UNITED STATES SECURITIES AND EXCHANGE COMMISSION ~~WASHINGTON,~~
Washington, D.C. 20549

FORM 10-K ~~(Mark~~

(Mark One) ~~|X| ANNUAL REPORT PURSUANT TO SECTION~~

T Annual Report Pursuant to Section 13 ORor 15(d) ~~OF THE SECURITIES EXCHANGE ACT OF~~of the Securities Exchange Act of 1934

For the fiscal year ended July 31, ~~2002 |_| TRANSITION REPORT PURSUANT TO SECTION~~2004

£ Transition Report Pursuant to Section 13 ORor 15(d) ~~OF THE SECURITIES EXCHANGE ACT OF~~of the Securities Exchange Act of 1934

Commission ~~file number:~~File Number: 0-7928 ~~COMTECH TELECOMMUNICATIONS CORP. (Exact Name~~

(Exact name of ~~Registrant~~registrant as ~~Specified~~specified in its Charter) Delaware 11-2139466 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 105 Baylis Road Melville, New York 11747 (Address of Principal Executive Offices) Registrant's telephone number, including area codecharter)

Delaware		11-2139466
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
105 Baylis Road, Melville, New York	11747	(631) 777-8900
(Address of principal executive offices)	(Zip Code)	(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
Series A Junior Participating Cumulative Preferred Stock par value $.10 per share ~~(Title~~

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ~~YES: |X| NO: |_|~~ T Yes £ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ~~|X|~~ T

Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). T Yes £ No

The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant, computed by reference to the closing sales price as quoted on the Nasdaq National Market on ~~October 11, 2002~~January 30, 2004 was approximately ~~$46,547,000.~~ $456,651,000.

The number of shares of the registrant's common stock outstanding on ~~October 11, 2002~~September 14, 2004 was ~~7,509,821.~~ 14,233,260.

DOCUMENTS INCORPORATED BY REFERENCE.

Certain portions of the document listed below have been incorporated by reference into the indicated Part of this Annual Report on Form 10-K:

Proxy Statement for Annual Meeting of ~~Shareholders~~Stockholders to be held December ~~10, 2002~~7, 2004 Part III

INDEX

PART I ITEM 1. BUSINESS 1 Overview 1 Business Strategies 2 Important Developments 3 Telecommunications Transmission Business Segment 4 RF Microwave Amplifier Business Segment 5 Mobile Data Communications Services Business Segment 6 Sales, Marketing and Customer Support 6 Backlog 6 Manufacturing and Service 7 Research and Development 7 Patents and Licenses 7 Competition 8 Key Personnel/Employees 8 Compliance with Federal, State and Local Environment Protection Laws 8 ITEM 2. PROPERTIES 8 ITEM 3. LEGAL PROCEEDINGS 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 10 Dividends 10 Approximate Number of Equity Security Holders 10 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 Overview 12 Critical Accounting Policies 14

ITEM 1.	BUSINESS	1

	Industry Background	1
	Corporate Strategies	2
	Competitive Strengths	2
	Telecommunications Transmission Segment	3
	Mobile Data Communications Segment	4
	RF Microwave Amplifier Segment	5
	Key Products, Systems and Services	6
	Acquisitions	7
	Sales, Marketing and Customer Support	7
	Backlog	8
	Manufacturing and Service	8
	Research and Development	8
	Intellectual Property	9
	Competition	9
	Employees	9
	Regulatory Matters	9

ITEM 2.	PROPERTIES	10

ITEM 3.	LEGAL PROCEEDINGS	10

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	10

	PART II

ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	11

	Dividends	11
	Recent Sales of Unregistered Securities	11
	Issuer Purchases of Equity Securities	12
	Approximate Number of Equity Security Holders	12

ITEM 6.	SELECTED CONSOLIDATED FINANCIAL DATA	13

ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	14
	��
	Overview	14

Results of Operations 15 Comparison of Fiscal 2002 and 2001 15 Comparison of Fiscal 2001 and 2000 16 Liquidity and Capital Resources 18 Recent Accounting Pronouncements 18 Forward-Looking Statements and Risk Factors 19 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT 24 ITEM 11. EXECUTIVE COMPENSATION 24 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 24 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 24 ITEM 14. CONTROLS AND PROCEDURES 24 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K 25 SIGNATURES 27 CERTIFICATIONS 28 SUBSIDIARIES 30 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE F-1
Critical Accounting Policies 15
Results of Operations 16
      Comparison of Fiscal 2004 and 2003 16
      Comparison of Fiscal 2003 and 2002 18
Liquidity and Capital Resources 20
Recent Accounting Pronouncements 21
Forward-Looking Statements and Risk Factors 22
ITEM 7A.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK 28
ITEM 8.
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA 28
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE 28
ITEM 9A.
CONTROLS AND PROCEDURES 29
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS
OF REGISTRANT 29
ITEM 11.
EXECUTIVE COMPENSATION 29
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS 29
ITEM 13.
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS 29
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES 29
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT
SCHEDULE AND REPORTS ON FORM 8-K 29
SIGNATURES 32
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE F-1

Note: As used in this Annual Report on Form 10-K, the terms ~~"Comtech," "we"~~“Comtech,” “we,” “us,” “our” and ~~"our company"~~“our company” mean Comtech Telecommunications Corp. and Comtech's subsidiaries.

PART I

ITEM 1. BUSINESS ~~Overview~~

We design, develop, produce and market ~~sophisticated wireless~~innovative products, systems and services for advanced communications solutions. We conduct our business through three complementary segments: telecommunications transmission, mobile data communications and RF microwave amplifiers. We sell our products ~~and solid state high-power broadband amplifiers for~~into commercial and government ~~purposes. Our telecommunications products~~markets where we believe we have technological, engineering, systems design or other expertise that differentiate our product offerings. We believe we are ~~used~~a leader in ~~point-to-point~~the market segments that we serve.

In the past several years, we have expanded our product lines, completed strategic acquisitions, increased our research and ~~point-to-multipoint telecommunications transmission~~development efforts and ~~reception applications such as satellite communications, over-the-horizon microwave systems, and cable and broadcast television. Our broadband amplifier products are used~~broadened our customer base. These efforts have resulted in communications, cellular and medical instrumentation and defense systems. We also offer satellite mobile data communications services. Our products meet the high performance requirements of our customers by drawing upon proprietary expertise in key microwave amplification and transmission technologies developed over more than 35back-to-back years of ~~operations. Demand~~significant growth in fiscal 2003 and 2004. Fiscal 2004 sales of $223.4 million and net income of $21.8 million are records for our ~~products over~~company. As of July 31, 2004, we have $163.3 million of unrestricted cash and cash equivalents on hand of which $101.2 million relates to the ~~past five years~~net proceeds from our January 2004 2.0% convertible senior notes offering.

Our Internet website is www.comtechtel.com and we make available free of charge, on our website, our annual reports, quarterly reports, current reports and any related amendments. We are incorporated in the state of Delaware.

Industry Background

Since our founding in 1967 during the infancy of satellite and other wireless communication services, the communications industry has experienced dramatic changes. Beyond initial requirements related to increasing the number of available voice circuits, the communications market has developed higher level needs around secure voice, video and data transmission at high throughput levels across a wide variety of land, air and sea environments.

Over the last decade, the industry has been driven by the global expansion of advanced communication services related to the needs of information-intensive economies, the U.S. military's transformation to information-based, network-centric warfare, and the need for developing countries to upgrade their commercial and ~~domestic government expansion of telecommunications services such as satellite systems, broadcast, cellular telephone systems, over-the-horizon microwave systems~~defense communication systems.

	•	Global Development of Information-Intensive Economies. Businesses are increasingly reliant upon the Internet and multimedia applications to communicate voice, video and data to their customers and employees around the world. We expect demand for these high-bandwidth applications to continue to grow.

	•	Military Transformation to Information Based, Network-Centric Warfare. The U.S. military is increasingly reliant on information and communications technology to provide critical advantages in battlefield, support and logistics operations. Situational awareness, defined by knowledge of the location and strength of friendly and unfriendly forces during battle, can increase the likelihood of success during a conflict. As evidenced in the recent Iraqi conflict, stretched battle and supply lines can use satellite communications to span distances that normal radio communications, such as terrestrial-based systems, are unable to cover.

	•	Developing Countries Upgrading Their Commercial and Defense Communication Systems. We believe many developing countries are committing greater resources and are now placing a higher priority on developing and upgrading their communications systems than in the past. Many of these countries lack the resources or have large geographic areas or unfriendly terrain that make it difficult to install extensive land-based networks on a cost-effective basis. We believe this provides an opportunity for satellite, over-the-horizon microwave and other wireless communications systems to meet the requirements for communication services in these countries.

We continue to benefit from the ~~Internet. However, fiscal 2002 was adversely impacted by the significant downturn in capital spending~~foregoing trends in the ~~telecommunications sector. Telecommunications Industry Trends The demand for telecommunications is largely tied to emerging economies seeking to modernize their infrastructure~~industry across our three business segments by focusing internal and increasingly information-intensive markets introducing new telecommunications services. The telecommunications industry has expanded rapidly over the last decade. Such rapid expansion has resulted in excess capacity which has reduced capital spending in fiscal 2002. Long-term, the industry, particularly in the wireless area, is poised for growth due to the following: Deregulationcustomer funded research and ~~Privatization. Many developing countries that had previously not committed significant~~development resources to ~~or place a high priority on developing~~produce secure, scalable and upgrading their communications systems are now doing so, primarily through deregulation and privatization. A significant number of these countries do not have the resources, or have large geographic areas or terrain that make it difficult, to install extensive land-based networks on a cost-effective basis. This provides an opportunity for satellite and other wireless communications services systemsreliable technologies to meet the requirement for communications services in these countries. Growing Demand for Data Communications Services. Factors contributing to the growing demand for communications services include worldwide economic development and the increasing globalization of commerce. Businesses have a growing need for higher bandwidth services to communicate with their customers and employees around the world and are increasingly reliant upon Internet and multimedia applications. We expect demand for these kinds of higher bandwidth services to grow in both developed and developing countries. Increasing Cost-Effectiveness. The relative cost-effectiveness of satellite and other wireless telecommunications services is a major factor driving the growth in areas with rapidly developing telecommunications infrastructures. These developing infrastructures often cover large geographic areas, where population concentrations that are separated by significant distances require a technology whose cost and speed of implementation is relatively insensitive to distance. Technological Advances. Technological advances continue to increase the capacity of telecommunications networks and reduce the overall cost of the systems and the services they deliver. This increases the number of potential end users for the services and expands the available market. We believe that recent technological developments, such as bandwidth on demand and signal processing methods, will continue to stimulate demand. 1 Product and Service Segments We conduct our business through three decentralized but complementary product and service segments: telecommunications transmission, RF microwave amplifiers, and our mobile data communications services business. The segments operate through individual operating units, each of which maintains its own sales, marketing, product development and manufacturing functions. We believe that this organizational structure allows the key personnel of each operating unit to be more responsive to their particular markets and customers. Brief descriptions of our business segments and operating units follow. Telecommunications transmission - Products in this segment include modems, frequency up converters and down converters, solid state high-power amplifiers, VSAT transceivers and antennas for satellite ground station applications and adaptive modems and microwave radios for over-the-horizon microwave communications systems. Primary markets include satellite systems integrators and communications service providers, defense contractors and oil companies. Customers include, among others, Globecomm Systems, Hughes Network Systems, DirecTV, ATT Alascom, Northrop Grumman, BP Amoco, Exxon Mobil and the U.S. government. RF microwave amplifiers - This segment provides solid state high-power broadband amplifier products in the microwave and radio frequency (RF) spectrums for a wide range of applications, including cellular and wireless instrumentation, medical systems, jamming and identification friend or foe (IFF) and other defense systems. Target markets are communications service providers, cellular and PCS telephony system manufacturers and defense contractors. Customers include, among others, Motorola, Ericsson, Nokia Telecommunications, Condor Systems, Siemens Medical Systems, Lucent Technologies, Northrop Grumman, Raytheon, Lockheed Martin and the U.S. government. Mobile data communications services - This segment provides secure, real time two-way location of and messaging between mobile platforms, such as land vehicles, rail and aircraft, or remotely placed fixed site sensors and headquarters through our Germantown, Maryland gateway satellite earth station. The network employs leased satellite capacity to communicate between the mobile platform and user headquarters via satellite, terrestrial and Internet links. Depending upon the end-user's needs, our system can be configured to provide a wide range of data applications, ranging from simple location tracking to messaging, e-mail, broadcasting of information and various other sensor monitoring. See note 11 to the Consolidated Financial Statements for more information regarding segment net sales, operating income (loss) and total assets as of and for the fiscal years ended July 31, 2002, 2001 and 2000. We believe that the global expansion of telecommunications, particularly in developing countries in Asia, South America, the Middle East and Europe, represents a key opportunity for growth in our telecommunications business. Included as international sales are sales made to domestic companies for inclusion in products which are sold to international customers. Sales for use by international customers represented approximately 41.2%, 46.2% and 71.4% of our total net sales in fiscal years 2002, 2001 and 2000, respectively. Sales to the U.S. government represented 33.8%, 23.1% and 8.8% of our total net sales in fiscal 2002, 2001 and 2000, respectively. Our product designs are based on both analog and digital microwave technologies. Digital microwave technology can significantly enhance performance of telecommunications systems. We have invested significant resources in developing our technological expertise, and work closely with customers and potential customers to develop product lines inevolving market ~~niches where we believe our expertise can enable us to become a leading supplier. Business~~needs.

Corporate Strategies

We manage our business with the following principal corporate business strategies: o

	•	Seek leadership positions in markets where we can provide specialized products and services;

	•	Identify and participate in emerging technologies that enhance or expand our product portfolio;

	•	Operate business segments flexibly to maximize responsiveness to our customers;

	•	Strengthen our diversified and balanced customer base; and

	•	Pursue acquisitions of businesses and technologies.

We believe that, as a result of these business strategies, we are well positioned to capitalize on growth opportunities in the commercial, international and defense markets.

Competitive Strengths

As a ~~decentralized basis to maximize responsiveness to customers. o Continue product innovation~~result of the successful execution of our principal corporate strategies, we have established the following competitive strengths:

		Leadership Positions in All Three Business Segments – In our telecommunications transmission segment, we believe we are the leading provider of over-the-horizon microwave systems, satellite earth station modems and integrated circuits incorporating Turbo Product Code (“TPC”) forward error correction technology. In our mobile data communications segment, we are the sole supplier of the U.S. Army logistics command's Movement Tracking System (“MTS”) and continue to expand our position into other U.S. Army battlefield command and control applications. In our RF microwave amplifiers segment, we are one of the largest independent suppliers of broadband, high-power, high performance RF microwave amplifiers.

		Reputation as an Innovative Leader with Emphasis on Research and Development – We have established a leading position in our fields through internal and customer funded research and development activities. We believe we were the first company to begin full-scale deployment of TPC in digital satellite earth station modems, which can reduce satellite transponder lease costs or increase satellite earth station modem data throughput by up to 60%. Our field-proven over-the-horizon microwave systems utilize our 8 megabit per second adaptive digital modem, which we believe to be significantly faster than those of our competitors. Our mobile data communications system is the leading satellite-based mobile data communication system used by the U.S. Army that operates in the L-band frequency range for near real-time messaging and location tracking of mobile assets.

		Ability to Leverage Our High Volume Manufacturing Center – Our high volume technology manufacturing center located in Tempe, Arizona utilizes state-of-the-art design and production techniques, including analog, digital and RF microwave production, hardware assembly and full-service engineering. All three of our business segments utilize this manufacturing center for certain high volume production which allows them to secure larger volume contracts on a more cost-effective basis than they would otherwise be able to obtain.

		Diverse Customer Base with Long-Standing Relationships – We have established long-standing relationships with key domestic and international system and network suppliers in the satellite, defense and aerospace industries, as well as the U.S. government and foreign governments. Our products are in service around the globe and we continue to expand our geographic distribution as we continue to be recognized for our ability to develop new technologies and meet stringent program requirements.

		Successful Acquisition Track Record – We have demonstrated that we can successfully integrate acquired businesses, achieve increased efficiencies and capitalize on market and technological synergies. We believe that our disciplined approach in identifying, integrating and capitalizing on acquisitions provides us with a proven platform for additional growth.

Our Three Business Segments

We conduct our business through ~~investment in research~~three complementary business segments: telecommunications transmission, mobile data communications and ~~development. 2~~ ~~o Capitalize on synergies among~~RF microwave amplifiers. This allows each of our business segments to ~~secure larger contracts. o Pursue acquisitions~~maintain a high level of focus and ~~investments in complementary~~customer attentiveness. As appropriate and as guided by corporate senior management, our businesses ~~technologies, products~~capitalize on synergies that exist between them with respect to manufacturing, technology, sales, marketing and ~~services. Specific operating strategies for~~customer support. Financial information about our business segments ~~include:~~ can be found in Note 11 to the consolidated financial statements beginning on page F-20.

Telecommunications ~~transmission. o Continue broadening~~Transmission Segment

Overview

Our telecommunications transmission segment, which is our ~~line~~largest business segment, provides sophisticated equipment and systems for satellite, over-the-horizon microwave and wireless line-of-sight telecommunications systems. Our telecommunications transmission products are used in a wide variety of commercial and defense applications including the transmission of voice, video and data over the Internet (such as voice over IP and broadband video), long distance telephone, broadcast, cable and highly secure defense applications.

The following are the key products and systems, along with related markets and applications, for our telecommunications transmission segment:

Satellite Earth Station Equipment and Systems. We provide customers a one-stop shopping approach by offering a broad range of communications equipment, including modems, frequency converters, power amplifiers, transceivers, access devices and voice gateways that are used in commercial and government satellite applications. We believe we are the leading provider of satellite earth station modems. Our modems incorporate TPC, an advanced form of forward error correction. We believe we were the first company to offer TPC in satellite earth station modems which can significantly reduce satellite transponder lease costs or increase satellite earth station modem data throughput by up to 60%. Our time division multiple access (“TDMA”) and single channel per carrier (“SCPC”) based communication products ~~to better serve~~and software enable our customers ~~with a full line of video, data and voice products. o Enhance our existing products~~ to ~~serve rapidly developing markets requiring higher speed and greater~~utilize satellite network bandwidth management techniques to more cost-effectively enable, among others, applications such as ~~emerging applications for wireless~~video teleconferencing, distance learning, telemedicine and Internet ~~access. o Maintain our~~content delivery.

Over-the-Horizon Microwave Systems. We design, develop, produce and market ~~leadership in~~ over-the-horizon microwave ~~technologies by broadening applications~~communications equipment and increasing product performance. RF microwave amplifiers. o Continue to incorporate the latest advances in solid state device electronics to broaden our product line bandwidth and high-power capabilities. o Encourage system integrators and end users to outsource their requirements to the Company rather than pursue this specialized field in-house. o Combine high-power amplifiers and solid state switches for advanced communications applications. Mobile data communications services. o Maximize the opportunities available to supply the Logistics Command under the U.S. Army contract. o Pursue identified opportunities to offer our products and services to other government agencies. o Penetrate the emerging markets for commercial uses, particularly in the land mobile and remote sensing markets. Important Developments In July 2000, we acquired the business of EF Data, the satellite communications division of Adaptive Broadband Corporation, for approximately $54.2 million in cash. Forty million dollars of the purchase price was supplied through institutional secured borrowings bearing interest at 9.25% due in installments through 2005, and the balance from internal company funds. We prepaid $19.2 million of this debt in August 2001. We combined this operation with our existing Arizona Comtech Communications Corp. satellite operations included in our telecommunications transmissions segment. In April 2001, we acquired certain assets and product lines of MPD Technologies, Inc. for $12.7 million. The purchase price was financed through $10 million of institutional secured borrowings and the balance from internal company funds. The secured borrowing bears an interest rate of 8.5% and requires interest only payments through June 2005 at which time the entire principal is due. We combined this operation with our New York Comtech PST Corp. operation in our RF microwave amplifiers segment. On July 31, 2002, we acquired certain assets and assumed certain liabilities of Advanced Hardware Architectures, Inc. for $7.0 million in cash. The purchase price was financed from internal Company funds. This operation is included in our telecommunications transmission segment. 3 Telecommunications Transmission Business Segment The demand for telecommunications is largely tied to emerging economies seeking to modernize their infrastructure and increasingly information-intensive markets introducing new telecommunications services. Advances in technology have lowered per-unit communications costs, increased product reliability and encouraged a proliferation of new enhanced communications products and services. In making procurement decisions, customers for telecommunications transmission equipment must weigh the relative cost and advantages of the six presently available transmission technologies: copper cable, fiber optic cable, high frequency radio systems wireless microwave systems, over-the-horizon microwave systems and satellite systems. Rarely is a complete communications network or system based solely on one of these technologies. Transmission of informationthat can be routed through a combination of technologies, each employed where most cost-effective. Our products are used in systems employing satellite, over-the-horizon microwave, terrestrial line-of-sight microwave and wireless technologies. Copper Cable, the traditional transmission medium most familiar to customers, is being replaced and supplemented by the other media, particularly for high-volume broadband and long distance transmissions where it has substantial capacity, cost and reliability limitations. Fiber Optic Cable is best suited to high-volume broadband, point-to-point, short or long distance links where its advantages - capacity, quality and security - justify the long lead-time and high cost to equip and install a network. High frequency (HF) radio systems employ long wavelengths which are propagated beyond line-of-sight distance either by surface waves traveling along the earth's perimeter or by skywave reflection of the transmitted waves off different layers of the ionosphere. This mode of transmission is very limited in capacity. Wireless and line-of-sight microwave communications systems generally used for point-to-point communications, employ signals with extremely short wavelengths which travel only in line-of-sight paths over relatively short distances, generally under 30 miles, can be quickly and easily installed, require relatively low initial capital investment and provide broadband capacity which can be upgraded and expanded over time. Over-the-horizon microwave communication systems transmit signals over ~~distances~~unfriendly or inaccessible terrain from 30 to 600 miles by ~~reflection of~~reflecting the transmitted signals off the troposphere, an atmospheric layer located approximately seven miles above the earth's surface. Such systems offer a high level of reliability and security, are limited in capacity but are used for transmission over unfriendly terrain. Satellite communications systems have grown and diversified in response to demand for efficient broadband and reliable long distance voice and video communication and digital information exchange. In a satellite communications system, information is relayed to and fromOver-the-horizon microwave transmitting and receiving stations on the ground by means of low earth orbit (LEO), medium earth orbit (MEO), or geostationary earth orbit (GEO) satellites, which are generally placed in an orbit from 600 to 22,300 miles above the earth's equator. Satellite communications systems are ~~particularly useful where long-range, broadband high capacity~~a cost-effective alternative to satellite systems since they do not require the leasing of satellite transponder space. We believe our eight megabit per second adaptive modem is significantly faster than our competitors' modems. Our primary customers in this product line include foreign governments, who have used our systems to, among other things, transport radar tracking information from remote border locations, as well as oil and ~~high quality point-to-point or point-to-multipoint~~gas companies for whom it is essential to maintain communication ~~transmission~~with offshore oil rigs and other remote exploration activities. We believe the U.S. military market is ~~desirable. As few~~also an area of potential growth as ~~three GEO satellites can provide global communications coverage. These systems, which use~~advancements in our over-the-horizon microwave technology are ~~well suited~~enabling new applications for ~~rapid introduction of long distance service in remote areas or where communication alternatives are unavailable,~~these systems, such as ~~mobile, shipboard or defense applications. Our Comtech EF~~the transmission of video.

