FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-26589, eff. 4/12/89)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
Form 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended October 31, 2000
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|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number: 0-7928
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COMTECH TELECOMMUNICATIONS CORP.
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(Exact name of registrant as specified in its charter)
Delaware 11-2139466
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(State or other jurisdiction of incorporation (I.R.S. Employer
/organization) Identification Number)
105 Baylis Road, Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
(631) 777-8900
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
|X| Yes |_| No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING
THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
|_| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, Par Value $.10 Per Share - 7,291,299 shares outstanding as
of December 11, 2000.
<PAGE>
COMTECH TELECOMMUNICATIONS CORP.
INDEX
Page
No.
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PART I FINANCIAL INFORMATION
Consolidated Balance Sheets - 2
October 31, 2000 (unaudited) and
July 31, 2000
Consolidated Statements of Operations - 3
Three Months Ended October 31, 2000
and 1999 (unaudited)
Consolidated Statements of Cash Flows - 4
Three Months Ended October 31, 2000 and 1999
(unaudited)
Notes to Consolidated Financial Statements 5 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 12
Quantitative and Qualitative Disclosures about Market Risk 12 - 13
PART II OTHER INFORMATION 14
Signature Page 15
1
<PAGE>
PART I
FINANCIAL INFORMATION
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October July 31,
Assets 31, 2000 2000
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 16,752,000 12,587,000
Marketable investment securities 19,048,000 18,634,000
Accounts receivable, less allowance for doubtful accounts of $747,000 at
October 31, 2000 and $806,000 at July 31, 2000 36,019,000 24,204,000
Other receivables -- 9,038,000
Inventories, net 25,630,000 26,170,000
Prepaid expenses and other current assets 676,000 583,000
Deferred tax asset - current 3,924,000 3,125,000
------------- -------------
Total current assets 102,049,000 94,341,000
Property, plant and equipment, net 10,282,000 10,738,000
Intangible assets, net of accumulated amortization of $902,000 at
October 31, 2000 and $308,000 at July 31, 2000 17,075,000 17,669,000
Other assets 487,000 468,000
Deferred tax asset - non current 2,815,000 2,815,000
------------- -------------
Total assets $ 132,708,000 126,031,000
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 2,100,000 2,100,000
Current installments of capital lease obligations (including payable
to related party of $355,000 at October 31, 2000 and $347,000 at July 31, 2000) 517,000 608,000
Accounts payable 10,831,000 11,260,000
Accrued expenses and other current liabilities 17,371,000 13,657,000
Income tax payable 2,919,000 1,449,000
------------- -------------
Total current liabilities 33,738,000 29,074,000
Long-term debt, less current installments 37,900,000 37,900,000
Capital lease obligations, less current installments (including payable
to related party of $63,000 at October 31, 2000 and $154,000 at July 31, 2000) 874,000 908,000
Other long-term liabilities 340,000 367,000
------------- -------------
Total liabilities 72,852,000 68,249,000
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
7,357,899 shares at October 31, 2000 and 7,345,376 shares at July 31, 2000 736,000 735,000
Additional paid-in capital 66,781,000 66,740,000
Accumulated other comprehensive income (98,000) (113,000)
Accumulated deficit (6,680,000) (8,687,000)
------------- -------------
60,739,000 58,675,000
Less:
Treasury stock (82,500 shares at October 31, 2000 and July 31, 2000) (184,000) (184,000)
Deferred compensation (699,000) (709,000)
------------- -------------
Total stockholders' equity 59,856,000 57,782,000
------------- -------------
Total liabilities and stockholders' equity $ 132,708,000 126,031,000
============= =============
Commitments and contingencies
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
October 31,
(Unaudited)
-----------
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 39,846,000 11,747,000
Cost of sales 26,738,000 8,406,000
------------ ------------
Gross profit 13,108,000 3,341,000
------------ ------------
Operating expenses:
Selling, general and administrative 6,167,000 1,922,000
Research and development 2,797,000 530,000
Amortization of intangibles 594,000 24,000
------------ ------------
Total operating expenses 9,558,000 2,476,000
------------ ------------
Operating income 3,550,000 865,000
Other expense (income):
Interest expense 957,000 37,000
Interest income (593,000) (32,000)
------------ ------------
