-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Po3jHSa0Tp9TE7s8wFr9vRXTV1F+CQ3viHd5fV33KhkDO7lf8eT7ahpeJkOQ2kPD 2UZkq9IzTbpNrVpyMOmaQg== 0001169232-02-003444.txt : 20021210 0001169232-02-003444.hdr.sgml : 20021210 20021210082855 ACCESSION NUMBER: 0001169232-02-003444 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20021031 FILED AS OF DATE: 20021210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMTECH TELECOMMUNICATIONS CORP /DE/ CENTRAL INDEX KEY: 0000023197 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 112139466 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-07928 FILM NUMBER: 02852904 BUSINESS ADDRESS: STREET 1: 105 BAYLIS RD CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 5167778900 MAIL ADDRESS: STREET 1: 105 BAYLIS ROAD CITY: MELVILLE STATE: NY ZIP: 11747 FORMER COMPANY: FORMER CONFORMED NAME: COMTECH LABORATORIES INC DATE OF NAME CHANGE: 19780425 FORMER COMPANY: FORMER CONFORMED NAME: COMTECH TELECOMMUNICATIONS CORP DATE OF NAME CHANGE: 19831215 FORMER COMPANY: FORMER CONFORMED NAME: COMTECH INC DATE OF NAME CHANGE: 19870503 10-Q 1 d52905_10-q.txt FORM 10-Q 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 quarterly period ended October 31, 2002 |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to ______________ Commission File Number: 0-7928 COMTECH TELECOMMUNICATIONS CORP. (Exact name of registrant as specified in its charter) Delaware 11-2139466 (State or other jurisdiction of (I.R.S. Employer incorporation /organization) Identification Number) 105 Baylis Road, Melville, New York 11747 (Address of principal executive offices) (Zip Code) (631) 777-8900 (Registrant's telephone number, including area code) 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 CORPORATE ISSUERS: As of December 5, 2002, the number of outstanding shares of Common Stock, par value $.10 per share, of the Registrant was 7,529,141. COMTECH TELECOMMUNICATIONS CORP. INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - October 31, 2002 (Unaudited) and July 31, 2002 2 Consolidated Statements of Operations - Three Months Ended October 31, 2002 and 2001 (Unaudited) 3 Consolidated Statements of Cash Flows - Three Months Ended October 31, 2002 and 2001 (Unaudited) 4 Notes to Consolidated Financial Statements 5-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 13 Item 4. Controls and Procedures 13 PART II. OTHER INFORMATION 13 Item 6. Exhibits and Reports on Form 8-K 13 Signature Page 14 Certifications 15-16 1 PART I FINANCIAL INFORMATION COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
Item 1. October 31, 2002 July 31, 2002 ---------------- ------------- Assets (Unaudited) ------------- Current assets: Cash and cash equivalents $ 20,375,000 15,510,000 Accounts receivable, less allowance for doubtful accounts of $818,000 at October 31, 2002 and $795,000 at July 31, 2002 28,862,000 27,435,000 Inventories, net 32,659,000 33,996,000 Prepaid expenses and other current assets 1,305,000 1,407,000 Deferred tax asset - current 2,492,000 2,492,000 ------------- ------------ Total current assets 85,693,000 80,840,000 Property, plant and equipment, net 11,819,000 11,889,000 Goodwill and other intangibles with indefinite lives, net of accumulated amortization of $1,648,000 17,726,000 17,726,000 Other intangibles with definite lives, net of accumulated amortization of $3,207,000 at October 31, 2002 and $2,681,000 at July 31, 2002 12,451,000 12,902,000 Other assets, net 548,000 661,000 Deferred tax asset - non-current 2,568,000 2,568,000 ------------- ------------ Total assets $ 130,805,000 126,586,000 ============= ============ Liabilities and Stockholders' Equity Current liabilities: Current installments of capital lease obligations $ 1,064,000 1,062,000 Accounts payable 6,868,000 9,529,000 Accrued expenses and other current liabilities 9,734,000 9,686,000 Customer advances and deposits 7,698,000 2,173,000 Deferred service revenue 4,578,000 4,343,000 Income taxes payable 2,926,000 2,470,000 ------------- ------------ Total current liabilities 32,868,000 29,263,000 Long-term debt 28,683,000 28,683,000 Capital lease obligations, less current installments 1,029,000 1,294,000 Other long-term liabilities 31,000 58,000 ------------- ------------ Total liabilities 62,611,000 59,298,000 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 7,612,141 shares at October 31, 2002 and 7,602,921 shares at July 31, 2002 761,000 760,000 Additional paid-in capital 67,933,000 67,883,000 Accumulated deficit (26,000) (825,000) ------------- ------------ 68,668,000 67,818,000 Less: Treasury stock (93,750 shares) (185,000) (185,000) Deferred compensation (289,000) (345,000) ------------- ------------ Total stockholders' equity 68,194,000 67,288,000 ------------- ------------ Total liabilities and stockholders' equity $ 130,805,000 126,586,000 ============= ============ Commitments and contingencies