Forward Error Correction and Data ~~Corp. operating unit, located in Tempe, Arizona, designs, develops, manufactures~~Compression Technology. We design, develop and markets equipment used in commercial and defense satellite communications. The equipment includes modems, frequency up converters and down converters, solid state power amplifiers and satellite VSAT transceivers, which combine our frequency converters with solid state, high-power amplifiers. These products comprise a broad range of receiving and transmitting equipment offering a variety of state-of-the-art technical capabilities with respect to performance, complexity and value. Our turbo codec modem product line offers significantly improved performance, power and bandwidth performance over traditional systems. This operating unit is a combination and integration of our Comtech Communications Corp. subsidiary with the acquired EF Data product line. The 4 ~~acquisition of EF Data's business expanded Comtech's growing telecommunications capabilities and enhanced Comtech's product offerings, distribution reach and~~ market presence. Additionally, it enabled Comtech to enter the satellite networking solution business. Our Comtech AHA Corporation operating unit, located in Pullman, Washington, designs, develops and markets forward error correction integrated circuits and data ~~coding~~compression technology solutions which allow for ~~telecommunications systems customers. This new subsidiary was formed as a result~~more efficient transmission of ~~our acquisition on July 31, 2002 of certain assets~~voice, video and ~~liabilities of Advanced Hardware Architectures, Inc. Comtech AHA Corporation's products include the latest generation~~data in wireless communication channels. We have been issued several U.S. patents relating to our forward error correction technology. We incorporate this technology ~~called Turbo Product Codec (TPC). These patented~~into our satellite earth station modems, which we believe provides us with a competitive advantage. Our data compression technology solutions are used by leading manufactures of copiers and data storage products.

Business Strategies

Our telecommunications transmission segment business strategies are as follows:

Expand Leadership Position in Satellite Earth Station Market – Our satellite earth station modems, which incorporate leading technology such as TPC, chips are an important enabling technology included in Comtech EF Data Corp.'s bandwidth efficient modems. Comtech AHA Corporation has also developed chips used in other telecommunication applications,have established us as a leading provider to domestic and international commercial satellite systems and network customers, as well as ~~data~~U.S. and foreign governments. We recently expanded our product offerings in this area to include access devices and voice gateways which allow customers to consolidate multi-service network traffic such as voice, video and data. When combined with our TPC-enabled

satellite earth station modems, the combined solution is ideal for backhauling cellular traffic using satellites and can reduce customer bandwidth requirements by up to 90%. We expect to continue to expand our leadership position by offering new products and solutions to meet the expected increased demand from commercial, government and defense customers.

Continue to Develop Technology for Efficient Satellite Bandwidth Utilization – As demand for satellite bandwidth continues to increase, technological advances will be needed to provide bandwidth solutions for our customers. We intend to continue to develop next generation advances of our TPC technology and believe this will have important utility in responding to the increasing demand for satellite bandwidth utilization, particularly by U.S. military, security and intelligence agencies. We intend to continue to develop our Internet, TDMA and SCPC based software and products which enable customers to utilize bandwidth management techniques to enable, among others, applications such as video teleconferencing, distance learning, telemedicine and Internet content delivery. We have recently licensed bandwidth compression technology that we will commercially market as Carrier-In-Carrier™. This compression technology, when combined with our advanced forward error correction and modulation techniques, will enable us to integrate additional bandwidth savings functionality into our satellite modems.

Capitalize on Increased Demand for ~~copiers~~Over-the-Horizon Microwave Systems and ~~tape storage. Our Comtech Systems, Inc. operating unit, located~~Upgrades – As the leading supplier in ~~Orlando, Florida, has a~~this specialized product line, ~~consisting~~we anticipate capitalizing on increased demand for these secure systems and demand for upgrades to a large domestic and international installed base of older systems. In light of the reliability and security of these systems, the U.S. military market is also an area of potential growth. We recently received our first significant order from the U.S. military for an over-the-horizon microwave application. In addition, we have successfully demonstrated our ability to transmit video over this communication channel and continue to discuss with the U.S. military a potential upgrade, and eventual replacement, of its inventory of over-the-horizon microwave systems.

Mobile Data Communications Segment

Overview

Our mobile data communications segment provides satellite-based mobile tracking and messaging services and mobile satellite transceivers primarily for defense applications, including logistics, support and battlefield command and control. We believe our system, which is currently being used by U.S. forces in Iraq, is the leading satellite-based mobile data communication system employed by both the U.S. Army warfighter and logistics commands that operates in the L-band frequency range and which provides near real-time messaging and location tracking of mobile assets. Our system and mobile transceivers can be used on a variety of vehicles, including trucks, jeeps, tanks and helicopters and allow communication globally.

The following are the key applications for our products and services:

The U.S. Army's Movement Tracking System – We are currently the sole provider of the U.S. Army logistics command's Movement Tracking System. This prime contract award allows for the purchase of equipment ~~for over-the-horizon microwave~~and services over an eight-year period ending in 2007. We provide MTS services through leased satellite capacity, utilizing our network operations center, mobile transceivers, ruggedized computers and satellite earth station gateways. Through July 31, 2004, we have received orders aggregating $112.5 million under the MTS contract. Of the total orders, $7.2 million relate to battlefield command and control applications as described below. Although we anticipate the continued roll-out of this system to continue, the contract can be terminated at any time and orders are subject to unpredictable funding and deployment decisions.

Battlefield Command & Control Applications – Pursuant to contracts with a major U.S. prime contractor and related subcontractors, as well as the orders mentioned above under the MTS contract, our technology is being integrated into the U.S. Army's Force XXI Battle Command, Brigade and Below (“FBCB2”) command and control systems, also known as Blue Force Tracking (“BFT”). Our efforts include the supply of mobile satellite transceivers, the lease of satellite capacity, the supply and ~~networks. It has a turnkey capability that ranges from system~~operation of the satellite packet data network and network ~~planning through~~gateways, and associated systems support and maintenance.

Commercial Applications – We believe that our satellite-based mobile tracking and messaging services and products may be useful to domestic and international transportation companies, private fleets and heavy equipment ~~and system training and operation and maintenance programs. It also supplies satellite telecommunications systems by combining its products with equipment manufactured by~~fleets throughout the world. We believe that these commercial customers may be able to utilize our ~~other operating units and third parties. Comtech Systems, Inc. markets its~~ products and services to ~~oil~~track the location of their vehicles and ~~gas companies~~to communicate with them en route and ~~other commercial users, foreign defense commands~~better manage their information and ~~system prime contractors.~~operations. Although we currently have little experience in this market, we continue to evaluate this market for our products and services.

Business Strategies

Our mobile data communications segment business strategies are as follows:

Continue to Capitalize on Opportunities with the U.S. Army – The number of logistic and combat vehicles we have equipped to date, as a percentage of the total number of vehicles the U.S. Army deploys, is relatively small. For example, as of July 31, 2004, less than 25.0% of the vehicles that the U.S. Army logistics command has identified a need to equip, have been equipped with our technology. We continue to work closely with the U.S. Army in providing enhancements to both our network capabilities and communications performance and in adding functionality and increased security to our mobile satellite transceivers. We believe our unique knowledge of the Army's requirements and historical experience should allow us to continue to maximize future opportunities.

Leverage our Current Installed Base into other Military Commands – In light of the integration of our mobile satellite transceivers into the U.S. Army's FBCB2 command and control systems used in Iraq, Afghanistan and elsewhere around the world, we believe that ~~Comtech Systems, Inc.'s~~there are a number of opportunities with other military commands. The U.S. Army Reserve has received funding to purchase some of our products ~~which employ~~and services under the MTS contract and we continue to work with a number of other military commands to increase brand and product awareness. In order to meet future needs, we continue to develop next-generation products. For example, we are currently developing miniaturized and upgraded mobile transceivers that will provide increased security and Radio Frequency Integrated Device (“RFID”) functionality.

Explore the Emerging Market for Commercial Satellite-Based Mobile Data Applications – Commercial markets for satellite-based mobile data communications include land mobile applications, remote sensing, utility, maritime and aviation applications. Although the market for commercial satellite-based mobile data applications is extremely competitive, we believe the performance of our ~~patented adaptive modem digital transmission technology, offer high-speed data (8 mbs) benefits over~~system in the ~~traditional analog and digital (2 mbs) over-the-horizon microwave products offered by its competition. Our Comtech Antenna Systems, Inc. operating unit, located~~military setting may establish our system as an attractive choice for users in St. Cloud, Florida, designs, manufactures, and markets a wide variety of fiberglass and aluminum antennas for over-the-horizon microwave and satellite communication applications, including distributed network programming, cable and broadcast television and radio as well as other forms of information and entertainment distribution. Comtech Antenna Systems, Inc. designs antennas for specific types of telecommunications systems and, typically, sells standardized products to independent distributors, prime contractors and end-user customers. Comtech Antenna Systems, Inc.'s antenna product line includes fixed and mobile antenna systems and specialized multi-beam satellite antenna systems that are capable of receiving signals simultaneously from many independent satellites located up to 60 degrees apart. commercial markets.

RF Microwave Amplifier ~~Business~~ Segment ~~Amplifiers~~

Overview

We are one of the largest independent companies designing, developing, manufacturing and marketing solid-state, high power, broadband amplifiers in the microwave and RF spectrums. Our amplifiers reproduce signals with greater power, current or voltage ~~amplitude. Indispensable~~amplitude and are extremely complex and critical to the performance of the systems into which they are incorporated. We sell our amplifiers to domestic and foreign commercial and government users. The following are the principal markets and applications for our amplifiers:

Defense – U.S. and foreign military customers use our amplifiers in a variety of telecommunications systems (such as transmitting and boosting signals) and electronic warfare systems (such as simulation, radar and jamming and in identification friend or foe (“IFF”) systems). We believe that ongoing heightened security concerns are resulting in increased interest in our amplifier products and that the ~~world~~performance and quality of ~~signal processing,~~our amplifiers ~~can be as tiny as~~should enable us to capitalize on increased defense spending. For example, we recently received an order from a ~~microchip for~~U.S. military customer who is using our amplifiers in a ~~hearing aid or as massive as a multi-story building for transmitting radio signals~~system to ~~submerged submarines or~~counteract improvised explosive devices.

Medical and Health – Our amplifiers are key components in oncology treatment systems and allow doctors to ~~outer space. In telecommunications, solid state high-power~~give patients who are suffering from cancer higher doses of radiation while focusing closer on the tumors, thereby avoiding damage to healthy tissue.

Satellite communications – Our amplifiers are used to amplify signals carrying voice, data and fax transmission for ~~radiation from transmitting antennas in~~air-to-satellite-to-ground communications. For example, our amplifiers, when incorporated as part of an aircraft satellite ~~or other wireless telecommunications systems. They are also used to amplify signals in defense, radar~~communication system, can provide passengers with e-mail, Internet access and ~~electronic jamming systems. In the laboratory, solid state, high-power~~video conferencing.

Instrumentation and testing – Manufacturers use our amplifiers ~~are used~~ to test the performance of high power microwave and wireless electronic system components used in cellular and PCS networks. Solid state, high-power amplifiers are also used in electromagnetic compatibility and susceptibility testing. The proliferation of electronic systems in products such as automobiles, computers, wireless telephones, radios, televisions, medical equipment, aircraft and other products has led to increasingly serious problems with electromagnetic interference. Manufacturers, therefore, test thesetheir electronic systems for electromagnetic compatibility and susceptibility ~~using broadband high-power RF microwave amplifiers such as those we manufacture.~~to interference. For example, such testing may be used to determine whether the various electronic systems in a commercial aircraft are likely to be affected by the use of laptop computers, wireless telephones or video games by passengers in flight.

Business Strategies

We manage our RF microwave amplifier segment with the following principal strategies:

Continue to Penetrate the Market for Outsourced Amplifier Production – Because solid-state high-power, broadband amplifiers are important to the performance of the larger systems into which they are incorporated, many companies often prefer to manufacture these amplifiers in-house. We believe that our ~~Comtech PST Corp. operating unit, located~~focus on and expertise in ~~Melville, New York, is one of~~designing and manufacturing solid-state high-power, broadband amplifiers, as well as our high volume manufacturing capability, make us a cost-effective and technologically superior alternative to such in-house manufacturing. Customers, among others, who currently outsource only a small percentage of their in-house amplifier work to us include Rockwell Collins, Raytheon, Thales, Lockheed Martin, Northrop Grumman and Varian.

Expand Marketing and Sales Efforts in the Defense Market – We believe there are a number of ~~independent companies designing, developing, manufacturing and marketing broadband high-power large signal amplifiers~~long-term opportunities in the ~~microwave~~defense and ~~RF spectrums. Our recent acquisition~~military markets, particularly for amplifiers used in electronic warfare such as IFF systems, and that we can increase our share of this market by pursuing partnering with existing and new prime contractors.

Enhance Position as Innovative Supplier by Increasing Research and Development – We will continue to pursue customer funded research and development to fuel new product development, as well as continue our internally funded research and development activities. We expect this emphasis on research and development to enhance our existing product line, develop new capabilities and solidify and strengthen our position in our principal markets.

Key Products, Systems and Services

Business Segment	Products/Systems and Services	Representative Customers	End-User Applications

Telecommunications transmission	Satellite earth station equipment and systems including: analog and digital modems, frequency converters, power amplifiers, transceivers, access devices and voice gateways	Satellite systems integrators, service providers and defense contractors such as Intelsat, PanAmSat, Globecom and Embratel, as well as U.S. and foreign governments	Commercial and defense applications including the transmission of voice, video and data over the Internet, broadband, long distance telephone, broadcast and cable, distance learning and telemedicine

	Over-the-horizon microwave systems and 8 megabit per second adaptive modems	Military customers and related prime manufacturers, as well as oil companies such as ExxonMobil and BP Amoco	Secure defense applications, such as transmission of military data, and commercial applications such as the transmission of voice and data to and from oil platforms

	Forward error correction technology such as Turbo Product Codec (TPC) and data compression technology	Satellite and wireless equipment providers and leading manufacturers of copier and data storage products, such as Sony	Enables more efficient transmission of voice, video and data in wireless communication channels

Mobile data communications	Mobile data tracking and messaging services for mobile assets, as well as related hardware	U.S. Army logistics command and prime contractors to the U.S. Armed Forces	Two-way satellite based mobile tracking, messaging services (U.S. Army's MTS), battlefield command and control applications (FBCB2 or BFT) and commercial applications such as fleet tracking

RF microwave amplifiers	Solid-state high-power, broadband RF microwave amplifiers	Domestic and international defense customers, prime contractors and system suppliers such as Raytheon and Thales, medical equipment companies such as Varian and aviation industry system providers such as Rockwell Collins	Defense applications including communications, radar, jamming and identification friend or foe (IFF) and commercial applications such as medical applications (oncology treatment systems) and satellite communications (including air-to-satellite-to-ground communications)

Acquisitions

We have made acquisitions during the past several years and have followed a disciplined approach in identifying, executing and capitalizing on these acquisitions.

In July 2000, we acquired EF Data, the satellite communications division of Adaptive Broadband Corporation, for approximately $54.2 million in cash. We combined this operation with our then existing Arizona-based satellite earth station equipment operations, which resulted in enhanced product offerings, distribution reach and market presence. The combined operations, which have become a one-stop shop for satellite earth station equipment, are part of our telecommunications transmission segment.

In April 2001, we acquired certain assets and product lines ~~from~~of MPD Technologies, Inc. ~~discussed above, further expands~~for $12.7 million. The acquisition expanded our product offerings, customer base, market and applications in the RF microwave amplifier segment. Products acquired included amplifiers utilized in oncology treatment systems, satellite air-to-ground communications, as well as a wide range of defense applications. We combined this ~~segment~~operation with our then existing New York-based operation in our RF microwave amplifiers segment.

In July 2002, we acquired certain assets and product lines and assumed certain liabilities of Advanced Hardware Architectures, Inc. for ~~applications, including wireless and aircraft air-to-ground satellite telecommunications, medical oncology systems, instrumentation and defense systems. Comtech PST Corp. sells its products~~$6.4 million in cash. The acquisition allowed us to ~~domestic and foreign commercial users, government 5~~ agencies and prime contractors. We believe it is an innovative supplier of these amplifiers and related processing equipment. Mobile Data Communications Services Business Segment The demand for mobile data communications services and products has increased dramatically in recent years for both government and commercial applications. This demand has been driven by advances in digital technology coupled with the need to better locate, track, manage, monitor and communicate with mobile and fixed assets. The transmission of information may be done over various systems, i.e., terrestrial, cellular or satellite, depending on the most cost-effective approach to meet the application's requirements. We are continuing todesign, develop and market forward error correction integrated circuits and data compression technology solutions which provides for more efficient transmission of voice, video and data in wireless communication channels. Products acquired included the patented forward error correction technology, TPC, which is included on a ~~Web-enabled, satellite-based mobile~~chip in our digital satellite earth station modems. We are currently exploring applications for TPC in our over-the-horizon microwave systems and other wireless applications. We also extended our diversified customer base by acquiring certain data ~~communications system.Through~~compression technology solutions that are used by leading manufacturers of copiers and data storage products. This operation is part of our telecommunications transmission segment.

In March 2003, we acquired certain Internet and TDMA-based software for $0.4 million in cash. The acquisition expanded our product line offering in our satellite earth station ~~gateway in Germantown, Maryland,~~equipment and systems market. The software enables our customers to utilize bandwidth management techniques to enable applications such as video teleconferencing, distance learning, telemedicine and Internet content delivery. This operation is part of our telecommunications transmission segment.

In May 2004, we ~~can route signals to~~acquired certain assets and from mobile or fixed, remote terminals via leased satellite capacity. Customers can access their messages or data through an Internet or terrestrial connection to their headquarters' Web sites. In early 1999, Comtech Mobile Datacom Corp. led a multi-company team in competing for the U.S. Army's Movement Tracking System (MTS)product lines and assumed certain liabilities of Memotec, Inc., a ~~system~~subsidiary of Kontron AG, and at the same time, purchased inventory owned by Kontron Canada Inc., for an aggregate purchase price of approximately $5.2 million in cash. The products acquired allow us to offer customers a multi-service platform that converges voice, IP and legacy data over packet-based networks with reduced bandwidth requirements. This operation is part of our telecommunications transmission segment and the manufacturing of these products is being ~~deployed by the U.S. Army for global use~~performed at our high volume technology manufacturing center located in tracking its assets and communicating by message in real time with these vehicles from fixed and mobile command centers. The contract was awarded to Comtech Mobile Datacom Corp. in June 1999. The contract allows for purchases of up to $418.2 million of equipment and services over an eight-year period, and is also open to other government agencies to procure their tracking and messaging requirements. Through July 31, 2002, we have received orders for $34.5 million under this contract, which can be terminated by the U.S. Army at any time. We are working with the U.S. Army to increase the future level of funding for this program in light of the lower than anticipated level of funding to date. Tempe, Arizona.

Sales, Marketing and Customer Support ~~Each of our operating units conducts its own sales and marketing efforts. In some instances, our operating units may bundle other units' products.~~

Sales and marketing strategies vary with particular markets served and include direct sales through sales, marketing and engineering personnel, sales through independent representatives, value-added resellers or a combination of the foregoing. Our operating units enter into sales distribution agreements for certain products with distributors. Unlike sales representatives, who merely find customers on a commission basis, some of our distributors purchase products from us for resale. We intend to continue to expand ~~domestic and~~ international marketing efforts ~~through~~by engaging additional independent sales representatives, distributors and value-added ~~resellers.~~ resellers and by establishing additional Comtech foreign sales offices. As appropriate and as guided by corporate senior management, our three business segments capitalize on manufacturing, technology, sales, marketing and customer support synergies between them.

Our management, technical and marketing personnel establish and maintain relationships with customers. Our strategy includes a commitment to provide ongoing customer support for our systems and equipment. This support involves providing direct access to engineering staff or trained technical representatives to resolve technical or operational issues. ~~Our international~~

Over-the-horizon microwave systems, mobile data tracking and messaging products and services and a portion of our solid-state high-power, broadband RF microwave amplifier product line have long sales ~~(including~~cycles. Once a product is designed into a system, customers may be reluctant to change the incumbent supplier due to the extensive qualification process and potential redesign required in using alternative sources. Accordingly, senior management is actively involved in key aspects of relations with our major customers.

During fiscal 2004, 2003 and 2002, approximately 40.1%, 44.2% and 33.8%, respectively, of our net sales resulted from contracts with the U.S. government or prime contractors to the U.S. government. International sales comprised 45.4%, 39.7% and 41.2% of net sales during fiscal 2004, 2003 and 2002, respectively. International sales include sales to ~~prime contractors'~~domestic companies for inclusion in products which will be sold to international ~~customers) from all three business segments~~customers. Domestic commercial sales represented ~~approximately 41.2%~~14.5%, ~~46.2%~~16.1% and ~~71.4%~~25.0% of total net sales infor fiscal 2004, 2003 and 2002, ~~2001~~respectively. During fiscal 2004 and ~~2000, respectively. We expect that international~~2003, sales ~~will remain~~to one customer, a ~~substantial portion of our total sales for the foreseeable future. Domestic commercial sales~~prime contractor, represented ~~approximately 25.0%, 30.7%~~12.5% and 19.8% of ~~our~~ total net sales, ~~in fiscal 2002, 2001 and 2000,~~ respectively. The balance of our sales were to U.S. government departments or agencies and represented 33.8%, 23.1% and 8.8% of our total net sales in fiscal 2002, 2001 and 2000, respectively. In fiscal 2002, sales to the U.S. Army for the Movement Tracking System represented 13.2% of our total net sales. There were no customers in fiscal ~~2001 which constituted~~2002, other than the U.S. government, that represented 10% or more of our total net sales. Direct and indirect sales to a North African country, including certain sales to the prime contractor mentioned above, during fiscal 2004 and 2003 represented 14.1% and 10.2%, respectively, of total net sales. Sales to ~~one customer, a major U.S. aerospace prime contractor, represented 43.1% of our total net sales for~~this North African country did not exceed 10.0% in fiscal ~~2000. A substantial portion of our sales may be derived from a relatively small number of large customer contracts.~~ 2002.

Backlog

Our backlog as of July 31, ~~2002~~2004 and ~~2001~~2003 was approximately ~~$44.1~~$83.5 million and ~~$50.1~~$100.1 million, respectively. We expect that a ~~substantial~~ majority of the backlog as of July 31, ~~2002~~2004 will be recognized as sales during fiscal ~~2003.~~2005. We received advance payments and deposits aggregating approximately ~~$2.2~~$7.3 million as of July 31, ~~2002~~2004 in connection with 6 orders included in the backlog at that date. At July 31, ~~2002,~~2004, approximately ~~40.9%~~56.1% of ~~that~~the backlog consisted of U.S. government contracts, subcontracts and government funded programs, approximately ~~33.7%~~29.4% consisted of orders for use by foreign customers (including sales to prime contractors' international customers) and approximately ~~25.4%~~14.5% consisted of orders for use by domestic commercial customers. Subsequent to July 31, 2004, we received a $77.0 million contract in our telecommunications transmission segment which will significantly increase our backlog as of October 31, 2004.

Our backlog consists solely of ~~orders believed to be firm.~~firm orders. In the case of contracts with departments or agencies of the U.S. government, including our MTS contract discussed above, orders are only included in backlog to the extent funding has been obtained for such orders. All of the contracts in our backlog are subject to cancellation at the convenience of the customer or for default in the event that we are unable to perform under the contract.

Variations in backlog from time to time are attributable, in part, to the timing ~~of our preparation and submission~~ of contract proposals, the timing of contract awards and the delivery schedules on specific contracts. As a result, we believe our backlog at any point in the fiscal year is not necessarily indicative of the total sales anticipated for any particular future period. Our ~~Comtech Antenna~~satellite earth station equipment, forward error correction product lines and ~~Comtech EF Data businesses~~a portion of our RF microwave amplifier business operate under short lead times and usually generate sales out of ~~inventory, as is also the case for a significant portion of our Comtech PST amplifier business.~~ inventory.

Manufacturing and Service

Our manufacturing operations consist principally of the assembly and testing of electronic products that we design and build from purchased fabricated parts, printed circuits and electronic components and, in the case of antennas, the casting of fiberglass antennas.

We consider our facilities to be well maintained and adequate for current and planned production requirements. All of our manufacturing facilities, including those that serve the military market, must comply with stringent customer specifications. We employ formal quality management programs and other training programs, including the International ~~Standards~~Standard Organization's ~~(ISO 9000)~~(ISO-9000) quality procedure registration programs. ~~Our Comtech PST Corp., Comtech Systems, Inc. and Comtech EF Data Corp. operating units have been qualified for ISO 9001.~~

Our ability to deliver products to customers on a timely basis is dependent, in part, upon the availability and timely delivery by subcontractors and suppliers of the components and subsystems that we use in manufacturing our products. Electronic components and raw materials used in our products are generally obtained from independent suppliers. Some components are standard items and are available from a number of suppliers. Others are manufactured to our specifications by subcontractors. WeAlthough we obtain certain components and subsystems from a single source or a limited number of ~~sources. We~~sources, we believe that most components and equipment are available from ~~existing or alternative suppliers and subcontractors. A significant interruption in the delivery of such items could have a material adverse effect on our business and results of operations.~~ multiple sources.

