.
Telecommunications Industry Trends
The demand for telecommunications is increasing worldwide as emerging
economies seek to modernize their infrastructure and as increasingly
information-intensive markets introduce new telecommunications services. The
telecommunications industry has expanded rapidly over the last decade and is
forecasted to continue to expand due to the following major factors:
Deregulation and Privatization. Many developing countries that had
previously not committed significant resources to or placed a high priority on
developing and upgrading their communications systems are now doing so,
primarily through deregulation and privatization. A significant number of these
countries do not have the resources, or have large geographic areas or terrain
that make it difficult, to install extensive land-based networks on a
cost-effective basis. This provides an opportunity for satellite and other
wireless communications services systems to meet the requirement for
communications services in these countries.
Growing Demand for Data Communications Services. Factors contributing to
the growing demand for communications services include worldwide economic
development and the increasing globalization of commerce. Businesses have a
growing need for higher bandwidth services to communicate with their customers
and employees
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around the world and are increasingly reliant upon Internet and multimedia
applications. We expect demand for these kinds of higher bandwidth services to
grow in both developed and developing countries.
Increasing Cost-Effectiveness. The relative cost-effectiveness of
satellite and other wireless telecommunications services is a major factor
driving the growth in areas with rapidly developing telecommunications
infrastructures. These developing infrastructures often cover large geographic
areas, where population concentrations that are separated by significant
distances require a technology whose cost and speed of implementation is
relatively insensitive to distance.
Technological Advances. Technological advances continue to increase the
capacity of telecommunications networks and reduce the overall cost of the
systems and the services they deliver. This increases the number of potential
end users for the services and expands the available market. We believe that
recent technological developments, such as bandwidth on demand and signal
processing methods, will continue to stimulate demand.
Product and Service Segments
We conduct our business through three decentralized but complementary
product and service segments: telecommunications transmission, RF microwave
amplifiers, and our mobile data communications services business. The segments
operate through individual operating units, each of which maintains its own
sales, marketing, product development and manufacturing functions. We believe
that this organizational structure allows the key personnel of each operating
unit to be more responsive to their particular markets and customers. Brief
descriptions of our business segments and operating units follow.
Telecommunications transmission -- modems, frequency up converters
and down converters, solid state high-power amplifiers, VSAT transceivers
and antennas for satellite ground station applications and adaptive modems
and microwave radios for over-the-horizon microwave communications
systems. Primary markets include satellite systems integrators and
communications services providers, defense contractors and oil companies.
Customers include, among others, Globecomm Systems, Inc., Hughes Network
Systems, IDB Worldcom Inc., DirecTV, ATT Alascom, Northrop Grumman, BP
Amoco and Exxon.
RF microwave amplifiers -- solid state high-power broadband
amplifier products in the microwave and radio frequency (RF) spectrums for
a wide range of applications, including cellular and wireless
instrumentation, and jamming and identification friend or foe (IFF) and
other defense systems. Target markets are communications service
providers, cellular and PCS telephony system manufactures and defense
contractors. Customers include, among others, Motorola Inc., Ericsson
Inc., Nokia Telecommunications, Inc., Lucent Technologies Inc., Litton
Systems Inc., Raytheon Systems Company, Lockheed Martin Corp. and the U.S.
government.
Mobile data communications services -- Secure, real time two-way
messaging between mobile platforms, such as land vehicles, rail and
aircraft, or remotely placed fixed site sensors and user headquarters
through our Germantown, Maryland gateway satellite earth station. The
network employs leased satellite capacity to communicate between the
mobile platform and user headquarters via satellite, terrestrial and
Internet links. Depending upon the end-user's needs, our system can be
configured to provide a wide range of data applications, ranging from
simple location tracking to messaging, e-mail, broadcasting of
information, meter, gauge and other sensor monitoring.
We believe that the global expansion of telecommunications, particularly
in developing countries in Asia, South America, the Middle East and Europe,
represents a key opportunity for the continued growth of our telecommunications
business. Included as international sales are sales made to domestic companies
for inclusion in products which are sold to international customers. Sales for
use by international customers represented approximately 71.4%, 60.1%, and 46.5%
of our net sales in fiscal years 2000, 1999 and 1998, respectively.
Our product designs are based on both analog and digital microwave
technologies. Digital microwave technology can significantly enhance performance
of telecommunications systems. We have invested significant
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resources in developing our technological expertise, and work closely with
customers and potential customers to develop product lines in market niches
where we believe our expertise can enable us to become a leading supplier.
Business Strategies
We manage our business with the following principal corporate strategies:
o Operate on a decentralized basis to maximize responsiveness to
customers.
o Continue product innovation through investment in research and
development.
o Capitalize on synergies among our business segments to secure
larger contracts.
o Pursue acquisitions and investments in complementary
businesses, technologies, products and services.
Specific operating strategies for our business segments include:
Telecommunications transmission.
o Continue broadening our line of satellite ground station
products to better serve our customers with a full line of
video, data and voice products.
o Enhance our existing products to serve rapidly developing
markets requiring higher speed and greater bandwidth, such as
emerging applications for wireless Internet access.
o Maintain our market leadership in over-the-horizon microwave
technologies by broadening applications and increasing product
performance.
RF microwave amplifiers.
o Continue to incorporate the latest advances in solid state
device electronics.
o Maintain our broadband technology in this product sector to
encourage system integrators and end users to outsource their
requirements rather than pursue this specialized field
in-house.
o Expand our product line to include PCS base station
amplifiers.
o Combine high-power amplifiers and solid state switches for
advanced communications applications.
Mobile data communications services.
o Capture the opportunities available to supply the Logistics
Command under the U.S. Army contract.
o Pursue identified opportunities to offer our products and
services to other government agencies.
o Penetrate the emerging markets for commercial uses,
particularly in the land mobile and remote sensing markets.
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Recent Developments
In June 1999, the U. S. Army awarded us a contract which, subject to
government funding and deployment decisions, provides for the purchase of up to
$418.2 million in mobile transceiver units and global data messaging
communication services over an eight-year period. In July 2000 we received
orders for $3.1 million under this contract, which can be terminated by the U.S.
Army at any time for its convenience. We cannot assure you that we will receive
any more such orders.
On February 17, 2000, we completed a public offering of our common stock
in which we sold 2,300,000 shares at an offering price of $17.50 per share. On
February 29, 2000, the underwriter exercised its overallotment option to
purchase an additional 345,000 shares. The net proceeds of the offering and
exercise of the overallotment option was approximately $42.4 million.
In July 2000, we acquired the business of EFData, the satellite
communications division of Adaptive Broadband Corporation for approximately
$52.5 million in cash. The acquisition is being accounted for under the
"purchase method" of accounting. Accordingly, we allocated the purchase price to
the assets purchased and the liabilities assumed based upon the estimated fair
values at the date of the acquisition. The excess of the purchase price over the
fair values of the net assets acquired was approximately $26.2 million, of which
$10.2 million was allocated to in-process research and development and was
expensed as of the acquisition date, $7.5 million was valued as purchased
technology, $3.6 million was valued as other purchased intangibles which are
being amortized over 5-7 years and $4.8 has been recorded as goodwill, which is
being amortized over ten years. $40 million of the purchase price was supplied
through institutional secured borrowings bearing interest at 9.25% due in
installments through 2005, and the balance from internal company funds. (See
notes 2 and 8 of the Notes to Consolidated Financial Statements).
Telecommunications Transmission Business Segment
The demand for telecommunications is increasing worldwide as emerging
economies seek to modernize their infrastructure and as increasingly
information-intensive markets introduce new telecommunications services. The
telecommunications industry has expanded rapidly during the last decade due to
technological advances and deregulation. Advances in technology have lowered
per-unit communications costs, increased product reliability and encouraged a
proliferation of new and enhanced communications products and services.
In making procurement decisions, customers for telecommunications
transmission 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 of
information can be routed through a combination of technologies, each employed
where most cost-effective. Our products are used in systems employing satellite,
over-the-horizon microwave, terrestrial line-of-sight microwave and wireless
technologies.
Copper Cable, the traditional transmission medium most familiar to
customers, is being replaced and supplemented by the other media,
particularly for high-volume broadband and long distance
transmissions where it has substantial capacity, cost and
reliability limitations.
Fiber Optic Cable is best suited to high-volume broadband,
point-to-point, short or long distance links where its
advantages-capacity, quality and security-justify the long lead-time
and high cost to equip and install a network.
High frequency (HF) radio systems employ long wavelengths which are
propagated beyond line-of-sight 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. This
mode of transmission is very limited in capacity.
Wireless and line-of-sight microwave communications systems
generally used for point-to-point communications, employ signals
with extremely short wavelengths which travel only in line-of-sight
paths over relatively short distances, generally under 30 miles, can
be quickly and easily
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installed, require relatively low initial capital investment and
provide broadband capacity which can be upgraded and expanded over
time.
Over-the-horizon microwave communication systems transmit signals
over distances from 30 to 600 miles by reflection of the transmitted
signals off the troposphere, an atmospheric layer located
approximately seven miles above the earth's surface. Such systems
offer a high level of reliability and security, are limited in
capacity but are used for transmission over unfriendly terrain.