See accompanying notes to consolidated financial statements. 2 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended October 31, (Unaudited) ----------------------------- 2002 2001 ------------ ----------- Net sales $ 31,273,000 31,045,000 Cost of sales 19,596,000 20,240,000 ------------ ----------- Gross profit 11,677,000 10,805,000 ------------ ----------- Expenses: Selling, general and administrative 6,328,000 5,573,000 Research and development 3,016,000 2,648,000 Amortization of intangibles 526,000 361,000 ------------ ----------- 9,870,000 8,582,000 ------------ ----------- Operating income 1,807,000 2,223,000 Other expense (income): Interest expense 691,000 973,000 Interest income (59,000) (182,000) ------------ ----------- Income before provision for income taxes 1,175,000 1,432,000 Provision for income taxes 376,000 530,000 ------------ ----------- Net income $ 799,000 902,000 ============ =========== Net income per share: Basic $ 0.11 0.12 ============ =========== Diluted $ 0.10 0.11 ============ =========== Weighted average number of common shares outstanding - basic 7,510,000 7,437,000 Potential dilutive common shares 263,000 545,000 ------------ ----------- Weighted average number of common and common equivalent shares outstanding assuming dilution - diluted 7,773,000 7,982,000 ============ ===========
See accompanying notes to consolidated financial statements. 3 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended October 31, (Unaudited) ------------------------------ 2002 2001 ------------ ----------- Cash flows from operating activities: Net income $ 799,000 902,000 Adjustments to reconcile net income to net cash provided by operating activities: Provision for (reduction of) bad debt allowance 23,000 (71,000) Provision for inventory reserves 453,000 259,000 Depreciation and amortization 1,539,000 1,342,000 Changes in assets and liabilities: Accounts receivable (1,450,000) (2,248,000) Inventories 884,000 2,362,000 Prepaid expenses and other current assets 102,000 530,000 Other assets 96,000 115,000 Accounts payable (2,661,000) (2,285,000) Accrued expenses and other current liabilities 48,000 (1,717,000) Customer advances and deposits 5,525,000 1,190,000 Deferred service revenue 235,000 469,000 Income taxes payable 456,000 498,000 Other liabilities (27,000) (27,000) ------------ ----------- Net cash provided by operating activities 6,022,000 1,319,000 ------------ ----------- Cash flows from investing activities: Purchases of property, plant and equipment (870,000) (1,294,000) Purchase of technology license (75,000) (91,000) Payment for business acquisitions, net of cash received -- (14,000) ------------ ----------- Net cash used in activities (945,000) (1,399,000) ------------ ----------- Cash flows from financing activities: Principal payments on capital lease obligations (263,000) (315,000) Prepayment of principal under loan agreement -- (19,217,000) Proceeds from issuance of common stock 51,000 124,000 ------------ ----------- Net cash used in financing activities (212,000) (19,408,000) ------------ ----------- Net increase (decrease) in cash and cash equivalents 4,865,000 (19,488,000) Cash and cash equivalents at beginning of period 15,510,000 36,205,000 ------------ ----------- Cash and cash equivalents at end of period $ 20,375,000 16,717,000 ============ ===========
See accompanying notes to consolidated financial statements. 4 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) General The accompanying consolidated financial statements at and for the three months ended October 31, 2002 and 2001 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 such periods are not necessarily indicative of the results of operations to be expected for the full year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended July 31, 2002 and the notes thereto contained in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission, and the Company's other filings with the Securities and Exchange Commission. (2) Reclassification Certain reclassifications have been made to previously reported statements to conform to the Company's current financial statement format. (3) Acquisition On July 31, 2002, the Company acquired certain assets and assumed certain liabilities of Advanced Hardware Architectures, Inc. ("AHA") for $6,985,000, including transaction costs of $185,000. In accordance with the terms of the purchase agreement, the purchase price is subject to adjustment based on a final determination of AHA's net intangible assets as of July 31, 2002. The acquisition was accounted for under the purchase method of accounting. Accordingly, the Company has recorded the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $6,312,000 of which $2,192,000 was allocated to in-process research and development and was expensed as of the acquisition date, $4,032,000 was allocated to existing and core technology and trade name and is being amortized over nine years and $88,000 was allocated to order backlog and is being amortized over six months. The Company's operating results for the three months ended October 31, 2002 include AHA. (4) Accounts Receivable
Accounts receivable consist of the following: October 31, July 31, 2002 2002 ----------- ---------- Accounts receivable from commercial customers $16,547,000 15,424,000 Unbilled receivables (including retainages) on contracts-in-progress 9,182,000 9,304,000 Amounts receivable from the United States government and its agencies 3,951,000 3,502,000 ----------- ---------- 29,680,000 28,230,000 Less allowance for doubtful accounts 818,000 795,000 ----------- ---------- Accounts receivable, net $28,862,000 27,435,000 =========== ==========
