Exhibit 21
SUBSIDIARIES
The following is a list of the subsidiaries of the Company as of October 20,
2000:
Subsidiary State of Incorporation
---------- ----------------------
Telecommunications Transmission Business Segment
CASI - Comtech Antenna Systems, Inc. Delaware
CEFD - Comtech EF Data Corp. Delaware
CSI - Comtech Systems, Inc. Delaware
RF Microwave Amplifier Business Segment
CPST - Comtech PST Corp. New York
Mobile Data Communications Services Business Segment
CMDC - Comtech Mobile Datacom Corp. Delaware
29
<PAGE>
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedule
Page
----
Independent Auditors' Report F-2
Consolidated Financial Statements:
Balance Sheets at July 31, 2000 and 1999 F-3
Statements of Operations for each of the years in the
three-yearperiod ended July 31, 2000 F-4
Statements of Stockholders' Equity for each of the years
in the three-year period ended July 31, 2000 F-5
Statements of Cash Flows for each of the years in the
three-year period ended July 31, 2000 F-6, F-7
Notes to Consolidated Financial Statements F-8 - F-21
Additional Financial Information Pursuant to the Requirements
of Form 10-K:
Schedule II - Valuation and Qualifying Accounts and Reserves S-1
Schedules not listed above have been omitted because they are
either not applicable or the required information has been
given elsewhere in the consolidated financial statements or
notes thereto
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Comtech Telecommunications Corp.:
We have audited the consolidated financial statements of Comtech
Telecommunications Corp. and subsidiaries as listed in the accompanying index.
In connection with our audits of the consolidated financial statements, we also
audited the financial statement schedule II as listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Comtech
Telecommunications Corp. and subsidiaries as of July 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended July 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule II, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG LLP
Melville, New York
October 19, 2000
F-2
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 2000 and 1999
<TABLE>
<CAPTION>
Assets 2000 1999
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,587,000 5,896,000
Marketable investment securities 18,634,000 --
Accounts receivable, less allowance for doubtful accounts of $806,000 in 2000
and $145,000 in 1999 24,204,000 5,152,000
Other receivables 9,038,000 --
Inventories, net 26,170,000 7,879,000
Prepaid expenses and other current assets 583,000 138,000
Deferred tax asset - current 3,125,000 1,658,000
------------- -------------
Total current assets 94,341,000 20,723,000
Property, plant and equipment, net 10,738,000 4,310,000
Intangible assets, net of accumulated amortization of $308,000 in 2000
and $78,000 in 1999 17,669,000 1,623,000
Other assets 468,000 274,000
Deferred tax asset - non current 2,815,000 2,917,000
------------- -------------
Total assets $ 126,031,000 29,847,000
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 2,100,000 --
Current installments of capital lease obligations (including payable
to related party of $347,000 in 2000 and $316,000 in 1999) 608,000 605,000
Accounts payable 11,260,000 3,763,000
Accrued expenses and other current liabilities 13,657,000 5,831,000
Income tax payable 1,449,000 195,000
Net liabilities of discontinued operation -- 137,000
------------- -------------
Total current liabilities 29,074,000 10,531,000
Capital lease obligations, less current installments (including payable
to related party of $154,000 in 2000 and $501,000 in 1999) 908,000 959,000
Long-term debt, less current installments 37,900,000 --
Other long-term liabilities 367,000 --
------------- -------------
Total liabilities 68,249,000 11,490,000
Stockholders' equity:
Preferred stock, par value $.10 per share; shares authorized and
unissued 2,000,000 -- --
Common stock, par value $.10 per share; authorized 30,000,000 shares,
issued 7,349,176 shares in 2000 and 4,471,368 shares in 1999 735,000 447,000
Additional paid-in capital 66,740,000 23,801,000
Accumulated other comprehensive income (113,000) --
Accumulated deficit (8,687,000) (4,746,000)
------------- -------------
58,675,000 19,502,000
Less:
Treasury stock (82,500 shares in 2000 and 1999) (184,000) (184,000)
Deferred compensation (709,000) (961,000)
------------- -------------
Total stockholders' equity 57,782,000 18,357,000
------------- -------------
Total liabilities and stockholders' equity $ 126,031,000 29,847,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended July 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Commitments and contingencies
Net sales $ 66,444,000 37,886,000 30,114,000
------------ ------------ ------------
Costs and expenses:
Cost of sales 45,942,000 26,405,000 21,330,000
Selling, general and administrative 12,058,000 6,554,000 6,013,000
Research and development 2,644,000 2,022,000 1,319,000
In-process research and development 10,218,000 -- --
Amortization of intangibles 230,000 78,000 --
------------ ------------ ------------
71,092,000 35,059,000 28,662,000
------------ ------------ ------------
Operating income (loss) from continuing operations (4,648,000) 2,827,000 1,452,000
Other expenses (income):
Interest expense 381,000 204,000 234,000
Interest income (1,511,000) (65,000) (36,000)
Other 201,000 (39,000) (30,000)
------------ ------------ ------------
Income (loss) from continuing operations before income taxes (3,719,000) 2,727,000 1,284,000
Provision (benefit) for income taxes 85,000 (3,754,000) 180,000
------------ ------------ ------------
Income (loss) from continuing operations (3,804,000) 6,481,000 1,104,000
Discontinued operations (Note 13):
Loss from operations of discontinued segment
(net of applicable income tax benefit of $79,000 in 2000
and $320,000 in 1999) (137,000) (622,000) --
Loss on disposal of segment, including provision in 1999
of $430,000 for operating losses during phase-out period
(net of applicable income tax benefit of $306,000) -- (594,000) --
------------ ------------ ------------
Net income (loss) $ (3,941,000) 5,265,000 1,104,000
============ ============ ============
Basic income (loss) per share:
Income (loss) from continuing operations $ (0.67) 1.56 0.28
Loss from discontinued operations (0.02) (0.29) --
------------ ------------ ------------
Basic income (loss) per share $ (0.69) 1.27 0.28
============ ============ ============
Diluted income (loss) per share:
Income (loss) from continuing operations $ (0.67) 1.42 0.27
Loss from discontinued operations (0.02) (0.27) --
------------ ------------ ------------
Diluted income (loss) per share $ (0.69) 1.15 0.27
============ ============ ============
Weighted average number of common shares outstanding-
Basic computation 5,663,000 4,143,000 3,902,000
Potential dilutive common shares -- 430,000 264,000
------------ ------------ ------------
Weighted average number of common and common equivalent
Shares outstanding assuming dilution -
Diluted computation 5,663,000 4,573,000 4,166,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended July 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Common Stock