Satellite communications systems have grown and diversified in
response to demand for efficient broadband and accurate long
distance voice and video communication and digital information
exchange. In a satellite communications system, information is
relayed to and from microwave transmitting and receiving stations on
the ground by means of a low earth orbit (LEO), medium earth orbit
(MEO), or geostationary earth orbit (GEO) satellites, which are
generally placed in an orbit from 600 to 22,300 miles above the
earth's equator. Satellite communications systems are particularly
useful where long-range, broadband high capacity and high quality
point-to-point or point-to-multipoint communication transmission is
desirable. As few as three GEO satellites can provide global
communications coverage. These systems, which use microwave
technology, are well suited for rapid introduction of long distance
service in remote areas or where communication alternatives are
unavailable, such as mobile, shipboard or defense applications.
Our Comtech EF Data Corp. operating unit, located in Tempe, Arizona,
designs and manufactures equipment used in commercial and defense satellite
communications. The equipment includes modems, frequency up converters and down
converters, solid state power amplifiers and satellite VSAT transceivers, which
combine our frequency converters with solid state, high-power amplifiers. These
products comprise a broad range of receiving and transmitting equipment offering
a variety of state-of-the-art technical capabilities with respect to
performance, complexity and value. Our turbo codec modem product line offers
significantly improved performance, power and bandwidth performance over
traditional systems. This operating unit is a combination and integration of our
Comtech Communications Corp. subsidiary with our newly acquired EF Data product
line. The acquisition of EF Data's business expands Comtech's growing
telecommunications capabilities and enhances Comtech's product offerings,
distribution reach and market presence. Additionally, it enables Comtech to
enter the growing satellite networking solution business.
Our Comtech Antenna Systems, Inc. operating unit, located in St. Cloud,
Florida, designs, manufactures, and markets a wide variety of fiberglass and
aluminum antennas for over-the-horizon microwave and satellite communication
applications, including distributed network programming, cable and broadcast
television and radio as well as other forms of information and entertainment
distribution. Comtech Antenna Systems, Inc. designs antennas for specific types
of telecommunications systems and, typically, sells standardized products to
independent distributors, prime contractors and end-user customers. Comtech
Antenna Systems Inc.'s antenna product line includes fixed and mobile antenna
systems and specialized multi-beam satellite antenna systems that are capable of
receiving signals simultaneously from many independent satellites located up to
60 degrees apart.
Our Comtech Systems, Inc. operating unit, located in Orlando, Florida, has
a product line consisting primarily of equipment for over-the-horizon microwave
systems and networks. It has a turnkey capability that ranges from system and
network planning through equipment and system training and operation and
maintenance programs. It also supplies satellite telecommunications systems by
combining its products with equipment manufactured by our other operating units
and third parties. Comtech Systems Inc.'s markets its products and services to
oil and gas companies and other commercial users, foreign defense commands and
system prime contractors. We believe that Comtech Systems Inc.'s products, which
employ adaptive modem digital transmission technology, offer high-speed data
benefits over the traditional analog over-the-horizon microwave products offered
by its sole competitor.
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RF Microwave Amplifier Business Segment
Amplifiers reproduce signals with greater power, current or voltage
amplitude. Indispensable in the world of signal processing, amplifiers can be as
tiny as a microchip for a hearing aid or as massive as a multi-story building
for transmitting radio signals to submerged submarines or to outer space.
In telecommunications, solid state high-power amplifiers are used to
amplify signals for radiation from transmitting antennas in satellite or other
wireless telecommunications systems. They are also used to amplify signals in
defense, 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 used in cellular and PCS
networks.
Solid state, high-power amplifiers are also used in electromagnetic
compatibility and susceptibility testing. The proliferation of electronic
systems in products such as automobiles, computers, wireless telephones, radios,
televisions, medical equipment, aircraft and other products has led to
increasingly serious problems with electromagnetic interference. Manufacturers,
therefore, test these electronic systems for electromagnetic compatibility and
susceptibility using broadband high-power RF microwave amplifiers such as those
we manufacture. For example, such testing may be used to determine whether the
various electronic systems in a commercial aircraft are likely to be affected by
the use of laptop computers, wireless telephones or video games by passengers in
flight.
We believe our Comtech PST Corp. operating unit, located in Melville, New
York, is one of a small number of companies designing, developing, manufacturing
and marketing broadband high-power large signal amplifiers in the microwave and
RF spectrums. Our products amplify energy for applications, including wireless
and satellite telecommunications, instrumentation and defense systems. Comtech
PST Corp. sells its products to domestic and foreign commercial users,
government agencies and prime contractors. We believe it is an innovative
supplier of these amplifiers and related processing equipment.
Mobile Data Communications Services Business Segment
The demand for mobile data communications services and products has
increased dramatically in recent years for both government and commercial
applications. This demand has been driven by advances in digital technology
coupled with the need to better locate, track, manage, monitor and communicate
with mobile and fixed assets. The transmission of information may be done over
various systems, i.e., terrestrial, cellular or satellite, depending on the most
cost-effective approach to meet the application's requirements.
We are continuing to develop and market a Web-enabled, satellite-based
mobile data communications system for the land mobile, remote sensing, utility,
aviation and maritime markets. Applications include asset location and tracking,
two-way mobile messaging, e-mail and automated reading of sensors, including
meters and gauges. Through our satellite earth station gateway in Germantown,
Maryland, we can route signals to and from mobile or fixed, remote terminals via
leased satellite capacity. Customers can access their message or data through an
Internet or terrestrial connection to their headquarter' Web sites.
While the service is satellite-based, we do not own satellites. Worldwide
coverage is available today, and multiple system coverage is available in many
regions as well. Satellite capacity, as required, can be leased for our data
communications services, which represents a significant advantage in
consideration of the increasingly competitive environment for sale or lease of
satellite capacity. As a result, we believe that our data services costs will be
among the lowest in the industry, and ongoing product development efforts will
enable us to maintain this competitive advantage.
In early 1999, Comtech Mobile Datacom Corp. led a multi-company team in
competing for the U.S. Army's Movement Tracking System, a system to be deployed
by the U.S. Army for global use in tracking its assets and communicating by
message in real time with these vehicles from fixed and mobile command centers.
The contract was awarded to Comtech Mobile Datacom Corp. in June 1999. The
contract allows for purchases of up to $418.2 million of equipment and services
over an eight-year period, and is also open to other government agencies to
procure their tracking and messaging requirements. While the U.S. Army and other
government agency business
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is expected to become a major source of our growth in the near term, we intend
to expand our customer base for mobile data communications services and products
into commercial markets. The system, which will be used by the U.S. Army can be
made immediately available for use as a commercial system. In July 2000 we
received an initial order for $3.1 million under the U.S. Army contract.
Sales, Marketing and Customer Support
Our international sales (including sales to prime contractors'
international customers) from all three business segments represented
approximately 46.5%, 60.1% and 71.4 % of total net sales in fiscal 1998, 1999
and 2000, respectively. We expect our international sales to continue to
increase due to the global expansion of telecommunications and microwave
instrumentation and we expect that international sales will remain a substantial
portion of our total sales for the foreseeable future.
Domestic commercial sales represented approximately 34.0%, 24.3% and 19.8%
of our total net sales in fiscal 1998, 1999 and 2000, respectively. The balance
of our sales were to U.S. government departments or agencies and represented
19.5%, 15.6% and 8.8% of our total net sales in fiscal 1998, 1999 and 2000,
respectively.
Sales to one customer in fiscal 1998 represented 12.2% of total net sales
and sales to a different customer, a major U.S. aerospace prime contractor,
represented 27.0% and 43.1% of our total net sales for fiscal 1999 and 2000,
respectively. We have experienced and will continue to experience the effect of
a limited number of customers on our net sales because most of our sales are
derived from a relatively small number of large customer contracts.
Each of our operating units conducts its own sales and marketing efforts.
In some instances, our operating units may bundle other units' products. Sales
and marketing strategies vary with particular markets served and include direct
sales through sales, marketing and engineering personnel, sales through
independent representatives, value-added resellers or a combination of the
foregoing. Our operating units enter into sales distribution agreements for
certain products with distributors. Unlike sales representatives, who merely
find customers on a commission basis, some of our distributors purchase products
from us for resale. We intend to continue to expand domestic and international
marketing efforts through independent sales representatives, distributors and
value-added resellers.
Our management, technical and marketing personnel establish and maintain
relationships with customers. Our strategy includes a commitment to provide
ongoing customer support for our systems and equipment. This support involves
providing direct access to engineering staff or trained technical
representatives to resolve technical or operational problems.
Backlog
Our backlog as of July 31, 2000 and 1999 was approximately $50.5 million
and $38.6 million, respectively. We expect that a substantial majority of the
backlog as of July 31, 2000 will be recognized as sales during fiscal 2001. We
received payments in respect of progress billings and advance payments
aggregating approximately $1.7 million as of July 31, 2000 in connection with
orders included in the backlog at that date. At July 31, 2000 approximately
20.2% of that backlog consisted of U.S. government contracts, subcontracts and
government funded programs, approximately 62.7% consisted of orders for use by
foreign customers (including sales to prime contractors' international
customers) and approximately 17.1% consisted of orders for use by domestic
commercial customers. Our backlog at July 31, 2000 included funded orders of
$3.1 million under the U.S. Army contract with Mobile Datacom Corp. and $20.6
million from the acquisition of EF Data.
Our backlog consists solely of orders believed to be firm. In the case of
contracts with departments or agencies of the U.S. government, orders are only
included in backlog to the extent funding has been obtained for such orders. All
of the contracts in our backlog are subject to cancellation at the convenience
of the customer or for default in the event that we are unable to perform the
contract.