5 (5) Inventories
Inventories consist of the following: October 31, July 31, 2002 2002 ----------- ---------- Raw materials and components $15,513,000 15,920,000 Work-in-process and finished goods 21,650,000 21,365,000 ----------- ---------- 37,163,000 37,285,000 Less: Progress payments 762,000 -- Reserve for anticipated losses on contracts and inventory reserves 3,742,000 3,289,000 ----------- ---------- Inventories, net $32,659,000 33,996,000 =========== ==========
(6) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following:
October 31, July 31, 2002 2002 ----------- --------- Accrued wages and benefits $2,936,000 2,918,000 Accrued commissions 1,084,000 1,125,000 Accrued warranty 2,592,000 2,975,000 Other 3,122,000 2,668,000 ---------- --------- $9,734,000 9,686,000 ========== =========
(7) Earnings Per Share The Company calculates earnings per share ("EPS") in accordance with 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. (8) Segment and Principal Customer Information Reportable operating segments are determined based on the Company's management approach. The management approach 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 cash, deferred tax assets and intercompany receivables. Unallocated losses result from such corporate expenses as legal, accounting and executive. Intersegment sales in the three months ended October 31, 2002 and 2001, by the telecommunications transmission segment to the RF microwave amplifiers segment were $863,000 and $741,000, respectively. 6 Three months ended October 31, 2002 (in thousands)
Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Total ------------ ---------- -------- ----------- ----- Net sales $21,818 6,525 2,930 -- 31,273 Operating income (loss) 2,098 723 (106) (908) 1,807 Interest income 5 -- -- 54 59 Interest expense 468 223 -- -- 691 Depreciation and amortization 1,132 270 78 59 1,539 Expenditures for long-lived assets, including intangibles 657 201 79 8 945 Total assets 60,164 25,229 20,175 25,237 130,805
Three months ended October 31, 2001 (in thousands)
Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Total ------------ ---------- -------- ----------- ----- Net sales $20,251 6,600 4,194 -- 31,045 Operating income (loss) 2,740 310 48 (875) 2,223 Interest income 37 1 -- 144 182 Interest expense 745 228 -- -- 973 Depreciation and amortization 917 359 49 17 1,342 Expenditures for long-lived assets, including intangibles 678 401 315 5 1,399 Total assets 66,201 25,179 15,421 19,825 126,626
(9) Accounting for Business Combinations, Goodwill and Other Intangible Assets Intangibles with definite lives as of October 31, 2002 are as follows:
Gross Carrying Accumulated Net Amount Amortization Book Value -------------- ------------ ---------- Existing technology $ 11,851,000 2,996,000 8,855,000 Core technology 1,315,000 36,000 1,279,000 Technology license 2,229,000 126,000 2,103,000 Trade name 175,000 5,000 170,000 Order backlog 88,000 44,000 44,000 ------------- --------- ---------- Total $ 15,658,000 3,207,000 12,451,000 ============= ========= ==========
7 The aggregate amortization expense for the three months ended October 31, 2002 and 2001 was $526,000 and $361,000, respectively. The estimated amortization expense for the twelve months ending October 31, 2003, 2004, 2005, 2006 and 2007 is $1,980,000, $1,943,000, $1,943,000, $1,943,000 and $1,463,000, respectively. Intangibles with indefinite lives by reporting unit as of October 31, 2002 are as follows: Telecommunications transmission $ 7,870,000 RF microwave amplifiers 8,422,000 Mobile data communications services 1,434,000 ----------- $17,726,000 =========== The Company performed its annual required impairment test for goodwill and other intangibles with indefinite lives as of August 1, 2002. Based on this evaluation, the Company determined that no impairment existed as of August 1, 2002. (10) Recent Accounting Pronouncements In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted SFAS No. 144 on August 1, 2002. The adoption did not have a material impact on the Company's consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." The Company adopted SFAS No. 145 on August 1, 2002. The adoption did not have a material impact on the Company's consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect adoption of SFAS No. 146 will have a material impact on the Company's consolidated financial statements. COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We design, develop, produce and market sophisticated wireless telecommunications transmission products 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 telecommunication applications such as satellite communications, over-the-horizon microwave systems, telephone systems and cable and broadcast television. Our broadband amplifier products are also used in cellular and PCS instrumentation testing, medical instrumentation and certain defense systems. Our business consists of three segments: telecommunications transmission, RF microwave amplifiers and mobile data communications services. Our sales are made to domestic and international customers, both commercial and governmental. International sales (including sales to prime contractors for end use by international customers) are expected to remain a substantial portion of our total sales for the foreseeable future due to the worldwide demand for wireless and satellite telecommunication products and services. At times, a substantial portion of our sales may be 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. Accordingly, we can experience significant fluctuations in sales and operating results from quarter to quarter. 