Income before provision for income taxes 3,186,000 860,000
Provision for income taxes 1,179,000 325,000
------------ ------------
Net income $ 2,007,000 535,000
============ ============
Net income per share:
Basic $ 0.28 0.12
Diluted $ 0.25 0.11
Weighted average number of common shares outstanding-basic computation 7,269,000 4,399,000
Potential dilutive common shares 622,000 683,000
------------ ------------
Weighted average number of common and common equivalent
shares outstanding assuming dilution - diluted computation 7,891,000 5,082,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
October 31,
(Unaudited)
-----------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,007,000 535,000
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Decrease in bad debt allowance (59,000) --
Reduction of inventory reserve (462,000) (25,000)
Depreciation and amortization 1,758,000 418,000
(Increase) decrease in deferred income tax provision (829,000) 267,000
Changes in assets and liabilities:
Accounts receivable (11,756,000) (4,425,000)
Other receivables 9,038,000 --
Inventories 1,002,000 (262,000)
Prepaid expenses and other current assets (13,000) (190,000)
Other assets (32,000) (1,000)
Accounts payable (429,000) 1,403,000
Accrued expenses and other current liabilities 3,714,000 (2,134,000)
Accrued taxes payable 1,470,000 --
Other liabilities 3,000 448,000
------------ ------------
Net cash provided by (used in) continuing operations 5,412,000 (3,966,000)
Net cash used in discontinued operations -- (218,000)
------------ ------------
Net cash provided by (used in) operating activities 5,412,000 (4,184,000)
------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (715,000) (210,000)
Purchase of marketable investment securities (449,000) --
------------ ------------
Net cash used in investing activities (1,164,000) (210,000)
------------ ------------
Cash flows from financing activities:
Principal payments on capital lease obligations (125,000) (173,000)
Proceeds from exercises of stock options and warrants 42,000 68,000
------------ ------------
Net cash used in financing activities (83,000) (105,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents 4,165,000 (4,499,000)
Cash and cash equivalents at beginning of period 12,587,000 5,896,000
------------ ------------
Cash and cash equivalents at end of period $ 16,752,000 1,397,000
============ ============
Supplemental cash flow disclosure:
Cash paid during the period for:
Interest $ 25,000 37,000
Income taxes $ 437,000 104,000
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) General
The accompanying consolidated financial statements for the three months
ended October 31, 2000 and 1999 are unaudited. In the opinion of management, the
information furnished reflects all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
unaudited interim periods. The results of operations for the three months ended
October 31, 2000 are not necessarily indicative of the results of operations to
be expected for the full year.
These financial statements should be read in conjunction with the audited
consolidated financial statements of the Company for the fiscal year ended July
31, 2000 and the notes thereto contained in the Company's Annual Report on form
10-K, filed with the Securities and Exchange Commission on October 30, 2000.
(2) Reclassifications
Certain balances in the prior fiscal quarter have been reclassified to
conform to the current fiscal quarter and fiscal year end presentation.
(3) Acquisitions
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 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
acquisition has been accounted for as purchase whereby the assets and
liabilities of Hill were consolidated with those of the Company from the
date of acquisition. 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 sheets and is being amortized over a
15-year period.
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 $40,000,000 supplied
through institutional secured borrowings. Direct acquisition costs
amounted to approximately $1,628,000. Based upon the acquisition
agreement, an adjustment to the purchase price in the amount of $9,038,000
was due to the Company which was included in the consolidated balance
sheet in other receivables at July 31, 2000. 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 was allocated to the assets acquired 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.
(4) Marketable Investment Securities
Marketable investment securities at October 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 earnings 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.
5
<PAGE>
(5) 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 $42,400,000.
(6) Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income", which requires all companies to
report all changes in equity during a period in a financial statement or
in the case of interim reporting, the footnote approach may be utilized.