Variations in backlog from time to time are attributable, in part, to the
timing of our preparation and submission of contract proposals, the timing of
contract awards and the delivery schedules on specific contracts. As a result,
we believe our backlog at any point in the fiscal year is not necessarily
indicative of the total sales
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anticipated for any particular future period. Our Comtech Antenna and Comtech EF
Data businesses operate under short lead times and usually generate sales out of
inventory as is the case for a significant portion of our Comtech PST amplifier
business.
Manufacturing and Service
Our manufacturing operations consist principally of the assembly and
testing of electronic products we design and build from purchased fabricated
parts, printed circuits and electronic components and, in the case of antennas,
the casting of fiberglass antennas. We employ formal quality management programs
and other training programs, including International Standards Organization's
(ISO 9000) quality procedure registration programs. Our Comtech PST Corp.,
Comtech Systems, Inc. and Comtech EF Data Corp. operating units have been
qualified for ISO 9001 and we are in the process of qualifying our other
operating units.
Our ability to deliver products to customers on a timely basis is
dependent, in part, upon the availability and timely delivery by subcontractors
and suppliers of the components and subsystems that we use in manufacturing our
products. Electronic components and raw materials used in our products are
generally obtained from independent suppliers. Some components are standard
items and are available from a number of suppliers. Others are manufactured to
our specifications by subcontractors. We obtain certain components and
subsystems from a single source or a limited number of sources. We believe that
most components and equipment are available from existing or alternative
suppliers and subcontractors. A significant interruption in the delivery of such
items could have a material adverse effect on our business and results of
operations.
Research and Development
The technology used in our products is subject to rapid development and
frequent change. Our business position is in large part contingent upon the
continuous refinement of our scientific and engineering expertise and the
development, either through internal research and development or acquisitions,
of new or enhanced products and technologies.
A majority of our sales in fiscal 2000 were of products developed by us
within the past five years, including, for example, linear amplifiers sold to
cellular and PCS telephony system manufacturers for testing their systems'
amplifiers and turbo codec modems sold to satellite systems integrators and
service providers for use in high performance voice, data, video and fax
transmission.
Our aggregate research and development expenditures (internal and customer
funded) were 5.6%, 10.0% and 10.4% of total net sales in fiscal 1998, 1999 and
2000, respectively. We reported internal research and development expenses of
$1.3 million, $2.0 million and $2.6 million in fiscal 1998, 1999 and 2000,
respectively, representing 4.4%, 5.3% and 4.0% of total net sales, respectively,
for these periods. A portion of our research and development efforts relates to
the adaptation of our basic technology to specialized customer requirements and
is recoverable under such contracts, and such expenditures are not included in
our research and development expenses for financial reporting purposes. During
fiscal 1998, 1999 and 2000, we were reimbursed by customers for such activities
in the amounts of $356,000, $1.8 million and $4.3 million, respectively.
Patents and Licenses
Although we own or hold licenses for a number of patents, patents and
licenses have been of substantially less significance in our business than our
scientific and engineering know-how, production techniques, the timely
application of our technology and the design development and marketing
capabilities of our personnel. We rely on the laws of unfair competition,
restrictions in licensing agreements and confidentiality agreements to protect
such knowledge and techniques.
8
<PAGE>
Competition
Our businesses are highly competitive and characterized by rapid
technological change. In addition, the number of potential customers for our
products is limited. Our growth and financial condition depend, among other
things, on our ability to keep pace with such changes and developments and to
respond to the sophisticated requirements of an increasing variety of electronic
equipment users. Many of our competitors are substantially larger, have
significantly greater financial, marketing, research and development,
technological and operating resources and broader product lines than we do. A
significant technological breakthrough by others, including smaller competitors
or new companies could have a material adverse effect on our business. In
addition, certain of our customers have technological capabilities in our
product areas and could choose to replace our products with their own.
In the market for mobile data communications services, there are several
much larger competitors with existing systems. The most prominent of these
competitors is Qualcomm Incorporated, which reported that it had sold more than
350,000 mobile units and provided messaging and maintenance services to more
than 850 transportation companies in the United States alone. Existing
competitors are aggressively pricing their products and services and may
continue to do so in the future. We anticipate that new competitors will enter
the market in the future. Competitors continue to offer new value-added products
and services, which we may be unable to match on a timely or cost-effective
basis. Increased competition may impact margins throughout the industry.
We believe that competition in all of our markets is based primarily on
product performance, reputation, delivery times, customer support and price. Due
to our decentralized organizational structure and proprietary know-how, we
believe we have the ability to develop, produce and to deliver equipment on a
cost-effective basis faster than many of our competitors.
Key Personnel/Employees
We believe our success is dependent upon the continued contributions of
our key management personnel, including the key management at each of our
operating units, and depends to a significant extent upon Fred Kornberg, our
Chairman, Chief Executive Officer and President. Many of our key personnel,
particularly the key engineers, would be difficult to replace, and are not
subject to employment or non-competition agreements. The development of our
mobile data communications services business is particularly dependent upon Joel
R. Alper, the President of Comtech Mobile Datacom Corp. The success of our
telecommunications transmissions segment is particularly dependent upon Richard
L. Burt, President of our Comtech Systems, Inc., subsidiary and Robert McCollum,
President of our Comtech EF Data Corp. subsidiary. Our growth and future success
will depend in large part upon our ability to attract and retain highly
qualified engineering, sales and marketing personnel. Competition for such
personnel from other companies, academic institutions, government entities and
other organizations is intense. Although we believe we have been successful to
date in recruiting and retaining key personnel, we may not be successful in
attracting and retaining the personnel we require in order to continue to grow
and operate profitably. The management skills that have been appropriate for our
business in the past may not continue to be appropriate if our business
continues to grow and diversify.
At July 31, 2000, we had 689 employees, 394 of whom were engaged in
production and production support, 174 in research and development and other
engineering support and 121 in marketing and administrative functions. None of
the employees are represented by a labor union. We believe that our employee
relations are good.
Compliance with Federal, State and Local Environment Protection Laws
We are subject to a variety of local, state and federal governmental
regulations relating to the storage, discharge, handling, emission, generation,
manufacture and disposal of toxic or other hazardous substances used to
manufacture our products, particularly in connection with the fabrication of
fiberglass antennas by Comtech Antenna Systems, Inc. We believe that we are
currently in compliance in all material respects with such regulations and that
we have obtained all necessary environmental permits to conduct our business. To
date, compliance with federal, state or local environment protection laws has
not had a material effect on our capital expenditures, earnings or competitive
position, and we do not expect that such compliance will have a material effect
in the future.
9
<PAGE>
ITEM 2. PROPERTIES
Our corporate offices are located in a portion of the 46,000-square foot
facility on two acres of land in Melville, New York, which also houses Comtech
PST. We lease this facility from a partnership controlled by our Chairman, Chief
Executive Officer and President. The lease, as amended, provides for our
exclusive use of the premises as they now exist for an initial term of ten years
through December 2001. We have 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.
We lease the 32,000-square foot facility on eight acres of land used by
Comtech Antenna Systems, Inc. in St. Cloud, Florida from a Florida land trust
controlled by our Senior Vice President and Chief Financial Officer. The lease
provides for our exclusive use of the premises as they now exist for a term
expiring September 2003. We have the option to extend the term of the lease for
an additional five-year period. The base annual rental under the lease is
subject to adjustments.
We lease a 72,500-square foot facility for Comtech Systems, Inc. in
Orlando, Florida from an unrelated third party. The lease provides for the
exclusive use of the premises as they now exist through April 2002. The base
annual rental is subject to adjustments.
We lease a 113,000-square foot facility in Tempe, Arizona for our Comtech
EF Data Corp. operating unit from an unrelated third party. The lease provides
for the exclusive use of the premises as they now exist through January 2006.
We lease 7,100-square feet of space located in Germantown, Maryland that
is used by Comtech Mobile Datacom Corp. from an unrelated third party. This
lease provides for the exclusive use of the premises as they now exist through
August 2004.
ITEM 3. LEGAL PROCEEDINGS
We are subject to certain legal actions which arise in the normal course
of business. We believe that the outcome of these actions will not have a
material effect on our consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our stockholders during the fourth quarter of
the fiscal year ended July 31, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the Nasdaq National Market under the symbol
"CMTL." The following table shows the quarterly range of the high and low sale
prices for our common stock as reported by the Nasdaq National Market. Such
prices do not include retail markups, markdowns, or commissions.
10
<PAGE>
Common Stock
------------
High (1) Low (1)
-------- -------
Fiscal Year Ended 7-31-99
First Quarter $ 6.50 $ 3.33
Second Quarter 6.50 4.33
Third Quarter 5.92 3.83
Fourth Quarter 18.67 5.25
Fiscal Year Ended 7-31-00
First Quarter 14.56 8.00
Second Quarter 29.50 14.13
Third Quarter 26.25 10.38
Fourth Quarter 17.13 8.63
(1) Amounts adjusted to reflect a three-for-two stock split effective
July 30, 1999.
Dividends
We have never paid cash dividends on our common stock and we intend to
continue this policy for the foreseeable future. We expect to use earnings to
finance the development and expansion of our business. Our Board of Directors
reviews our dividend policy periodically. The payment of dividends in the future
will depend upon our earnings, capital requirements, financial condition and
other factors considered relevant by our Board of Directors.
Approximate Number of Equity Security Holders
As of October 20, 2000, there were approximately 750 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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands except per share amounts)
The following table shows selected historical consolidated financial data for
Comtech. Detailed historical financial information is included in the audited
consolidated financial statements for fiscal years 2000 and 1999.