8 Sales consist of stand-alone products and systems. For the past several 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, an increasing amount of our sales may be attributable to the recurring service revenue component of our mobile data communications services segment. We generally recognize income on 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. Profits expected to be realized on contracts are based on total estimated sales value as related to estimated costs at completion. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change. Estimated losses on long-term contracts-in-progress are recorded in the period in which such losses become known. Since our contract with the U.S. Army for the Movement Tracking System is for an eight-year period, revenue recognition is based on the percentage-of-completion method. The gross margin is based on the estimated sales and expenses for the entire eight-year contract. The amount of revenue recognized has been limited to the amount of funded orders received from the U.S. Army. The portion of such orders representing service time revenue is being deferred until the service time is used by the customer. Significant changes in the estimates used to derive the gross profit margin can materially impact our operating results and financial condition in future periods (see Critical Accounting Policies below for more information). Our gross profit is affected by a variety of factors, including the mix of products, systems and services sold, production efficiency, price competition and general economic conditions. 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. 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. On July 31, 2002, we acquired certain assets for cash and assumed certain liabilities of Advanced Hardware Architectures, Inc. ("AHA"). The acquisition was 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 acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $6.3 million, of which $2.2 million was allocated to in-process research and development and expensed as of the acquisition date. The results of operations in our telecommunications transmission segment include the AHA related business commencing on August 1, 2002. CRITICAL ACCOUNTING POLICIES The Company considers certain accounting policies to be critical due to the estimation process involved in each. Revenue Recognition on Long-Term Contracts As discussed above, when the performance of a contract will extend beyond a 12-month period, revenue and related costs are recognized on the percentage-of-completion method of accounting. Profits expected to be realized on such contracts are based on total estimated sales for the contract compared to total estimated costs at completion of the contract. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change. Estimated losses on long-term contracts are recorded in the period in which the losses become known. Some of the Company's largest contracts, including its contract with the U.S. Army for the Movement Tracking System, are accounted for using the percentage-of-completion method. If the Company does not accurately estimate the total sales and related costs on such contracts, the estimated gross margins may be significantly impacted or losses may need to be recognized in future periods. Any such resulting reductions in margins or contract losses could be material to the Company's results of operations and financial position. 9 The cumulative orders to-date under the Movement Tracking System contract have been far below the Army's initial requirements. The Company is currently in active discussions with the Army to address the funding shortfalls experienced to date on this program. The ultimate resolution of these discussions could result in, among other things, material changes to the estimates used in applying the percentage-of-completion method of accounting. Impairment of Intangible Assets As of October 31, 2002, the Company's intangible assets, including goodwill, aggregated $30.2 million. In assessing the recoverability of the Company's goodwill and other intangibles, the Company must make various assumptions regarding estimated future cash flows and other factors in determining the fair values of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets in future periods. Any such resulting impairment charges could be material to the Company's results of operations. Provisions for Excess and Obsolete Inventory We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based on historical and future usage trends. Several factors may influence the sale and