------------
Accumulated
Additional other
paid-in comprehensive Accumulated
Shares Amount capital income deficit
------ ------ ------- ------ -------
<S> <C> <C> <C> <C>
Balance July 31, 1997 3,975,606 $ 398,000 $ 21,994,000 -- $(11,115,000)
Amortization of deferred compensation -- -- -- -- --
Stock options exercised 32,400 3,000 61,000 -- --
Net income -- -- -- -- 1,104,000
--------- ------------ ------------ ------------ ------------
Balance July 31, 1998 4,008,006 401,000 22,055,000 -- (10,011,000)
Amortization of deferred
compensation -- -- -- -- --
Stock issued in acquisition of
Mobile Datacom 150,000 15,000 513,000 -- --
Restricted shares issued pursuant to
employment stock award agreement 225,000 22,000 1,034,000 -- --
Stock options exercised 88,362 9,000 199,000 -- --
Net income -- -- -- -- 5,265,000
--------- ------------ ------------ ------------ ------------
Balance July 31, 1999 4,471,368 447,000 23,801,000 -- (4,746,000)
Amortization of deferred
compensation -- -- -- -- --
Stock issued in acquisition of
Hill Engineering 30,000 3,000 368,000 -- --
Stock options exercised 188,117 18,000 404,000 -- --
Unrealized loss on securities net of
reclassification adjustment -- -- -- (113,000) --
Warrants issued 14,691 1,000 (1,000) -- --
Shares issued in connection
with public offering 2,645,000 266,000 42,168,000 -- --
Net loss -- -- -- -- (3,941,000)
--------- ------------ ------------ ------------ ------------
Balance July 31, 2000 7,349,176 $ 735,000 $ 66,740,000 $ (113,000) $ (8,687,000)
========= ============ ============ ============ ============
<CAPTION>
Treasury stock
--------------
Stock- Comprehen-
Deferred holders' sive
Shares Amount compensation equity income
------ ------ ------------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance July 31, 1997 82,500 $ (184,000) $ (215,000) $ 10,878,000 $ --
Amortization of deferred compensation -- -- 47,000 47,000 --
Stock options exercised -- -- -- 64,000 --
Net income -- -- -- 1,104,000 1,104,000
------ ------------ ------------ ------------ ------------
Balance July 31, 1998 82,500 (184,000) (168,000) 12,093,000 1,104,000
Amortization of deferred
compensation -- -- 248,000 248,000 --
Stock issued in acquisition of
Mobile Datacom -- -- -- 528,000 --
Restricted shares issued pursuant to
employment stock award agreement -- -- (1,041,000) 15,000 --
Stock options exercised -- -- -- 208,000 --
Net income -- -- -- 5,265,000 5,265,000
------ ------------ ------------ ------------ ------------
Balance July 31, 1999 82,500 (184,000) (961,000) 18,357,000 5,265,000
Amortization of deferred
compensation -- -- 252,000 252,000 --
Stock issued in acquisition of
Hill Engineering -- -- -- 371,000 --
Stock options exercised -- -- -- 422,000 --
Unrealized loss on securities net of
reclassification adjustment -- -- -- (113,000) (113,000)
Warrants issued -- -- -- -- --
Shares issued in connection
with public offering -- -- -- 42,434,000 --
Net loss -- -- -- (3,941,000) (3,941,000)
------ ------------ ------------ ------------ ------------
Balance July 31, 2000 82,500 $ (184,000) $ (709,000) $ 57,782,000 $ (4,054,000)
====== ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,941,000) 5,265,000 1,104,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss from discontinued operations 137,000 1,216,000 --
Loss on sale of marketable investment securities 201,000 -- --
Unrealized loss on marketable investment securities (113,000) -- --
Depreciation and amortization 2,149,000 1,510,000 1,206,000
Write-off of in-process research and development 10,218,000 -- --
Increase (decrease) in bad debt allowance -- (25,000) 68,000
Provision (reduction of) inventory reserves 244,000 341,000 (127,000)
Deferred income tax benefit (1,298,000) (4,575,000) --
Changes in assets and liabilities, net of effects of acquisitions:
Restricted cash securing letter of credit obligations -- 22,000 68,000
Accounts receivable (2,111,000) 1,006,000 (449,000)
Inventories (4,580,000) (1,724,000) 548,000
Prepaid expenses and other current assets (412,000) 138,000 (45,000)
Other assets (293,000) 9,000 (3,000)
Accounts payable 3,048,000 372,000 (277,000)
Accrued expenses and other current liabilities 3,059,000 2,181,000 479,000
Income tax payables 1,449,000 195,000 --
Other liabilities 367,000 -- --
------------ ------------ ------------
Net cash provided by continuing operations 8,124,000 5,931,000 2,572,000
Net cash used by discontinued operations (151,000) (988,000) --
------------ ------------ ------------
Net cash provided by operating activities 7,973,000 4,943,000 2,572,000
------------ ------------ ------------
Cash flows from investing activities:
Purchases of marketable investment securities (37,015,000) -- --
Proceeds from sale of marketable securities 18,000,000 -- --
Purchases of property, plant and equipment (1,185,000) (1,000,000) (312,000)
Payment for business acquisitions, net of cash received (63,138,000) (173,000) --
------------ ------------ ------------
Net cash used in investing activities (83,338,000) (1,173,000) (312,000)
------------ ------------ ------------
Cash flows from financing activities:
Borrowings under line of credit facility 1,000,000 850,000 1,900,000
Repayments of borrowings under line of credit facility (1,000,000) (850,000) (1,900,000)
Borrowings under loan agreement 40,000,000 -- --
Principal payments on capital lease obligations (800,000) (821,000) (874,000)
Proceeds from issuance of common stock, net 42,434,000 -- --
Proceeds from exercises of stock options 422,000 208,000 64,000
Restricted stock issuances -- 15,000 --
------------ ------------ ------------
Net cash provided by (used in) financing activities 82,056,000 (598,000) (810,000)
------------ ------------ ------------
</TABLE>
(continued)
F-6
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended July 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------- --------- ---------
<S> <C> <C> <C>
Net increase in cash and cash equivalents $ 6,691,000 3,172,000 1,450,000
Cash and cash equivalents at beginning of period 5,896,000 2,724,000 1,274,000
----------- --------- ---------
Cash and cash equivalents at end of period $12,587,000 5,896,000 2,724,000
=========== ========= =========
Supplemental cash flow disclosure
Cash paid during the period for:
Interest $ 134,000 204,000 234,000
=========== ========= =========
Income taxes $ 500,000 169,000 22,000
=========== ========= =========
Non cash investing and financing activities:
Acquisition of property and equipment through capital leases $ 567,000 136,000 1,207,000
=========== ========= =========
Capital stock issued in connection with business acquisition $ 371,000 -- --
=========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 31, 2000 and 1999
(1) Summary of Significant Accounting and Reporting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Comtech Telecommunications Corp. and its subsidiaries (the Company),
all of which are wholly owned. All significant intercompany balances
and transactions have been eliminated in consolidation.