Other comprehensive income may include foreign currency translation
adjustments, minimum pension liability adjustments and unrealized gains
and losses on marketable securities classified as available-for-sale. The
Company's items of other comprehensive income (loss) include unrealized
loss on marketable equity securities and unrealized gain on forward
foreign currency contracts. The Company's total comprehensive income for
the three-month period ended October 31, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
October 31, October 31,
2000 1999
----------- -----------
<S> <C> <C>
Net income $ 2,007,000 535,000
Other comprehensive income (loss), net of tax:
Change in equity due to unrealized loss on available-for-sale
securities (148,000) --
Net unrealized gain on forward foreign currency contracts 50,000 --
----------- -----------
Comprehensive income $ 1,909,000 535,000
=========== ===========
</TABLE>
(7) Accounts Receivable
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
October 31, July 31,
2000 2000
----------- -----------
<S> <C> <C>
Accounts receivable from commercial customers $30,163,000 19,841,000
Unbilled receivables (including retainages) on contracts-in-progress 3,762,000 2,602,000
Amounts receivable from the United States government and its agencies 2,841,000 2,567,000
----------- -----------
36,766,000 25,010,000
Less allowance for doubtful accounts 747,000 806,000
----------- -----------
Accounts receivable, net $36,019,000 24,204,000
=========== ===========
</TABLE>
(8) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
October 31, July 31,
2000 2000
----------- -----------
<S> <C> <C>
Raw materials and components $15,712,000 14,814,000
Work-in-process 11,985,000 14,265,000
----------- -----------
27,697,000 29,079,000
Less:
Progress payments -- 380,000
Reserve for anticipated losses on contracts and inventory reserves 2,067,000 2,529,000
----------- -----------
Inventories, net $25,630,000 26,170,000
=========== ===========
</TABLE>
6
<PAGE>
(9) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
October 31, July 31,
2000 2000
----------- -----------
Customer advances and deposits $ 4,215,000 1,346,000
Accrued wages and benefits 3,908,000 3,970,000
Accrued commissions 3,927,000 3,992,000
Accrued warranty 2,452,000 2,314,000
Accrued interest on long-term debt 1,172,000 247,000
Other 1,697,000 1,788,000
----------- -----------
17,371,000 13,657,000
=========== ===========
(10) Capital Lease Obligations
Capital lease obligations consist of the following:
October 31, July 31,
2000 2000
---------- ----------
Obligations under capital leases $1,391,000 1,516,000
Less current installments 517,000 608,000
---------- ----------
$ 874,000 908,000
========== ==========
(11) Long-Term Debt
Long-term debt consists of the following:
October 31, July 31,
2000 2000
----------- -----------
Long-term debt $40,000,000 40,000,000
Less current installments 2,100,000 2,100,000
----------- -----------
$37,900,000 37,900,000
=========== ===========
(12) Earnings Per Share
The Company calculates earning per share ("EPS") in accordance with SFAS
No. 128, "Earnings per Share". Basic EPS are computed based on the
weighted average number of shares outstanding. Diluted EPS reflects the
maximum dilution from potential common stock issuable pursuant to the
exercise of stock options and warrants, if dilutive, outstanding during
each period.
(13) Segment and Principal Customer Information
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 three
segments: (I) Telecommunications Transmission, (II) RF Microwave
Amplifiers and (III) Mobile Data Communications Services.
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.
Unallocated assets consist principally of corporate cash, deferred tax
assets and intercompany receivables. Unallocated losses result from
corporate expenses such as legal, accounting and executive
7
<PAGE>
salaries and benefits. Sales between segments were negligible.
Eliminations consist of intercompany balances.