use of our inventories, including our decisions to exit a product line, technological change and new product development. These factors could result in a change in the amount of excess and obsolete inventory on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory was overvalued, we would be required to recognize such costs in the Company's financial statements at the time of such determination. Any such charges could be material to the Company's results of operations and financial position. Allowance for Doubtful Accounts We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness, as determined by our review of our customers' current credit information. Generally, we will require cash in advance or payment secured by irrevocable letters of credit before an order is accepted from an international customer that we do not do business with regularly. In addition, we have obtained credit insurance for certain international customers that we have determined could be a credit risk. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the allowances established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Measurement of such losses requires consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and financial health of specific customers. Changes to the estimated allowance for doubtful accounts could be material to the Company's results of operations and financial position. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2002 AND OCTOBER 31, 2001 Net Sales. Consolidated net sales were $31.3 million and $31.0 million for the three months ended October 31, 2002 and 2001, respectively, representing an increase of $0.3 million. Sales from our telecommunications transmission segment were $21.8 million, or 69.6% of our total net sales for the three months ended October 31, 2002, as compared to $20.2 million, or 65.2% of our total net sales for the three months ended October 31, 2001. The increase in sales of $1.6 million in this segment was primarily due to sales from our recently formed subsidiary, Comtech AHA Corporation, which was formed in connection with the acquisition on July 31, 2002 of certain assets and liabilities of Advanced Hardware Architectures, Inc. Sales from our RF microwave amplifier segment were $6.5 million or 20.8% of total net sales for the three months ended October 31, 2002, as compared to $6.6 million or 21.3% of our total net sales for three months ended October 31, 2001. Sales from our mobile data communications services segment were $3.0 million, or 9.6% of total net sales for the three months ended October 31, 2002, as compared to $4.2 million, or 13.5% of total net sales for the three months ended October 31, 2001. Sales in this segment for both fiscal year periods were principally sales of our Movement Tracking System to the U.S. Army. Quarterly sales relating to the Movement Tracking System contract can fluctuate significantly based on the timing of orders from the U.S. Army. 10 International sales represented 45.6% and 43.9% of total net sales for the three months ended October 31, 2002 and 2001, respectively. Domestic sales represented 23.2% and 27.0% of total net sales for the three months ended October 31, 2002 and 2001, respectively. U.S. government sales represented 31.2% and 29.1% of total net sales for the three months ended October 31, 2002 and 2001, respectively. Gross Profit. Gross profit was $11.7 million and $10.8 million for the three months ended October 31, 2002 and 2001, respectively. The increase was primarily due to the higher proportion of sales from our telecommunications transmission segment, including the Comtech AHA Corporation sales, which generally carry higher margins than sales from our other two segments. Gross margin, as a percentage of net sales, was 37.3% and 34.8% for the three months ended October 31, 2002 and 2001, respectively. As mentioned above, this was primarily the result of a greater proportion of higher margin sales from our telecommunications transmission segment. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $6.3 million for the three months ended October 31, 2002 as compared to $5.6 million for the three months ended October 31, 2001. The increase was largely due to the addition of Comtech AHA Corporation. In addition, selling expenses were higher due to increased bidding and marketing activities. Research and Development Expenses. Research and development expenses were $3.0 million and $2.6 million during the three months ended October 31, 2002 and 2001, respectively. As an investment for the future, we are continually enhancing our existing products and developing new products and technologies. 