(b) Nature of Business
We design, develop, produce and market sophisticated components and
systems that are used by telecommunications and defense systems and
service providers in a broad range of applications.
The Company's business is highly competitive and characterized by rapid
technological change. In addition, the number of potential customers
for the Company's products is limited. The Company's growth and
financial position depends, among other things, on its ability to
keep pace with such changes and developments and to respond to the
sophisticated requirements of an increasing variety of electronic
equipment users. Many of the Company's competitors are substantially
larger, have significantly greater financial, marketing and
operating resources and broader product lines than does the Company.
A significant technological breakthrough by others, including
smaller competitors or new companies, could have a material adverse
effect on the Company's business. In addition, certain of the
Company's customers have technological capabilities in the Company's
product areas and could choose to replace the Company's products
with their own.
International sales expose the Company to certain risks, including
barriers to trade, fluctuations in foreign currency exchange rates
(which may make the Company's products less price competitive),
political and economic instability, availability of suitable export
financing, export license requirements, tariff regulations, and
other United States and foreign regulations that may apply to the
export of the Company's products, as well as the generally greater
difficulties of doing business abroad. The Company attempts to
reduce the risk of doing business in foreign countries by seeking
contracts denominated in U.S. dollars, advance payments and
irrevocable letters of credit in its favor.
(c) Revenue Recognition
Revenues on long-term, fixed price contracts are generally recorded based
on the relationship of total costs incurred to date to total
projected final costs or, alternatively, as deliveries are made.
Revenue under cost reimbursement contracts are recorded as costs are
incurred.
Revenues on other contract orders are recognized under the units of
delivery method. Under this method, revenues are recorded as units
are delivered with the related cost of sales recognized on each
shipment based upon a percentage of estimated final contract costs.
Contract costs include material, direct labor, manufacturing
overhead and other direct costs. Retainages and estimated earnings
in excess of amounts billed on certain multi-year programs are
reported as unbilled receivables.
(Continued)
F-8
<PAGE>
Revenue not associated with long-term contracts are generally recognized
when the earnings process is complete, generally upon shipment or
customer acceptance.
Provision for anticipated losses on uncompleted contracts is made in the
period in which such losses are determined.
(d) Cash and Cash Equivalents
Cash equivalents consist of highly liquid money market funds with a
maturity at acquisition of three months or less. Cash equivalents at
July 31, 2000 and 1999 amounted to $4,779,000 and $2,258,000,
respectively. These investments are carried at cost plus accrued
interest, which approximates market.
(e) Statement of Cash Flows
The Company acquired equipment financed by capital leases in the amounts
of $567,000, $136,000 and $1,207,000 in 2000, 1999 and 1998,
respectively.
(f) Marketable Investment Securities
Marketable investment securities at July 31, 2000 consists of a mutual
fund investment classified as available-for-sale and recorded at
fair value. Unrealized holding gains and losses, net of the related
tax effect on these available-for-sale securities are excluded from
earning and are reported as a component of accumulated other
comprehensive income until realized. Realized gains and losses from
the sale of available-for-sale securities are determined on a
specific identification basis.
(g) Inventories
Work-in-process inventory reflects all accumulated production costs, which
are comprised of direct production costs and overhead, reduced by
amounts attributable to units delivered. These inventories are
reduced to their estimated net realizable value by a charge to cost
of sales in the period such excess costs are determined.
Raw materials and components and work-in-process inventory are stated at
the lower of cost or market, computed on the first-in, first-out
(FIFO) method.
(h) Long-Lived Assets
The Company's plant and equipment, which are recorded at cost, are
depreciated or amortized over their estimated useful lives (building
and improvements - 40 years, equipment - three to eight years) under
the straight-line method. Capitalized values of properties under
leases are amortized over the life of the lease or the estimated
life of the asset, whichever is less. Intangible assets, consisting
of goodwill and other intangible assets resulting from acquisitions,
are being amortized over their respective lives. The Company reviews
its long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not
be recoverable. If the sum of the expected cash flows, undiscounted
and without interest, is less than the carrying amount of the asset,
an impairment loss is recognized as the amount by which the carrying
amount of the asset exceeds its fair value.
(i) Other Assets
Included in other assets at July 31, 2000 and 1999 is approximately
$350,000 less accumulated amortization, which relates to an
intellectual property rights agreement being amortized over the
eight-year term of the agreement. At July 31, 2000 and 1999,
accumulated amortization related to this purchased technology was
approximately $277,000 and $232,000, respectively. The Company
assesses the recoverability of the intangible asset by determining
whether the amortization of purchased technology over its remaining
life can be recovered through undiscounted future operating cash
flows from product sales utilizing the technology.
F-9
<PAGE>
(j) Research and Development Costs
The Company charges research and development costs to operations as
incurred, except in those cases in which such costs are reimbursable
under customer-funded contracts. In fiscal 2000, 1999 and 1998, the
Company was reimbursed by customers for such activities in the
amount of $4,272,000, $1,779,000 and $356,000, respectively.
(k) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(l) Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with the
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share". Basic EPS is computed based on the weighted
average number of shares outstanding. Diluted EPS reflects the
maximum dilution from potential common stock issuable pursuant to
the exercise of stock options and warrants, if dilutive, outstanding
during each period. All share and per share amounts have been
restated to reflect a three-for-two stock split effective July 30,
1999 (Note 10(f)).
(m) Financial Instruments
Management of the Company believes that the book value of its monetary
assets and liabilities approximates fair value as a result of the
short-term nature of such assets and liabilities. Management further
believes that the fair market value of its long-term debt and
capital lease obligations does not differ materially from its
carrying value.
(n) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results may
differ from those estimates.
(o) Reclassifications
Certain reclassifications have been made to the fiscal 1999 consolidated
financial statements to conform to the 2000 presentation.