(in thousands)
Three months ended
October 31, 2000
----------------
<TABLE>
<CAPTION>
Mobile Data
Telecommunications RF Microwave Communications Un-
Transmission Amplifiers Services Allocated Eliminations Total
------------ ---------- -------- --------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Net sales $32,434 3,909 3,503 39,846
Operating income (loss) 4,642 (148) (178) (766) 3,550
Interest income 13 -- -- 580 593
Interest expense 938 19 -- -- 957
Depreciation and
amortization 1,470 225 52 11 1,758
Expenditures for
long-lived assets 471 185 59 -- 715
Total assets 75,362 10,632 6,765 98,400 (58,451) 132,708
</TABLE>
(in thousands)
Three months ended
October 31, 1999
----------------
<TABLE>
<CAPTION>
Mobile Data
Telecommunications RF Microwave Communications Un-
Transmission Amplifiers Services allocated Eliminations Total
------------ ---------- -------- --------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 9,453 2,149 145 -- 11,747
Operating income (loss) 1,471 (60) (81) (465) 865
Interest income -- -- 32 32
Interest expense 8 28 1 -- 37
Depreciation and
amortization 154 185 79 -- 418
Expenditures for
long-lived assets 93 54 57 6 210
Total assets 12,405 8,255 3,333 9,972 (4,050) 29,915
</TABLE>
(14) Accounting for Derivatives and Hedging Activities
Effective August 1, 2000, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"), as amended, which
establishes new accounting and reporting guidelines for derivative
instruments and hedging activities. SFAS No. 133 requires the recognition
of all derivative financial instruments as either assets or liabilities in
the consolidated balance sheet and measurement of those instruments at
fair value. Changes in the fair values of those derivatives will be
reported in earnings or other comprehensive income depending on the
designation of the derivative and whether it qualifies for hedge
accounting. The accounting for gains and losses associated with changes in
the fair value of a derivative and the effect on the consolidated
financial statements will depend on its hedge designation and whether the
hedge is highly effective in achieving offsetting changes in the fair
value or cash flows of the asset or liability hedged. Under the provisions
of SFAS No. 133, as amended, the method that will be used for assessing
the effectiveness of a hedging derivative, as well as the measurement
approach for determining the ineffective aspects of the hedge, must be
established at the inception of the hedging relationship.
Designation is established at the inception of a derivative, but
redesignation is permitted. For derivatives designated as cash flow
hedges, changes in fair value are reported in other comprehensive income.
If the cash flow hedge is fully effective, the change in fair value of the
hedged item attributable to the hedged risk is adjusted
8
<PAGE>
to fair value and is reported in other comprehensive income. Changes in
the fair value of the forward contracts designated and qualifying as cash
flow hedges of forecasted transactions are reported in accumulated other
comprehensive income. The gains and losses are reclassified into earnings,
as a component of cost of sales in the same period as the asset acquired
affects earnings.
Management believes it is prudent to minimize the risk caused by foreign
currency fluctuation. Management minimizes the risk by hedging foreign
currency receivables by purchasing forward foreign currency contracts
(forward contracts) with financial institutions. Forward contracts
represent commitments to purchase or sell a particular foreign currency at
a future date and at a specific price. Since forward contracts are
purchased for the exact amount of foreign currency needed, the Company
feels that it eliminates all risks relating to foreign currency
fluctuation. The difference between the fair value and notional amounts of
the foreign currency contracts and the related receivables have been
recorded in the accompanying consolidated balance sheet at October 31,
2000. Senior management continually monitors foreign currency risks and
the use of this derivative instrument.
The Company does not enter into derivative instruments for any purpose
other than cash flow hedging purposes. That is, the Company does not
speculate using derivative instruments.
The impact of adopting this statement did not have a material effect on
the Company's consolidated financial statements. The cumulative effect of
the adoption of this accounting policy is reported as a component of other
comprehensive income in the quarter ended October 31, 2000.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain information contained in this Quarterly Report on Form 10-Q,
including, without limitation, information appearing under Part I, Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are believed to be forward-looking statements (within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934). Factors set forth in the Company's Annual Report on Form
10-K, filed on October 30, 2000, or in the Company's other Securities and
Exchange Commission filings, could affect the Company's actual results and could
cause the Company's actual results to differ materially from those expressed in
any forward-looking statements made by, or on behalf of, the Company in this
Quarterly Report on Form 10-Q.
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 the quarter ended October 31, 2000, there were no
customers for which sales accounted for 10% or more of our consolidated sales.
For the quarter ended October 31, 1999, sales to one customer accounted for
58.2% of consolidated sales. Accordingly, we experience significant fluctuations
in sales and operating results from quarter to
9
<PAGE>
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.
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.
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. In July 2000, we received our
initial order under the U.S. Army contract of $3.1 million. Sales by our mobile
data communications services segment in the first quarter of fiscal 2001 and
2000 were approximately $3.5 million and $145,000, respectively.