Research and Development The technology used in our products is subject to rapid development and frequent change. Our business position is in large part contingent upon the continuous refinement of our scientific and engineering expertise and the development, either through research and development or acquisitions, of new or enhanced products and technologies. A majority of our sales in fiscal 2002 were of products developed by us or acquired through acquisitions within the past five years. Our aggregate research and development expenditures (internal and customer funded) were 11.0%, 8.7% and 10.4% of total net sales in fiscal 2002, 2001 and 2000, respectively.

We reported ~~internal~~ research and development expenses for financial reporting purposes of ~~$11.0~~$15.9 million, ~~$10.2~~$12.8 million and ~~$2.6~~$11.0 million in fiscal ~~2002, 2001~~2004, 2003 and ~~2000,~~2002, respectively, representing ~~9.3%~~7.1%, ~~7.5%~~7.4% and ~~4.0%~~9.3% of total net sales, respectively, for these periods.

A portion of our research and development efforts relates to the adaptation of our basic technology to specialized customer requirements and is recoverable under ~~such~~ contracts, and such expenditures are not included in our research

and development expenses for financial reporting purposes. During fiscal ~~2002, 2001~~2004, 2003 and ~~2000,~~2002, we were reimbursed by customers for such activities in the amounts of $5.7 million, $3.7 million and $2.0 million, ~~$1.7~~respectively. Our aggregate research and development expenditures (internal and customer funded) were $21.7 million, $16.5 million and ~~$4.3~~$13.1 million ~~respectively. Patents~~or 9.7%, 9.5% and ~~Licenses Although~~11.0% of total net sales in fiscal 2004, 2003 and 2002, respectively.

Intellectual Property

We rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. The products we ~~own or hold licenses for a number~~sell require significant engineering design and manufacturing expertise. The majority of these technological capabilities, however, are not protected by patents ~~licenses~~ and patents have been of substantially less significance in our business than our scientific and engineering know-how, production techniques, the timely application of our technology and the design, development and marketing capabilities of our personnel. Generally, welicenses. We rely on the ~~laws~~expertise of ~~unfair competition, restrictions~~our employees and our learned experiences in ~~licensing agreements~~both the design and ~~confidentiality agreements to protect such knowledge~~manufacture of our products and ~~techniques. However, Comtech AHA's TPC chips are~~the delivery of our services.

Some of our telecommunications transmission technology is protected by patents, which are significant into protecting ~~this~~our proprietary technology. ~~In addition, Comtech Systems' 8mbs adaptive modem for 7~~ ~~over-the-horizon microwave applications~~We have been issued several U.S. patents relating to forward error correction technology that is ~~protected by~~utilized in our turbo product codec satellite modems. The earliest of these patents ~~and is the only modem~~expires in ~~the world capable of 8mbs of transmission over a troposcatter channel.~~ 2012.

Competition

Our ~~product~~ businesses are highly competitive and characterized by rapid technological change. ~~In addition, the number of potential~~A significant technological breakthrough by others, including new companies or our customers, ~~for~~could have a material adverse effect on our ~~products is limited.~~business. Our growth and financial condition depend on, among other things, on our ability to keep pace with such changes and developments and to respond to the sophisticated requirements of an increasing variety of electronic equipment ~~users. Many~~users and transmission technologies.

Certain of our competitors are substantially larger, have significantly greater financial, marketing, research and development, technological and operating resources and broader product lines than we do. ~~A significant technological breakthrough by others, including smaller~~The principal competitors ~~or new companies could have a material adverse effect on~~in our ~~business.~~telecommunications transmission segment include ViaSat, Inc., Radyne ComStream Corporation, Miteq, Inc. and Marconi Corporation plc. The principal competitors in our mobile data communications segment include Qualcomm, Inc. and EMS Technologies, Inc. The principal competitors in our RF microwave amplifier segment include Herley Industries, Inc., Zeta (a division of DRS Technologies, Inc.) and ARKalmus. In addition, certain of our customers, such as prime contractors who currently outsource their engineering and manufacturing requirements to us, have technological capabilities in our product areas and could choose to replace our products with their own. In the market for mobile data communications services, there are several much larger competitors with existing systems. The most prominent of these competitors is Qualcomm Incorporated. Existing competitors are aggressively pricing their products and services and may continue to do so in the future. We anticipate that new competitors will enter the market in the future. Competitors continue to offer new value-added products and services, which we may be unable to match on a timely or cost-effective basis. Increased competition may impact margins throughout the industry.

We believe that competition in all of our markets is based primarily on product performance, reputation, delivery times, customer support and price. Due to our ~~decentralized~~flexible organizational structure and proprietary know-how, we believe we have the ability to develop, produce and to deliver equipment on a cost-effective basis faster than many of our competitors. ~~Key Personnel/~~

Employees We believe our success is dependent upon the continued contributions of our key management personnel, including the key management at each of our operating units, and depends to a significant extent upon Fred Kornberg, our Chairman, Chief Executive Officer and President. Many of our key personnel, particularly the key engineers, would be difficult to replace, and are not subject to employment or non-competition agreements. Our growth and future success will depend in large part upon our ability to attract and retain highly qualified engineering, sales and marketing personnel. Competition for such personnel from other companies, academic institutions, government entities and other organizations is intense. Although we believe we have been successful to date in recruiting and retaining key personnel, we may not be successful in attracting and retaining the personnel we require in order to continue to grow and operate profitably. The management skills that have been appropriate for our business in the past may not continue to be appropriate if our business continues to grow and diversify.

At July 31, ~~2002,~~2004, we had ~~626~~842 employees ~~316~~(including temporary employees and contractors), 438 of whom were engaged in production and production support, ~~178~~243 in research and development and other engineering support and ~~132~~161 in marketing and administrative functions. None of ~~the~~our employees are represented by a labor union. We believe that our employee relations are good. ~~Compliance with Federal, State and Local Environment Protection Laws~~

Regulatory Matters

We are subject to a variety of local, state and federal governmental regulations. Our products that are incorporated into wireless communications systems must comply with various governmental regulations, ~~relating to~~including those of the ~~storage, discharge, handling, emission, generation, manufacture~~Federal Communications Commission. Our manufacturing facilities, which may store, handle, emit, generate and ~~disposal~~dispose of ~~toxic or other~~ hazardous substances that are used toin the manufacture of our products, ~~particularly~~are subject to a variety of local, state and federal regulations, including those issued by the Environmental Protection Agency. Our international sales are subject to U.S. and foreign regulations and may require licenses from U.S. government agencies or require the payment of certain tariffs. Our financial reporting, corporate governance, public disclosure and compliance practices are governed by laws such as the Sarbanes-Oxley Act of 2002 and rules and regulations issued by the Securities and Exchange Commission. As a U.S. government contractor and subcontractor, we are subject to a variety of rules and regulations, such as the Federal Acquisitions Regulations.

To date, we have incurred costs in connection with the fabrication of fiberglass antennas by Comtech Antenna Systems, Inc. We believe that we are currently in compliance, in all material respects, with such regulations and that we have obtained all necessary environmental permits to conduct our business. To date, compliance with ~~federal, state or local environment protection laws has~~these regulations in the normal course of business. We have not ~~had a~~experienced material ~~effect on~~changes to our earnings, capital expenditures ~~earnings~~ or competitive position ~~and we do not expect that~~caused by unexpected expenditures in connection with complying with such ~~compliance will have a material effect in the future.~~ regulations.

ITEM 2. PROPERTIES

Our corporate offices are located in a portion of ~~the~~a 46,000-square foot engineering and manufacturing facility on more than two acres of land in Melville, New ~~York, which also houses Comtech PST.~~York. This facility is primarily used by our RF microwave amplifier segment. We lease this facility from a partnership controlled by our Chairman, Chief Executive Officer and President. The lease, as amended, provides for our use of the premises as 8 they now exist for a term of ten years through December 2011. We have a right of first refusal in the event of a sale of the facility. The base annual rental under the lease is subject to customary adjustments. ~~We lease the 32,000-square~~

Although primarily used for our satellite earth station product lines which are part of our telecommunications transmission segment, all three of our business segments utilize a 113,000-square foot, ~~facility on eight acres of land used by Comtech Antenna Systems, Inc.~~high-volume manufacturing center located in ~~St. Cloud, Florida from an unrelated third party.~~Tempe, Arizona. This manufacturing center utilizes state-of-the-art design and production techniques, including analog, digital and RF microwave production, hardware assembly and full service engineering. The lease ~~provides~~ for ~~our exclusive use of the premises as they now exist for a term expiring September 2003. We~~this facility expires in February 2006 and we have the option to extend the term of the lease for an additional five-year period. The base annual rental under the lease is subject to adjustments. We lease a 72,500-square foot facility for Comtech Systems, Inc. in Orlando, Florida from an unrelated third party. The lease provides for the exclusive use of the premises as they now exist through April 2007. The base annual rental is subject to adjustments. We lease a 113,000-square foot facility in Tempe, Arizona for our Comtech EF Data Corp. operating unit from an unrelated third party. The lease provides for the exclusive use of the premises as they now exist through February 2006. We have the option to extend the term of the lease for

Our telecommunications transmission segment leases an additional ~~five-year period. We lease 10,500-square~~seven facilities of which four are located in the United States. The United States facilities aggregate 194,500-square feet ~~of space~~and are primarily utilized for manufacturing, engineering, and general office use. Our telecommunications transmission segment also operates three small offices in China, North Africa and Canada that are primarily utilized for customer support, engineering and sales. Our mobile data communications segment operates in a 32,000 square foot facility located in Germantown, ~~Maryland~~Maryland. The lease terms for all of these facilities are generally for multi-year periods and we believe that is used by Comtech Mobile Datacom Corp. from an unrelated third party. This lease provides for the exclusive use of the premises as they now exist through August 2004. We lease 6,000-square feet of space located in Pullman, Washington that is used by Comtech AHA Corporation from an unrelated third party. This lease provides for the exclusive use of the premises as they now exist through July 2005. we will be able to renew these leases or find comparable facilities elsewhere.

ITEM 3. LEGAL PROCEEDINGS In or about December 2000, two former employees, Shiv Verma and Robert Levin, commenced an action in the United States District Court, District of New Jersey, against the Company and others asserting, among other things, breach of certain restricted stock agreements and seeking unspecified monetary damages, specific performance of the restricted stock agreements, including the issuance of an aggregate 225,000 shares of the Company's common stock for a purchase price of $.10 per share, and other relief. The Company asserted defenses against the claims and interposed certain counterclaims and third-party claims against NJL, Inc., a company then controlled by Mr. Verma. In April 2002, Mr. Levin dismissed his claims against the Company, and the Company in return dismissed its counterclaims against him, without payment of any monies by either party, with both the Company and Mr. Levin executing general releases. On July 22, 2002, the District Judge dismissed Verma's complaint with prejudice and the Company's counterclaims against Verma without prejudice. On August 8, 2002, the Company voluntarily dismissed its third-party claims against defendant NJL, Inc., without prejudice. As a result, there are no claims or counterclaims pending by or against any party to the action, and the case has been closed on the Court's docket.

We are subject to certain ~~other~~ legal actions, which arise in the normal course of business. WeAlthough the ultimate outcome of litigation is difficult to accurately predict, we believe that the outcome of these actions will not have a material effect on our consolidated financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to our stockholders during the fourth quarter of the fiscal year ended July 31, ~~2002. 9~~ 2004.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, ~~AND~~ RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on the Nasdaq National Market under the symbol ~~"CMTL".~~“CMTL.” The following table shows the quarterly range of the high and low sale prices for our common stock as reported by the Nasdaq National ~~Market.~~Market, as adjusted to reflect the three-for-two stock split effected in July 2003. Such prices do not include retail markups, markdowns, or commissions. Common Stock ------------ High Low ---- --- Fiscal Year Ended 7-31-01 First Quarter $19.88 12.00 Second Quarter 19.50 9.00 Third Quarter 19.00 11.00 Fourth Quarter 17.99 11.45 Fiscal Year Ended 7-31-02 First Quarter $16.45 12.50 Second Quarter 13.83 11.15 Third Quarter 12.90 8.25 Fourth Quarter 10.72 6.31

	Common Stock
	High		Low
Fiscal Year Ended 7-31-03
First Quarter	$	6.08		3.83
Second Quarter		7.93		4.88
Third Quarter		9.71		5.89
Fourth Quarter		23.60		9.67

Fiscal Year Ended 7-31-04
First Quarter		32.90		14.60
Second Quarter		39.52		26.67
Third Quarter		34.20		15.90
Fourth Quarter		23.88		14.93

Dividends

We have never paid cash dividends on our common stock and we intend to continue this policy for the foreseeable future. We expect to use earnings to finance the development and expansion of our businesses. Our Board of Directors reviews our dividend policy periodically. The payment of dividends in the future will depend upon our earnings, capital requirements, financial condition and other factors considered relevant by our Board of Directors.

Recent Sales of Unregistered Securities

On July 16, 2003, we sold 2.1 million shares of our common stock to a limited number of accredited investors in a private placement transaction for an aggregate price of approximately $40.6 million (or $19.33 per share). We used a portion of the net proceeds of $38.2 million from the sale of shares to prepay long-term debt and will use the balance for other corporate purposes.

The securities offered and sold in the private placement were not registered with the SEC and were sold without registration in reliance upon the exemption from securities registration afforded by the provisions of Regulation D under the Securities Act of 1933, as amended. We registered for resale the shares sold in the private placement by filing a registration statement with the SEC, which became effective in August 2003.

In addition to the private placement, we sold, in the aggregate, 31,580 and 54,736 shares of our common stock to holders of warrants who exercised purchase rights during fiscal 2004 and 2003, respectively. These warrants for the purchase of shares of our common stock were issued in connection with our acquisition of Mobile Datacom Corporation in September 1998 and were issued with an exercise price of $4.38 per share.

On January 27, 2004, we issued $105.0 million of 2.0% convertible senior notes in a private offering pursuant to Rule 144A under the Securities Act of 1933, as amended. During certain periods, the notes are convertible into shares of our common stock at an initial conversion price of $47.25 per share (a conversion rate of 21.1640 shares per $1,000 original principal amount of notes), subject to adjustment in certain circumstances. The notes may be converted if, during a conversion period on each of at least 20 trading days, the closing sale price of our common stock exceeds 120% of the conversion price in effect. Upon conversion of the notes, in lieu of delivering common stock, we may, in our discretion, deliver cash or a combination of cash and common stock. We may, at our option, redeem some or all of the notes on or after February 4, 2009. Holders of the notes will have the right to require us to repurchase some or all of the outstanding notes on February 1, 2011, February 1, 2014 and February 1, 2019 and upon certain events, including a change in control. If not redeemed by us or repaid pursuant to the holders' right to require repurchase, the notes mature on February 1, 2024.

The 2.0% interest is payable in cash, semi-annually, through February 1, 2011. After such date, the 2.0% interest will be accreted into the principal amount of the notes. Also, commencing with the six month period beginning

February 1, 2009, if the average note price for the applicable trading period equals 120% or more of the accreted principal amount of such notes, we will pay contingent interest at an annual rate of 0.25%.

The notes are general unsecured obligations of Comtech, ranking equally in right of payment with all of our other existing and future unsecured senior indebtedness and senior in right of payment to any of our future subordinated indebtedness. All of our subsidiaries have issued full and unconditional guarantees in favor of the holders of our 2.0% convertible senior notes, except for our subsidiary that purchased certain assets and assumed certain liabilities of Memotec (the “Memotec Subsidiary”). The Memotec Subsidiary's total assets, equity, sales, income from continuing operations before income taxes and cash flows from operating activities were less than 3% of the corresponding consolidated amount. These full and unconditional guarantees are joint and several. Other than supporting the operations of its subsidiaries, Comtech Telecommunications Corp. (the “Parent”) has no independent assets or operations and there are currently no significant restrictions on its ability, or the ability of the guarantors, to obtain funds from each other by dividend or loan.

The net proceeds of the offering are being used for working capital and general corporate purposes and potentially may be used for future acquisitions of businesses or technologies or repurchases of our common stock. We filed a registration statement with the SEC, which became effective in April 2004, for the resale of the notes and the shares of common stock issuable upon conversion of the notes.

Issuer Purchases of Equity Securities

We did not repurchase any of our equity securities during fiscal 2004.

Approximate Number of Equity Security Holders

As of ~~October 11, 2002~~September 14, 2004, there were approximately ~~705~~793 holders of ~~the Company's~~our common stock. Such number of record owners was determined from ~~the Company~~our shareholders' records and does not include beneficial owners of ~~the Company's~~our common stock held in the name of various security holders, dealers and clearing agencies.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table shows selected historical consolidated financial data for ~~the~~our Company. Detailed historical financial information is included in the audited consolidated financial statements for fiscal years ~~2002~~2004 and ~~2001. 10~~
Years Ended July 31, (In thousands, except per share amounts) 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- Consolidated Statement of Operations Data: Net sales $ 119,357 135,931 66,444 37,886 30,114 Cost of sales 78,780 87,327 45,942 26,405 21,330 --------- --------- --------- --------- --------- Gross profit 40,577 48,604 20,502 11,481 8,784 Expenses: Selling, general and administrative 22,512 22,707 12,058 6,554 6,013 Research and development 11,041 10,190 2,644 2,022 1,319 In-process research and development 2,192 -- 10,218 -- -- Amortization of intangibles 1,471 2,552 230 78 -- --------- --------- --------- --------- --------- 37,216 35,449 25,150 8,654 7,332 --------- --------- --------- --------- --------- Operating income (loss) 3,361 13,155 (4,648) 2,827 1,452 Other expenses (income): Interest expense 3,061 4,015 381 204 234 Interest income (452) (2,303) (1,511) (65) (36) Other (income) expense, net (28) 841 201 (39) (30) --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes 780 10,602 (3,719) 2,727 1,284 Provision (benefit) for income taxes (368) 3,888 85 (3,754) 180 --------- --------- --------- --------- --------- Income (loss) from continuing operations 1,148 6,714 (3,804) 6,481 1,104 Discontinued operations: Loss from operations of discontinued segment (less applicable income tax benefit of $79 in 2000 and $320 in 1999) -- -- (137) (622) -- Loss on disposal of discontinued segment, including provision of $430 for operating losses during phase out period (net of income tax benefit of $306) -- -- -- (594) -- --------- --------- --------- --------- --------- Net income (loss) $ 1,148 6,714 (3,941) 5,265 1,104 ========= ========= ========= ========= ========= Basic income (loss) per share: Income (loss) from continuing operations $ 0.15 0.91 (0.67) 1.56 0.28 Loss from discontinued operations -- -- (0.02) (0.29) -- --------- --------- --------- --------- --------- Basic income (loss) $ 0.15 0.91 (0.69) 1.27 0.28 ========= ========= ========= ========= ========= Diluted income (loss) per share: Income (loss) from continuing operations $ 0.15 0.85 (0.67) 1.42 0.27 Loss from discontinued operations -- -- (0.02) (0.27) -- --------- --------- --------- --------- --------- Diluted income (loss) $ 0.15 0.85 (0.69) 1.15 0.27 ========= ========= ========= ========= ========= Weighted average number of common shares outstanding - Basic 7,461 7,348 5,663 4,143 3,902 Potential dilutive common shares 344 562 -- 430 264 --------- --------- --------- --------- --------- Weighted average number of common and common equivalent shares outstanding assuming dilution - Diluted 7,805 7,910 5,663 4,573 4,166 ========= ========= ========= ========= =========
2003.

	Years Ended July 31, (In thousands, except per share amounts)
	2000			2001			2002			2003			2004

Consolidated Statement of Operations Data:
Net sales	$	66,444			135,931			119,357			174,035			223,390
Cost of sales		45,942			87,327			78,780			114,317			135,858

Gross profit		20,502			48,604			40,577			59,718			87,532
Expenses:
Selling, general and administrative		12,058			22,707			22,512			28,045			36,016
Research and development		2,644			10,190			11,041			12,828			15,907
In-process research and development		10,218			—			2,192			—			940
Amortization of intangibles		230			2,552			1,471			2,039			2,067

		25,150			35,449			37,216			42,912			54,930

Operating income (loss)		(4,648	)		13,155			3,361			16,806			32,602
Other expenses (income):
Interest expense		381			4,015			3,061			2,803			1,425
Interest income		(1,511	)		(2,303	)		(452	)		(275	)		(921	)
Other (income) expense, net		201			841			(28	)		—			—


Income (loss) from continuing operations before income taxes		(3,719	)		10,602			780			14,278			32,098
Provision (benefit) for income taxes		85			3,888			(368	)		4,569			10,271

Income (loss) from continuing operations		(3,804	)		6,714			1,148			9,709			21,827
Discontinued operations:
Loss from operations of discontinued segment (less applicable income tax benefit of $79 in 2000)		(137	)		—			—			—			—

Net income (loss)	$	(3,941	)		6,714			1,148			9,709			21,827


Basic income (loss) per share:
Income (loss) from continuing operations	$	(0.45	)		0.61			0.10			0.85			1.55
Loss from discontinued operations		(0.01	)		—			��			—			—

Basic income (loss)	$	(0.46	)		0.61			0.10			0.85			1.55


Diluted income (loss) per share:
Income (loss) from continuing operations	$	(0.45	)		0.57			0.10			0.80			1.42
Loss from discontinued operations		(0.01	)		—			—			—			—

Diluted income (loss)	$	(0.46	)		0.57			0.10			0.80			1.42


Weighted average number of common shares outstanding –
Basic		8,495			11,022			11,192			11,445			14,119
Potential dilutive common shares		—			843			516			748			1,261

Weighted average number of common and common equivalent shares outstanding assuming dilution –
Diluted		8,495			11,865			11,708			12,193			15,380

(Continued) 11

Other Consolidated Operating Data: Backlog at period-end $ 44,121 50,094 50,538 38,637 15,452 New orders 113,384 135,487 78,345 61,071 30,842 Research and development-internal and customer funded 13,070 11,846 6,916 3,801 1,675 EBITDA (1) 10,783 19,730 7,954 4,337 2,658
~~(1) Earnings from continuing operations before interest, taxes, depreciation and amortization and non-recurring items (primarily in-process research and development charges).~~
As of July 31, (In thousands) 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- Consolidated Balance Sheet Data: Total assets $ 126,586 146,988 126,031 29,847 19,710 Working capital 51,577 67,089 65,267 10,192 8,917 Long-term debt 28,683 42,000 37,900 -- -- Long-term capital lease obligations 1,294 2,157 908 959 1,445 Other long-term liabilities 58 259 367 -- -- Stockholders' equity 67,288 65,565 57,782 18,357 12,093

Other Consolidated Operating Data:

Backlog at period-end
     $ 50,538          50,094          44,121          100,142          83,549
New orders
     78,345          135,487          113,384          230,056          206,797
Research and development expenditures
– internal and customer funded
     6,916          11,846          13,070          16,504          21,656

As of July 31,
(In thousands)
2000
2001
2002
2003
2004
Consolidated Balance Sheet Data:

Total assets
     $ 126,031          146,988          126,586          164,250          306,390
Working capital
     65,267          67,089          51,577          74,801          201,218
Long-term debt
     37,900          42,000          28,683          —          —
Convertible senior notes
     —          —          —          —          105,000
Long-term capital lease obligations
     908          2,157          1,294          393          158
Stockholders' equity
     57,782          65,565          67,288          117,568          142,398

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~Overview~~

We design, develop, produce and market ~~sophisticated wireless~~innovative products, systems and services for advanced communications solutions. We conduct our business through three complementary segments: telecommunications transmission, mobile data communications and RF microwave amplifiers. We sell our products into commercial and government markets where we believe we have technological, engineering, systems design or other expertise that differentiate our product offerings. We believe we are a leader in the market segments that we serve.