(p) Accounting for Stock-Based Compensation
The Company records compensation expense for employee stock options only
if the current market price of the underlying stock exceeds the
exercise price on the date of the grant. The Company has elected not
to implement the fair value based accounting method for employee
stock options of SFAS No. 123, "Accounting for Stock-Based
Compensation", but has elected to disclose the pro forma net income
per share for employee stock option grants made beginning in fiscal
1996 as if such method had been used to account for stock-based
compensation cost as described in SFAS No. 123.
(q) Reporting Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
which requires companies to report all changes in equity during a
period, except those resulting from investment by owners and
distribution to owners, for the period in which they are recognized.
Comprehensive income is the total of net income and all other
nonowner changes in equity (or other comprehensive income) such as
unrealized gains/losses on securities
F-10
<PAGE>
classified as available-for-sale, foreign currency translation
adjustments and minimum pension liability adjustments.
Comprehensive and other comprehensive income must be reported on the face
of an annual financial statement or in the case of interim
reporting, the footnote approach may be utilized. The Company's
operations in fiscal 1999 and 1998 did not give rise to items
includible in comprehensive income which were not already included
in net income. Accordingly, the Company's comprehensive income in
fiscal 1999 and 1998 is the same as its net income for those periods
presented. The amount reported in other comprehensive income for the
year ending July 31, 2000 is comprised of unrealized holding losses
arising during the period, net of tax, of $113,000.
(2) Acquisitions
In the first quarter of fiscal 1999, the Company formed two subsidiaries,
Comtech Mobile Datacom Corp. ("CMDC") and Comtech Wireless, Inc.
("CWI") to acquire the assets and assume certain liabilities of two
businesses. The purchase price of the business acquired by CMDC
amounted to $628,000 consisting of cash of $100,000, 150,000 shares
of restricted common stock, valued at $528,000, and warrants to
purchase 150,000 shares of common stock at an exercise price of
$6.57 per share. The purchase price of the business acquired by CWI
amounted to $350,000 consisting of $100,000 of cash and a
non-recourse note payable of $250,000. The assets acquired were
inventories and equipment. Both acquisitions were accounted for as
purchases whereby the assets and liabilities of the businesses
acquired were consolidated with those of the Company from their
respective acquisition dates. The excess of the purchase price over
the fair value of the net assets of the business acquired by CMDC
approximated $1,701,000 and is being amortized over a 20-year
period. This amount is included in intangible assets in the
accompanying consolidated balance sheet. Effective July 31, 1999,
the operations of the business acquired by CWI were discontinued
(see Note 13). The pro forma effect of the acquisition of CMDC was
not material to the results of operations for the year ended July
31, 1999.
In January 2000, the Company acquired certain assets and assumed certain
liabilities of Hill Engineering Inc. ("Hill") in exchange for 50,000
shares of the Company's common stock. Such shares were issued and
placed in escrow and will be released to the sellers as follows: (i)
30,000 shares on January 21, 2001 assuming the resolution of certain
pending claims; (ii) 10,000 shares on January 31, 2001 assuming Hill
meets certain profit goals; and (iii) 10,000 shares on January 31,
2002 also assuming Hill meets certain profit goals. To the extent
that Hill does not meet cumulative profit goals by January 31, 2005,
the 20,000 escrow shares will be returned to the Company. The
acquisition has been accounted for as a purchase. 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 will be recorded at fair value
on the date when the profit goals are met. This business operates in
the RF Microwave Amplifiers segment. The accompanying consolidated
financial statements reflect this acquisition at the fair value of
the assets acquired ($652,000) and liabilities assumed ($871,000)
and include the operations of Hill from the date of acquisition
through July 31, 2000. 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. The operations of Hill are not
material to the operations of the Company. Pro forma results of
operations were not provided as their effect on the consolidated
operations were not material.
On July 10, 2000, the Company acquired the business of EF Data, the
satellite communications division of Adaptive Broadband Corporation,
at an estimated adjusted cost of $54,359,000. The preliminary cash
purchase price of $61,500,000 was partially financed with $40
million supplied through institutional secured borrowings. Direct
acquisition costs amounted to $1,628,000. Based upon the acquisition
agreement, an adjustment to the purchase price in the amount of
$9,038,000 is due the Company which is included in the consolidated
balance sheet in other receivables (this amount was received by the
Company in September 2000).
The acquisition was accounted for under the purchase method of accounting.
The cost of the acquisition has been allocated to the assets and the
liabilities assumed based on their estimated fair values at the date
of the acquisition. The excess of the cost over the fair value of
the net assets acquired amounted to approximately $26,157,000, of
which $10,218,000 was allocated to in-process research and
development and was expensed as of the acquisition date, $7,508,000
was recorded as purchased technology which is being amortized over
seven years, $3,577,000 was recorded as other purchased intangibles
which are being amortized over five to seven years and $4,854,000
has been recorded as goodwill, which is being amortized over ten
years. The in-process research and development charge is included in
the accompanying consolidated statement of operations for the year
ended July 31, 2000. The acquisition cost was allocated as follows
(in thousands):
F-11
<PAGE>
Historical book value of net assets acquired $ 28,202
Adjustments to record assets and liabilities at fair value:
Fair value of in-process research and development costs 10,218
Fair value of existing technology 7,508
Fair value of assembled workforce 2,835
Fair value of customer base 742
Excess of the purchase price over the fair value of
net assets 4,854
--------
$ 54,359
========
An independent third-party appraiser was used to assess and value the
purchased in-process research and development, existing technology,
assembled workforce, and customer base from the acquisition. The
valuation of existing technology and in-process research and
development was determined for products under development, based
upon the estimated future revenues to be earned upon
commercialization of the products. The percentage of the cash flows
allocated to the purchased in-process research and development was
derived from the estimated percentage complete for each of the
projects. These cash flows were discounted back to their net present
value. The resulting projected net cash flows from such projects
reflects management's estimates of revenues and operating profits
related to such projects. The workforce and customer base valuation
was based upon replacement cost.
The operating results of EF Data have been included in the consolidated
statements of operations from the acquisition date (July 10, 2000)
through July 31, 2000. The Company's unaudited pro forma results for
fiscal years 2000 and 1999 assuming the merger occurred on August 1,
1998 and August 1, 1999 are as follows:
1999 2000
--------- -------
Net revenues $ 120,258 153,479
Net income (loss) (8,941) 187
Basic income (loss) per share (2.16) 0.03
Diluted income (loss) per share (2.16) 0.03
Weighted average shares 4,143 5,663
Weighted average shares assuming dilution 4,143 6,280
These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of
operations that actually would have resulted had the merger been in
effect August 1, 1998 and August 1, 1999, or the future results of
operations.