11
<PAGE>
<TABLE>
<CAPTION>
Year Ended July 31,
(In thousands, except per share amounts)
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net Sales $ 66,444 37,886 30,114 24,746 20,916
Cost of sales 45,942 26,405 21,330 17,670 14,819
-------- -------- -------- -------- --------
Gross profit 20,502 11,481 8,784 7,076 6,097
Expenses:
Selling, general and administrative 12,058 6,554 6,013 5,415 5,015
Amortization of intangibles 230 78 -- -- --
Research and development 2,644 2,022 1,319 1,023 741
In-process research and
development 10,218 -- -- -- --
-------- -------- -------- -------- --------
25,150 8,654 7,332 6,438 5,756
-------- -------- -------- -------- --------
Operating earnings (loss) (4,648) 2,827 1,452 638 341
Other expenses (income):
Interest expense 381 204 234 284 302
Interest income (1,511) (65) (36) (33) (60)
Other (income) loss 201 (39) (30) (151) --
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes (3,719) 2,727 1,284 538 99
Provision (benefit) for income taxes 85 (3,754) 180 54 27
-------- -------- -------- -------- --------
Income (loss) from continuing
operations (3,804) 6,481 1,104 484 72
Discontinued operations:
Loss from operations of
discontinued segment (less
applicable income tax benefit of
$79 in 2000 and $320 in 1999) (137) (622) -- -- --
Loss on disposal of discontinued
segment, including provision of
$430 for operating losses during
phase out period (net of income
tax benefit of $306) -- (594) -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ (3,941) 5,265 1,104 484 72
======== ======== ======== ======== ========
Basic income (loss) per share:
Income (loss) from continuing
operations $ (0.67) 1.56 0.28 0.13 0.02
Loss from discontinued operations $ (0.02) (0.29) -- -- --
-------- -------- -------- -------- --------
Basic income (loss) (0.69) 1.27 0.28 0.13 0.02
======== ======== ======== ======== ========
Diluted income (loss) per share:
Income (loss) from continuing
operations $ (0.67) 1.42 0.27 0.12 0.02
Loss from discontinued operations (0.02) (0.27) -- -- --
-------- -------- -------- -------- --------
Diluted income (loss) $ (0.69) 1.15 0.27 0.12 0.02
======== ======== ======== ======== ========
Weighted average number of
common shares outstanding-
Basic computation 5,663 4,143 3,902 3,873 3,887
Potential dilutive common shares -- 430 264 33 105
-------- -------- -------- -------- --------
Weighted average number of
common and common equivalent
shares outstanding assuming
dilution-
Diluted computation 5,663 4,573 4,166 3,906 3,992
======== ======== ======== ======== ========
Other Consolidated Operating
Data:
Backlog at period-end $ 50,538 38,637 15,452 14,724 9,700
New orders 78,345 61,071 30,842 29,770 20,374
Research and development-internal
and customer funded 6,916 3,801 1,675 1,459 1,257
EBITDA (1) 7,955 4,337 2,658 1,693 1,470
</TABLE>
(1) Earnings from continuing operations before interest, taxes, depreciation
and amortization and non-recurring items.
12
<PAGE>
<TABLE>
<CAPTION>
As of July 31,
(In thousands)
2000 1999 1998 1997 1996
-------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Total assets $126,031 29,847 19,710 17,960 16,629
Working capital 65,267 10,192 8,917 7,930 7,797
Long-term debt 37,900 -- -- -- --
Long-term capital lease obligations 908 959 1,445 1,310 1,875
Other long-term liabilities 367 -- -- -- --
Stockholders' equity 57,782 18,357 12,093 10,878 10,301
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We design, develop, produce and market sophisticated wireless
telecommunications transmissions components and systems and solid state,
high-power broadband amplifiers for commercial and government purposes. Our
products are used in point-to-point and point-to-multipoint telecommunications
and reception applications such as satellite communications, over-the-horizon
microwave systems, cellular telephone systems and cable and broadcast
television. Our broadband amplifier products are also used in cellular and PCS
instrumentation testing and certain defense systems.
Our business consists of three segments: mobile data communications
services, telecommunications transmission, and RF microwave amplifiers. We began
reporting financial results on a segment basis in fiscal 1999. Our sales of
mobile data communications services are expected to increase substantially if,
when and as orders are received under our contract with the U.S. Army and we
penetrate other government and commercial markets for these services.
Our sales are made to domestic and international customers, both
commercial and governmental. International sales (including sales to prime
contractors' international customers) are expected to increase in the
foreseeable future due to the growing worldwide demand for wireless and
satellite telecommunications and our expanded line of product offerings to meet
these demands.
A substantial portion of our sales is derived from a limited number of
relatively large customer contracts, the timing of which cannot be predicted.
Quarterly sales and operating results may be significantly affected by one or
more of such contracts. For example, sales to one customer in fiscal 2000 and
1999 accounted for 43.1% and 27.0% of total net sales, respectively.
Accordingly, we experience significant fluctuations in sales and operating
results from quarter to quarter and, because our backlog is comprised in large
part of a small number of large contracts, we expect such fluctuations to
continue in the near future.
Sales consist of stand-alone products and systems. For the past five years
we have endeavored to achieve greater product sales as a percentage of total
sales, because product sales generally have higher gross profit margins than
systems sales. In the future, as our installed base of mobile data
communications terminals is established, we expect an increasing amount of our
sales will be attributable to the recurring revenue component of our mobile data
communications services segment.
We generally recognize income under contracts only when the products are
shipped. However, when the performance of a contract will extend beyond a
12-month period, income is recognized on the percentage-of-completion method.
Our gross profit is affected by a variety of factors, including the mix of
products, systems and equipment sold, production efficiency and price
competition.
13
<PAGE>
Selling, general and administrative expenses consist primarily of salaries
and benefits for marketing, sales and administrative employees, advertising and
trade show costs, professional fees and amortization of deferred compensation.
Deferred compensation consists of restricted stock awards granted to certain
operating management personnel. Under these grants, the employees purchased
shares of our common stock at prices representing a discount to the then market
value. The shares vest ten years after issuance, subject to earlier vesting upon
achievement of certain operating unit performance goals.
Our research and development expenses relate to both existing product
enhancement and new product development. A portion of our research and
development efforts is related to specific contracts and is recoverable under
those contracts because they are funded by the customers. Such customer-funded
expenditures are not included in research and development expenses for financial
reporting purposes but are reflected in cost of sales.
As of the end of fiscal 1998, we had a 100% valuation allowance against
our gross deferred tax assets. During fiscal 1999, based on our assessment of
the recoverability of the deferred tax assets, we concluded that a full
valuation allowance was no longer necessary given our estimates of future
earnings and the expected timing of temporary difference reversals. Accordingly,
we reduced the valuation allowance to $777,000 and recorded a corresponding
one-time $4.6 million deferred tax benefit in fiscal 1999. In fiscal 2000, our
gross deferred tax asset was $8,340,000 offset by a valuation reserve of
$2,400,000, relating to the write off of in-process research and development
resulting from the EF Data acquisition.
In the first quarter of fiscal 1999, we acquired the assets and assumed
certain liabilities of two businesses through newly formed, wholly-owned
subsidiaries: Comtech Mobile Datacom Corp., our mobile data communications
services business; and Comtech Wireless, Inc., our wireless local loop business.
Both acquisitions were accounted for using the purchase method of accounting.
The goodwill resulting from the purchase of the mobile data communications
services business (i.e., the excess of the purchase price over the fair value of
the net assets acquired and liabilities assumed) is being amortized over a
20-year period. In June 1999, the U.S. Army awarded Comtech Mobile Datacom Corp.
a contract which, subject to, among other things, government funding and
deployment decisions and additional field testing, provides for the purchase of
up to $418.2 million in mobile terminal units and global data communications
services over an eight-year period. Sales will be dependent upon annual
government funding and deployment decisions. Sales by our mobile data
communications services segment in fiscal 2000 and 1999 were approximately $2.2
million and $318,000, respectively.
Comtech Wireless, Inc. designed and manufactured wireless local loop
systems for the rural and remote telephony market. Due to disappointing results
and uncertain prospects, effective July 31, 1999, we adopted a plan to liquidate
Comtech Wireless, Inc. on or about January 31, 2000. The results of operations
for the segment have been shown as a discontinued operation in the consolidated
financial statements. Comtech Wireless, Inc. did not have any sales in fiscal
1999 and 2000.
In January 2000, we acquired certain assets and assumed certain
liabilities of Hill Engineering Inc. ("Hill") in exchange for 50,000 shares of
the Company's common stock. The acquisition is being accounted for under the
"purchase method of accounting". The purchase price amounted to approximately
$371,000 which principally represents the fair value of the initial 30,000
shares of common stock to be issued to Hill. The remaining 20,000 shares were
placed in escrow and will only be released to the sellers if certain profit
goals, as defined in the agreement are met and will be recorded at fair value on
the date when the profit goals are met. This business will operate in the RF
Microwave Amplifiers segment. The excess of the purchase price over the net
assets acquired of approximately $606,000 is included in intangible assets in
the accompanying consolidated balance sheet and is being amortized over a
15-year period.
In July 2000, we acquired the business of EFData, the satellite
communications division of Adaptive Broadband Corporation for cash. The
acquisition is being accounted for under the "purchase method" of accounting.
Accordingly, we allocated the purchase price to the assets purchased and the
liabilities assumed based upon the estimated fair values at the date of the
acquisition. The excess of the purchase price over the fair values of the net
assets acquired was approximately $26.2 million, of which $10.2 million was
allocated to in-process research and development and was expensed as of the
acquisition date, $7.5 million was valued as purchased technology, $3.6 million
was valued as other purchased intangibles which are being amortized over 5-7
years and
14
<PAGE>
$4.8 has been recorded as goodwill, which is being amortized over ten years.