Our telecommunications transmission segment, our largest business segment, provides specialized 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~~wireless line-of-sight microwave telecommunications systems. Our ~~business consists of three segments: telecommunications transmission, RF microwave amplifiers and~~ mobile data communications ~~services.~~segment provides satellite-based mobile location, tracking and messaging services and mobile satellite transceivers primarily for defense applications, including logistics, support and battlefield command and control. Our ~~sales are made to domestic~~RF microwave amplifier segment designs, manufactures 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, amarkets solid-state, high power, broadband RF microwave amplifier products.

A substantial portion of our sales may be derived from a limited number of relatively large customer contracts, the timing of revenues from 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. Sales consist~~quarter-to-quarter and period-to-period comparisons may not be indicative 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. performance.

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~~revenue is recognized on the percentage-of-completion method. Profits expected to be realized on contracts are based on total estimated sales value as ~~related~~compared to total 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. 12

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 prepaid 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.~~ other administrative costs.

Our research and development expenses relate to both existing product enhancement and new product development. A portion of our research and development ~~efforts~~effort is related to specific contracts and is recoverable under those contracts because ~~they are~~it is 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. Comtech Wireless, Inc. designed and manufactured wireless local loop systems for the rural and remote telephony market. Due to disappointing results and uncertain prospects, effective July 31, 1999, we adopted a plan to liquidate Comtech Wireless, Inc. on or about January 31, 2000. The results of operations for the segment have been shown as a discontinued operation in the consolidated financial statements. 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 was accounted for under the purchase method of accounting. The purchase price amounted to approximately $0.4 million, 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 is part of the RF microwave amplifiers segment. The excess of the purchase price over the net assets acquired of approximately $0.6 million, net of amortization, is included in goodwill in the accompanying consolidated balance sheet.

In July 2000, we acquired the business of EF Data, the satellite communications division of Adaptive Broadband Corporation for cash. 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 the acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $26.8 million, of which $10.2 million was allocated to in-process research and development and expensed as of the acquisition date. Forty million dollars of the purchase price was supplied through institutional secured borrowings bearing interest at 9.25% due in installments through 2005, and the balance from internal company funds. In April 2001, we acquired certain assets and product lines of MPD Technologies, Inc. for cash. The acquisition was accounted for under the purchase method of accounting. Accordingly, we 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 $9.8 million. The purchase price was financed through $10 million of institutional secured borrowings and the balance from internal company funds. The secured borrowing bears interest at a rate of 8.5% and requires interest only payments through June 2005 at which time the entire principal is due. We combined this operation with our Comtech PST Corp. operation in our RF microwave amplifiers segment. On July 31, 2002, we acquired certain assets and assumed certain liabilities of Advanced Hardware Architectures, Inc. (“AHA”) for $6.4 million in cash. 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. 13 The results of operations in our telecommunications transmission segment include the AHA related business commencing in August 2002.

In May 2004, we acquired certain assets and assumed certain liabilities of Memotec, Inc. (“Memotec”), a subsidiary of Kontron AG, and at the same time, purchased related inventory owned by Kontron Canada Inc., for an aggregate purchase price of approximately $5.2 million in cash. 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 $3.2 million, of which $0.9 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 Memotec related business commencing in May 2004.

~~Critical Accounting Policies ~~The Company considers~~~~

~~We consider certain accounting policies to be critical due to the estimation process involved in each.~~

Revenue Recognition on Long-Term ~~Contracts~~ 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. Revenue is recognized based on the relationship of total costs incurred to total projected costs, or, alternatively, based on output measures, such as units delivered. Profits expected to be realized on such contracts are based on total estimated sales for the contract compared to total estimated costs, including warranty 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~~our largest contracts, including ~~its~~our contract with the U.S. Army for the Movement Tracking System, are accounted for using the percentage-of-completion method. We have been engaged in the production and delivery of goods and services on a continual basis under contractual arrangements for many years. Historically, we have demonstrated an ability to accurately estimate revenues and expenses relating to our long-term contracts. However, there exist inherent risks and uncertainties in estimating revenues and expenses and progress toward completion, particularly on larger or longer-term contracts. If ~~the Company does~~we do not accurately estimate the total sales, ~~and~~ related costs and progress towards completion 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~~changes in margins or contract losses could be material to ~~the Company's~~our results of operations and financial position. ~~The cumulative orders to-date under~~

In addition, most government contracts have termination for convenience clauses that provide the ~~Movement Tracking System contract have been far below the Army's initial requirements. The Company is currently in active discussions~~customer with the ~~Army~~right to ~~address~~terminate the ~~funding shortfalls experienced to date on this program. The ultimate resolution of these discussions~~contract at any time. Such terminations could ~~result~~impact the assumptions regarding total contract revenues and expenses utilized in ~~among other things, material changes to the estimates used in applying~~recognizing profit under the percentage-of-completion method of accounting. Changes to these assumptions could materially impact our results of operations and financial position. Historically, we have not experienced material terminations of our long-term contracts.

We also address customer acceptance provisions in assessing our ability to perform our contractual obligations under long-term contracts. Our inability to perform on our long-term contracts could materially impact our results of operations and financial position. Historically, we have been able to perform on our long-term contracts.

Impairment of Intangible ~~Assets~~ Assets. As of July 31, ~~2002, the Company's~~2004, our company's intangible assets, including goodwill, aggregated ~~$30.6~~$29.4 million. In assessing the recoverability of ~~the Company's~~ goodwill and other intangibles, ~~the Company~~we 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~~we 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~~our results of operations.

Provisions for Excess and Obsolete ~~Inventory~~ Inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based on historical and future usage trends. ~~The review of excess and obsolete inventory primarily relates to our telecommunications transmission and RF microwave amplifier segments.~~ 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~~our financial statements at the time of such determination. Any such charges could be material to ~~the Company's~~our results of operations and financial position.

Allowance for Doubtful ~~Accounts~~ 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~~seek to obtain insurance for certain international customers that we have determined could be a credit risk. However, we are not able to obtain irrevocable letters of credit or credit insurance in all instances. 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 14 and financial health of specific customers. Changes to the estimated allowance for doubtful accounts could be material to ~~the Company's~~our results of operations and financial position.

~~Results of Operations~~

The following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of our net sales:
Year Ended July 31, ------------------------------------------------------------------------ 2002 2001 2000 --------------------- --------------------- ---------------------- Net sales 100.0% 100.0% 100.0% Gross margin 34.0 35.8 30.9 Selling, general and administrative expenses 18.9 16.7 18.1 Research and development expenses 9.3 7.5 4.0 Amortization of intangibles 1.2 1.9 0.4 Operating income (loss) from continuing operations 2.8 9.7 (7.0) Interest expense (income), net 2.2 1.3 (1.7) Income (loss) before income taxes 0.7 7.8 (5.6) Net income (loss) 1.0 4.9 (5.9)

Year Ended July 31,
2004
2003
2002
Net sales
     100.0 %                      100.0 %                      100.0 %
Gross margin
     39.2                      34.3                      34.0
Selling, general and administrative expenses
     16.1                      16.1                      18.9
Research and development expenses
     7.1                      7.4                      9.3
In-process research and development
     0.4                      —                      1.8
Amortization of intangibles
     0.9                      1.2                      1.2
Operating income
     14.6                      9.7                      2.8
Interest expense (income), net
     0.2                      1.5                      2.2
Income before income taxes
     14.4                      8.2                      0.7
Net income
     9.8                      5.6                      1.0

Comparison of Fiscal ~~2002~~2004 and ~~2001~~ 2003
Net Sales. Consolidated net sales were ~~$119.4~~$223.4 million and ~~$135.9~~$174.0 million for fiscal ~~2002~~2004 and ~~2001,~~2003, respectively, representing ~~a decrease~~an increase of ~~$16.5~~$49.4 million, or ~~12.1%~~28.4%. The ~~decrease~~increase was ~~primarily due to the weak economic environment, particularly~~driven by significant growth in our telecommunications transmission ~~segment.~~ and mobile data communications segments, as described below.
Sales from our telecommunications transmission segment were ~~$78.6~~$141.5 million infor fiscal ~~2002,~~2004, as compared to sales of ~~$106.3~~$102.6 million infor fiscal ~~2001, a decrease~~2003, an increase of ~~$27.7~~$38.9 million, or ~~26.1%~~37.9%. ~~We believe~~The significant sales growth in this segment ~~will continue~~resulted primarily from (i) increased demand for our satellite earth station products and (ii) incremental sales of over-the-horizon microwave systems relating to ~~be adversely impacted until conditions~~two contract awards received in ~~the telecommunications industry improve.~~fiscal 2003. Our telecommunications transmission segment represented ~~65.9%~~63.3% of total net sales infor fiscal ~~2002~~2004 as compared to ~~78.2% in~~59.0% for fiscal ~~2001. In fiscal 2002,~~2003.
16
Mobile data communications segment sales ~~from our RF microwave amplifier segment were $22.8 million as compared to $16.4 million in fiscal 2001. This increase of $6.4~~increased $11.7 million, or ~~39.0%~~24.3%, from $48.1 million for fiscal 2003 to $59.8 million for fiscal 2004. The significant sales growth in this segment was ~~principally~~primarily the result of (i) increased demand for battlefield command and control applications by the ~~acquisition in April 2001 of certain assets~~U.S. Army and product lines of MPD Technologies, Inc. Our RF microwave amplifier segment represented 19.1% of total net sales in fiscal 2002 as compared to 12.1% in fiscal 2001. Sales from our mobile data communications segment were $18.0 million in fiscal 2002 as compared to $13.2 million in fiscal 2001, an increase of $4.8 million or 36.4%. This increase was due to increased sales(ii) the continued rollout of our Movement Tracking System to the U.S. Army. ~~Sales from this~~Our mobile data communications segment represented ~~15.0% and 9.7%~~26.8% of total net sales for fiscal 2004 as compared to 27.6% for fiscal 2003.
Sales from our RF microwave amplifier segment were $22.1 million for fiscal 2004 compared to $23.3 million for fiscal 2003, representing a decrease of $1.2 million, or 5.2%. The decrease was the result of continued softness in ~~fiscal 2002 and 2001, respectively. In fiscal 2002, our sales to the U.S. Army for the Movement Tracking System represented 13.2%~~certain of our ~~total net sales. There were no customers in fiscal 2001 which constituted 10% or more of~~commercial product lines, partially offset by increasing demand for our ~~total net sales. International sales~~defense-related products. Our RF microwave amplifier segment represented ~~41.2%~~9.9% of total net sales infor fiscal ~~2002~~2004 as compared to ~~46.2%~~13.4% for fiscal 2003.
International sales (including sales to domestic companies for inclusion in products which are sold to international customers) represented 45.4% and 39.7% of total net sales for fiscal ~~2001.~~2004 and 2003, respectively. Domestic commercial sales represented ~~25.0%~~14.5% and 16.1% of total net sales ~~as compared to 30.7% in~~for fiscal ~~2001~~2004 and ~~sales~~2003, respectively. Sales to the U.S. government (including sales to prime contractors to the U.S. government) represented 40.1% and ~~its agencies~~44.2% of total net sales for fiscal 2004 and 2003, respectively.
During fiscal 2004 and 2003, sales to one customer, a prime contractor, represented ~~33.8%~~12.5% and ~~23.1% in~~19.8% of total net sales, respectively. Direct and indirect sales to a North African country, including certain sales to the prime contractor mentioned above, during fiscal ~~2002~~2004 and ~~2001, respectively.~~ 2003 represented 14.1% and 10.2%, respectively, of total net sales.
Gross Profit. Gross profit was ~~$40.6~~$87.5 million and ~~$48.6~~$59.7 million for fiscal ~~2002~~2004 and ~~2001,~~2003, respectively, representing ~~a decrease~~an increase of ~~$8.0~~$27.8 million, or ~~16.5%~~46.6%. ~~This decrease~~The increase in gross profit was ~~primarily~~ due to the ~~reduced total level of~~significant increase in net sales, ~~discussed above.~~as well as an increase in the gross profit percentage. Gross ~~margin,~~profit, as a percentage of net sales, ~~decreased to 34.0% in~~was 39.2% for fiscal ~~2002~~2004, as compared to ~~35.8% in~~34.3% for fiscal ~~2001.~~ 2003.
The ~~decrease~~increase in the gross ~~margin~~profit, as a percentage of sales, was ~~driven by~~primarily due to (i) the ~~significant decrease~~higher proportion of our sales being in the telecommunications transmission segment, ~~sales~~ which ~~generally carry~~typically realize higher margins than sales in our other two segments, (ii) a more favorable product mix within the mobile data communications segment, and (iii) increased operating efficiencies and overhead absorption in both the telecommunications transmission and mobile data communications segments. These increases were partially offset by a decrease in gross profit in our RF microwave amplifier segment due to higher than anticipated costs to complete two contracts.
As mentioned above, in fiscal 2004, we realized increased operating efficiencies in our two largest segments. In our telecommunications transmission segment, such efficiencies were achieved, in part, by our continuing efforts to expand the usage of our high-volume manufacturing facility in Tempe, Arizona. The increased utilization and resulting operating efficiencies were the result of higher demand for our satellite earth station products, as well as the continued use of the facility by our other two segments for certain high-volume manufacturing requirements. In our mobile data communications segment, such efficiencies were the result of incremental MTS and battlefield command and control application funding from the ~~other~~U.S. Army. If the current levels of MTS and battlefield command and control funding are maintained or increased, we believe that we will continue to realize increased operating efficiencies.
As discussed above under “Critical Accounting Policies – Revenue Recognition on Long-term Contracts,” we periodically review and adjust total estimated contract revenues and costs on long-term contracts. In fiscal 2004, we adjusted the estimated margins at completion on certain large contracts. In the telecommunications transmission segment, we increased the estimated margins at completion on two ~~segments.~~ large over-the-horizon microwave system contracts as they draw nearer to completion. In the mobile data communications segment, we increased the estimated margins at completion on the MTS contract with the U.S. Army as a result of increased funding. These adjustments resulted in an aggregate $1.9 million cumulative increase to the gross profits recognized on these contracts in prior years. Such amount is included in the fiscal 2004 results of operations. Further adjustments to the estimated gross margins are possible in future periods as these contracts are completed.
Included in cost of sales for fiscal 2004 and 2003 are provisions for excess and obsolete inventory of $1.2 million and $2.5 million, respectively. As discussed under “Critical Accounting Policies – Provisions for Excess and Obsolete Inventory,” we regularly review our inventory and record a provision for excess and obsolete inventory based on historical usage assumptions. The provision for fiscal 2003 includes $0.4 million relating to certain product line discontinuances in our telecommunications transmission segment.
17
Selling, General and ~~Administrative.~~ Administrative Expenses. Selling, general and administrative expenses were ~~$22.5~~$36.0 million and ~~$22.7~~$28.0 million infor fiscal ~~2002~~2004 and ~~2001,~~2003, respectively, representing ~~a decrease~~an increase of ~~$0.2 million.~~$8.0 million, or 28.6%. The ~~decrease is~~increase was due to higher expenses relating to the significant increases in sales and profitability during fiscal 2004, including expenses related to recent acquisitions. Also contributing to the ~~reduction~~increase were higher insurance costs and compliance costs incurred in connection with recently enacted corporate governance regulations. As a percentage of net sales, ~~during~~selling, general and administrative expenses were 16.1% for fiscal ~~2002.~~ 2004 and 2003.
Research and ~~Development.~~ Development Expenses. Research and development expenses were ~~$11.0~~$15.9 million and ~~$10.2~~$12.8 million infor fiscal ~~2002~~2004 and ~~2001,~~2003, respectively. ~~Despite~~Approximately $14.2 million and $11.6 million of such amounts, respectively, related to our telecommunications transmission segment. As an investment for the ~~softness in sales discussed above,~~future, we are ~~continuing to invest in the future by~~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 fiscal ~~2002~~2004 and ~~2001,~~2003, customers reimbursed us ~~$2.0~~$5.7 million and ~~$1.7~~$3.7 million, respectively, which amounts are not reflected in the reported research and development ~~expenses. 15~~ expenses, but are included in net sales with the related costs included in cost of sales.
In-Process Research and ~~Development.~~ Development Expense. In connection with the purchase of certain assets and liabilities of Advanced Hardware Architectures, Inc., $2.2 million of the purchase price was allocated to in-process research and development. This allocation was part of the overall purchase price allocation performed by an independent third party. The value of in-process research and development is based upon new product development projects that were underway at the time of the acquisition and are expected to eventually lead to new products but had not yet established technological feasibility and for which no future alternative use was identified. In accordance with generally accepted accounting principles ("GAAP"),Memotec in fiscal 2004, we recorded a ~~one-time~~ charge of ~~$2.2~~$0.9 million for the write-off of ~~this amount.~~in-process research and development. There was no in-process research and development expense in fiscal ~~2001.~~ 2003.
Amortization of Intangibles. Amortization of intangibles for fiscal 2004 and 2003 was ~~$1.5~~$2.1 million and ~~$2.6~~$2.0 million, for fiscal 2002 and 2001, respectively, representing a decrease of $1.1 million. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed at least annually for impairment. Separate intangible assets that are not deemedrespectively. The amortization relates to have an indefinite life continue to be amortized over their useful lives. We applied the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2002. If SFAS No. 142 had been effective August 1, 2000, approximately $1.4 million of amortization expense would not have been expensed in fiscal 2001. Operating Income. As a result of the foregoing factors,intangibles with definite lives which we had operating income from continuing operations of $3.4 million and $13.2 million in fiscal 2002 and 2001, respectively. Excluding the impact of the in-process research and development charge in fiscal 2002, operating income was $5.6 million. Interest Expense. Interest expense was $3.1 million and $4.0 million in fiscal 2002 and 2001, respectively. Additional interest on borrowingsacquired in connection with ~~the acquisition of MPD Technologies, Inc. in April 2001 were more than offset by interest savings from the prepayment of $19.2 million of debt in August 2001. Interest~~various acquisitions.
Operating Income. ~~Interest~~Operating income for fiscal 2004 and 2003 was ~~$0.5~~$32.6 million and ~~$2.3~~$16.8 million, ~~for fiscal 2002 and 2001,~~ respectively. The ~~decrease~~$15.8 million increase was the result of a lower level of investable funds during fiscal 2002, as well as lower interest rates. Other, Net. Our other income for fiscal 2002 was $28,000 as compared to other expense of $0.8 million for fiscal 2001. The amount in fiscal 2001 primarily related to the ~~loss realized upon the sale in March 2001 of a short-term investment classified as available-for-sale,~~higher sales and gross profit, discussed above, partially offset by ~~royalty and other~~higher operating expenses.
Operating income received of $0.1 million. Provision (Benefit) for Income Taxes. During fiscal 2002, the Company conducted an independent study and identified certain research and experimentation tax credits, relating to the current and prior years, which can be used to offset regular income taxes. See note 9 to the consolidated financial statements. The total amount of these credits more than offset the provision for income taxes. The net effect was a benefit of $0.4 million for fiscal 2002. Comparison of Fiscal 2001 and 2000 Net Sales. Consolidated net sales were $135.9 million and $66.4 million for fiscal 2001 and 2000, respectively, representing an increase of $69.5 million or 104.6%. This increase was primarily due to the acquisition in July 2000 of EF Data. This business, which is included in our telecommunications transmission segment increased to $29.2 million for fiscal 2004 from $14.2 million for fiscal 2003 as a result of significantly higher sales combined with increased operating efficiencies and overhead absorption. Our mobile data communications segment generated operating income of $9.5 million for fiscal 2004 compared to $5.2 million for fiscal 2003 due primarily to the increase in sales, more favorable product mix and the impact of the cumulative gross margin adjustment discussed above under “Gross Profit.” Operating income in our ~~product offerings~~RF microwave amplifier segment decreased to $0.3 million for fiscal 2004 from $1.8 million for fiscal 2003 primarily as a result of the decrease in sales and ~~broadened~~higher than anticipated costs to complete two contracts. Unallocated operating expenses increased to $6.4 million for fiscal 2004 from $4.4 million for fiscal 2003 due primarily to higher incentive compensation expense, increased costs associated with recent corporate governance regulations and higher insurance costs.
Interest Expense. Interest expense decreased from $2.8 million for fiscal 2003 to $1.4 million for fiscal 2004. The decrease was due to the prepayment of our ~~customer base~~term loan, which bore interest at approximately 9.0%, in July 2003. Interest expense for ~~satellite earth station equipment.~~ fiscal 2004 primarily represents interest expense associated with our 2.0% convertible senior notes issued in January 2004.
Interest Income. Interest income for fiscal 2004 was $0.9 million, as compared to $0.3 million for fiscal 2003. The $0.6 million increase was due primarily to a higher average cash position resulting from the proceeds received from our private placement of common stock in July 2003 and issuance of our 2.0% convertible senior notes in January 2004.
Provision for Income Taxes. The provision for income taxes was $10.3 million and $4.6 million for fiscal 2004 and 2003, respectively, as a result of the significant increase in pre-tax profit. The effective tax rate was 32.0% in both periods.
Comparison of Fiscal 2003 and 2002
Net Sales. Consolidated net sales were $174.0 million and $119.4 million for fiscal 2003 and 2002, respectively, representing an increase of $54.6 million or 45.7%. The increase was driven by significant growth in our telecommunications transmission and mobile data communications segments, as described below.
Sales from our telecommunications transmission segment were ~~$106.3~~$102.6 million in fiscal 2003, as compared to sales of $78.6 million in fiscal 2002, an increase of $24.0 million or ~~78.2%~~30.5%. The sales growth in this segment resulted
18
from (i) incremental sales of our over-the-horizon microwave systems in connection with two large contract awards in fiscal 2003, (ii) sales relating to AHA which we purchased in July 2002 and (iii) increased sales of our satellite earth station products. Our telecommunications transmission segment represented 59.0% of total net sales in fiscal ~~2001~~2003 as compared to ~~$53.3~~65.9% in fiscal 2002.
Mobile data communications segment sales increased $30.1 million, or ~~80.2% of our total net sales~~167.2%, from $18.0 million in fiscal ~~2000. Substantially all of the increase~~2002 to $48.1 million in ~~the telecommunications transmission~~fiscal 2003. The sales growth in this segment was the result of the EF Data acquisition. In fiscal 2001, sales from our RF microwave amplifier segment were $16.4 million as compared to $11.0 million in fiscal 2000. Approximately $2.7 million of this $5.4 million increase was due to the acquisition we completed in April 2001 of certain assets and product lines of MPD Technologies, Inc. This acquisition has increased our product offerings and our customer base in our RF microwave amplifier segment. The RF microwave amplifier segment was 12.1% of our total net sales in fiscal 2001 as compared to 16.5% in fiscal 2000. Sales from our mobile data communications services segment were $13.2 million or 9.7% of our total net sales in fiscal 2001 compared to $2.2 million or 3.3% in fiscal 2000. This increase of approximately $11.0 million was primarily due to increasedhigher sales of our Movement Tracking System to the U.S. Army, as well as sales to a major U.S. prime contractor that is providing a battle command application to the U.S. Army. ~~International sales~~Our mobile data communications segment represented ~~46.2%~~27.6% of total net sales in fiscal ~~2001~~2003 as compared to ~~71.4%~~15.0% in fiscal ~~2000. The decrease in the percentage of international sales reflects the absence~~2002.
Sales from our RF microwave amplifier segment were $23.3 million in fiscal ~~2001 of significant revenues from one customer for over-the-horizon microwave equipment which occurred~~2003 versus $22.8 million in fiscal ~~2000. Domestic~~2002. The 2.2% increase was the result of strong defense related sales partially offset by weakness in our commercial product lines, such as our commercial aviation product line. Our RF microwave amplifier segment represented ~~30.7%~~13.4% of total net sales in fiscal ~~2001~~2003 as compared to ~~19.8%~~19.1% in fiscal ~~2000.~~2002.
In fiscal 2003, one customer, a prime contractor, represented 19.8% of total net sales. In fiscal 2002, no customer, other than the U.S. government, represented more than 10% of total net sales. International sales represented ~~23.1%~~39.7% and 41.2% of total net sales in fiscal ~~2001 as compared to 8.8%~~2003 and 2002, respectively. Domestic commercial sales represented 16.1% and 25.0% of total net sales in fiscal ~~2000. There were no customers~~2003 and 2002, respectively. Sales to the U.S. government (including prime contractors to the U.S. government) represented 44.2% and 33.8% of total net sales in fiscal ~~2001 that represented 10% or more of our total sales. In fiscal 2000, sales to one customer, a 16~~ major U.S. prime contractor for ultimate sale to an international end user, represented 43.1% of total sales. Sales during the second half of fiscal 2001 were adversely impacted by the weakening economy. Particular softness was experienced in our telecommunications transmission segment as a result of the significant downturn in the telecommunications market. We believe sales will continue to be adversely impacted until such economic conditions improve. 2003 and 2002, respectively.
Gross Profit. Gross profit was ~~$48.6~~$59.7 million and ~~$20.5~~$40.6 million ~~for~~in fiscal ~~2001~~2003 and ~~2000,~~2002, respectively, representing an increase of ~~$28.1 million or 137.1%. This~~$19.1 million. The increase was primarily due to the ~~increase~~higher sales levels in ~~sales volume.~~ fiscal 2003 as compared to fiscal 2002.
Gross margin, as a percentage of net sales, was ~~35.8%~~34.3% and ~~30.9%~~34.0% in fiscal ~~2001~~2003 and ~~2000,~~2002, respectively. ~~The~~Although fiscal 2003 contained a significantly higher proportion of mobile data communications segment sales, which generally are at lower gross ~~margin in fiscal 2001 was largely due to~~margins than our other businesses, the overall increase in ~~the sale~~sales resulted in greater operating efficiencies and overhead absorption.
Included in cost of ~~satellite earth station equipment products by~~sales for fiscal 2003 and 2002, respectively, are provisions for excess and obsolete inventory of $2.5 million and $1.7 million. As discussed above under “Critical Accounting Policies – Provisions for Excess and Obsolete Inventory”, we regularly review our inventory and record a provision, approximately $2.1 million and $1.7 million for fiscal 2003 and 2002, respectively, for excess and obsolete inventory based on historical usage and future usage assumptions. The provision for fiscal 2003 also includes $0.4 million relating to certain product line discontinuances in our telecommunications transmission ~~segment as a result of the EF Data acquisition. Those products generally have a lower per unit cost and yield a higher gross margin than most other products and systems we sell.~~ segment.
Selling, General and ~~Administrative.~~ Administrative Expenses. Selling, general and administrative expenses were ~~$22.7~~$28.0 million and ~~$12.1~~$22.5 million in fiscal ~~2001~~2003 and ~~2000,~~2002, respectively, representing an increase of ~~$10.6 million or 88.3%. This~~$5.5 million. The increase was due to the ~~result~~addition of ~~additional~~AHA, as well as higher expenses ~~including additional personnel, sales and marketing expenses and other administrative expenses, required~~relating to ~~support~~ the higher sales ~~volume.~~and profit levels in fiscal 2003. As a percentage of net sales, ~~these~~selling, general and administrative expenses were ~~16.7%~~16.1% and ~~18.1% of total net sales for~~18.9% in fiscal ~~2001~~2003 and ~~2000,~~2002, respectively.
Research and ~~Development.~~ Development Expenses. Research and development expenses were ~~$10.2~~$12.8 million and ~~$2.6~~$11.0 million in fiscal ~~2001~~2003 and ~~2000,~~2002, respectively. Approximately $11.6 million and $10.2 million of such amounts, respectively, representing an increase of approximately $7.6 million or 285.4%. The increase in fiscal 2001 was principally due to the continuation of research and development for the projects that were underway at the time of our acquisition of EF Data in July 2000, as well as for expenses related to ~~new product development and product announcements for all of~~ our ~~businesses.~~telecommunications transmission segment. 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 fiscal ~~2001~~2003 and ~~2000,~~2002, customers reimbursed us ~~$1.7~~$3.7 million and ~~$4.3~~$2.0 million, respectively, which amounts are not reflected in the reported research and development ~~expenses. Amortization~~expenses, but are included in sales with the related estimated costs included in cost of Intangibles. Amortization of intangibles was $2.6 million and $230,000 for fiscal 2001 and 2000, respectively. The increase in fiscal 2001 was primarily due to the full year of amortization expense relating to goodwill and other identified intangibles associated with our acquisition of EF Data in July 2000. The increase also reflects the amortization of intangibles resulting from our April 2001 acquisition of MPD Technologies. sales.
In-Process Research and Development.In connection with the purchase of certain assets and liabilities of AHA in fiscal 2002, we recorded a charge of $2.2 million for the write-off of in-process research and development in fiscal 2002. There was no in-process research and development expense in fiscal ~~2001. In~~2003.
Amortization of Intangibles. Amortization of intangibles was $2.0 million and $1.5 million in fiscal ~~2000,~~2003 and 2002, respectively. The increase was primarily the result of the amortization related to intangibles with definite lives we acquired in connection with the acquisition of ~~EF Data, $10.2~~AHA.
19
Operating Income. Operating income in fiscal 2003 and 2002 was $16.8 million and $3.4 million, respectively. The increase was the result of the ~~purchase price was allocated~~higher sales and gross profit, discussed above, partially offset by higher operating expenses.
Operating income in our telecommunications transmission segment increased from $5.3 million in fiscal 2002 to $14.2 million in fiscal 2003 as a result of higher sales, as discussed above, combined with increased operating efficiencies and overhead absorption. In addition, fiscal 2002 operating income included a $2.2 million charge for in-process research and development. Our ~~financial statements for~~mobile data communications segment's operating income increased from $0.2 million in fiscal ~~2000 include a one-time charge of $10.2~~2002 to $5.2 million ~~for the write-off of this amount~~ in ~~accordance with generally accepted accounting principles. Operating Income (Loss). As~~fiscal 2003 as a result of the ~~foregoing factors, we had operating~~significant increase in sales, as discussed above. Operating income in our RF microwave amplifier segment increased from ~~continuing operations of $13.2~~$1.2 million in fiscal ~~2001 as compared~~2002 to ~~an operating loss from continuing operations~~$1.8 million in fiscal ~~2000~~2003 as a result of ~~$4.6 million. Excluding the impact of the in-process research and development charge~~a more favorable product mix in fiscal ~~2000, operating income was $5.6 million. Interest Expense. Interest~~2003. Unallocated expenses increased from $3.3 million in fiscal 2002 to $4.4 million in fiscal 2003 as a result of higher incentive compensation expense, was $4.0 million and $381,000 for fiscal 2001 and 2000, respectively, representing an increase of approximately $3.6 million. The increase was primarily due to the interest on the long term debt we incurredas well as increased costs in connection with recent corporate governance regulations.
Interest Expense. Interest expense decreased to $2.8 million in fiscal 2003 from $3.1 million in fiscal 2002. The decrease was the ~~acquisition~~result of ~~EF Data~~a partial debt prepayment during the first quarter of fiscal 2002. In addition, we prepaid the balance of our long-term debt in July 2000. The original amount of the loan was $40.0 million payable over five years. In connection with our acquisition of certain assets and product lines from MPD Technologies, Inc. in April 2001, we borrowed an additional $10.0 million. 2003.
Interest Income. Interest income was ~~$2.3~~$0.3 million and ~~$1.5~~$0.5 million ~~for fiscal 2001 and 2000, respectively, representing an increase of $792,000. This increase~~ in fiscal ~~2001~~2003 and 2002, respectively. The decrease was primarily ~~due to~~ the ~~increase in the amount of cash available in excess of working capital requirements, principally as~~ result of the proceeds received from a follow-on stock offering completed in the third quarter of fiscal 2000. Other Expense, Net. Other expense, net was $841,000 and $201,000 for fiscal 2001 and 2000, respectively. The amountlower interest rates in fiscal 2001 related to a loss of $990,000 realized upon the sale in March 2001 of a short-term investment classified as available-for-sale, offset by royalty and other income of $149,000. The amount in fiscal 2000 primarily related to the loss realized upon the sale of a short-term investment classified as available-for-sale. 17 2003.
Provision for Income Taxes. The ~~provision for income taxes in fiscal 2001 reflects an~~ effective tax rate of ~~36.7%.~~32% for fiscal 2003 reflects the tax benefits of among other items, research and experimentation tax credits. The research and experimentation tax credits in fiscal ~~2000 provision for~~2002 more than offset the tax expense on the lower level of pre-tax income, ~~taxes was effected by~~resulting in a ~~change in the valuation allowance. (See note 9 to the consolidated financial statements for further information regarding the provision for income taxes.)~~ tax benefit of $0.4 million.
Liquidity and Capital Resources
Our unrestricted cash and cash equivalents ~~position decreased~~increased to ~~$15.5~~$163.3 million at July 31, ~~2002~~2004 from ~~$36.2~~$48.6 million at July 31, 2001. During fiscal 2002, we prepaid $19.2 million of long-term debt and paid approximately $7.0 million, including expenses, for the acquisition of certain assets and liabilities of Advanced Hardware Architectures, Inc. 2003.
Net cash provided by operating activities, excluding the effects of the Memotec acquisition, was ~~$9.4~~$24.3 million infor fiscal ~~2002.~~2004. Such amount reflects (i) net income of ~~$1.1~~$21.8 million plus the impact of ~~non-cash items such as~~ depreciation, amortization, the provisions for doubtful accounts and ~~amortization aggregating $5.2 million, and the write-off of~~inventory reserves, in-process research and development ~~of $2.2 million;~~expense and the income tax benefit from stock-related transactions aggregating $10.1 million and (ii) ~~the~~ changes in working capital ~~balances.~~ balances, most notably increases in accounts receivable of $16.5 million and inventory of $5.2 million. Also impacting net cash provided by operating activities were increases in accrued expenses, customer advances and deposits and deferred service revenue aggregating $14.3 million. The increase in billed receivables was the result of the increase in sales during fiscal 2004 and the timing of related cash receipts, as well as billings related to one of our large over-the-horizon microwave system contracts as it draws nearer to completion. The decrease in unbilled receivables was due to the liquidation of previously unbilled amounts on the same over-the-horizon microwave system contract. A significant portion of the credit risk associated with such contract is covered by credit insurance.
Net cash used in investing activities infor fiscal ~~2002~~2004 was ~~$10.2~~$11.8 million. ~~Cash of $3.2~~We used $6.6 million ~~was used~~ for capital expenditures and ~~$7.0~~$5.2 million ~~was used~~ for the acquisition of ~~Advanced Hardware Architectures, Inc.~~ Memotec. We expect to complete the build-out of our state-of-the-art network operations center located in our Germantown, Maryland facility, as well as our company-wide information reporting system, during the first half of fiscal 2005. We currently expect capital expenditures for fiscal 2005 to be between $7.0 million and $9.0 million.
Net cash ~~used in~~provided by financing activities was $102.2 million, due primarily to the net proceeds of $101.2 million from the sale of our 2.0% convertible senior notes in ~~fiscal 2002 was $19.9~~January 2004, as well as the proceeds from stock option exercises and employee stock purchase plan shares aggregating $1.9 million. ~~We prepaid $19.2 million of long-term debt. Principal~~These amounts were partially offset by principal payments on capital lease obligations ~~amounted~~of $0.9 million.
Financing Arrangement
On January 27, 2004, we issued $105.0 million of our 2.0% convertible senior notes in a private offering pursuant to ~~$1.1 million. These uses~~Rule 144A under the Securities Act of ~~cash were offset by~~1933, as amended. The net proceeds from this transaction were $101.2 million after deducting the ~~sale of stock~~initial purchaser's discount and ~~exercise of stock options aggregating approximately $0.5 million.~~ other transaction costs. For further information concerning this financing, see “Notes to Consolidated Financial Statements – Note 8(a) 2.0% Convertible Senior Notes due 2024.”
20
Commitments
In the normal course of business, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment. We do not expect that these commitments as of July 31, ~~2002~~2004 will materially or adversely affect our liquidity.
At July 31, ~~2002~~2004 we had contractual cash obligations to repay ~~debt (including~~our 2.0% convertible senior notes, capital lease ~~obligations)~~ and ~~to make payments under~~ operating ~~leases.~~lease obligations. Payments due under these long-term obligations are as follows:
Obligations due by fiscal year (in thousands) 2004 2006 and and After Total 2003 2005 2007 2007 --------- --------- --------- --------- --------- Long-term debt $ 28,683 -- 28,683 -- -- Capital lease obligations 2,356 1,062 1,114 180 -- Operating lease commitments 14,359 3,484 6,132 2,334 2,409 --------- --------- --------- --------- --------- Total contractual cash obligations $ 45,398 4,546 35,929 2,514 2,409 ========= ========= ========= ========= =========
Obligations due by fiscal years (in thousands)
Total
2005
2006
and
2007
2008
and
2009
After
2009