(3) Accounts Receivable
Accounts receivable consist of the following at July 31, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Accounts receivable from commercial customers $19,841,000 3,924,000
Unbilled receivables (including retainages) on contracts-in-progress 2,602,000 1,154,000
Amounts receivable from the United States government and its agencies 2,567,000 219,000
----------- -----------
25,010,000 5,297,000
Less allowance for doubtful accounts 806,000 145,000
----------- -----------
Accounts receivable, net $24,204,000 5,152,000
=========== ===========
</TABLE>
In the opinion of management, substantially all of the unbilled balances
will be billed and collected during fiscal 2001.
F-12
<PAGE>
(4) Inventories
Inventories consist of the following at July 31, 2000 and 1999:
2000 1999
----------- -----------
Raw materials and components $14,814,000 3,553,000
Work-in-process 14,265,000 5,798,000
----------- -----------
29,079,000 9,351,000
Less:
Progress payments 380,000 302,000
Reserve for anticipated losses on
contracts and inventory reserves 2,529,000 1,170,000
----------- -----------
Inventories, net $26,170,000 7,879,000
=========== ===========
(5) Property, Plant and Equipment
Property, plant and equipment consists of the following at July 31, 2000
and 1999:
2000 1999
----------- -----------
Equipment $18,958,000 9,574,000
Leasehold improvements 1,674,000 427,000
Facilities financed by capital lease 3,365,000 3,365,000
Equipment financed by capital lease 1,569,000 4,219,000
----------- -----------
25,566,000 17,585,000
Less accumulated depreciation and
amortization 14,828,000 13,275,000
----------- -----------
$10,738,000 4,310,000
=========== ===========
Depreciation and amortization expense on property, plant and equipment
amounted to approximately $1,562,000, $1,152,000, and $1,103,000 for
the years ended July 31, 2000, 1999 and 1998, respectively.
(6) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at
July 31, 2000 and 1999:
2000 1999
----------- -----------
Customer advances and deposits $ 1,346,000 2,798,000
Accrued wages and benefits 3,970,000 1,603,000
Accrued commissions 3,992,000 915,000
Accrued warranty 2,314,000 --
Other 2,035,000 710,000
----------- -----------
$13,657,000 6,026,000
=========== =========
(7) Capital Lease Obligations
Capital lease obligations consist of the following at July 31, 2000 and
1999:
2000 1999
---------- ----------
Obligations under capital leases $1,516,000 1,564,000
Less current installments 608,000 605,000
---------- ----------
$ 908,000 959,000
========== ==========
F-13
<PAGE>
The obligations under capital leases relate to the Melville, New York
facilities, as well as certain equipment, the net carrying value of
which was $2,106,000 and $2,087,000 at July 31, 2000 and 1999,
respectively.
Future minimum lease payments under capital leases as of July 31, 2000
are:
Years ending July 31,
2001 $ 720,000
2002 454,000
2003 278,000
2004 192,000
2005 100,000
-----------
Total minimum lease payments 1,744,000
Less amounts representing
interest (at rates varying
from 6.8% to 10.8%) 228,000
-----------
1,516,000
Less current installments 608,000
-----------
Obligations under capital leases,
net of current installments $ 908,000
===========
In December 1991, the Company and a partnership controlled by the
Company's Chairman, Chief Executive Officer and President entered
into an agreement in which the Company leases from the partnership
its corporate headquarters and Melville production facility. The
lease is for a ten-year period and provides for annual rentals of
approximately $456,000 for fiscal 2000, subject to annual
adjustments equal to the lesser of 5% or the change in the Consumer
Price Index. For financial reporting purposes, the Company has
capitalized this lease at inception in the amount of $2,450,000, net
of deferred interest of $1,345,000. The outstanding balance at July
31, 2000 and 1999 approximated $501,000 and $817,000, respectively.
(8) Long-term Debt
In July of 2000, in connection with the acquisition of EF Data, the
Company entered into a secured loan agreement with the Teachers'
Retirement System of Alabama, The Employees' Retirement System of
Alabama, the Alabama Heritage Trust Fund, PEIRAF-Deferred
Compensation Plan, and State Employees' Health Insurance Fund which
provided a term loan in the amount of $40,000,000, expiring on June
30, 2005. Costs incurred to obtain the financing amounted to
$269,000 and is included in other assets in the accompanying
consolidated balance sheet. Borrowings under the term loan are
evidenced by promissory notes and are secured by all of the
Company's assets. The principal amount of the loan outstanding bear
interest at the annum rate of 9.25%. In addition, the Company, on
December 30, 2000, shall make a payment of interest equal to all
accrued and unpaid interest. The loan agreement contains restrictive
covenants which, among other things, requires the Company to
maintain certain financial ratios. At July 31, 2000 the Company was
in compliance with such covenants.
Future minimum debt payments as of July 31, 2000 are:
Years ended July 31,
2001 $ 2,100,000
2002 5,900,000
2003 9,550,000
2004 13,600,000
2005 8,850,000
---------------
Total minimum debt payments 40,000,000
Less current installments 2,100,000
---------------
Long-term debt, less current installments $ 37,900,000
===============
F-14
<PAGE>
(9) Income Taxes
The provision (benefit) for income taxes on continuing operations included
in the accompanying consolidated statements of operations consists
of following:
Year ended July 31,
-------------------
2000 1999 1998
----------- ----------- -----------
Federal - current $ 1,004,000 60,000 45,000
Federal - deferred (1,204,000) (3,949,000) --
State and local - current 446,000 135,000 135,000
State and local-deferred (161,000) -- --
----------- ----------- -----------
$ 85,000 (3,754,000) 180,000
=========== =========== ===========
The provision (benefit) for income taxes on income from continuing
operations was $85,000, ($3,754,000) and $180,000 for fiscal 2000,
1999 and 1998, respectively and differed from the amounts computed
by applying the U.S. Federal income tax rate of 34% as a result of
the following:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax expense $(1,338,000) (34.0)% 927,000 34.0% 437,000 34.0%
Increase (reduction) in income taxes
resulting from:
Change in the beginning of the year
valuation allowance for deferred
tax assets 1,623,000 41.2 (4,544,000) (166.6) (93,000) (7.2)
Utilization of tax benefit carryforward -- -- (223,000) (8.2) (299,000) (23.3)
State and local income tax, net of
federal benefit 188,000 4.8 86,000 3.2 135,000 10.5
Other state tax adjustments (388,000) (9.8) -- -- -- --
----------- ----- ---------- ------ ------- ----
$ 85,000 2.2% (3,754,000) (137.6)% 180,000 14.0%
=========== ===== ========== ====== ======= ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at July 31, 2000
and 1999 are presented below.