Forty million dollars of the purchase price was supplied through institutional
secured borrowings bearing interest at 9.25% due in installments through 2005,
and the balance from internal company funds. (See notes 2 and 8 of the Notes to
Consolidated Financial Statements).
Results of Operations
The following table sets forth, for the periods indicated, certain income
and expense items expressed as a percentage of our net sales:
Year Ended July 31,
-------------------------
2000 1999 1998
---- ---- ----
Net sales 100% 100.0% 100.0%
Gross margin 30.9 30.3 29.2
Selling, general and administrative expenses 18.5 17.5 20.0
Research and development expenses 4.0 5.3 4.4
Operating income (loss) from continuing operations (7.0) 7.5 4.8
Interest expense (income), net (1.7) 0.4 0.7
Income (loss) before income taxes (5.6) 7.2 4.3
Net income (loss) (5.9) 13.9 3.7
The following table sets forth the percentage change in certain of our
income and expense items from fiscal 1998 to 1999, and 1999 to 2000,
respectively.
Year Ended July 31,
% Change % Change
from 1999 to 2000 from 1998 to 1999
----------------- -----------------
Net sales 75.4% 25.8%
Gross profit 78.6 30.7
Selling, general and administrative
expenses 84.0 9.0
Research and development expenses 30.8 53.3
Operating income (loss) from
continuing operations (264.4) 94.7
Interest expense 86.8 (12.8)
Interest income 2,224.6 80.6
Income (loss) before income taxes (236.4) 112.4
Net income (loss) (174.9) 376.9
Comparison of Fiscal 2000 and 1999
Net Sales Consolidated net sales were $66.4 million and $37.9 million for fiscal
2000 and 1999, respectively, representing an increase of $28.5 million or
approximately 75.4%. This increase was due primarily to increased sales by our
telecommunications transmission segment, principally to one customer, a major
U.S. prime contractor, of over-the-horizon microwave equipment. Sales to this
customer were $28.6 million and $10.2 million for fiscal 2000 and 1999,
respectively, representing 43.1% and 27.0% of consolidated net sales for fiscal
2000 and 1999, respectively. The total order received from this customer in
fiscal 1999 was approximately $43.6 million. The balance of $4.8 million is
expected to be recognized as revenue during fiscal 2001. There were no other
customers in fiscal 2000 or 1999 that represented 10% or more of consolidated
net sales. Included in the telecommunications transmission segment are products
for satellite earth stations. Sales of these products increased 162.5% due to
additional product offerings which were partly the result of our acquisition of
EF Data in July 2000. Sales from our RF microwave amplifier segment declined by
approximately 24.0% compared to fiscal 1999, due to the timing of the receipt of
expected follow-on orders. Sales from our mobile data communications services
segment increased from nominal sales, less than 1%, in fiscal 1999 to 3.3% of
consolidated net sales in fiscal 2000. International sales increased by
approximately $24.7 million or 107.9%, representing 71.4% and 60.1%, of total
net sales for fiscal
15
<PAGE>
2000 and 1999, respectively. Domestic sales increased by $4.0 million or 43.5%,
representing 19.8% and 24.3% of total net sales for fiscal 2000 and 1999,
respectively. U.S. government sales decreased by $65,000 or 1.1%, representing
8.8% and 15.6% of total net sales for fiscal 2000 and 1999, respectively.
Gross Profit Gross profit was $20.5 million and $11.5 million for fiscal 2000
and 1999, respectively, representing an increase of $9.0 million or
approximately 78.6%. The increase was due primarily to the increase in sales
volume in fiscal 2000 compared to fiscal 1999. Gross margin as a percentage of
net sales was 30.9% and 30.3% in fiscal 2000 and 1999, respectively, due
primarily to the increase in sales of products with lower per unit costs, which
yield higher gross margins.
Selling, General and Administrative Selling, general and administrative expenses
were $12.1 million and $6.6 million in fiscal 2000 and 1999, respectively,
representing an increase of $5.5 million or approximately 84.0%. This was due
primarily to the increase in costs associated with supporting increased sales
such as administrative, selling and marketing salaries and benefits, sales
commissions, travel and other related expenses. We also incurred additional
expenses related to our acquisition of EF Data including the integration of the
facilities and workforce.
Research and Development Research and development expenses were $2.6 million and
$2.0 million in fiscal 2000 and 1999, respectively, representing an increase of
$600,000 or approximately 30.8%. As an investment for the future we are
continually enhancing and developing new products and technologies. In fiscal
2000, the increase is due primarily to expenses incurred by our recently
acquired business, for the continuation of research and development for the
projects that were underway at the time of the acquisition. Whenever possible,
we seek customer funding for research and development to adapt our products to
specialized customer requirements. During fiscal 2000 and 1999, customers
reimbursed us $4.3 million and $1.8 million, respectively, which amounts are not
reflected in the reported research and development expenses.
In-Process Research and Development In connection with the purchase of EF Data,
$10.2 million of the purchase price was allocated to in-process research and
development. This allocation was part of the overall purchase price allocation
performed by an independent third party engaged by us. The value of in-process
research and development is based upon new product development projects that
were underway at the time of the acquisition and are expected to eventually lead
to new products but had not yet established technological feasibility and for
which no future alternative use was identified. Our financial statements for
fiscal 2000 include a one-time charge of $10.2 million for the write-off of this
amount in accordance with generally accepted accounting principles.
Operating Income (Loss) As a result of the foregoing factors, we had an
operating loss from continuing operations of $4.6 million for fiscal 2000 as
compared to operating income of $2.8 million for fiscal 1999, representing a
decrease of $7.4 million.
Interest Expense Interest expense was $381,000 and $204,000 for fiscal 2000 and
1999, respectively, representing an increase of $177,000 or 86.8%. The increase
in fiscal 2000 was due primarily to the interest on $40.0 million of long-term
debt that we incurred during July 2000 that was used to partially finance the EF
Data acquisition. The balance of interest expense in fiscal 2000 and all of the
interest expense in fiscal 1999 was interest associated with our capital lease
obligations.
Interest Income Interest income was $1.5 million and $65,000 for fiscal 2000 and
1999, respectively, representing an increase of $1.4 million. This increase was
due to the increase in the amount of cash available to invest during this period
primarily as a result of the proceeds received from a follow-on stock offering
completed in the third quarter of fiscal 2000. Interest income was primarily
derived from the short term investments of the cash on hand in excess of working
capital requirements.
Provision (Benefit) for Income Tax On income from continuing operations we had
an income tax provision of $85,000 in fiscal 2000 as compared to an income tax
benefit in fiscal 1999 of $3.8 million. Our income tax provision is calculated
according to the provisions of SFAS No. 109, "Accounting for Income Taxes". In
applying the provisions of SFAS No. 109, temporary differences due to the timing
of the deductibility of items for income tax purposes as compared to the timing
of deductibility for financial reporting purposes, are recorded as deferred tax
assets and liabilities. As a result of these temporary differences , our
effective tax rates were 2.2% and (137.6)% for fiscal 2000 and 1999,
respectively.
16
<PAGE>
Discontinued Operations We adopted a plan, effective as of July 31, 1999, to
liquidate our wireless local loop business. The loss from operations, net of a
tax benefit, for fiscal 2000, was $137,000.
Comparison of Fiscal 1999 and 1998
Net Sales Consolidated net sales were $37.9 million and $30.1 million for fiscal
1999 and 1998, respectively, representing an increase of $7.8 million or 25.8%.
This increase was due primarily to increased sales by our telecommunications
transmission segment of over-the-horizon microwave equipment, principally to one
customer, a major U.S. prime contractor. Total sales to this customer during
fiscal 1999 were approximately $10.2 million, representing 27.0% of the total
net sales. The total order received from this customer in fiscal 1999 was
approximately $43.6 million and the contract balance of approximately $33.4
million at July 31, 1999 is expected to be recognized as revenue in fiscal 2000
and 2001. There were no other customers for which total sales in fiscal 1999
represented 10% or more of net sales. In fiscal 1998, sales to a different
customer represented 12.2% of total net sales. Included in the
telecommunications transmission segment are sales of our satellite equipment
products, which increased in fiscal 1999 by approximately 65.8%, due to
additional product offerings. Sales from our RF microwave amplifier segment
declined by approximately 14.9% compared to fiscal 1998, due to the timing of
receipt of follow-on orders. International sales increased by approximately $8.8
million or 62.7%, representing 60.1% and 46.5% of total net sales for fiscal
1999 and 1998, respectively. Domestic sales decreased by $1.0 million or 9.9%,
representing 24.3% and 34.0%, of total net sales for fiscal 1999 and 1998,
respectively. U.S. government sales increased by $20,000 or .3%, representing
15.6% and 19.5% of total net sales for fiscal 1999 and 1998, respectively.
Gross Profit Gross profit was $11.5 million and $8.8 million for fiscal 1999 and
1998, respectively, representing an increase of $2.7 million or 30.7%. The
increase was due primarily to the increase in sales volume in fiscal 1999
compared to fiscal 1998. Gross margin as a percentage of net sales was 30.3% and
29.2% in fiscal 1999 and 1998, respectively, due primarily to increased sales of
products coupled with lower per unit costs.