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 operates 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. Sales in the first quarter of fiscal 2001 and 2000 for the RF
amplifier segment were $3.9 and $2.1 million, respectively, reflecting the
higher level of new orders over the past two quarters.
In July 2000, we acquired the business of EF Data, 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 $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. We combined these operations with
our existing satellite communications operations included in our
telecommunications transmission segment. Sales of EF Data products during the
first quarter 2001 were approximately $23.0 million.
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COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31,
2000 AND OCTOBER 31, 1999
Net Sales. Consolidated net sales were $39.8 million and $11.7 million for the
three months ended October 31, 2000 and 1999, respectively, representing an
increase of $28.1 million or approximately 239.2%. This increase was due
primarily to increased sales by our telecommunications transmission segment of
satellite earth station products. The increase in this business segment which
was due primarily to the increase generated by the acquisition we completed in
July 2000 of EF Data, a division of Adaptive Broadband Corp., was $23.0 million
or approximately 243.1%. To a lesser extent we also had higher sales in our
other two segments. The increase in our RF microwave amplifier segment was $1.8
million or approximately 81.9% and the increase in our mobile data
communications services segment was $3.3 million or approximately 2,315.9%.
International sales increased by $9.5 million or approximately 95.0%,
representing 49.2% and 85.5% of total net sales for the three-months ended
October 31, 2000 and 1999, respectively. Domestic sales increased by $11.2
million or approximately 883.7%, representing 31.4% and 10.8% of total net sales
for the three-months ended October 31, 2000 and 1999, respectively. U.S.
government sales increased by $7.3 million or approximately 1,705.8%,
representing 19.4% and 3.7% of total net sales for the three-months ended
October 31, 2000 and 1999, respectively.
Gross Profit. Gross profit was $13.1 million and $3.3 million for the three
months ended October 31, 2000 and 1999, respectively, representing an increase
of $9.8 million or 292.3%. This increase was due primarily to the increase in
sales volume in the three months ended October 31, 2000 as compared to the same
period in 1999. Gross profit margin, as a percentage of net sales, was 32.9% and
28.4% in the three-month periods of 2000 and 1999, respectively. The higher
gross profit margin was due primarily to the increase in the sale of satellite
earth station equipment products by our telecommunications transmission segment,
which generally have a lower per unit cost and yield a higher gross profit
margin than most other equipment and systems we sell, partially offset by lower
gross margins by our RF microwave amplifier segment.
Selling, General and Administrative. Selling, general and administrative
expenses were $6.2 million and $1.9 million for the three months ended October
31, 2000 and 1999, respectively, representing an increase of $4.3 million or
approximately 220.9%. This increase was due primarily to the additional expenses
required to support the increased sales volume resulting from the acquisition of
EF Data, including additional personnel, sales and marketing expenses and other
administrative expenses. As a percentage of sales, these expenses were 15.5% and
16.4% in the 2000 and 1999 quarters, respectively.
Research and Development. Research and development expenses were $2.8 million
and $530,000 for the three-month periods of 2000 and 1999, respectively,
representing an increase of $2.3 million or approximately 427.7 %. As an
investment for the future we are continually enhancing and developing new
products and technologies. In the three-month period of 2000, the increase is
due primarily to expenses incurred by our recently acquired EF Data 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 the three months ended October 31, 2000 and 1999,
customers reimbursed us $187,000 and $246,000, respectively, which amounts are
not reflected in the reported research and development expenses. Internally
funded and customer funded research and development expenses combined, as a
percentage of sales, represented approximately 7.5% and 6.6% in the three-month
periods of 2000 and 1999, respectively.
Operating Income. As a result of the foregoing factors, we had operating income
of $3.6 million in the three months ended October 31, 2000 as compared to
$865,000 in the prior year period, representing an increase of approximately
$2.7 million.
Interest Expense. Interest expense was $957,000 and $37,000 for the three months
ended October 31, 2000 and 1999, respectively, representing an increase of
$920,000. The increase was due primarily to the interest on $40.0 million of
long-term debt that we incurred during July 2000 in connection with the
acquisition of EF Data. The balance of interest expense in the three months
ended October 31, 2000 and all of the interest expense in the 1999 period was
interest associated with our capital lease obligations.