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts receivable $ 94,000 60,000
Intangibles 4,351,000 --
Inventory reserve 1,136,000 646,000
Plant and equipment, principally due to capitalized
leases and differences in depreciation 628,000 (16,000)
Compensated absences, principally due to accrual
For financial reporting purposes 1,895,000 395,000
Deferred compensation 236,000 250,000
Net operating loss carryforwards -- 3,490,000
Investment tax credit carryforwards -- 440,000
Alternative minimum tax credit carryforwards -- 87,000
----------- -----------
Total gross deferred tax assets 8,340,000 5,352,000
Less valuation allowance (2,400,000) (777,000)
----------- -----------
Net deferred tax assets $ 5,940,000 4,575,000
=========== ===========
</TABLE>
F-15
<PAGE>
The Company provides for income taxes under the provisions of SFAS No.
109, "Accounting for Income Taxes". SFAS 109 requires an asset and
liability based approach in accounting for income taxes. In
assessing the realizability of deferred tax assets and liabilities,
management considers whether it is more likely than not that some
portion or all of them will not be realized. During fiscal 1999, the
Company concluded that a full valuation allowance was no longer
necessary given its estimates of future earnings, which include
substantial long-term contracts entered into in the first and fourth
quarters of fiscal 1999 and the expected timing of temporary
difference reversals. Accordingly, the Company reduced the valuation
allowance to $777,000 during fiscal 1999 and recorded deferred tax
assets of $4,575,000. In fiscal 2000, the Company's gross deferred
tax asset was $8,340,000 offset by a valuation allowance of
$2,400,000 related to the extended write off period of in-process
research and development from the acquisition of EF Data. The
Company must generate approximately $22,610,000 of taxable income to
fully utilize its deferred tax assets. Management believes it is
more likely than not that the results of future operations will
generate sufficient taxable income to realize the net deferred tax
assets.
(10) Stockholders' Equity
(a) Common Stock Offering
In February and March 2000, the Company sold an aggregate of 2,645,000
shares of its common stock in a public offering resulting in net proceeds
to the Company of approximately $42.4 million.
(b) Option and Warrant Plans and Agreements
The Company has several option and warrant plans and agreements as
follows:
1982 Incentive Stock Option Plan - The 1982 Incentive Stock Option and
Appreciation Plan provided for the granting to key employees and
officers of incentive stock options to purchase up to 240,000 shares
of the Company's common stock through September 29, 1992 at prices
not less than the fair market value of such shares on the date the
option is granted. The plan expired on September 29, 1992. Options
granted to purchase an aggregate of 13,050 shares remain
outstanding. All outstanding awards have been transferred to the
2000 Stock Incentive Plan. The terms applicable to these awards
prior to the transfer continue to apply.
1993 Incentive Stock Option Plan - The 1993 Incentive Stock Option Plan,
as amended, provides for the granting to key employees and officers
of incentive and non-qualified stock options to purchase up to
1,042,500 shares of the Company's common stock at prices generally
not less than the fair market value at the date of grant with the
exception of anyone who, prior to the grant, owns more than 10% of
the voting power, the exercise price cannot be less than 110% of the
fair market value. In addition, it provided formula grants to
non-employee members of the Board of Directors. The term of the
options may be no more than ten years. However, for incentive stock
options granted to any employee who, prior to the granting of the
option, owns stock representing more than 10% of the voting power,
the option term may be no more than five years. As of July 31, 2000,
the Company had granted incentive stock options representing the
right to purchase an aggregate of 1,086,515 shares at prices ranging
between $1.50 - $11.94 per share, of which 106,868 options were
canceled and 721,628 are outstanding at July 31, 2000. To date,
258,019 shares have been exercised. Outstanding awards have been
transferred to the 2000 Stock Incentive Plan. The terms applicable
to these awards prior to the transfer continue to apply. The plan
was terminated by the Board of Directors in December 1999 due to the
approval by the shareholders of the 2000 Stock Incentive Plan.
2000 Stock Incentive Plan- The 2000 Stock Incentive Plan, which was
approved by the shareholders on December 14, 1999, provides for the
granting to all employees and consultants of the Company (including
prospective employees and consultants) non-qualified stock options,
stock appreciation rights, restricted stock, performance shares,
performance units and other stock-based awards. In addition,
employees of the Company are eligible to be granted incentive stock
options. Non-employee directors of the Company are eligible to
receive non-discretionary grants of nonqualified stock options
subject to certain limitations. The aggregate number of shares of
common stock which may be issued may not exceed 500,000 plus 882,935
shares that were transferred to the Plan relating to outstanding
awards that were previously granted under the 1982 Incentive Stock
Option Plan and the 1993 Incentive Stock Option Plan. The Stock
Option Committee of the Board of Directors, consistent with the
terms of the Plan, will determine the types of awards to be granted,
the terms and conditions of each award and the number
F-16
<PAGE>
of shares of common stock to be covered by each award. Grants of
incentive and non-qualified stock options may not have a term
exceeding ten years or no more than five years in the case of an
incentive stock option granted to a stockholder who owns stock
representing more than 10% of the voting power. As of July 31, 2000,
the Company had granted incentive stock options representing the
right to purchase an aggregate of 52,000 shares at prices ranging
between $11.25 - $16.25 of which 3,000 options were canceled and
49,000 are outstanding at July 31, 2000. There have been no
exercises. All options granted have been incentive stock options at
prices equal to the fair market value of the stock on the date of
grant.
Warrant Issued Pursuant to Acquisition of CMDC - As part of the asset
purchase agreement for the acquisition of CMDC (see Note 2), the
Company issued warrants to the owners and creditors to purchase
150,000 shares of the Company's common stock at an exercise price of
$6.57. The warrants, which contain transferability restrictions, are
exercisable for a period of five years commencing September 24,
1998, and shares purchased through the exercise of these warrants
contain voting restrictions. During fiscal 2000, warrants to
purchase 30,000 shares were exercised.