Selling, General and Administrative Selling, general and administrative expenses
were $6.6 million and $6.0 million in the fiscal 1999 and 1998, respectively,
representing an increase of $541,000 or 9.0%. This increase was due primarily to
higher sales commissions, marketing personnel expenses, deferred compensation
and other administrative expenses. As a percentage of net sales, these expenses
were 17.3% and 20.0% in fiscal 1999 and 1998, respectively. Although increased
expenses were required to support the higher sales volume in fiscal 1999
compared to fiscal 1998, these expenses increased at a lower rate than the
increase in sales. In addition, the increased expenditures reflect those
required by our mobile data communications services segment, which was formed in
fiscal 1999.
Research and Development Research and development expenses were $2.0 million and
$1.3 million in fiscal 1999 and 1998, respectively, representing an increase of
$703,000 or 53.3%. We are continually enhancing and developing new products and
technologies. In fiscal 1999, the research and development expenses were
primarily for developing additional satellite product offerings and redesigning
components of over-the-horizon microwave products. Whenever possible, we seek
customer funding for research and development to adapt our products to
specialized customer requirements. During fiscal 1999 and 1998, we were
reimbursed $1.8 million and $356,000, respectively. These amounts are not
reflected in the reported research and development expenses.
Operating Income As a result of the foregoing factors, we had operating income,
from continuing operations, of $2.8 million and $1.5 million in fiscal 1999 and
1998, respectively, representing an increase of $1.4 million or 94.7%.
Interest Expense Interest expense was $204,000 and $234,000 for fiscal 1999 and
1998, respectively, representing a decrease of $30,000 or 12.8%. Interest
expense in both years was due primarily to interest associated with our capital
lease obligations.
Interest Income Interest income was $65,000 and $36,000 for fiscal 1999 and
1998, respectively, representing an increase of $29,000 or 80.6%. The increase
was due primarily to the increase in the amount of cash available to invest in
fiscal 1999 as compared to fiscal 1998. Interest income was primarily derived
from the cash on hand in
17
<PAGE>
excess of working capital requirements that is invested in highly liquid,
short-term money-market funds consisting primarily of direct obligations of the
U.S. government.
Provision (Benefit) for Income Tax The benefit for income taxes applicable to
continuing operations in fiscal 1999 was $3.8 million compared to the provision
for income taxes of $180,000 in fiscal 1998. Due to our net operating loss
carryforwards and other temporary differences between recognition of income for
financial reporting and income tax purposes, we had deferred tax assets of $5.4
and $5.3 million in fiscal 1999 and 1998, respectively. As of July 31, 1998, we
assessed a 100% valuation allowance against this deferred tax asset. During
fiscal 1999, we concluded that a full valuation allowance was no longer
necessary given our estimates of future earnings based on substantial new
contracts entered into and the expected timing of temporary difference
reversals. Accordingly, we reduced the valuation allowance to $777,000 during
fiscal 1999. The effect of this change resulted in a tax benefit to us in fiscal
1999 of $4.6 million, which was partially offset by the provision for the fiscal
1999 income tax expense.
Discontinued Operation We adopted a plan, effective as of July 31, 1999, to
liquidate our wireless local loop business. The loss from operations, net of a
tax benefit, for fiscal 1999, was $622,000. The loss on the disposition of the
segment, net of a tax benefit, was $594,000, which includes a provision of
$430,000 for operating losses expected to be incurred during the phase-out
period.
Liquidity and Capital Resources
Our cash and cash equivalent position increased by $6.7 million, from $5.9
million at July 31, 1999 to $12.6 million at July 31, 2000. We had marketable
investment securities of $18.6 million at July 31, 2000 whereas at July 31,
1999, we did not have any investment in marketable securities. In January 2000,
we acquired the assets and assumed certain liabilities of Hill Engineering, Inc.
in exchange for 50,000 shares of our common stock. During the third quarter of
fiscal 2000, we completed a public offering of 2.6 million shares of our common
stock resulting in net proceeds to us of approximately $42.4 million. In July
2000, we acquired the business of EF Data, a division of Adaptive Broadband
Corp. for which we paid $61.5 million, subject to post closing adjustments. We
financed the acquisition with the proceeds of $40.0 million of secured long-term
debt and the remainder of the purchase price was paid out of our then existing
cash balances. We also incurred acquisition costs of approximately $1.9 million.
Subsequent to the end of fiscal 2000, the post closing adjustments were
completed and we received $9.0 million in September 2000 from the seller. This
amount is reflected in the financial statements for fiscal 2000 as other
receivables.
For the year ended July 31, 2000, cash provided by operating activities,
net of the assets and liabilities acquired from Hill Engineering Inc. and EF
Data, was $8.0 million. Cash used in investing activities was $83.3 million and
cash provided by financing activities was $82.1 million. Working capital at July
31, 2000 was $65.3 million.
Excluding the amounts acquired through our acquisitions in fiscal 2000,
our accounts receivable increased by $2.1 million from July 31, 1999 to July 31,
2000, due primarily to the timing of shipments, and the subsequent collections
of the related receivable in the following fiscal period. The allowance for
doubtful accounts of $145,000 at July 31, 2000 remained the same as July 31,
1999. We review our allowance for doubtful accounts periodically and believe it
adequately reflects the collectibility of our receivables based on past
experience and our credit standards. Generally, foreign customers are required
to secure payment by an irrevocable letter of credit before an order is
accepted. As the amount of accounts receivable acquired through recent
acquisitions is significantly higher than previous amounts, we have secured a
credit insurance policy in the amount of $10.0 million for certain foreign
receivables.
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Excluding the amounts acquired through our acquisitions, in fiscal 2000,
inventory increased by $4.6 million from July 31, 1999 to July 31, 2000
primarily due to increased demand for orders of our products which require
shorter delivery times and therefore the necessity to maintain higher levels of
inventory. We generally operate on a job-order cost basis, that is, costs are
incurred as work-in-process inventory for specific contracts or jobs.
Accordingly, inventory levels will vary as a function of our order backlog. Some
of our product lines require a more rapid delivery response to customers'
requirements and require us to provide for a level of "off-the-shelf" equipment
inventory availability. The only other general inventory that we maintain is for
basic components which are common to many of our products.
Excluding the amounts acquired through our acquisitions in fiscal 2000,
accounts payable increased by $3.0 million from July 31, 1999 to July 31, 2000
primarily due to an increase of inventory purchases.
Excluding the amounts acquired through our acquisitions, accrued expenses
and other current liabilities increased by $3.1 million due primarily to
increased warranty reserves and higher accrued commissions, both due primarily
to the higher sales level.
During fiscal 2000, we made leasehold improvements and purchases of
machinery and equipment of $1.8 million, of which $567,000 was financed by
capital leases.
At July 31, 2000, we had capital lease obligations, including current
portion, of $1.5 million. Our long-term debt, including current portion, is
$40.0 million. It is payable over a five-year period and bears an interest rate
of 9.25%. Other long-term liabilities are for deferred revenue related to an
extended warranty contract.
Our bank credit facility was terminated as of July 10, 2000 as a result of
our securing long-term financing of $40.0 million in connection with our
acquisition of EF Data. We believe that our cash and cash equivalents and short
term investments will be sufficient to meet our operating cash requirements for
at least the next year.
Year 2000 Compliance
To date, the Company has not encountered any significant effects of the
Y2K problems either internally or with third parties. This does not guarantee
that problems will not occur in the future or have not yet been detected.
Risk Factors
Many statements in this Form 10-K constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking statements
include:
o Statements of goals, intentions and expectations;
o Estimates of risks and of future costs and benefits; and
o Statements of the ability to achieve financial and other goals.
These forward-looking statements are subject to significant uncertainties
because they are based upon or are affected by:
o Management's estimates and projections of U.S. and international
economic and business conditions; and
o Future laws and regulations; and
o A variety of other matters, including those described below
Because of these uncertainties, actual future results may be materially
different from the results indicated by these forward-looking statements, which
are inherently predictive and speculative. The following are some of the risks
that could cause actual results to differ significantly from those expressed or
implied by such statements.
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All of our businesses are subject to rapid technological change; we must keep
pace with changes to compete successfully.
We are engaged in businesses characterized by rapid technological change,
evolving industry standards, frequent new product announcements and
enhancements, and changing customer demands. The introduction of products and
services embodying new technologies and the emergence of new industry standards
could render our products and services obsolete or non-competitive. The
technology used in our products and services evolves rapidly, and our business
position depends, in large part, on the continuous refinement of our scientific
and engineering expertise and the development, either through internal research
and development or acquisitions, of new or enhanced products and technologies.
We may not have the economic or technological resources to be successful in such
efforts and we may not be able to identify and respond to technological
improvements made by our competitors in a timely or cost-effective fashion. A
significant technological breakthrough by others, including smaller competitors
or new firms, could have a material adverse impact on our business.
Our mobile data communications services business is subject to risk.
Our mobile data communications services business has a limited operating
history and to date has generated modest sales. It is subject to all of the
risks inherent in the operation of a new business enterprise. Moreover, our
business experience has been in producing products, not in providing services.