2.0% Convertible senior notes
     $ 105,000      —      —      —      105,000

Capital lease obligations
     392      234      158      —      —

Operating lease commitments
     13,240      6,505      3,754      1,608      1,373







Total contractual cash obligations
     $ 118,632      6,739      3,912      1,608      106,373






We have entered into standby letter of credit agreements with financial institutions relating to the guarantee of future performance on certain contracts. At July 31, ~~2002,~~2004, the balance of these agreements was ~~$0.5~~$4.1 million. Cash we have pledged against such agreements aggregating $4.1 million has been classified as restricted cash in the consolidated balance sheet.
We believe that our cash and cash equivalents will be sufficient to meet our operating cash requirements for 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.
Impact of Recent Hurricanes
In August and September 2004, two of our leased facilities located in Florida experienced damage from Hurricanes Charley and Frances (the “Hurricanes”). The damage was to both leaseholds and personal property. We are working with our landlords and property insurance company in assessing the cost to repair and clean up the facilities. Although we believe that most of these costs will be covered by insurance, the related policies do include deductibles and coinsurance provisions. The net cost to us relating to the hurricane damage, which is not expected to exceed $0.5 million, will be expensed in our consolidated statement of operations for the quarter ending October 31, 2004. Other than minor disruptions immediately following the storms, the Hurricanes and clean up have not and are not expected to impact our ability to meet customer demands and contract requirements.
Recent Accounting Pronouncements
In ~~August 2001,~~December 2002, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. ~~144, "Accounting~~148 provides alternative methods of transition for a voluntary change to the ~~Impairment or Disposal~~fair value method of ~~Long-Lived Assets", which addresses financial~~ accounting ~~and reporting~~ for ~~the impairment or disposal of long-lived assets. The Company adopted~~stock-based employee compensation as originally provided by SFAS No. ~~144 on August 1, 2002.~~123 “Accounting for Stock-Based Compensation.” Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 in both annual and interim financial statements. We adopted the disclosure portion of this statement during fiscal 2003. The adoption did not have ~~a material~~any impact on ~~the Company's~~our consolidated financial statements. 18 ~~In April 2002,~~
On March 31, 2004, the FASB issued ~~SFAS~~a proposed statement, “Share-Based Payment – An Amendment to Statement Nos. 123 and 95,” that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. The proposed statement would eliminate the ability to account for share-based compensation transactions using Accounting Principles Board (“APB”) Opinion No. ~~145, "Recission~~25, “Accounting for Stock Issued to Employees,” and generally would require, instead, that such transactions be accounted for using a fair value based method. As proposed, this standard would be applied prospectively for fiscal years beginning after December 15, 2004 (the Company's 2006
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fiscal year), as if all share-based compensation awards granted, modified or settled after December 15, 1994 had been accounted for using the fair value based method of accounting. We will monitor the FASB's progress on the issuance of this proposed statement and its impact on our consolidated financial statements.
In July 2004, the Emerging Issues Task Force (“EITF”) of the FASB ~~Statements~~announced that it had reached a tentative consensus with respect to Issue No. ~~4, 44, and 64, Amendment~~04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings Per Share.” The EITF's tentative consensus states that shares of common stock contingently issuable pursuant to contingent convertible securities should be included in diluted earnings per share computations (if dilutive) regardless of whether their market price triggers (or other contingent features) have been met. Additionally, in its efforts to converge with international accounting standards, the FASB has issued an Exposure Draft, “Earnings Per Share – an amendment of FASB Statement No. ~~13,~~128.” This Exposure Draft requires contracts that contain an option to settle in cash or stock be assumed to settle in stock for diluted earnings per share computations. As discussed in Note 8(a) to the Consolidated Financial Statements, we issued $105.0 million of our 2.0% convertible senior notes in January 2004. If these proposals become effective, we would be required to include an additional 2.2 million shares (relating to our convertible senior notes) using the “if-converted” method (under which net income would also be adjusted to exclude the related interest expense) in our computation of diluted earnings per share for our fiscal year ending July 31, 2005 and ~~Technical Corrections."~~subsequent years and would be required to restate earnings per share for fiscal 2004 for comparative purposes. No restatement of diluted earnings per share for fiscal 2003 or 2002 would be required since our convertible senior notes were not outstanding during these periods. The ~~Company adopted SFAS No. 145 on August 1, 2002. The adoption did not have~~exact amount of a ~~material impact~~restatement, if any, would be based on the ~~Company's consolidated financial statements. In July 2002,~~provisions of any final changes in 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. applicable accounting principles.
Forward-Looking Statements and Risk Factors ~~Many~~
This Form 10-K contains “forward-looking statements” including statements concerning the future of our industry, product development, business strategy, continued acceptance of our products, market growth, and dependence on significant customers. These statements can be identified by the use of forward-looking terminology such as “may,” “expect,” “anticipate,” “estimate,” “continue,” or other similar words. When considering forward looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-K constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include: o Statements of goals, intentions and expectations; o Estimates of risks and of future costs and benefits; and o Statements of the ability to achieve financial10-K. The risk factors noted below and other goals. These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by: o Management's estimates and projections of U.S. and international economic and business conditions; o Future laws and regulations; and o A variety of other matters, including those described below. Because of these uncertainties, actual future results may be materially different from the results indicated by these forward-looking statements, which are inherently predictive and speculative. The following are some of the risks thatfactors noted throughout this Form 10-K could cause our actual results to differ significantly from those ~~expressed~~contained in any forward-looking statement.
Due to many factors, including the amount of business represented by large contracts, new orders, net sales and our operating results are difficult to forecast and may be volatile.
We have experienced, and will experience in the future, significant fluctuations in new orders, net sales and operating results, including our net income and earnings per share, from quarter to quarter. One reason for this is that a significant portion of our business – primarily the over-the-horizon microwave systems of our telecommunications transmission business segment, a portion of our RF microwave amplifier business segment and the majority of our mobile data communications segment – is derived from a limited number of relatively large customer contracts, the timing of which cannot be predicted. While we generally recognize revenue on contracts when the products are shipped, revenue is recognized on the percentage-of-completion method when the performance of a contract will extend beyond a 12-month period. Our new orders, net sales and operating results, including our net income and earnings per share, also may vary significantly from period-to-period because of the following factors: product mix sold; fluctuating market demand; price competition; new product introductions by our competitors; fluctuations in foreign currency exchange rates; unexpected changes in delivery of components or ~~implied~~subsystems; political instability; regulatory developments; and general economic conditions. Accordingly, you should not rely on period-to-period comparisons as indications of our future performance because these comparisons may not be meaningful.
Our business, results of operations, liquidity and financial condition depend on our ability to maintain our level of government business.
In recent years, we have increased our dependence on U.S. government business. Our sales to the U.S. government (including sales to prime contractors to the U.S. government) accounted for approximately 40.1%, 44.2% and 33.8% of our total net sales for the fiscal years ended July 31, 2004, 2003 and 2002, respectively. Approximately 56.1% of our backlog at July 31, 2004 consisted of orders from the U.S. government. We expect such business to represent a significant portion of our revenues for the foreseeable future. U.S. government business exposes us to various risks, including:
• unexpected contract or project terminations or suspensions;
• unpredictable order placements, reductions or cancellations;
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• reductions in government funds available for our projects due to government policy changes, budget cuts and other spending priorities;
• penalties arising from post-award contract audits;
• cost audits in which the value of our contracts may be reduced;
• higher-than-expected final costs, particularly relating to software and hardware development, for work performed under contracts where we commit to specified deliveries for a fixed price; and
• unpredictable cash collections of unbilled receivables that may be subject to acceptance of contract deliverables by the customer and contract close-out procedures, including government approval of final indirect rates.
All of our U.S. government contracts can be terminated by the U.S. government for its convenience. Termination for convenience provisions provide only for our recovery of costs incurred or committed, settlement expenses and profit on work completed prior to termination. In addition to the right of the U.S. government to terminate, U.S. government contracts are conditioned upon the continuing approval by Congress of the necessary spending. Congress usually appropriates funds for a given program on a fiscal year basis even though contract performance may take more than one year. Consequently, at the beginning of a major program, the contract may not be fully funded, and additional monies are normally committed to the contract only if, as and when appropriations are made by Congress for future fiscal years.
The U.S. government may review our costs and performance on certain contracts, as well as our accounting and general business practices. Based on the result of such ~~statements.~~ audits, the U.S. government may adjust our contract-related costs and fees.
We obtain U.S. government contracts through a competitive bidding process. We cannot assure you that we will continue to win competitively awarded contracts or that awarded contracts will generate sufficient net sales to result in profitability.
All of our businesses are subject to rapid technological change; we must keep pace with changes to compete successfully.
We are engaged in businesses characterized by rapid technological change, evolving industry standards, frequent new product announcements and enhancements, and changing customer demands. The introduction of products and services embodying new technologies and the emergence of new industry standards could render our products and services obsolete or non-competitive. The technology used in our products and services evolves rapidly, and our business position depends, in large part, on the continuous refinement of our scientific and engineering expertise and the development, either through internal research and development or acquisitions, of new or enhanced products and technologies. We may not have the economic or technological resources to be successful in such efforts and we may not be able to identify and respond to technological improvements made by our competitors in a timely or cost-effective fashion. A significant technological breakthrough by others, including smaller competitors or new firms, could have a material adverse impact on our business. A slowing economy and continued reduction in telecommunications equipment and systems spending may negatively affect our revenues and profitability. During the second half of fiscal 2001 and all of fiscal 2002, our revenues were negatively affected by the increasingly uncertain economic environment both in the overall market, and more specifically in the telecommunications sector. If the economy continues to slow, some of our customers may further reduce their budgets for spending on telecommunications equipment and systems. As a consequence, our current customers and other prospective customers may postpone, reduce or even forego the purchase of our products and systems, which could adversely affect our revenues and profitability. Our mobile data communications services business is subject to risk. Our mobile data communications services business has a limited operating history. It is subject to all of the risks inherent in the operation of a new business enterprise. Moreover, our business experience has been in producing products, not in providing services. We may not be able to implement and operate our mobile data communications services business successfully. In addition to the other risk factors described in this section, the risk factors applicable to our mobile data communications services business include the following: 19 o Although the U.S. Army contract obligates us to provide up to 56,000 mobile terminals and worldwide satellite services over an eight year period as and when ordered by the U.S. Army and at the fixed prices and other terms set forth in this contract, the U.S. Army is not obligated to purchase any terminals or services under this contract and may terminate this contract. Sales under the U.S. Army contract will be subject to unpredictable funding and deployment decisions. Through July 31, 2002, we have received orders for $34.5 million under this contract. o Certain components that we need have purchasing lead-time of four months or longer, and the U.S. Army contract requires us to provide mobile terminals within 90 days after we receive an order. o Our success in commercial markets will depend on, among other things, our ability to access the best distribution channels, the development of applications which create value for the customer and our ability to attract and retain qualified personnel. Delays in delivering terminals could also adversely affect our ability to obtain and retain commercial customers. o In general, as we seek to grow our mobile data communications services business, we anticipate that we will need to maintain a substantial inventory in order to provide terminals to our customers on a timely basis. If forecasted orders are not received, we might be left with large inventories of slow moving or unusable parts or terminals. This could result in an adverse effect on our business, results of operations ~~liquidity~~ and financial position. o We lease the satellite capacity necessary to operate our system from third party satellite networks. We currently have a long-term lease with a satellite network operator (TMI) for satellite coverage in North America, Central America and the northern rim of South America. While several vendors have announced plans for new satellite systems, only one provider, INMARSAT, presently offers the global coverage that will be required under the U.S. Army contract. We cannot assure you that we will be able to obtain sufficient satellite capacity or geographical coverage from any vendor to operate our mobile data communications services system on acceptable terms or on a timely basis. o There are several existing competitors in the mobile data communications market that have established systems with sizable customer bases and much greater financial resources than us. The largest of these competitors is Qualcomm Incorporated. Existing competitors, including terrestrial service providers, are also aggressively pricing their products and services and may continue to do so in the future. Competitors continue to offer new value added products and services, which we may be unable to match on a timely or cost effective basis. Increased competition may impact margins throughout the industry. We anticipate that new competitors will enter the mobile data communications market in the future. o All satellite communications are subject to the risk that a satellite or ground station failure or a natural disaster may interrupt service. Interruptions in service could have a material adverse effect on our results of operations. With respect to U.S. satellite service, satellite network providers have arranged to provide back-up satellite and ground station service for each other in the event of catastrophic failure. o We believe that we own or have licensed all intellectual property rights necessary for the operation of our mobile data communications services business as currently contemplated. If our terminals or services are found to infringe on protected technology, we could be required to redesign our terminals, license the protected technology, and/or pay damages or other compensation to the infringed party. If we are unable to license protected technology used in our terminals or if we were required to redesign our terminals, we could be prohibited from making and selling our terminals or providing mobile data communications services. Due to many factors, including the amount of business represented by large contracts, our operating results are difficult to forecast and may be volatile. We have experienced, and will experience in the future, significant fluctuations in sales and operating results from quarter to quarter. One reason for this is that a significant portion of our business - primarily the over-the-horizon microwave systems and other products of our telecommunications transmission business segment and a portion of our RF microwave amplifier business segment - is derived from a limited number of relatively large customer 20 contracts, the timing of which cannot be predicted. While we generally recognize income on contracts when the products are shipped, income is recognized on the percentage-of-completion method when the performance of a contract will extend beyond a 12-month period. Our net sales and operating results also may vary significantly from period to period because of the following factors: product mix sold; fluctuating market demand; price competition; new product introductions by our competitors; fluctuations in foreign currency exchange rates; unexpected changes in delivery of components or subsystems; political instability; regulatory developments; and general economic conditions. Accordingly, you should not rely on period-to-period comparisons as indications of our future performance because these comparisons may not be meaningful. condition.
Our dependence on international sales may adversely affect us.
Sales for use by international customers (including sales to prime contractors' international customers) represented approximately ~~41.2%~~45.4%, ~~46.2%~~39.7% and ~~71.4%,~~41.2% of our total net sales for the fiscal years ended July 31, ~~2002, 2001~~2004, 2003 and ~~2000,~~2002, respectively. Approximately ~~33.9%~~29.4% of our backlog at July 31, ~~2002~~2004 consisted of orders for use by foreign customers. Direct and indirect sales to a North African country during the fiscal year ended July 31, 2004 were 14.1% of total net sales. We expect that international sales will continue to be a substantial portion of our total sales.
These sales expose us to certain risks, including barriers to trade, fluctuations in foreign currency exchange rates (which may make our products less ~~price competitive)~~price-competitive), political and economic instability, exposure to public health epidemics (such as Severe Acute Respiratory Syndrome (“SARS”)), availability of suitable export financing, tariff regulations, and other U.S. and foreign regulations that may apply to the export of our products and the generally greater difficulties of doing business abroad. We attempt to reduce the risk of doing business in foreign countries by seeking subcontracts with large systems suppliers, contracts denominated in U.S. dollars, advance or milestone payments, credit insurance and irrevocable letters of credit in our favor. However, we may not be able to reduce the economic risk of doing business in foreign countries, in all instances. In such cases billed and unbilled receivables relating to international sales are subject to increased collectibility risk and may result in significant write-offs, which could have a material adverse impact on our business, results of operations and financial condition.
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Foreign defense contracts generally contain provisions relating to termination at the convenience of the government. In addition, certain of our products and systems may require licenses from U.S. government agencies for export from the United States, and some of our products are not permitted to be exported. We cannot be sure of our ability to gain any licenses that may be required to export our products, and failure to receive required licenses could materially reduce our ability to sell our products outside the United States.
Reductions in telecommunications equipment and systems spending may negatively affect our revenues, profitability and the recoverability of our assets, including intangible assets.
From the second half of fiscal 2001 through fiscal 2003, our revenues from commercial customers were negatively affected by the uncertain economic environment both in the overall market, and more specifically in the telecommunications and aviation sectors. Although we have seen signs of a strengthening economy, if this trend does not continue, some of our customers may reduce their budgets for spending on telecommunications equipment and systems. As a consequence, our current customers and other prospective customers may postpone, reduce or even forego the purchase of our products and systems, which could adversely affect our revenues, profitability and the recoverability of our assets, including intangible assets, particularly in our telecommunications transmission and RF microwave amplifier segments, which are exposed to the telecommunications and aviation sectors.
Our mobile data communications business is subject to risk.
Although fiscal 2004 sales and earnings increased significantly over prior years, our mobile data communications business has a relatively limited operating history compared to our other business segments. It is subject to all of the risks inherent in the operation of a new business enterprise. In addition to the other risk factors described in this section, the risk factors applicable to our mobile data communications services business include the following:
• Although our U.S. Army contract for the logistics command's Movement Tracking System obligates us to provide satellite services and hardware, including mobile satellite transceivers and computers, through 2007, as and when ordered by the U.S. Army and at the fixed prices and other terms set forth in this contract, the U.S. Army is not obligated to purchase any terminals or services under this contract and may terminate this contract. Sales under the U.S. Army contract could be subject to unpredictable funding and deployment decisions. Through July 31, 2004, we have received orders aggregating $112.5 million under the MTS contract, $7.2 million of which relates to battlefield command and control applications.
• Certain components that we need have purchasing lead-time of four months or longer, and the U.S. Army contract requires us to provide mobile terminals within 90 days after we receive an order.
• Our success in commercial markets will depend on, among other things, our ability to access the best distribution channels, the development or licensing of applications which create value for the customer and our ability to attract and retain qualified personnel. Delays in delivering terminals could also adversely affect our ability to obtain and retain commercial customers.
• In general, as we seek to grow our mobile data communications services business, we anticipate that we will need to maintain a substantial inventory in order to provide terminals to our customers on a timely basis. If forecasted orders are not received, we might be left with large inventories of slow moving or unusable parts or terminals. This could result in an adverse effect on our business, results of operations and financial condition.
• We lease the satellite capacity necessary to operate our system from third party satellite networks. We currently have a long-term lease that expires on June 30, 2005 with a satellite network operator, Mobile Satellite Ventures, for satellite coverage in North America, Central America and the northern rim of South America. We have leases with other vendors for satellite coverage in other parts of the world as required by the U.S. Army contract. We cannot assure you that we will be able to obtain sufficient satellite capacity or geographical coverage from any vendor to operate our mobile data communications services system on acceptable terms or on a timely basis.
• There are several existing competitors in the mobile data communications market that have established systems with sizable customer bases and much greater financial resources than us. The largest of these competitors is Qualcomm, Inc. Existing competitors, including terrestrial service providers, are also aggressively pricing their products and services and may continue to do so in the future. Competitors continue to offer new value added products and services, which we may be unable to match on a timely or cost effective basis. Increased competition may impact margins throughout the industry. We anticipate that new competitors will enter the mobile data communications market in the future. This could impact our entry into the commercial market in a significant way.
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All satellite communications are subject to the risk that a satellite or ground station failure or a natural disaster may interrupt service. In addition, during the first half of fiscal 2005, we expect to complete our new state-of-the-art network operations center located in our new Germantown, Maryland facility. The existing network operations center will be relocated to our Tempe, Arizona facility and will be used to provide back-up capability. We may not be able to successfully complete this move and relocation. Interruptions in service could have a material adverse impact on our business, results of operations and financial condition. At present, one of our satellite providers is operating without a full in-orbit back-up capability in the event of a failure of one of its two satellites in operation. Should we be obliged to restore service on another system in the event of a satellite failure, our costs would increase and could have an adverse effect on our business, results of operations and financial condition.