(c) Option Activity
The following table sets forth summarized information concerning the
Company's stock options:
Number Weighted
of Average exercise
Shares price
------- ---------------
Outstanding at July 31, 1997 320,970 $ 2.55
Granted 583,125 2.99
Expired/canceled (13,500) 2.13
Exercised (32,400) 2.00
-------
Outstanding at July 31, 1998 858,195 2.65
Granted 140,250 6.08
Expired/canceled (5,688) 5.90
Exercised (88,362) 2.43
------- ---------------
Outstanding at July 31, 1999 904,395 $ 3.40
Granted 109,500 12.02
Expired/canceled (42,100) 5.69
Exercised (188,117) 2.71
------- ---------------
Outstanding at July 31, 2000 783,678 4.65
======= ===============
Options exercisable
July 31, 2000 297,738 $ 3.52
Options available for
grant at July 31, 2000 508,310
The options outstanding as of July 31, 2000 are summarized in ranges as
follows:
Weighted Number of Weighted
Range of average options average
exercise price exercise price outstanding remaining life
-------------- -------------- ----------- --------------
$ 1.50-3.99 $ 2.94 555,928 7 years
4.00-7.50 6.27 134,750 8 years
7.51-12.00 10.54 60,000 9 years
12.01-17.84 16.14 33,000 10 years
F-17
<PAGE>
(d) Stock-Based Compensation Plans
The Company accounts for its stock option plans under APB Opinion No. 25,
under which no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent with
SFAS No. 123, the Company's net income (loss) and income (loss) per
share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
2000 1999 1998
------------- --------- ---------
<S> <C> <C> <C>
Net income (loss) As reported $ (3,941,000) 5,265,000 1,104,000
Pro forma $ (4,617,000) 4,836,000 817,000
Net income (loss)
per share As reported Basic $ (0.69) 1.27 0.28
Diluted $ (0.69) 1.15 0.27
Pro forma Basic $ (0.82) 1.17 0.21
Diluted $ (0.82) 1.06 0.19
</TABLE>
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net income (loss) and
net income (loss) per share amounts presented above because
compensation cost is reflected over the option's vesting period and
compensation cost for options granted prior to August 1, 1995 was
not considered.
The per share weighted-average fair value of stock options granted during
2000 and 1999 was $9.14 and $3.19, respectively, on the date of
grant using the Black Scholes option-pricing model with the
following weighted-average assumptions:
2000 - expected dividend yield of 0%, risk-free interest rate of 6.04%,
expected volatility of 82.74% and an expected option life of 10
years.
1999 - expected dividend yield of 0%, risk-free interest rate of 5.86%,
expected volatility of 69.5% and an expected option life of 10
years.
1998 - expected dividend yield of 0%, risk-free interest rate of 6%,
expected volatility of 63.32% and an expected option life of 10
years.
(e) Restricted Common Stock
In February 1994, a total of 180,000 (after effect of three-for-two stock
split - see Note 10(f)) restricted shares of the Company's common
stock were granted by the Board of Directors to the principal
officers of one of the Company's operating units, Comtech
Communications Corp, ("CCC"), at a cost of $.10 per share. The award
relates to services to be provided over future years and, as a
result, the stock awards are subject to certain restrictions which
may be removed earlier upon CCC attaining certain business plan
milestones, as provided in the agreement, but no later than ten
years from the date of the award. The excess of market value over
cost of the shares awarded of $633,000 was recorded as deferred
compensation and is being amortized to expense over a ten-year
period subject to the aforementioned accelerated provisions, if
appropriate, as evaluated on an annual basis. The deferred
compensation is reflected as a reduction of stockholders' equity in
the accompanying consolidated balance sheet.
In July 2000, the Company combined the operations of CCC with Comtech EF
Data Corp. ("CEFD") and the principal officers of CCC were made
principal officers of the combined companies. The Board of Directors
accelerated the vesting of all of the remaining shares of this
agreement. The remaining unamortized balance of $136,000 of deferred
compensation was expensed in fiscal 2000.
In October 1998, a total of 225,000 (after effect of three-for-two stock
split - see Note 10(e) restricted shares of the Companys' common
stock were granted by the Board of Directors to the principal
officers and employees of the
F-18
<PAGE>
Companys' new subsidiary, Comtech Mobile Datacom Corp.("CMDC"), at a
cost of $.10 per share. The award relates to services to be provided
over future years and, as a result, the stock awards are subject to
certain restrictions which may be removed earlier upon CMDC
attaining certain business plan milestones, as provided in the
agreement, but no later than ten years from the date of the award.
The excess of market value over cost of the shares awarded of
$1,041,000 was recorded as deferred compensation and is being
amortized to expense over a ten-year period subject to the
aforementioned accelerated provisions, if appropriate, as evaluated
on an annual basis. The deferred compensation is reflected as a
reduction of stockholders' equity in the accompanying consolidated
balance sheet as of July 31, 2000.
(f) Stock Split
On July 6, 1999, the Company's Board of Directors authorized a
three-for-two stock split effected in the form of a 50% stock
dividend payable July 30, 1999 to stockholders of record on July 16,
1999. All share and per share amounts in the accompanying
consolidated financial statements have been restated to reflect the
stock split.
(11) Segment and Principal Customer Information
Effective July 31, 1999, the Company adopted SFAS No. 131,"Disclosures
about Segments of an Enterprise and Related Information." Reportable
operating segments are determined based on the Company's management
approach. The management approach, as defined by SFAS No. 131, is
based on the way that the chief operating decision-maker organizes
the segments within an enterprise for making operating decisions and
assessing performance. While the Company's results of operations are
primarily reviewed on a consolidated basis, the chief operating
decision-maker also manages the enterprise in four segments:
(I) Telecommunications Transmission, (II) RF Microwave Amplifiers,
(III) Mobile Data Communications Services and (IV) Wireless Local
Loop, which has been discontinued. Telecommunications Transmission
products include modems, frequency converters, satellite VSAT
transceivers and antennas and over-the-horizon microwave
communications products and systems. RF Microwave Amplifier products
include high-power amplifier products that use the microwave and
radio frequency spectrums. Mobile Data Communications Services
include two-way messaging links between mobile platforms or remote
sites and user headquarters using satellite, terrestrial microwave
or Internet links. Corporate assets consist principally of cash,
deferred tax assets and intercompany receivables. Corporate losses
result from such corporate expenses as legal, accounting and
executive. Sales between segments were negligible. Eliminations
consist of intercompany balances.