We may not be able to implement and operate our mobile data communications
services business successfully. In addition to the other risk factors described
in this section, the risk factors applicable to our mobile data communications
services business include the following:
o Although the U.S. Army contract obligates us to provide up to 56,000
mobile terminals and worldwide satellite services over an eight year
period as and when ordered by the U.S. Army and at the fixed prices
and other terms set forth in this contract, the U.S. Army is not
obligated to purchase any terminals or services under this contract
and may terminate this contract at its convenience. Sales under the
U.S. Army contract will be subject to unpredictable funding and
deployment decisions. We received our first production orders under
this contract in July 2000 for $3.1 million, but we cannot assure
you that any further orders will be received.
o Certain components that we need have purchasing lead-time of four
months or longer, and the U.S. Army contract requires us to provide
mobile terminals within 30 days after we receive an order.
o Our success in commercial markets will depend on, among other
things, our ability to access the best distribution channels, the
development of applications which create real value for the customer
and our ability to attract and retain qualified personnel. Delays in
delivering terminals could also adversely affect our ability to
obtain and retain commercial customers.
o In general, as we seek to grow our mobile data communications
services business, we anticipate that we will need to maintain a
substantial inventory in order to provide terminals to our customers
on a timely basis. If forecasted orders are not received, we might
be left with large inventories of slow moving or unusable parts or
terminals. This could result in an adverse effect on our business,
results of operations, liquidity and financial position.
o We will lease the satellite capacity necessary to operate our system
from third party satellite networks. We currently have a long-term
lease with a satellite network operator (TMI) for satellite coverage
in North America, Central America and the northern rim of South
America. While several vendors have announced plans for new
satellite systems, only one provider, INMARSAT, presently offers the
global coverage that will be required under the U.S. Army contract.
We cannot assure you that we will be able to obtain sufficient
satellite capacity or geographical coverage from any vendor to
operate our mobile data communications services system on acceptable
terms or on a timely basis.
o There are several existing competitors in the mobile data
communications market that have established systems with sizable
customer bases and much greater financial resources than us. The
largest of these competitors is QUALCOMM Incorporated, which
reported that it had sold more than 350,000 mobile
20
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terminals and provided messaging and maintenance services to more
than 850 transportation companies in the United States. Existing
competitors, including terrestrial service providers such as PCS
vendors, are also aggressively pricing their products and services
and may continue to do so in the future. Competitors continue to
offer new value added products and services, which we may be unable
to match on a timely or cost effective basis. Increased competition
may impact margins throughout the industry. We anticipate that new
competitors will enter the mobile data communications market in the
future.
o We have been granted authority by the Federal Communications
Commission ("FCC") to provide satellite packet data communications
services in the United States on a commercial basis for up to 5000
mobile terminals pursuant to Special Temporary Authority. Our
application for a blanket FCC license to operate up to 25,000 mobile
data terminals is pending.
o All satellite communications are subject to the risk that a
satellite or ground station failure or a natural disaster may
interrupt service. Interruptions in service could have a material
adverse effect on our results of operations. With respect to U.S.
satellite service, satellite network providers have arranged to
provide back-up satellite and ground station service for each other
in the event of catastrophic failure. We expect to establish a
redundant gateway communications center located distant from our
main Germantown facility during fiscal 2001 as our business develops
at an estimated cost of $250,000.
o Our mobile terminals will be manufactured by subcontractors, the
first of which is SCI Systems, Inc. of Huntsville, Alabama, a large
electronics contract manufacturer. While we have successfully
produced limited quantities of terminals, we have not yet produced
significant quantities of terminals or complete assemblies (which
include computers and palm top input/output devices for
user-customized applications) and we cannot assure you that we will
be able to obtain them on a timely or cost-effective basis.
o We believe that we own or have licensed all intellectual property
rights necessary for the operation of our mobile data communications
services business as currently contemplated. If our terminals or
services are found to infringe on protected technology, we could be
required to redesign our terminals, license the protected
technology, and/or pay damages or other compensation to the
infringed party. If we are unable to license protected technology
used in our terminals or if we were required to redesign our
terminals, we could be prohibited from making and selling our
terminals or providing mobile data communications services.
Due to many factors, including the amount of business represented by large
contracts, our operating results are difficult to forecast and may be volatile.
We have experienced, and will experience in the future, significant
fluctuations in sales and operating results from quarter to quarter. One reason
for this is that a significant portion of our business - primarily the
over-the-horizon microwave systems and other products of our telecommunications
transmission business segment and a portion of our RF microwave amplifier
business segment - is derived from a limited number of relatively large customer
contracts, the timing of which cannot be predicted. For example, sales to one
customer represented 43.1% of our total net sales in fiscal 2000. While we
generally recognize income under contracts when the products are shipped, income
is recognized on the percentage-of-completion method when the performance of a
contract will extend beyond a 12-month period. Our net sales and operating
results also may vary significantly from period to period because of the
following factors: product mix sold; fluctuating market demand; price
competition; new product introductions by our competitors; fluctuations in
foreign currency exchange rates; unexpected changes in delivery of components or
subsystems; political instability; regulatory developments; and general economic
conditions. Accordingly, you should not rely on period-to-period comparisons as
indications of our future performance because these comparisons may not be
meaningful.
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Our dependence on international sales may adversely affect us.
Sales for use by international customers (including sales to prime
contractors' international customers) represented approximately 46.5%, 60.1% and
71.4% of our total net sales for the fiscal years ended July 31, 1998, 1999 and
2000, respectively. Approximately 62.7% of our backlog at July 31, 2000
consisted of orders for use by foreign customers. We expect that international
sales will continue to be a substantial portion of our total sales. These sales
expose us to certain risks, including barriers to trade, fluctuations in foreign
currency exchange rates (which may make our products less price competitive),
political and economic instability, availability of suitable export financing,
tariff regulations, and other U.S. and foreign regulations that may apply to the
export of our products and the generally greater difficulties of doing business
abroad. We attempt to reduce the risk of doing business in foreign countries by
seeking subcontracts with large system suppliers, contracts denominated in U.S.
dollars, advance payments and irrevocable letters of credit in our favor.
Foreign defense contracts generally contain provisions relating to
termination at the convenience of the government. In addition, certain of our
products and systems may require licenses from U.S. government agencies for
export from the United States, and some of our products are not permitted to be
exported. We cannot be sure of our ability to gain any licenses that may be
required to export our products, and failure to receive required licenses could
materially reduce our ability to sell our products outside the United States.
Our dependence on component availability, subcontractor availability and
performance and key suppliers may adversely affect us.
We do not generally maintain a substantial inventory of components and
subsystems. We obtain certain components and subsystems from a single source or
a limited number of sources, but believe that most components and subsystems are
available from alternative suppliers and subcontractors. A significant
interruption in the delivery of such items, however, could have a material
effect on our business and results of operations.
Our backlog is subject to customer cancellation or modification.
We currently have a backlog of orders, mostly under contracts that the
customer may modify or terminate. We cannot assure you that our backlog will
result in net sales.
Our sales to the U.S. government are subject to funding and other risks.
We sell our products and services to agencies of the U.S. government or to
contractors or subcontractors under contracts with U.S. agencies. These sales
accounted for approximately, 19.5%, 15.6% and 8.8% or our total net sales in
fiscal 1998, 1999 and 2000, respectively. As a result of our contract with the
U.S.Army, we expect sales to agencies of the U.S. government to increase
significantly in the future. As is customary for government sales, these sales
are subject to various risks. These risks include the ability of the U.S.
government to:
o change government policy which could reduce our business;
o terminate existing contracts for its convenience; and
o audit our contract-related costs and fees, including allocated
indirect costs.
A reduction in government agency budgets could cause us to experience
declining net sales, increased pressure on operating margins and, in certain
cases, net losses. The loss or significant cutback of a large program in which
we participate could also materially adversely affect our future results of
operations.
All of our U.S. government contracts can be terminated by the U.S.
government for its convenience. Termination for convenience provisions provide
only for our recovery of costs incurred or committed, settlement expenses and
profit on work completed prior to termination. In addition to the right of the
U.S. government to terminate, U.S. government contracts are conditioned upon the
continuing approval by Congress of the necessary spending. Congress usually
appropriates funds for a given program on a fiscal-year basis even though
contract performance may take more than one year. Consequently, at the beginning
of a major program, the contract is
22
<PAGE>
usually not fully funded, and additional monies are normally committed to the
contract only if, as and when appropriations are made by Congress for future
fiscal years.
The U.S. government may review our costs and performance on their
contracts, as well as our accounting and general business practices. Based on
the results of such audits, the U.S. government may adjust our contract-related
costs and fees, including certain financing costs, goodwill, portions of
research and development costs, and certain marketing expenses, may not be
reimbursable under U.S. government contracts.
We obtain U.S. government contracts through a competitive bidding process.
We cannot assure you that we will continue to win competitively awarded
contracts or that awarded contracts will generate sufficient net sales to result
in profitability.
Acquisitions and strategic investments may divert our resources and management
attention; results may fall short of expectations.
We intend to continue pursuing selected acquisitions of and investments in
businesses, technologies and product lines as a key component of our growth
strategy. Any future acquisition or investment may result in the use of
significant amounts of cash, potentially dilutive issuances of equity
securities, incurrence of debt and amortization expenses related to goodwill and
other intangible assets. Acquisitions involve numerous risks, including:
o difficulties in the integration and assimilation of the
operations, technologies, products and personnel of an
acquired business.
o diversion of management's attention from other business
concerns; and
o potential loss of key employees or customers of any acquired
business.
Our fixed price contracts subject us to risk.
Almost all of our products and services are sold under fixed price
contracts. This means that we bear the risk if unanticipated technological,
manufacturing, supply or other problems or price increased delay or increase the
cost of performance.
Our markets are highly competitive.
The markets for our products are highly competitive. We cannot assure you
that we will be able to successfully compete or that our competitors will not
develop new technologies and products that are more commercially effective than
our own. We expect the Department of Defense's increased use of commercial
off-the-shelf products and components in military equipment will encourage new
competitors to enter the market. Also, although the implementation of advanced
telecommunications services is in its early stages in many developing countries,
we believe competition may intensify as businesses and foreign governments
realize the market potential of telecommunications services. Many of our
competitors have financial, technical, marketing, sales and distribution
resources greater than ours.