Our backlog is subject to customer cancellation or modification.
We currently have a backlog of orders, mostly under contracts that the customer may modify or terminate. We cannot assure you that our backlog will result in sales.
Our dependence on component availability, subcontractor availability and performance and key suppliers may adversely affect us.
We do not generally maintain a substantial inventory of components and subsystems. We obtain certain components and subsystems from a single source or a limited number of sources, but believe that most components and subsystems are available from alternative suppliers and subcontractors. A significant interruption in the delivery of such items, however, could have a material ~~effect~~adverse impact on our business, ~~and~~ results of ~~operations.~~ operations and financial condition.
Our ~~backlog is~~fixed price contracts subject us to ~~customer cancellation or modification. We currently have a backlog~~risk.
Almost all of orders, mostly under contracts that the customer may modify or terminate. We cannot assure you that our backlog will result in net sales. Our sales to the U.S. government are subject to funding and other risks. We sell our products and services are sold under fixed price contracts. This means that we bear the risk of unanticipated technological, manufacturing, supply or other problems, price increases or increases in the cost of performance.
Adverse regulatory changes could impair our ability to ~~agencies~~sell products.
Our products are incorporated into wireless communications systems that must comply with various government regulations, including those of the ~~U.S. government~~Federal Communications Commission (“FCC”). Regulatory changes, including changes in the allocation and availability of frequency spectrum, and in the military standards and specifications that define the current satellite networking environment, could materially harm our business by (1) restricting development efforts by us and our customers, (2) making our current products less attractive or obsolete, or (3) increasing the opportunity for additional competition.
Changes in, or our failure to ~~contractors or subcontractors under contracts~~comply with, ~~U.S. agencies. These sales accounted~~applicable regulations could materially harm our business. In addition, the increasing demand for approximately 33.8%, 23.1% and 8.8% of our total net sales in fiscal 2002, 2001 and 2000, respectively. As is customary for government sales, these sales are subject to various risks. These risks include the ability of the U.S. government to: o Change government policy which could reduce our business; o Terminate existing contracts for its convenience; and o Audit our contract-related costs and fees, including allocated indirect costs. A reduction in government agency budgets could cause us to experience declining net sales, increasedwireless communications has exerted pressure on ~~operating margins~~regulatory bodies worldwide to adopt new standards and reassign bandwidth for these products and services. The reduced number of available frequencies for other products and services and the time delays inherent in ~~certain cases, net losses. The loss~~the government approval process of new products and services have caused and may continue to cause our customers to cancel, postpone or ~~significant cutback~~reschedule their installation of communications systems including their satellite, over-the-horizon microwave, or terrestrial line-of-sight microwave communication systems. This, in turn, could have a ~~large program~~material adverse effect on our sales of products to our customers.
We face risks from the uncertainty of prevailing economic and political conditions.
Current global political and economic conditions are uncertain. As a result, it is difficult to estimate the level of expansion, if any, for the global or U.S. economies generally or the markets in which we ~~participate, such as~~participate. Because our budgeting and forecasting process relies on estimates of growth in the ~~mobile data communications services U.S. Army contract,~~markets we serve, the current economic environment renders estimates of future income and expenses even more difficult than usual to formulate. The future direction of the domestic and global economies and political environment could ~~also materially adversely affect~~have a material adverse impact on our ~~future~~business, results of operations. All of our U.S. government contracts can be terminated by the U.S. government for its convenience. Termination for convenience provisions provide only for our recovery of costs incurred or committed, settlement expensesoperations and 21 profit on work completed prior to termination. In addition to the right of the U.S. government to terminate, U.S. government contracts are conditioned upon the continuing approval by Congress of the necessary spending. Congress usually appropriates funds for a given program on a fiscal-year basis even though contract performance may take more than one year. Consequently, at the beginning of a major program, the contract is usually not fully funded, and additional monies are normally committed to the contract only if, as and when appropriations are made by Congress for future fiscal years. The U.S. government may review our costs and performance on their contracts, as well as our accounting and general business practices. Based on the results of such audits, the U.S. government may adjust our contract-related costs and fees, including certain financing costs, goodwill, portions of research and development costs, and certain marketing expenses, which may not be reimbursable under U.S. government contracts. We obtain U.S. government contracts through a competitive bidding process. We cannot assure you that we will continue to win competitively awarded contracts or that awarded contracts will generate sufficient net sales to result in profitability. financial condition.
Acquisitions and strategic investments may divert our resources and management attention; results may fall short of expectations.
We intend to continue pursuing selected acquisitions of and investments in businesses, technologies and product lines as a key component of our growth strategy. Any future acquisition or investment may result in the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of debt and amortization
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expenses or in process research and development charges related to intangible assets. Acquisitions involve numerous risks, including: o difficulties in the integration and assimilation of the operations, technologies, products and personnel of an acquired business; o diversion of management's attention from other business concerns; and o potential loss of key employees or customers of any acquired business. Our fixed price contracts subject us to risk. Almost all of our products and services are sold under fixed price contracts. This means that we bear the risk of unanticipated technological, manufacturing, supply or other problems, price increases or increases in the cost of performance. Our markets are highly competitive. The markets for our products are highly competitive.
• difficulties in the integration and assimilation of the operations, technologies, products and personnel of an acquired business;
• diversion of management's attention from other business concerns;
• increased expenses associated with the acquisition; and
• potential loss of key employees or customers of any acquired business.
We cannot assure you that weour acquisitions will be ~~able to successfully compete or that our competitors~~successful and will not ~~develop new technologies and products that are more commercially effective than~~adversely affect our ~~own. We expect the Department~~business, results of Defense's increased use of commercial off-the-shelf products and components in military equipment will encourage new competitors to enter the market. Also, although the implementation of advanced telecommunications services is in its early stages in many developing countries, we believe competition may intensify as businesses and foreign governments realize the market potential of telecommunications services. Many of our competitors haveoperations or financial ~~technical, marketing, sales and distribution resources greater than ours.~~ condition.
The loss of key technical or management personnel could adversely affect our business.
Our success depends on the continued contributions of key technical management personnel, including the key corporate and operating unit management at each of our subsidiaries. Many of our key personnel, particularly the key engineers of our subsidiaries, would be difficult to replace, and are not subject to employment or noncompetition agreements. Our growth and future success will depend in large part upon our ability to attract and retain highly qualified engineering, sales and marketing personnel. Competition for such personnel from other companies, academic institutions, government entities and other organizations is intense. Although we believe that we have been successful to date in recruiting and keeping key personnel, we may not be successful in attracting and retaining the personnel we will need to continue to grow and operate profitably. Also, the management skills that have been appropriate for us in the past may not continue to be appropriate if we continue to grow and diversify. 22
Our ~~success also depends~~markets are highly competitive.
The markets for our products are highly competitive. We cannot assure you that we will be able to ~~a significant extent upon~~successfully compete or that our ~~President~~competitors will not develop new technologies and ~~Chief Executive Officer, Fred Kornberg. The loss~~products that are more commercially effective than our own. We expect the U.S. Department of Defense's increased use of commercial off-the-shelf products and components in military equipment will encourage new competitors to enter the market. Also, although the implementation of advanced telecommunications services is in its early stages in many developing countries, we believe competition may intensify as businesses and foreign governments realize the market potential of ~~Mr. Kornberg could~~telecommunications services. Many of our competitors have ~~a material adverse effect on us. We have entered into an employment contract with Mr. Kornberg.~~ financial, technical, marketing, sales and distribution resources greater than ours.
Protection of our intellectual property is limited; we are subject to the risk of third party claims of infringement.
Our businesses rely in large part upon our proprietary scientific and engineering ~~"know-how"~~“know-how” and production techniques. Historically, patents have not been an important part of our protection of our intellectual property rights. ~~However, patents are important to protecting our intellectual property rights in Comtech AHA's TPC chips and Comtech Systems' 8mbs adaptive modem.~~ We rely upon the laws of unfair competition, restrictions in licensing agreements and confidentiality agreements to protect our intellectual property. We limit access to and distribution of our proprietary information. These efforts allow us to rely upon the knowledge and experience of our management and technical personnel to market our existing products and to develop new products. The departure of any of our key management and technical personnel, the breach of their confidentiality and non-disclosure obligations to us or the failure to achieve our intellectual property objectives may have a material adverse ~~effect~~impact on our business, ~~financial condition and~~ results of ~~operations.~~ operations and financial condition.
Our ability to compete successfully and achieve future revenue growth will depend, in part, on our ability to protect our proprietary technology and operate without infringing upon the rights of others. We may fail to do so. In addition, the laws of certain countries in which our products are or may be sold may not protect our products and intellectual property rights to the same extent as the laws of the United States.
We believe that we own or have licensed all intellectual property rights necessary for the operation of our businesses as currently contemplated. If the technology we use is found to infringe on protected technology, we could be required to change our business practices, license the protected technology, and/or pay damages or other compensation to the infringed party. If we are unable to license protected technology used in our business or if we were required to change our business practices, we could be prohibited from making and selling our products or providing certain telecommunications services.
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Our operations are subject to environmental ~~regulation.~~ laws and regulations and we may be subject to environmental liabilities.
We engage in manufacturing and are subject to a variety of local, state and federal governmental laws and regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture our products, particularly in the fabrication of fiberglass antennas by our Comtech Antenna Systems, Inc. subsidiary. ~~We believe that we are currently in compliance, in all material respects, with such regulations and that we have obtained all necessary environmental permits to conduct our business. Nevertheless, the~~The failure to comply with current or future ~~regulations~~environmental requirements could result in the imposition of substantial fines, suspension of production, alteration of our manufacturing processes or cessation of operations that could ~~materially adversely~~have a material adverse impact on our business, results of operations and financial condition.
In addition, the handling, treatment or disposal of hazardous substances by us or our predecessors may have resulted or could in the future result in contamination requiring investigation or remediation, or leading to other liabilities, any of which could have a material adverse impact on our business, results of operations and financial condition.
Recently enacted and proposed changes in securities laws and regulations are increasing our costs.
The Sarbanes-Oxley Act of 2002 that became law in July 2002 requires changes in some of our corporate governance, public disclosure and compliance practices. The Act also requires the SEC to promulgate new rules on a variety of subjects. In addition, the Nasdaq National Market has revised its requirements for companies, such as us, that are listed on the Nasdaq National Market. These developments are increasing our legal and financial compliance costs. We expect these developments to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These developments could make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.
Terrorist attacks and threats, and government responses thereto, and threats of war elsewhere may negatively impact all aspects of our operations, revenues, costs and stock price.
The terrorist attacks in the United States and against U.S. interests overseas, the U.S. government's response thereto, and threats of war may negatively affect our business, financial condition and results of operations. Any escalation in these events or similar or future events may disrupt our operations or those of our customers and may affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers. In addition, these events have had and could continue to have an adverse impact on the U.S. and world economy in general.
Provisions in our corporate documents, stockholder rights plan, and Delaware law could delay or prevent a change in control of Comtech.
We have taken a number of actions that could have the effect of discouraging, delaying or preventing a merger or acquisition involving Comtech that our stockholders may consider favorable. For example, we have a classified board and the employment contract of our chief executive officer provides for a substantial payment in the event of a change of control of Comtech. We also adopted a stockholder rights plan that could cause substantial dilution to a stockholder, and substantially increase the cost paid by a stockholder, who attempts to acquire us on terms not approved by our board of directors. These could prevent us from being acquired. In addition, our certificate of incorporation grants the board of directors the authority to fix the rights, preferences and privileges of and issue up to 2,000,000 shares of preferred stock without stockholder action. Although we have no present intention to issue shares of preferred stock, such an issuance of any class or series of our preferred stock could have rights which would adversely affect the voting power of the common stock or which could delay, defer, or prevent a change in control of Comtech. In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, this statute provides that except in certain limited circumstances a corporation shall not engage in any “business combination” including mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, for purposes of Section 203 of the Delaware General Corporation Law, an “interested stockholder” is a person who, together with affiliates, owns, or within three years did own, 15% or more of the corporation's voting stock. This provision could have the effect of delaying or preventing a change in control of Comtech.
Our debt service obligations may adversely affect our cash flow.
The higher level of indebtedness resulting from the issuance of our 2.0% convertible senior notes increases the risk that we may default on our debt obligations. We cannot assure you that we will be able to generate sufficient cash flow to pay the interest on our debt or that future working capital, borrowings or equity financing will be available to pay or refinance such debt.
27
The level of our indebtedness, among other things, could:
• make it difficult for us to make payments on our debt;
• make it difficult for us to obtain any necessary financing in the future for working capital, acquisitions, capital expenditures, debt service requirements or other purposes;
• limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and
• make us more vulnerable in the event of a downturn in our business.
Our stock price is volatile.
The stock market in general, and the stock prices of technology-based companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of any specific public ~~companies.~~company. The market price of our common stock has fluctuated significantly in the past and is likely to fluctuate significantly in the future as well. Factors that may have a significant impact on the market price of our stock include: o future announcements concerning us or our competitors; o receipt or non-receipt of substantial orders for products and services; o results of technological innovations; o new commercial products; o changes in recommendations of securities analysts; o government regulations; o proprietary rights or product or patent litigation; o changes in market conditions generally, particularly in the market for small cap stocks; and o limited public float.
• future announcements concerning us or our competitors;
• receipt or non-receipt of substantial orders for products and services;
• results of technological innovations;
• new commercial products;
• changes in recommendations of securities analysts;
• government regulations;
• proprietary rights or product or patent litigation;
• changes in economic conditions generally, particularly in the telecommunications sector;
• changes in market conditions generally, particularly in the market for small cap stocks; and
• limited public float.
Shortfalls in our ~~revenues~~sales or earnings in any given period relative to the levels expected by securities analysts could immediately, significantly and adversely affect the trading price of our common stock.
We have never declared or paid cash dividends.
We have never declared or paid a cash dividend and do not intend to declare any cash dividends on our common stock in the foreseeable future. 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ~~The Company's~~
Our earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from ~~its~~our investment of available cash ~~balances in money market funds and short-term U.S. treasury securities.~~balances. Under ~~its~~our current policies, ~~the Company does~~we do not use interest rate derivative instruments to manage exposure to interest rate changes. If the interest rate we receive on our investment of available cash balances were to change by 10%, the effect would be immaterial.
Our 2.0% convertible senior notes bear a fixed rate of interest. As such, our earnings and cash flows are not sensitive to changes in interest rates on our long-term debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report, Consolidated Financial Statements, Notes to Consolidated Financial Statements and ~~related financial schedule~~Related Financial Schedule are listed in the Index to Consolidated Financial Statements and Schedule annexed hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
28
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this Annual Report on Form 10-K, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures was carried out by the Company under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures have been designed and are being operated in a manner that provides reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Certain information concerning ~~the~~ directors and officers ~~of the Company~~ is incorporated by reference to ~~the~~our Proxy Statement ~~of the Company~~ for the Annual Meeting of Stockholders to be held December ~~10, 2002~~7, 2004 (the ~~"Proxy Statement"~~“Proxy Statement”) which will be filed with the Securities and Exchange Commission no more than 120 days after the close of ~~its~~our fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of ~~its~~our fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding securities authorized for issuance under equity compensation plans and certain information regarding security ownership of certain beneficial owners and management is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of ~~its~~our fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is incorporated by reference to the ~~Company's~~ Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of ~~its~~our fiscal year.
ITEM 14. ~~CONTROLS~~PRINCIPAL ACCOUNTANT FEES AND ~~PROCEDURES Not applicable. 24~~ SERVICES
Information regarding principal accountant fees and services is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
      (a) Documents filed as part of this report: ~~1. and 2. Financial Statements and Financial Statement Schedule~~
      1. and 2. Financial Statements and Financial Statement Schedule
The Financial Statements filed as part of this report are listed in the accompanying Index to Consolidated Financial Statements and Schedule. ~~(b) No reports~~
29
(b) Reports on ~~Form 8-K have been filed during the fourth quarter of the fiscal year ended July 31, 2002. (c) Exhibit index~~
Exhibit - ------- Incorporated By Number Description of Exhibit Reference to Exhibit ------ ---------------------- -------------------- ~~3(a) Certificate of Incorporation of the Registrant Exhibit 3(a) of the Registrant's 1987~~ Form 10-K 3(b) Amendment of the Certificate of Incorporation effecting the Exhibit 3(b) to the Registrant's 1991 Form 10-K 5 to 1 reverse stock split 3(c) Amended and restated By-Laws of the Registrant Exhibit 3(c) of Registrant's 1998 Form 10-K 3(d) Amendment to the Certificate of Incorporation increasing Exhibit 3(d) to the Registrant's 1994 Form 10-K authorized shares to 12 million 3(e) Amendment to the Certificate of Incorporation increasing the Exhibit 3(e) to Registrant's 1998 Form 10-K authorized shares to 17 million 3(f) Form of Certificate of Designation of the Series A Junior Exhibit 4(1) to the Registrant's Form 8-A/A dated Participating Preferred Stock December 23, 1998 3(g) Amendment to the Certificate of Incorporation increasing the Exhibit 3(g) to Registrant's 2000 Form 10-K authorized shares to 32 million 4(a) Rights Agreement dated as of December 15, 1998 between the Exhibit 4(1) to the Registrant's Form 8-A/A dated Registrant and American Stock Transfer and Trust Company, as December 23, 1998 Rights Agent 10(a) Amended and restated Employment Agreement dated October 9, Exhibit 10(a) to the Registrant's 2001 Form 10-K 2001 between the Registrant and Fred Kornberg 10(b) Lease and amendment thereto on the Melville Facility Exhibit 10(k) to the Registrant's 1992 Form 10-K 10(c) Amended and restated 1993 Incentive Stock Option Plan Appendix A to the Registrant's Proxy Statement dated November 3, 1997 10(d) Time Accelerated Restricted Stock Purchase Agreements between Exhibit 10(f) to the Registrant's 1999 Form 10-K Registrant and Principals of Comtech Mobile Datacom Corp. operating unit 10(e) Movement Tracking System Contract between Comtech Mobile Exhibit 10(g) to the Registrant's 1999 Form 10-K Datacom Corp. and U.S. Army's CECOM Acquisition Center dated June 24, 1999 (certain portions of this agreement have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment)
25
Exhibit - ------- Incorporated By Number Description of Exhibit Reference to Exhibit ------ ---------------------- -------------------- 10(f) License Agreement between Vistar Telecommunications Inc. and Exhibit 10(h) to the Registrant's 1999 Form 10-K Comtech Mobile Datacom Corp. dated August 31, 1999 (certain portions of this agreement have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment) 10(g)(1) 2000 Stock Incentive Plan Appendix A to the Registrant's Proxy Statement dated November 8, 1999 10(g)(2) Amendment to the 2000 Stock Incentive Plan Appendix A to the Registrant's Proxy Statement dated November 6, 2000 10(g)(3) Amendment to the 2000 Stock Incentive Plan 10(h) Asset Purchase Agreement between the Registrant, Comtech/AHA Acquisition Corp. and Advanced Hardware Architectures, Inc. 10(i)(1) Loan and Security Agreement between the Registrant and The Exhibit 10(k) to the Registrant's 2000 Form 10-K Teachers' Retirement System of Alabama, The Employees' Retirement System of Alabama, The Alabama Heritage Trust Fund, PEIRAF - Deferred Compensation Plan and State Employee'' Health Insurance Fund, dated July 7, 2000 10(i)(2) Amendment to the Loan and Security Agreement between the Registrant Exhibit 10(i)(2) to the Registrant's 2001 Form and The Teachers' Retirement System of Alabama, The Employees' 10-K Retirement System of Alabama, The Alabama Heritage Trust Fund, PEIRAF - Deferred Compensation Plan and State Employees' Health Insurance Fund, dated April 30, 2001 10(j) Asset Purchase Agreement between the Registrant and MPD Exhibit 2.1 to the Registrant's 8-K:
Form 8-K dated ~~Technologies, Inc., dated March 2, 2001~~June 8, 2004 – Item 9 – Press release announcing Results of Operations for the quarter ended April 30, 2001 10(k) 2001 Employee Stock Purchase Plan Appendix B to the Registrant's Proxy Statement dated November 6, 2000 21 Subsidiaries of the Registrant 23 Consent of KPMG LLP 99.1 Certifications of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 99.2 Certifications of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 2004
(c) Exhibit index
Exhibit
Number
     Description of Exhibit
   Incorporated By
Reference to Exhibit