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, 2002 and 2001, customers reimbursed us $0.6 million and $0.5 million, respectively, which amounts are not reflected in the reported research and development expenses. Amortization of Intangibles. Amortization of intangibles was $0.5 million and $0.4 million for the three months ended October 31, 2002 and 2001, respectively. The increase was the result of the amortization related to the additional intangibles with definite lives we acquired in connection with the acquisition of AHA. Operating Income. Operating income for the three months ended October 31, 2002 and 2001 was $1.8 million and $2.2 million, respectively. The decrease was primarily the result of higher operating expenses as discussed above, which more than offset the increase in gross profit. Interest Expense. Interest expense was $0.7 million and $1.0 million for the three months ended October 31, 2002 and 2001, respectively. Interest expense was lower in the fiscal 2003 period due to the lower amount of debt outstanding during the three month period ended October 31, 2002, as compared to the amount of debt outstanding during the three month period ended October 31, 2001. Interest Income. Interest income was $59,000 and $182,000 for the three months ended October 31, 2002 and 2001, respectively. The decrease was the result of a lower level of investable funds during the three months ended October 31, 2002, as well as lower interest rates. Provision for Income Taxes. The provision for income taxes for the three months ended October 31, 2002 reflects an estimated effective tax rate of 32%. The estimated effective tax rate used in the three months ended October 31, 2001 was 37%. The decrease in the estimated effective tax rate reflects the impact of research and experimentation tax credits. LIQUIDITY AND CAPITAL RESOURCES Our cash and cash equivalents increased to $20.4 million at October 31, 2002 from $15.5 million at July 31, 2002. Net cash provided by operating activities was $6.0 million for the three months ended October 31, 2002. Such amount reflects (i) net income of $799,000 plus the impact of depreciation and amortization aggregating $1.5 million; and (ii) changes in working capital balances, most notably an increase of $5.5 million in customer advances relating to a new $42.3 million contract received during the three months ended October 31, 2002. Net cash used in investing activities for the three months ended October 31, 2002 was $945,000. Cash of $870,000 was used for capital expenditures and $75,000 was used for the purchase of a technology license. Net cash used in financing activities was $212,000. Principal payments on capital lease obligations amounted to $263,000. This use of cash was offset by proceeds from the sale of stock and exercise of stock options aggregating $51,000. 11 In the normal course of business, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment, and from time to time, technology licenses. We do not expect that these commitments as of October 31, 2002 will materially adversely affect our liquidity. At October 31, 2002 we had contractual cash obligations to repay debt (including capital lease obligations) and to make payments under operating leases. Payments due under these long-term obligations are as follows:
Obligations due by fiscal year (in thousands) Remainder 2004 2006 of and and After Total 2003 2005 2007 2007 ------- ------ ------ ----- ----- Long-term debt $28,683 -- 28,683 -- -- Capital lease obligations 2,093 799 1,114 180 -- Operating lease commitments 13,491 2,610 6,137 2,335 2,409 ------- ------ ------ ----- ----- Total contractual cash obligations $44,267 3,409 35,934 2,515 2,409 ======= ====== ====== ===== =====
We have entered into standby letter of credit agreements with financial institutions relating to the guarantee of future performance on certain contracts. At October 31, 2002, the balance of these agreements was $0.4 million. We believe that our cash and cash equivalents will be sufficient to meet our operating cash requirements for at least the foreseeable future. In the event that we identify a significant acquisition that requires additional cash, we would seek to borrow additional funds or raise additional equity capital. FORWARD-LOOKING STATEMENTS Certain information in this Quarterly Report on Form 10-Q contains forward-looking statements, including but not limited to, information relating to the future performance and financial condition of the Company, the plans and objectives of the Company's management and the Company's assumptions regarding such performance and plans that are forward-looking in nature and involve certain significant risks and uncertainties. Actual results could differ materially from such forward-looking information. The Company's Form 10-K filed with the Securities and Exchange Commission identifies many of such risks and uncertainties, which include the following: o the impact of a continued domestic and foreign economic slow-down on the demand for our products and services, particularly in the telecommunications industry; o risks associated with our mobile data communications business being in an early stage; o our potential inability to keep pace with rapid technological changes; o our backlog being subject to customer cancellation or modification; o our sales to the U.S. government being subject to funding, deployment and other risks; o our fixed price contracts being subject to risks; o our dependence on component availability, subcontractor availability and performance by key suppliers; o the highly competitive nature of our markets; o our dependence on international sales; o the adverse effect on demand for our products and services that