The loss of key technical or management personnel could adversely affect our
business.
Our success depends on the continued contributions of key technical
management personnel, including the key management at each of our subsidiaries.
Many of our key personnel, particularly the key engineers of our subsidiaries,
would be difficult to replace, and are not subject to employment or
noncompetition agreements. The development of our mobile data communications
services business is particularly dependent upon Joel R. Alper, the President of
our Comtech Mobile Datacom Corp. subsidiary. The success of our Comtech Systems,
Inc. subsidiary is particularly dependent upon Richard L. Burt, its President.
Our growth and future success will depend in large part upon our ability to
attract and retain highly qualified engineering, sales and marketing personnel.
Competition
23
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for such personnel from other companies, academic institutions, government
entities and other organizations is intense. Although we believe that we have
been successful to date in recruiting and keeping key personnel, we may not be
successful in attracting and retaining the personnel we will need to continue to
grow and operate profitably. Also, the management skills that have been
appropriate for us in the past may not continue to be appropriate if we continue
to grow and diversify.
Our success also depends to a significant extent upon our President and
Chief Executive Officer, Fred Kornberg. The loss of the services of Mr. Kornberg
could have a material adverse effect on us. We have entered into an employment
contract with Mr. Kornberg. We have also purchased key man insurance in the
amount of $1.0 million on each of Fred Kornberg, Joel R. Alper and Richard L.
Burt.
Protection of our intellectual property is limited; we are subject to the risk
of third party claims of infringement.
Our businesses rely in large part upon our proprietary scientific and
engineering "know-how" and production techniques. Historically, patents have not
been an important part of our protection of our intellectual property rights. We
rely upon the laws of unfair competition, restrictions in licensing agreements
and confidentiality agreements to protect our intellectual property. We limit
access to and distribution of our proprietary information. These efforts allow
us to rely upon the knowledge and experience of our management and technical
personnel to market our existing products and to develop new products. The
departure of any of our key management and technical personnel, the breach of
their confidentiality and non-disclosure obligations to us or the failure to
achieve our intellectual property objectives may have a material adverse effect
on our business, financial condition and results of operations.
Our ability to compete successfully and achieve future revenue growth will
depend, in part, on our ability to protect our proprietary technology and
operate without infringing upon the rights of others. We may fail to do so. In
addition, the laws of certain countries in which our products are or may be sold
may not protect our products and intellectual property rights to the same extent
as the laws of the United States.
Our operations are subject to environmental regulation.
We are subject to a variety of local, state and federal governmental
regulations relating to the storage, discharge, handling, emission, generation,
manufacture and disposal of toxic or other hazardous substances used to
manufacture our products, particularly in the fabrication of fiberglass antennas
by our Comtech Antenna Systems, Inc. subsidiary. We believe that we are
currently in compliance in all material respects with such regulations and that
we have obtained all necessary environmental permits to conduct our business.
Nevertheless, the failure to comply with current or future regulations could
result in the imposition of substantial fines, suspension or production,
alteration of our manufacturing processes or cessation of operations that could
materially adversely affect our business, financial condition and results of
operations.
Our stock price is volatile.
The stock market in general, and the stock prices of technology-based
companies in particular, have experienced extreme volatility that often has been
unrelated to the operating performance of any specific public companies. The
market price of our common stock has fluctuated significantly in the past and is
likely to fluctuate significantly in the future as well. Factors that may have
significant impact on the market price of our stock include:
o future announcements concerning us or our competitors;
o receipt or non-receipt of substantial orders for products and
services;
o results of technological innovations;
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o new commercial products;
o changes in recommendations of securities analysts;
o government regulations;
o proprietary rights or product or patent litigation;
o changes in market conditions generally, particularly in the
market for small cap stocks; and
o limited public float.
Shortfalls in our revenues or earnings in any given period relative to the
levels expected by securities analysts could immediately, significantly and
adversely affect the trading price of our common stock.
We have never declared or paid dividends.
We have never declared or paid a cash dividend and do not intend to
declare any cash dividends on our common stock in the foreseeable future.
ITEM 7A. QUANTATATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to
changes in interest rates primarily from its investment of available cash
balances in money market funds. Under its current policies, the Company does not
use the interest rate derivative instruments to manage exposure to interest rate
changes.
The Company's exposure to debt price risk relates to its investment in a
mutual fund which primarily invests in debt securities. At July 31, 2000, this
investment was considered available-for-sale with any unrealized gains or losses
deferred as a component of accumulated other comprehensive income. The Company
is subject to debt price risk associated with this investment which could
ultimately affect the Company's available cash flow from that investment as well
as realized gains and losses upon the ultimate sale of its investment in the
mutual fund.
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 12, 2000 (the "Proxy
Statement") which will be filed with the Securities and Exchange Commission no
more than 120 days after the close of its fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference
to the Proxy Statement, which will be filed with the Securities and Exchange
Commission no more than 120 days after the close of its fiscal year.
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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 Proxy Statement, which will be
filed with the Securities and Exchange Commission no more than 120 days after
the close of its fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated by reference to the Company's Proxy Statement which will be filed
with the Securities and Exchange Commission no more than 120 days after the
close of its fiscal year.
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) In July 2000, and as amended in September 2000, the Company filed a
report on Form 8-K with respect to the acquisition of EF Data, the
satellite communications division of Adaptive Broadband Company.
(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 Registrant's 1991 Form
to 1 reverse stock split 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 Form
authorized shares to 12 million 10-K
3(e) Amendment to the Certificate of Exhibit 3(e) to
Incorporation increasing the Registrant's 1998 Form
authorized shares to 17 million 10-K
3(f) Form of Certificate of Exhibit 4(1) to the
Designation of the Series A Registrant's Form 8-A/A
Junior Participating Preferred dated December 23, 1998
Stock
3(g) Amendment to the Certificate of
Incorporation increasing the
authorized shares to 32 million
4(a) Rights Agreement dated as of Exhibit 4(1) to the
December 15, 1998 Exhibit 4(1) Registrant's Form 8-A/A
to the Registrant's Form dated December 23, 1998
between the Registrant and
American Stock 8-A/A dated
December 23, 1998 Transfer and
Trust Company, as Rights Agent
10(a) Amended and restated Employment Exhibit 10(a) of the
Agreement dated January 14, Registrant's 1998 Form
1998 between the Registrant and 10-K
Fred 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 Exhibit 10(k) to the
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
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Statement dated
November 3, 1997
10(e) Time Accelerated Restricted Exhibit 10(j) to the
Stock Purchase Agreements Registrant's 1994 Form
between Registrant and 10-K
Principals of Comtech
Communications Corp. operating
unit
10(f) Time Accelerated Restricted Exhibit 10(f) to the
Stock Purchase Agreements Registrant's 1999 Form
between Registrant and 10-K
Principals of Comtech Mobile
Datacom Corp. operating unit
10(g) Movement Tracking System Exhibit 10(g) to the
Contract between Comtech Mobile Registrant's 1999 Form
Datacom Corp. and U.S. Army's 10-K
CECOM Acquisition Center dated
June 24, 1999 (certain portions
of this agreement have been
omitted and filed separately
with the Securities and
Exchange Commission pursuant to
a request for confidential
treatment)
10(h) License Agreement between Exhibit 10(h) to the
Vistar Telecommunications Inc. Registrant's 1999 Form
and Comtech Mobile Datacom 10-K
Corp. dated August 31, 1999
(certain portions of this
agreement have been omitted and
filed separately with the
Securities and Exchange
Commission pursuant to a
request for confidential
treatment)
10(i) 2000 Stock Incentive Plan Appendix A to the
Registrant's Proxy
Statement dated
November 8, 1999.
10(j) Amended and Restated Asset Exhibit 2.1 to the
Purchase Agreement between the Registrants Form 8-K
Registrant and Adaptive dated July 10, 2000.
Broadband Corporation dated as
of July 10, 2000
10(k) Loan and Security Agreement
between the Registrant and The
Teachers' Retirement System of
Alabama, The Employees'
Retirement System of Alabama,
The Alabama Heritage Trust
Fund, PEIRAF-Deferred
Compensation Plan and State
Employees' Health Insurance
Fund, dated July 7, 2000
21 Subsidiaries of the Registrant
23 Consent of KPMG LLP
27 Financial Data Schedule
Exhibits to this Annual Report on Form 10-K are available from the Company upon
request and payment to the Company for the cost of reproduction.
27
<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 19, 2000 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 19, 2000 s/ Fred Kornberg Chairman of the Board Chief
----------------- ----------------------- Executive Officer and President
(Date) Fred Kornberg (Principal Executive Officer)
October 19, 2000 s/ J. Preston Windus Senior Vice President
----------------- ----------------------- Chief Financial Officer
(Date) J. Preston Windus
October 19, 2000 s/ George Bugliarello Director
----------------- -----------------------
(Date) George Bugliarello
October 19, 2000 s/ Richard L. Goldberg Director
----------------- -----------------------
(Date) Richard L. Goldberg
October 19, 2000 s/ Gerard R. Nocita Director
----------------- -----------------------
(Date) Gerard R. Nocita
October 19, 2000 s/ John B. Payne III Director
----------------- -----------------------
(Date) John B. Payne III
October 19, 2000 s/ Sol S. Weiner Director
----------------- -----------------------
(Date) Sol S. Weiner
28