3
(a)      Certificate of Incorporation of the Registrant    Exhibit 3(a) of the Registrant's 1987 Form 10-K
3
(b)      Amendment of the Certificate of Incorporation effecting the 5 to 1 reverse stock split    Exhibit 3(b) to the Registrant's 1991 Form 10-K
3
(c)      Amended and restated By-Laws of the Registrant    Exhibit 3(c) of Registrant's 1998 Form 10-K
3
(d)      Amendment to the Certificate of Incorporation increasing authorized shares to 12 million    Exhibit 3(d) to the Registrant's 1994 Form 10-K
3
(e)      Amendment to the Certificate of Incorporation increasing the authorized shares to 17 million    Exhibit 3(e) to Registrant's 1998 Form 10-K
3
(f)      Form of Certificate of Designation of the Series A Junior Participating Preferred Stock    Exhibit 4(1) to the Registrant's Form 8-A/A dated December 23, 1998
3
(g)      Amendment to the Certificate of Incorporation increasing the authorized shares to 32 million    Exhibit 3(g) to Registrant's 2000 Form 10-K
4
(a)      Rights Agreement dated as of December 15, 1998 between the Registrant and American Stock Transfer and Trust Company, as Rights Agent    Exhibit 4(1) to the Registrant's Form 8-A/A dated December 23, 1998
4
(b)      Indenture by and between the Registrant and The Bank of New York, as trustee, dated as of January 27, 2004, including form of Note    Exhibit 4.2 to the Registrant's Form S-3 (File No. 333-114268)
4
(c)      Registration Rights Agreement dated as of January 27, 2004, between the Registrant and Bear, Stearns & Co. Inc., as Initial Purchaser    Exhibit 4.4 to the Registrant's Form S-3 (File No. 333-114268)
10
(a)      Amended and restated Employment Agreement dated June 2, 2003, between the Registrant and Fred Kornberg    Exhibit 10(a) to the Registrant's Form 10-Q for quarter ended April 30, 2003
10
(b)      Amended and restated Employment Agreement dated June 2, 2003, between the Registrant and Robert G. Rouse    Exhibit 10(b) to the Registrant's Form 10-Q for quarter ended April 30, 2003
10
(c)      Lease and amendment thereto on the Melville Facility    Exhibit 10(k) to the Registrant's 1992 Form 10-K
10
(d)      Amended and restated 1993 Incentive Stock Option Plan    Appendix A to the Registrant's Proxy Statement dated November 3, 1997
10
(e)      Time Accelerated Restricted Stock Purchase Agreements between Registrant and Principals of Comtech Mobile Datacom Corp. operating unit    Exhibit 10(f) to the Registrant's 1999 Form 10-K
10
(f)      Movement Tracking System Contract between Comtech Mobile Datacom Corp. and U.S. Army's CECOM Acquisition Center dated June 24, 1999 (certain portions of this agreement have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment)    Exhibit 10(g) to the Registrant's 1999 Form 10-K
10
(g) (1)      2000 Stock Incentive Plan    Appendix A to the Registrant's Proxy Statement dated November 8, 1999
10
(g) (2)      Amendment to the 2000 Stock Incentive Plan    Appendix A to the Registrant's Proxy Statement dated November 6, 2000
10
(g) (3)      Amendment to the 2000 Stock Incentive Plan    Exhibit 10(g)(3) to the Registrant's 2002 Form 10-K
30
Exhibit
Number
     Description of Exhibit
   Incorporated By
Reference to Exhibit

10
(g) (4)      Amendment to the 2000 Stock Incentive Plan    Exhibit 10(h)(4) to the Registrant's 2003 Form 10-K
10
(g) (5)      Amendment to the 2000 Stock Incentive Plan
10
(h)      Asset Purchase Agreement between the Registrant, Comtech/AHA Acquisition Corp. and Advanced Hardware Architectures, Inc.    Exhibit 10(h) to the Registrant's 2002 Form 10-K
10
(i)      Asset Purchase Agreement between the Registrant and MPD Technologies, Inc., dated March 2, 2001    Exhibit 2.1 to the Registrant's Form 8-K dated April 30, 2001
10
(j)      2001 Employee Stock Purchase Plan    Appendix B to the Registrant's Proxy Statement dated November 6, 2000
21
     Subsidiaries of the Registrant
23
     Consent of Independent Registered Public Accounting Firm
31
.1      Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31
.2      Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32
.1      Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32
.2      Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibits to this Annual Report on Form 10-K are available from the Company upon request and payment to the Company for the cost of reproduction. 26
31
SIGNATURE
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMTECH TELECOMMUNICATIONS CORP. October 16, 2002 By: /s/ Fred Kornberg - ---------------- -------------------------------------- (Date) Fred Kornberg, Chairman of the Board
COMTECH TELECOMMUNICATIONS CORP.
September 22, 2004
        (Date) By: /s/ Fred Kornberg
Fred Kornberg, Chairman of the Board
and Chief Executive Officer
      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title ~~---------------------------- ------------------------------------~~ ~~October 16, 2002 /s/~~
September 22, 2004
        (Date) /s/ Fred Kornberg
Fred Kornberg Chairman of the Board ~~- ---------------------------------- ----------------------------~~
Chief Executive Officer and President ~~(Date) Fred Kornberg (Principal~~
(Principal Executive Officer) ~~October 16, 2002 /s/~~
September 22, 2004
        (Date) /s/ Robert G. Rouse
Robert G. Rouse Senior Vice President and ~~- ---------------------------------- ----------------------------~~
Chief Financial Officer ~~(Date) Robert G. Rouse (Principal~~
(Principal Financial and Accounting Officer) ~~October 16, 2002 /s/~~
September 22, 2004
        (Date) /s/ George Bugliarello ~~Director - ---------------------------------- ---------------------------- (Date)~~
George Bugliarello ~~October 16, 2002 /s/~~ Director
September 22, 2004
        (Date) /s/ Richard L. Goldberg ~~Director - ---------------------------------- ---------------------------- (Date)~~
Richard L. Goldberg ~~October 16, 2002 /s/~~ Director
September 22, 2004
        (Date) /s/ Edwin Kantor ~~Director - ---------------------------------- ---------------------------- (Date)~~
Edwin Kantor ~~October 16, 2002 /s/~~ Director
September 22, 2004
        (Date) /s/ Ira Kaplan ~~Director - ---------------------------------- ---------------------------- (Date)~~
Ira Kaplan ~~October 16, 2002 /s/~~ Director
September 22, 2004
        (Date) /s/ Gerard R. Nocita ~~Director - ---------------------------------- ---------------------------- (Date)~~
Gerard R. Nocita Director
27
32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 I, Fred Kornberg, certify that: 1. I have reviewed this Annual Report on Form 10-K of Comtech Telecommunications Corp. ("Registrant"); 2. Based on my knowledge, this Annual Report does not contain any untrue statements 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 Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual 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 Annual Report. Date: October 16, 2002 /s/ Fred Kornberg --------------------------------------- Fred Kornberg Chief Executive Officer and President EXPLANATORY NOTE REGARDING CERTIFICATION: Representations 4, 5 and 6 consistent with the Transition Provisions of SEC Exchange Act Release No. 34-46427 have been omitted from this Certification for the Annual Report on Form 10-K since this Annual Report on Form 10-K covers a period ending before the Effective Date of such Release. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Annual Report on Form 10-K of Comtech Telecommunications Corp. (the "Company") for the fiscal year ended July 31, 2002 (the "Annual Report"), I, Fred Kornberg, Chief Executive Officer and President of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: October 16, 2002 /s/ Fred Kornberg --------------------------------------- Fred Kornberg Chief Executive Officer and President 28 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 I, Robert G. Rouse, certify that: 1. I have reviewed this Annual Report on Form 10-K of Comtech Telecommunications Corp. ("Registrant"); 2. Based on my knowledge, this Annual Report does not contain any untrue statements 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 Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual 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 Annual Report. Date: October 16, 2002 /s/ Robert G. Rouse --------------------------------------- Robert G. Rouse Senior Vice President and Chief Financial Officer EXPLANATORY NOTE REGARDING CERTIFICATION: Representations 4, 5 and 6 consistent with the Transition Provisions of SEC Exchange Act Release No. 34-46427 have been omitted from this Certification for the Annual Report on Form 10-K since this Annual Report on Form 10-K covers a period ending before the Effective Date of such Release. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Annual Report on Form 10-K of Comtech Telecommunications Corp. (the "Company") for the fiscal year ended July 31, 2002 (the "Annual Report"), I, Robert G. Rouse, Senior Vice President and Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: October 16, 2002 /s/ Robert G. Rouse --------------------------------------- Robert G. Rouse Senior Vice President and Chief Financial Officer 29 SUBSIDIARIES The following is a list of the subsidiaries of the Company as of October 11, 2002: Subsidiary State of Incorporation - ---------- ---------------------- Telecommunications Transmission Business Segment Comtech Antenna Systems, Inc. Delaware Comtech EF Data Corp. Delaware Comtech Systems, Inc. Delaware Comtech AHA Corporation Delaware RF Microwave Amplifier Business Segment Comtech PST Corp. New York Mobile Data Communications Services Business Segment Comtech Mobile Datacom Corp. Delaware 30
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedule Page ---- Independent Auditors' Report F-2 Consolidated Financial Statements: Balance Sheets at July 31, 2002 and 2001 F-3 Statements of Operations for each of the years in the three-year period ended July 31, 2002 F-4 Statements of Stockholders' Equity for each of the years in the three-year period ended July 31, 2002 F-5 Statements of Cash Flows for each of the years in the three-year period ended July 31, 2002 F-6, F-7 Notes to Consolidated Financial Statements F-8 to F-25 Additional Financial Information Pursuant to the Requirements of Form 10-K: Schedule II - Valuation and Qualifying Accounts and Reserves S-1
Page
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Financial Statements:
Balance Sheets at July 31, 2004 and 2003
F-3
Statements of Operations for each of the years in the three-year period
ended July 31, 2004
F-4
Statements of Stockholders' Equity for each of the years in the three-year
period ended July 31, 2004
F-5
Statements of Cash Flows for each of the years in the three-year
period ended July 31, 2004
F-6, F-7
Notes to Consolidated Financial Statements
F-8 to F-24
Additional Financial Information Pursuant to the Requirements of Form 10-K:
Schedule II – Valuation and Qualifying Accounts and Reserves
S-1
Schedules not listed above have been omitted because they are either not applicable or the required information has been provided elsewhere in the consolidated financial statements or notes thereto.
F-1
KPMG LLP
Suite 200
                            1305 Walt Whitman Road
                            Melville, NY 11747-4302
Report of Independent ~~Auditors' Report~~ Registered Public Accounting Firm
The Board of Directors and Stockholders
Comtech Telecommunications Corp.:
We have audited the accompanying consolidated ~~financial statements~~balance sheets of Comtech Telecommunications Corp. and subsidiaries as ~~listed~~of July 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the ~~accompanying index.~~three-year period ended July 31, 2004. In connection with our audits of the consolidated financial statements, we also audited the consolidated financial statement schedule as listed in the accompanying index. These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with ~~auditing~~the standards ~~generally accepted in~~of the ~~United States of America.~~Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Comtech Telecommunications Corp. and subsidiaries as of July 31, ~~2002~~2004 and ~~2001,~~2003, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, ~~2002~~2004, in conformity with ~~accounting principles~~U.S. generally accepted ~~in the United States of America.~~accounting principles. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
Melville, New York ~~October 15, 2002~~
September 21, 2004
F-2
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, ~~2002~~2004 and ~~2001~~
~~Assets 2002 2001 ------------- -------------~~ Current assets: Cash and cash equivalents $ 15,510,000 36,205,000 Accounts receivable, less allowance for doubtful accounts of $795,000 in 2002 and $845,000 in 2001 27,435,000 27,374,000 Inventories, net 33,996,000 36,732,000 Prepaid expenses and other current assets 1,407,000 1,151,000 Deferred tax asset - current 2,492,000 2,634,000 ------------- ------------- Total current assets 80,840,000 104,096,000 Property, plant and equipment, net 11,889,000 11,778,000 Goodwill and other intangibles with indefinite lives, net of accumulated amortization of $1,648,000 17,726,000 17,657,000 Intangibles with definite lives, net of accumulated amortization of $2,681,000 in 2002 and $1,210,000 in 2001 12,902,000 10,162,000 Other assets, net 661,000 569,000 Deferred tax asset - non-current 2,568,000 2,726,000 ------------- ------------- Total assets $ 126,586,000 146,988,000 ============= ============= Liabilities and Stockholders' Equity Current liabilities: Current installments of long-term debt $ -- 5,900,000 Current installments of capital lease obligations (including payable to related party of $155,000 in 2001) 1,062,000 1,097,000 Accounts payable 9,529,000 11,014,000 Accrued expenses and other current liabilities 11,859,000 13,615,000 Deferred service revenue 4,343,000 2,073,000 Income taxes payable 2,470,000 3,308,000 ------------- ------------- Total current liabilities 29,263,000 37,007,000 Long-term debt, less current installments 28,683,000 42,000,000 Capital lease obligations, less current installments 1,294,000 2,157,000 Other long-term liabilities 58,000 259,000 ------------- ------------- Total liabilities 59,298,000 81,423,000 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 7,602,921 shares in 2002 and 7,511,105 shares in 2001 760,000 751,000 Additional paid-in capital 67,883,000 67,490,000 Accumulated deficit (825,000) (1,973,000) ------------- ------------- 67,818,000 66,268,000 Less: Treasury stock (93,750 shares in 2002 and 82,500 shares in 2001) (185,000) (184,000) Deferred compensation (345,000) (519,000) ------------- ------------- Total stockholders' equity 67,288,000 65,565,000 ------------- ------------- Total liabilities and stockholders' equity $ 126,586,000 146,988,000 ============= =============
~~Commitments and contingencies~~ 2003
Assets 2004
2003

Current assets:

Cash and cash equivalents
     $ 163,292,000      48,617,000
Restricted cash
     4,054,000      4,288,000
Accounts receivable, less allowance for doubtful accounts of
$732,000 in 2004 and $912,000 in 2003
     43,002,000      26,696,000
Inventories, net
     39,758,000      34,048,000
Prepaid expenses and other current assets
     1,817,000      1,742,000
Deferred tax asset – current
     6,501,000      5,699,000



     258,424,000      121,090,000

Property, plant and equipment, net
     14,652,000      12,328,000
Goodwill
     18,721,000      17,726,000
Intangibles with definite lives, net of accumulated amortization of
$6,787,000 in 2004 and $4,720,000 in 2003
     10,706,000      11,353,000
Deferred financing costs, net
     3,541,000      —
Other assets, net
     346,000      390,000
Deferred tax asset – non-current
     —      1,363,000



Total assets
     $ 306,390,000      164,250,000




Liabilities and Stockholders' Equity

Current liabilities:

Current installments of capital lease obligations
     $ 234,000      899,000
Accounts payable
     9,566,000      11,527,000
Accrued expenses and other current liabilities
     20,515,000      13,267,000
Customer advances and deposits
     7,290,000      2,491,000
Deferred service revenue
     13,716,000      11,160,000
Interest payable
     1,073,000      —
Income taxes payable
     4,812,000      6,945,000



     57,206,000      46,289,000

Convertible senior notes
     105,000,000      —
Capital lease obligations, less current installments
     158,000      393,000
Deferred tax liability – non-current
     1,628,000      —



Total liabilities
     163,992,000      46,682,000
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 14,371,335 shares in 2004 and 14,020,769 shares
in 2003
     1,437,000      1,402,000
Additional paid-in capital
     110,435,000      107,573,000
Retained earnings
     30,711,000      8,884,000



     142,583,000      117,859,000

Less:

Treasury stock (140,625 shares)
     (185,000 )      (185,000 )
Deferred compensation
     —      (106,000 )



Total stockholders' equity
     142,398,000      117,568,000



Total liabilities and stockholders' equity
     $ 306,390,000      164,250,000



Commitments and contingencies

See accompanying notes to consolidated financial statements.
F-3
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended July 31, ~~2002, 2001~~2004, 2003 and ~~2000~~
~~2002 2001 2000 ------------- ------------- -------------~~ Net sales $ 119,357,000 135,931,000 66,444,000 Cost of sales 78,780,000 87,327,000 45,942,000 ------------- ------------- ------------- Gross profit 40,577,000 48,604,000 20,502,000 Expenses: Selling, general and administrative 22,512,000 22,707,000 12,058,000 Research and development 11,041,000 10,190,000 2,644,000 In-process research and development 2,192,000 -- 10,218,000 Amortization of intangibles 1,471,000 2,552,000 230,000 ------------- ------------- ------------- 37,216,000 35,449,000 25,150,000 ------------- ------------- ------------- Operating income (loss) from continuing operations 3,361,000 13,155,000 (4,648,000) Other expenses (income): Interest expense 3,061,000 4,015,000 381,000 Interest income (452,000) (2,303,000) (1,511,000) Other, net (28,000) 841,000 201,000 ------------- ------------- ------------- Income (loss) from continuing operations before income taxes 780,000 10,602,000 (3,719,000) Provision (benefit) for income taxes (368,000) 3,888,000 85,000 ------------- ------------- ------------- Income (loss) from continuing operations 1,148,000 6,714,000 (3,804,000) Discontinued operations (Note 13): Loss from operations of discontinued segment (net of applicable income tax benefit of $79,000) -- -- (137,000) ------------- ------------- ------------- Net income (loss) $ 1,148,000 6,714,000 (3,941,000) ============= ============= ============= Basic income (loss) per share: Income (loss) from continuing operations $ 0.15 0.91 (0.67) Loss from discontinued operations -- -- (0.02) ------------- ------------- ------------- Basic income (loss) $ 0.15 0.91 (0.69) ============= ============= ============= Diluted income (loss) per share: Income (loss) from continuing operations $ 0.15 0.85 (0.67) Loss from discontinued operations -- -- (0.02) ------------- ------------- ------------- Diluted income (loss) $ 0.15 0.85 (0.69) ============= ============= ============= Weighted average number of common shares outstanding - Basic 7,461,000 7,348,000 5,663,000 Potential dilutive common shares 344,000 562,000 -- ------------- ------------- ------------- Weighted average number of common and common equivalent shares outstanding assuming dilution - Diluted 7,805,000 7,910,000 5,663,000 ============= ============= =============
2002
2004
2003
2002

Net sales
     $ 223,390,000      174,035,000      119,357,000
Cost of sales
     135,858,000      114,317,000      78,780,000




Gross profit
     87,532,000      59,718,000      40,577,000

Expenses:

Selling, general and administrative
     36,016,000      28,045,000      22,512,000
Research and development
     15,907,000      12,828,000      11,041,000
In-process research and development
     940,000      —      2,192,000
Amortization of intangibles
     2,067,000      2,039,000      1,471,000




     54,930,000      42,912,000      37,216,000





Operating income
     32,602,000      16,806,000      3,361,000

Other expenses (income):

Interest expense
     1,425,000      2,803,000      3,061,000
Interest income
     (921,000 )      (275,000 )      (452,000 )
Other, net
     —      —      (28,000 )




Income before provision for income taxes
     32,098,000      14,278,000      780,000
Provision (benefit) for income taxes
     10,271,000      4,569,000      (368,000 )




Net income
     $ 21,827,000      9,709,000      1,148,000





Net income per share:

Basic
     $ 1.55      0.85      0.10




Diluted
     $ 1.42      0.80      0.10





Weighted average number of common shares
outstanding – Basic
     14,119,000      11,445,000      11,192,000
Potential dilutive common shares
     1,261,000      748,000      516,000





Weighted average number of common and
common equivalent shares outstanding assuming
dilution – Diluted
     15,380,000      12,193,000      11,708,000