would be caused by a decrease in the value of foreign currencies relative to the U.S. dollar; o the potential entry of new competitors in all of our segments; o uncertainty whether the satellite communications industry or infrastructure will continue to develop and the market will grow; o uncertainty whether the Internet will continue to grow in international markets; o the potential impact of increased competition on prices, profit margins and market share for the Company's products and services; 12 o the availability of satellite capacity on a leased basis needed to provide the necessary global coverage for our mobile data communications services; o whether we can successfully implement our satellite mobile data communications services and achieve recurring revenues for such services; and o whether we can successfully combine and assimilate the operations of acquired businesses and product lines. 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 and short-term U.S. treasury securities. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. Item 4. Controls and Procedures Our principal executive and financial officers have concluded, based on their evaluation as of a date within 90 days before the filing of this Form 10-Q, that our disclosure controls and procedures (as defined in SEC Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) are effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The evaluation included controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. Subsequent to our evaluation, there were no significant changes in internal controls or other factors that could significantly affect these internal controls. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 99.1 Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None 13 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 10, 2002 By: /s/ Fred Kornberg --------------------------------------------- Fred Kornberg Chairman of the Board Chief Executive Officer and President (Principal Executive Officer) Date: December 10, 2002 By: /s/ Robert G. Rouse --------------------------------------------- Robert G. Rouse Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 14 CERTIFICATION I, Fred Kornberg, Chief Executive Officer of Comtech Telecommunications Corp. (the "registrant"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of Comtech Telecommunications Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in SEC Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report was being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 10, 2002 By: /s/ Fred Kornberg ------------------------------------- Fred Kornberg Chairman of the Board Chief Executive Officer and President (Principal Executive Officer) 15 CERTIFICATION I, Robert G. Rouse, Chief Financial Officer of Comtech Telecommunications Corp. (the "registrant"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of Comtech Telecommunications Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in SEC Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report was being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 10, 2002 By: /s/ Robert G. Rouse --------------------------------------------- Robert G. Rouse Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 16 EX-99.1 3 d52905_ex99-1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Fred Kornberg, Chief Executive Officer of Comtech Telecommunications Corp., certify that: The Form 10-Q of Comtech Telecommunications Corp. for the period ended October 31, 2002, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and The information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Comtech Telecommunications Corp. as of the dates and for the periods presented. Date: December 10, 2002 By: /s/ Fred Kornberg ----------------------------------------- Fred Kornberg Chairman of the Board Chief Executive Officer and President (Principal Executive Officer) This certification is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and, except to the extent required by the Sarbanes-Oxley Act, shall not be deemed to be filed as part of the periodic report described herein nor shall it be deemed filed by Comtech Telecommunications Corp. for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. EX-99.2 4 d52905_ex99-2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert G. Rouse, Chief Financial Officer of Comtech Telecommunications Corp., certify that: The Form 10-Q of Comtech Telecommunications Corp. for the period ended October 31, 2002, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and The information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Comtech Telecommunications Corp. as of the dates and for the periods presented. Date: December 10, 2002 By: /s/ Robert G. Rouse --------------------------------------------- Robert G. Rouse Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) This certification is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and, except to the extent required by the Sarbanes-Oxley Act, shall not be deemed to be filed as part of the periodic report described herein nor shall it be deemed filed by Comtech Telecommunications Corp. for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----