Interest Income. Interest income was $593,000 and $32,000 for the three months
ended October 31, 2000 and 1999, respectively, representing an increase of
$561,000. 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 for Income Taxes. The provision for income taxes was $1.2 million and
$325,000 for the three months ended October 31, 2000 and 1999, respectively,
reflecting an approximate 37% and 38% effective tax rate, respectively. Our
income tax
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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.
LIQUITY AND CAPITAL RESOURCES
For the three month period ended October 31, 2000, our cash and cash
equivalent position increased by $4.2 million from $12.6 million at July 31,
2000 to $16.8 million at October 31, 2000. Operating activities provided $5.4
million, investing activities used $1.2 million and financing activities used
$83,000. The following changes are reflected in the financial statements.
Accounts receivable increased by $11.8 million from July 31, 2000, due
primarily to the timing of the shipments, the subsequent collection of the
related receivables, and an increase of approximately $1.2 million in unbilled
receivables. The allowance for doubtful accounts decreased by $59,000 due to the
write-off of certain receivables deemed uncollectible. The Company reviews its
allowance for doubtful accounts periodically and believes it is sufficient based
on past experience and the Company's credit standards. We also have a credit
insurance policy in the amount of $10.0 million for certain foreign receivables.
Other receivables decreased by $9.0 million as a result of the receipt of
this amount from Adaptive Broadband Corp. in accordance with the asset purchase
agreement in connection with our acquisition of EF Data.
Net inventories decreased by $540,000, primarily due to the lower levels
of inventory required by our telecommunications transmission segment. A
significant portion of the Company's product lines require a competitive
delivery response to customers' requirements and require the Company to provide
for a level of "off-the-shelf" equipment, thus inventory levels will vary as a
function of backlog and new orders. The only other general inventory that the
Company maintains is for basic components which are common for most of its
products. Inventory reserves are reviewed on an ongoing basis and adjustments
are made as needed.
Accounts payable decreased by $429,000 primarily due to the decrease in
inventory purchases.
Accrued expenses and other current liabilities increased by $3.7 million
due primarily to increases in customer advances and deposits and accrued
interest on long-term debt.
Taxes payable increased by $1.5 million due to the additional income taxes
associated with the taxable net income earned for the period.
Capital lease obligations, including current portion decreased by $125,000
due to the payments made. We did not enter into any additional capital leases
during the period. At October 31, 2000, our capital lease obligation, including
current portion, was $1.4 million.
Our long-term debt, including the current portion, is $40.0 million. It
bears an interest rate of 9.25% and is payable over a five-year period, with the
first principal payment due on June 30, 2001.
Other long-term liabilities are for deferred revenue related to an
extended warranty contract.
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.
ITEM 3. QUANTITATIVE 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 interest rate derivative instruments to manage exposure to interest rate
changes.
The Company's exposure to debt price risks relates to its investment in a
mutual fund which primarily invests in debt securities. At October 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.
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The Company maintains a minor amount of foreign currency contracts solely
to hedge foreign currency receivables. It has established policies, procedures
and internal processes governing the management of this hedging to reduce market
risks inherent in foreign exchange. Any change in these markets would not
materially affect the consolidated financial position, results of operations or
cash flows of the Company.
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibit is being filed as part of this Report:
Exhibition No. Description
-------------- -----------
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the three months ended
October 31, 2000:
1. On September 25, 2000, a report on Form 8-K/A was filed amending a
July 10, 2000 report to provide the financial statements required in
connection with the acquisition by Comtech Telecommunications Corp.
of substantially all the assets of EF Data Division of Adaptive
Broadband Corp.
2. On September 28, 2000, a report on Form 8-K/A was filed amending the
September 25, 2000 report to provide corrected pro forma financial
information.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMTECH TELECOMMUNICATIONS CORP.
--------------------------------
(Registrant)
Date: December 13, 2000 By: /s/ Fred Kornberg
----------------------------------
Fred Kornberg
Chairman of the Board
Chief Executive Officer
and President
Date: December 13, 2000 By: /s/ J. Preston Windus, Jr.
-----------------------------------
J. Preston Windus, Jr.
Senior Vice President
Chief Financial Officer
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