<TABLE>
<CAPTION>
(in thousands)
Mobile Data
Telecommunications RF Microwave Communications Un-
Fiscal 2000 Transmission Amplifiers Services allocated Eliminations Total
----------- ------------ ---------- -------- --------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 53,311 10,968 2,165 66,444
Operating income (loss) 254 52 (2,350) (2,604) (4,648)
Interest income 1,511 1,511
Interest expense 282 99 381
Depreciation and
amortization 974 763 159 253 2,149
Expenditure for
long-lived assets 27,166 1,356 286 5 28,813
Total assets 68,018 9,693 4,286 101,112 (57,078) 126,031
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
Mobile Data
Telecommunications RF Microwave Communications Un-
Fiscal 1999 Transmission Amplifiers Services allocated Eliminations Total
----------- ------------ ---------- -------- --------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 23,045 14,523 318 -- 37,886
Operating income (loss) 2,296 2,503 (309) (1,663) 2,827
Interest income 10 -- 55 65
Interest expense 38 152 11 3 204
Depreciation and
amortization 461 714 87 248 1,510
Expenditure for
long-lived assets 791 326 1,734 3 2,854
Total assets 16,907 8,409 2,691 15,494 (13,654) 29,847
</TABLE>
<TABLE>
<CAPTION>
Mobile Data
Telecommunications RF Microwave Communications Un-
Fiscal 1998 Transmission Amplifiers Services allocated Eliminations Total
----------- ------------ ---------- -------- --------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 13,047 17,067 -- -- 30,114
Operating income (loss) 123 2,565 -- (1,236) 1,452
Interest income -- -- 36 36
Interest expense 52 160 -- 22 234
Depreciation and
amortization 506 653 -- 47 1,206
Expenditure for
long-lived assets 669 850 -- -- 1,519
Total assets 4,433 9,207 -- 11,930 (5,860) 19,710
</TABLE>
Sales to one customer in fiscal 2000 and 1999 represented 43.1% and 27.0%,
respectively, and sales to a different customer in fiscal 1998
represented 12.2% of the consolidated net sales, respectively. Such
sales were made from the Telecommunications Transmission business
segment in 2000 and 1999, and from the RF Microwave Amplifier
business segment in 1998. During fiscal 2000, 1999 and 1998,
approximately 8.8%, 15.6% and 19.5%, respectively, of the Company's
net sales resulted from contracts with the United States government
and its agencies. Export sales comprised 71.4%, 60.1% and 46.5% of
net sales in fiscal 2000, 1999 and 1998, respectively. Export sales
include sales to domestic companies for inclusion in products which
will be sold to international customers.
(12) Commitments and Contingencies
(a) Operating Leases
The Company is obligated under noncancellable operating lease agreements.
At July 31, 2000, the future minimum lease payments under operating
leases are as follows:
2001 $ 1,757,000
2002 1,855,000
2003 1,941,000
2004 2,019,000
2005 1,763,000
Thereafter 599,000
-----------
$ 9,934,000
===========
Lease expense charged to operations was $474,000, $301,000 and $140,000 in
fiscal 2000, 1999 and 1998, respectively.
(b) United States Government Contracts
Certain of the Company's contracts are subject to audit by applicable
governmental agencies. Until such audits are completed, the ultimate
profit on these contracts cannot be determined; however, it is
management's belief that the
F-20
<PAGE>
final contract settlements will not have a material adverse effect
on the Company's consolidated financial condition.
(c) Litigation
The Company is subject to certain legal actions which arise out of the
normal course of business. It is management's belief that the
outcome of these actions will not have a material adverse effect on
the Company's consolidated financial position.
(d) Employment Contract
Mr. Kornberg, the Company's Chairman of the Board of Directors, Chief
Executive Officer and President is employed pursuant to an agreement
which was amended and restated in January 1998 which provides, among
other things, for his employment until 2003 at a current basic
compensation of $295,000 per annum plus such additional amounts, if
any, as the Board of Directors may from time to time determine.
(13) Discontinued Operations
Based upon CWI's disappointing fiscal 1999 results of operations and its
uncertain future prospects, in September 1999, the Board of
Directors approved a plan to liquidate CWI by January 31, 2000.
Costs and expenses, assets and liabilities, and cash flows
associated with CWI have been excluded from the respective captions
in the accompanying consolidated balance sheets, statements of
operations and statements of cash flows. Components of amounts
included in the net liabilities of discontinued operations in the
accompanying consolidated balance sheets for fiscal 1999 are as
follows:
July 31, 1999
-------------
Inventory $ 293,000
Provision for operating losses during phase-out period (430,000)
-------------
$ (137,000)
=============
During fiscal 2000, the Company liquidated the operations of CWI and
recorded a loss of $137,000 net of applicable income taxes.
(14) Stockholder Rights Plan
On December 15, 1998, the Company's Board of Directors approved the
adoption of a stockholder rights plan in which one stock purchase
right ("Right") was distributed as a dividend on each outstanding
share of the Company's common stock to stockholders of record at the
close of business on January 4, 1999. Under the plan, the Rights
will be exercisable only if triggered by a person or group's
acquisition of 15% or more of the Company's common stock. If
triggered, each Right, other than Rights held by the acquiring
person or group, would entitle its holder to purchase a specified
number of the Company's common shares for 50% of their market value
at that time. Unless a 15% acquisition has occurred, the Rights may
be redeemed by the Company at any time prior to the termination date
of the plan.
This Right to purchase common stock at a discount will not be
triggered by a person's or group's acquisition of 15% or more of the
common stock pursuant to a tender or exchange offer which is for all
outstanding shares at a price and on terms that Comtech's Board of
Directors determines (prior to acquisition) to be adequate and in
the best interest of the Company and its stockholders. The Rights
will expire on December 15, 2008.
F-21
<PAGE>
Schedule II
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended July 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
-----------------
(1) (2)
Charged to
Balance at Charged to other Transfers Balance at
beginning cost and accounts- (deductions) end of
Description of period expenses describe describe period
----------- --------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts -
accounts receivable:
Year ended July 31,:
2000 145,000 661,000(E) 806,000
1999 170,000 -- -- (25,000)(D) 145,000
1998 102,000 96,000(C) -- (28,000)(D) 170,000
Inventory reserves:
Year ended July 31,:
2000 1,170,000 244,000(A) 1,115,000(E) 2,529,000
1999 829,000 341,000(A) -- -- 1,170,000
1998 956,000 -- (127,000)(B) 829,000
</TABLE>
(A) Increase in reserves for contract and other adjustments.
(B) Reduction of excess reserves for contract and other adjustments.
(C) Increase in allowance for doubtful accounts.
(D) Write-off of uncollectible receivables.
(E) Acquired in acquisition of EF Data.
S-1