See accompanying notes to consolidated financial statements.
F-4
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended July 31, ~~2002, 2001~~2004, 2003 and ~~2000~~
Accumulated Common Stock Additional Other ------------ Paid-in Comprehensive Accumulated Shares Amount Capital Income Deficit ------ ------ ------- ------ ------ Balance July 31, 1999 4,471,368 $ 447,000 $ 23,801,000 $ -- $ (4,746,000) Amortization of deferred compensation -- -- -- -- -- Stock issued in acquisition of Hill Engineering 30,000 3,000 368,000 -- -- Stock options exercised 188,117 18,000 404,000 -- -- Unrealized loss on securities net of reclassification adjustment -- -- -- (113,000) -- Warrants exercised 14,691 1,000 (1,000) -- -- Shares issued in connection with public offering 2,645,000 266,000 42,168,000 -- -- Net loss -- -- -- -- (3,941,000) ------------ ------------ ------------ ------------ ------------ Balance July 31, 2000 7,349,176 735,000 66,740,000 (113,000) (8,687,000) Amortization of deferred compensation -- -- -- -- -- Unrealized loss on securities net of reclassification adjustment -- -- -- 113,000 -- Stock options exercised 97,146 10,000 265,000 -- -- Employee stock purchase plan shares purchased 14,112 1,000 157,000 -- -- Warrants exercised 50,671 5,000 328,000 -- -- Net income -- -- -- -- 6,714,000 ------------ ------------ ------------ ------------ ------------ Balance July 31, 2001 7,511,105 751,000 67,490,000 -- (1,973,000) Amortization of deferred compensation -- -- -- -- -- Termination of unvested restricted shares issued pursuant to employee stock award agreement -- -- (52,000) -- -- Stock options exercised 59,048 6,000 167,000 -- -- Employee stock purchase plan shares purchased 26,419 2,000 237,000 -- -- Warrants exercised 6,349 1,000 41,000 -- -- Net income -- -- -- -- 1,148,000 ------------ ------------ ------------ ------------ ------------ Balance July 31, 2002 7,602,921 $ 760,000 $ 67,883,000 $ -- $ (825,000) ============ ============ ============ ============ ============ Treasury Stock -------------- Deferred Stockholders' Comprehensive Shares Amount Compensation Equity Income ------ ------ ------------ ------ ------ Balance July 31, 1999 82,500 $ (184,000) $ (961,000) $ 18,357,000 $ 5,265,000 Amortization of deferred compensation -- -- 252,000 252,000 -- Stock issued in acquisition of Hill Engineering -- -- -- 371,000 -- Stock options exercised -- -- -- 422,000 -- Unrealized loss on securities net of reclassification adjustment -- -- -- (113,000) (113,000) Warrants exercised -- -- -- -- -- Shares issued in connection with public offering -- -- -- 42,434,000 -- Net loss -- -- -- (3,941,000) (3,941,000) ------------ ------------ ------------ ------------ ------------ Balance July 31, 2000 82,500 (184,000) (709,000) 57,782,000 (4,054,000) Amortization of deferred compensation -- -- 190,000 190,000 -- Unrealized loss on securities net of reclassification adjustment -- -- -- 113,000 113,000 Stock options exercised -- -- -- 275,000 -- Employee stock purchase plan shares purchased -- -- -- 158,000 -- Warrants exercised -- -- -- 333,000 -- Net income -- -- -- 6,714,000 6,714,000 ------------ ------------ ------------ ------------ ------------ Balance July 31, 2001 82,500 (184,000) (519,000) 65,565,000 6,827,000 Amortization of deferred compensation -- -- 122,000 122,000 -- Termination of unvested restricted shares issued pursuant to employee stock award agreement 11,250 (1,000) 52,000 (1,000) -- Stock options exercised -- -- -- 173,000 -- Employee stock purchase plan shares purchased -- -- -- 239,000 -- Warrants exercised -- -- -- 42,000 -- Net income -- -- -- 1,148,000 1,148,000 ------------ ------------ ------------ ------------ ------------ Balance July 31, 2002 93,750 $ (185,000) $ (345,000) $ 67,288,000 $ 1,148,000 ============ ============ ============ ============ ============
2002

Common Stock
Additional
Paid-in
Capital
Retained
Earnings
(Accumulated
Deficit)
Treasury Stock
Deferred
Compensation
Stockholders'
Equity
Comprehensive
Income
Shares
Amount
Shares
Amount

Balance July 31, 2001
   11,266,658    $ 1,127,000    $ 67,114,000    $ (1,973,000 )    123,750    $ (184,000 )    $ (519,000 )    $ 65,565,000
Amortization of deferred compensation
   —    —    —    —    —    —    122,000    122,000    $ —
Termination of unvested restricted shares issued pursuant to employee stock award agreement
   —    —    (52,000 )    —    16,875    (1,000 )    52,000    (1,000 )    —
Stock options exercised
   88,572    8,000    165,000    —    —    —    —    173,000    —
Employee stock purchase plan shares issued
   39,629    4,000    235,000    —    —    —    —    239,000    —
Warrants exercised
   9,523    1,000    41,000    —    —    —    —    42,000    —
Net income
   —    —    —    1,148,000    —    —    —    1,148,000    1,148,000










Balance July 31, 2002
   11,404,382    1,140,000    67,503,000    (825,000 )    140,625    (185,000 )    (345,000 )    67,288,000    1,148,000


Amortization of deferred compensation
   —    —    —    —    —    —    239,000    239,000    —
Shares issued in connection with private placement, net of related costs
   2,100,000    210,000    37,981,000    —    —    —    —    38,191,000    —
Stock options exercised and related income tax benefit
   421,395    42,000    1,649,000    —    —    —    —    1,691,000    —
Employee stock purchase plan shares issued
   40,256    4,000    206,000    —    —    —    —    210,000    —
Warrants exercised
   54,736    6,000    234,000    —    —    —    —    240,000    —
Net income
   —    —    —    9,709,000    —    —    —    9,709,000    9,709,000










Balance July 31, 2003
   14,020,769    1,402,000    107,573,000    8,884,000    140,625    (185,000 )    (106,000 )    117,568,000    9,709,000


Amortization of deferred compensation
   —    —    —    —    —    —    106,000    106,000    —
Stock options exercised and related income tax benefit
   300,140    30,000    2,485,000    —    —    —    —    2,515,000    —
Employee stock purchase plan shares issued
   18,846    2,000    353,000    —    —    —    —    355,000    —
Warrants exercised
   31,580    3,000    24,000    —    —    —    —    27,000    —
Net income
   —    —    —    21,827,000    —    —    —    21,827,000    21,827,000










Balance July 31, 2004
   14,371,335    $ 1,437,000    $ 110,435,000    $ 30,711,000    140,625    $ (185,000 )    $ —    $ 142,398,000    $ 21,827,000










See accompanying notes to consolidated financial statements.
F-5
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, ~~2002, 2001~~2004, 2003 and ~~2000~~ 2002
2004
2003
2002

Cash flows from operating activities:

Net income
     $ 21,827,000      9,709,000      1,148,000
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization
     6,514,000      6,258,000      5,230,000
Amortization of deferred financing costs
     280,000      —      —
Loss on disposal of property, plant and equipment
     91,000      —      —
Write-off of in-process research and development
     940,000      —      2,192,000
Provision for doubtful accounts
     147,000      246,000      269,000
Provision for inventory reserves
     1,193,000      2,521,000      1,698,000
Income tax benefit from stock option exercises
     1,001,000      —      —
Deferred income tax expense (benefit)
     2,079,000      (2,002,000 )      300,000
Changes in assets and liabilities, net of effects of acquisitions:

Restricted cash securing letter of credit obligations
     234,000      (4,288,000 )      —
Accounts receivable
     (16,453,000 )      493,000      300,000
Inventories
     (5,152,000 )      (2,793,000 )      1,199,000
Prepaid expenses and other current assets
     284,000      (500,000 )      451,000
Other assets
     44,000      69,000      140,000
Accounts payable
     (1,961,000 )      1,998,000      (2,030,000 )
Accrued expenses and other current liabilities
     6,915,000      3,540,000      (2,820,000 )
Customer advances and deposits
     4,799,000      318,000      84,000
Deferred service revenue
     2,556,000      6,817,000      2,270,000
Interest payable
     1,073,000      —      —
Income taxes payable
     (2,133,000 )      4,475,000      (838,000 )
Other liabilities
     —      (58,000 )      (201,000 )




Net cash provided by operating activities
     24,278,000      26,803,000      9,392,000




Cash flows from investing activities:

Purchases of property, plant and equipment
     (6,591,000 )      (4,317,000 )      (3,081,000 )
Purchases of technology licenses
     —      (75,000 )      (91,000 )
Payments for business acquisitions
     (5,187,000 )      (440,000 )      (7,055,000 )
Cash received in connection with business acquisitions
     —      551,000      —




Net cash used in investing activities
     (11,778,000 )      (4,281,000 )      (10,227,000 )




Cash flows from financing activities:

Repayment of borrowings under loan agreement
     —      (28,683,000 )      (19,217,000 )
Principal payments on capital lease obligations
     (900,000 )      (1,064,000 )      (1,097,000 )
Proceeds from issuance of convertible senior notes, net of related costs of $3,821,000
     101,179,000      —      —
Proceeds from issuance of common stock, net
     —      38,191,000      —
Proceeds from exercises of stock options, warrants and employee stock purchase plan shares
     1,896,000      2,141,000      454,000




Net cash provided by (used in) financing activities
     102,175,000      10,585,000      (19,860,000 )




(Continued)
F-6
~~2002 2001 2000 ------------ ------------ ------------~~ Cash flows from operating activities: Net income (loss) $ 1,148,000 6,714,000 (3,941,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Loss from discontinued operations -- -- 137,000 Loss on sale of marketable investment securities -- 990,000 88,000 Depreciation and amortization 5,230,000 6,575,000 2,149,000 Write-off of in-process research and development 2,192,000 -- 10,218,000 Provision for bad debt allowance 269,000 39,000 -- Provision for inventory reserves 1,698,000 264,000 244,000 Deferred income tax expense (benefit) 300,000 580,000 (1,298,000) Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable 300,000 (3,059,000) (2,111,000) Inventories 1,199,000 (8,132,000) (4,580,000) Prepaid expenses and other current assets 451,000 (568,000) (412,000) Other assets 140,000 (335,000) (293,000) Accounts payable (2,030,000) (246,000) 3,048,000 Accrued expenses and other current liabilities (2,736,000) (1,846,000) 3,059,000 Deferred service revenue 2,270,000 2,073,000 -- Income taxes payable (838,000) 1,859,000 1,449,000 Other liabilities (201,000) (108,000) 367,000 ------------ ------------ ------------ Net cash provided by continuing operations 9,392,000 4,800,000 8,124,000 Net cash used by discontinued operations -- -- (151,000) ------------ ------------ ------------ Net cash provided by operating activities 9,392,000 4,800,000 7,973,000 ------------ ------------ ------------ Cash flows from investing activities: Purchases of marketable investment securities -- (1,330,000) (37,015,000) Proceeds from sale of marketable securities -- 19,221,000 18,000,000 Purchases of property, plant and equipment (3,081,000) (2,776,000) (1,185,000) Purchase of technology license (91,000) (563,000) -- Payment for business acquisitions, net of cash received (7,055,000) (3,682,000) (63,138,000) ------------ ------------ ------------ Net cash provided by (used in) investing activities (10,227,000) 10,870,000 (83,338,000) ------------ ------------ ------------ Cash flows from financing activities: Borrowings under line of credit facility -- -- 1,000,000 Repayments of borrowings under line of credit facility -- -- (1,000,000) Borrowings under loan agreement -- 10,000,000 40,000,000 Repayment of borrowings under loan agreement (19,217,000) (2,100,000) -- Principal payments on capital lease obligations (1,097,000) (718,000) (800,000) Proceeds from issuance of common stock, net 239,000 158,000 42,434,000 Proceeds from exercises of stock options and warrants 215,000 608,000 422,000 ------------ ------------ ------------ Net cash provided by (used in) financing activities (19,860,000) 7,948,000 82,056,000 ------------ ------------ ------------
~~(Continued) F-6~~
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, ~~2002, 2001~~2004, 2003 and ~~2000~~
~~2002 2001 2000 ------------ ---------- ----------~~ Net increase (decrease) in cash and cash equivalents $(20,695,000) 23,618,000 6,691,000 Cash and cash equivalents at beginning of period 36,205,000 12,587,000 5,896,000 ------------ ---------- ---------- Cash and cash equivalents at end of period $ 15,510,000 36,205,000 12,587,000 ============ ========== ========== Supplemental cash flow disclosure Cash paid during the period for: Interest $ 3,099,000 3,898,000 134,000 ============ ========== ========== Income taxes $ 237,000 1,425,000 500,000 ============ ========== ========== Non cash investing and financing activities: Acquisition of property, equipment and technology license through capital leases $ 199,000 2,456,000 567,000 ============ ========== ========== Capital stock issued in connection with business acquisition $ -- -- 371,000 ============ ========== ==========
2002
2004
2003
2002

Net increase (decrease) in cash and cash equivalents
     $ 114,675,000      33,107,000      (20,695,000 )
Cash and cash equivalents at beginning of period
     48,617,000      15,510,000      36,205,000




Cash and cash equivalents at end of period
     $ 163,292,000      48,617,000      15,510,000




Supplemental cash flow disclosure

Cash paid during the period for:

Interest
     $ 55,000      2,884,000      3,099,000




Income taxes
     $ 9,324,000      2,096,000      237,000




Non cash investing activities:

Acquisition of property, equipment and technology license through capital leases
     $ —      —      199,000




See accompanying notes to consolidated financial statements.
F-7
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 31, ~~2002~~2004 and ~~2001~~ 2003
(1) Summary of Significant Accounting and Reporting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Comtech Telecommunications Corp. and its subsidiaries (the Company), all of which are wholly ~~owned.All~~owned. All significant intercompany balances and transactions have been eliminated in consolidation.
(b) Nature of Business
We design, develop, produce and market ~~sophisticated~~innovative products, systems and ~~systems that are used by telecommunications and defense companies and service providers in a broad range of applications.~~ services for advanced communications solutions.
The Company's business is highly competitive and characterized by rapid technological change. ~~In addition, the number of potential customers for the Company's products is limited.~~ The Company's growth and financial position depends, among other things, on its ability to keep pace with such changes and developments and to respond to the sophisticated requirements of an increasing variety of electronic equipment users. Many of the Company's competitors are substantially larger, have significantly greater financial, marketing and operating resources and broader product lines than does the Company. A significant technological breakthrough by others, including smaller competitors or new companies, could have a material adverse effect on the Company's business. In addition, certain of the Company's customers have technological capabilities in the Company's product areas and could choose to replace the Company's products with their own.
International sales expose the Company to certain risks, including barriers to trade, fluctuations in foreign currency exchange rates (which may make the Company's products less price competitive), political and economic instability, availability of suitable export financing, export license requirements, tariff regulations, and other ~~United States~~U.S. and foreign regulations that may apply to the export of the Company's products, as well as the generally greater difficulties of doing business abroad. The Company attempts to reduce the risk of doing business in foreign countries by seeking contracts denominated in U.S. dollars, advance or milestone payments, credit insurance and irrevocable letters of credit in its favor.
(c) Revenue Recognition
Revenue not associated with long-term contracts is recognized when the earnings process is complete, upon shipment or customer acceptance.
Revenue on long-term ~~fixed price~~ contracts ~~are generally recorded~~is accounted for under the percentage-of-completion method of accounting. These contracts relate to the design, development, manufacturing or modification of complex electronic equipment to customer's specifications or services relating to the performance of such contracts.
Revenue recognition on long-term contracts under the percentage-of-completion method is based on the relationship of total costs, including warranty costs, incurred ~~to date~~ to total projected ~~final~~ costs, or, alternatively, ~~as deliveries are made. Revenues~~based on ~~other contract orders are recognized under the units of delivery method. Under this method, revenues are recorded~~output measures, such as units are delivered with the related cost of sales recognized on each shipment based upon a percentage of estimated final contract costs. Contract costs include material, direct labor, manufacturing overhead and other direct costs. Retainages and estimated earnings in excess of amounts billed on certain multi-year programs are reported as unbilled receivables.delivered. Provision for anticipated losses on uncompleted contracts is made in the period in which such losses are determined.
The Company has historically demonstrated an ability to estimate contract revenues and expenses in applying the percentage-of-completion method of accounting. However, there exist risks and uncertainties in estimating future revenues and expenses, particularly on larger or longer-term contracts. Changes to such estimates could have a material effect on the Company's consolidated financial position and results of operations.
F-8
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Revenue ~~not associated with~~recognized in excess of amounts billable under long-term contracts ~~is recognized when~~accounted for under the ~~earnings process is complete, generally~~percentage-of-completion method are recorded as unbilled receivables in the accompanying consolidated balance sheets. Unbilled receivables are billable upon ~~shipment~~various events, including the attainment of performance milestones, delivery of hardware, submission of progress bills based on time and materials, or completion of the contract.
In the case of our mobile data communications segment's contract with the U.S. Army, the Company utilizes the percentage-of-completion method and estimates total contract revenues, which are subject to annual funding appropriations. However, the Company does not recognize revenue, or record unbilled receivables, until it receives fully funded orders.
Most government contracts have termination for convenience clauses that provide the customer ~~acceptance.~~ with the right to terminate the contract at any time. Historically, the Company has not experienced material contract terminations or write-offs of unbilled receivables.
The Company addresses customer acceptance provisions in assessing its ability to perform its contractual obligations under long-term contracts. Historically, the Company has been able to perform on its long-term contracts.
(d) Cash, ~~and~~ Cash Equivalents and Restricted Cash
Cash equivalents are temporary cash investments with a maturity of three months or less when purchased. Cash equivalents, primarily U.S. treasury securities with a maturity of three months or less, at July 31, ~~2002~~2004 and ~~2001~~2003 amounted to ~~$8,990,000~~$151,381,000 and ~~$27,412,000,~~$40,981,000, respectively. These investments are carried at cost, which approximates ~~market. F-8~~ ~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued~~ fair market value. Restricted cash as of July 31, 2004 and 2003 represents the amount the Company has pledged against guarantees of performance on certain of its contracts.
(e) Statement of Cash Flows
The Company acquired equipment and a technology license financed by capital leases in the ~~amounts~~amount of $199,000 $2,456,000, and $567,000 in 2002, 2001 and 2000, respectively. (f) Marketable Investment Securities Marketable investment securities at July 31, 2000 consisted of a mutual fund investment classified as available-for-sale and recorded at fair value. Such investment securities were sold in fiscal 2001. 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-sales securities are determined on a specific identification basis. (g)2002.
(f) Inventories ~~Work-in-progress~~
Work-in-process inventory reflects all accumulated production costs, which are comprised of direct production costs and overhead, and is reduced by amounts attributable to units delivered. These inventories are reduced to their estimated net realizable value by a charge to cost of sales in the period such excess costs are determined.
Raw materials and components and ~~work-in-process~~finished goods inventory are stated at the lower of cost or market, computed on the first-in, first-out ~~("FIFO"~~(“FIFO”) method. ~~(h)~~
(g) Long-Lived Assets
The Company's plant and equipment, which are recorded at cost, are depreciated or amortized over their estimated useful lives (building and improvements ~~- 40~~– forty years, equipment -– three to eight years) under the straight-line method. Capitalized values of properties under leases are amortized over the life of the lease or the estimated life of the asset, whichever is less.
F-9
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. In accordance with Statement of Financial Accounting Standards ~~("SFAS"~~(“SFAS”) No. 142, ~~"Goodwill~~“Goodwill and Other Intangible ~~Assets",~~Assets,” goodwill is no longer amortized. ~~See Note 15 for further discussion regarding amortization of goodwill.~~ The Company periodically, at least on an annual basis, reviews goodwill, considering factors such as projected cash flows and revenue and earnings multiples, to determine whether the carrying value of the goodwill is impaired. If the goodwill is deemed to be impaired, the difference between the carrying amount reflected in the financial statements and the estimated fair value is recognized as an expense in the period in which the impairment occurs. The Company defines its reporting units to be the same as its business segments.
The Company assesses the recoverability of the carrying value of its other long-lived assets, including identifiable intangible assets with finite useful lives, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company evaluates the recoverability of such assets based upon the expectations of undiscounted cash flows from such assets. If the sum of the expected future undiscounted cash flows were less than the carrying amount of the asset, a loss would be recognized for the difference between the fair value and the carrying amount. ~~(i)~~
(h) Research and Development Costs
The Company charges research and development costs to operations as incurred, except in those cases in which such costs are reimbursable under customer-funded contracts. In fiscal ~~2002, 2001~~2004, 2003 and ~~2000,~~2002, the Company was reimbursed by customers for such activities in the amount of $5,749,000, $3,676,000 and $2,029,000, ~~$1,656,000 and $4,272,000~~ respectively. ~~F-9~~ ~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (j)~~
(i) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. ~~(k)~~
(j) Earnings Per Share
The Company calculates earnings per share ~~("EPS"~~(“EPS”) in accordance with SFAS No. 128, ~~"Earnings~~“Earnings per ~~Share".~~Share.” Basic EPS is computed based on the weighted average number of shares outstanding. Diluted EPS reflects the dilution from potential common stock issuable pursuant to the ~~exercises~~exercise of stock options, warrants and ~~warrants,~~convertible senior notes, if dilutive, outstanding during each period. Stock options to purchase 70,000, 713,000 and 642,000 shares for fiscal 2004, 2003 and 2002, respectively, were not included in the EPS calculation because their effect would have been anti-dilutive.
Since the conditions required for conversion of the Company's 2.0% convertible senior notes have not been met, the Company did not assume conversion of the 2.0% convertible senior notes in calculating diluted EPS for fiscal 2004. As a result of recently proposed changes to the accounting for convertible securities, the Company may be required to include the impact of the assumed conversion of the 2.0% convertible senior notes in calculating diluted EPS for the fiscal year ending July 31, 2005 and subsequent years and to restate prior period EPS for comparative purposes.
(k) Accounting for Stock-Based Compensation
The Company accounts for its stock option and employee stock purchase plans under the intrinsic value method of APB Opinion No. 25, and as a result no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income and income per share would have been reduced to the following pro forma amounts:
F-10
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
2004
2003
2002

Net income, as reported
     $ 21,827,000      9,709,000      1,148,000

Less: Total stock-based employee compensation expense determined under fair value based method
         for all awards, net of related tax effects
     (1,615,000 )      (629,000 )      (520,000 )




Pro forma net income
     $ 20,212,000      9,080,000      628,000




Net income per share:

As reported
     Basic      $ 1.55      0.85      0.10
     Diluted      $ 1.42      0.80      0.10
Pro forma
     Basic      $ 1.43      0.79      0.06
     Diluted      $ 1.31      0.74      0.05

The per share weighted average fair value of stock options granted during fiscal 2004, 2003 and 2002 was $9.89, $2.83 and $4.32, respectively, on the date of grant. These fair values were determined using the Black Scholes option-pricing model with the following weighted average assumptions: 2004 – expected dividend yield of 0%, risk free interest rate of 3.31%, expected volatility of 53.67% and an expected option life of 5 years; 2003 – expected dividend yield of 0%, risk free interest rate of 3.32%, expected volatility of 56.59% and an expected option life of 5 years; 2002 – expected dividend yield of 0%, risk free interest rate of 4.29%, expected volatility of 54.10%, and an expected option life of 5 years.
(l) Financial Instruments
The Company believes that the book value of its current monetary assets and liabilities approximates fair value as a result of the short-term nature of such assets and liabilities. The Company further believes that the fair market value of its capital lease obligations does not differ materially from the carrying value. As ~~a result~~ of July 31, 2004, the ~~higher interest rate on the Company's long-term debt as compared to current interest rates on similar debt, management believes~~Company estimates the fair market value of its ~~long-term debt is~~2.0% convertible senior notes to be approximately ~~$1.2 million higher than its carrying value.~~ $85,000,000 based on recent trading activity.
(m) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results may differ from those estimates.
(n) Reclassifications Certain reclassifications have been made to previously reported consolidated financial statements to conform to the 2002 presentation. (o) Accounting for Stock-Based Compensation The Company records compensation expense for employee stock options only if the current market price of the underlying stock exceeds the exercise price on the date of the grant. The Company has elected not to implement the fair value based accounting method for employee stock options of SFAS No. 123, "Accounting for Stock-Based Compensation", but has elected to disclose the pro forma net income per share for employee stock option grants made beginning in fiscal 1996 as if such method had been used to account for stock-based compensation cost as described in SFAS No. 123. (p) Comprehensive Income
The Company has adopted SFAS No. 130, ~~"Reporting~~“Reporting Comprehensive Income,"” which requires companies to report all changes in equity during a period, except those resulting from investment by owners and distribution to owners, for the period in which they are recognized. Comprehensive income is the total of net income and all other non-owner changes in equity (or other comprehensive income) such as unrealized gains/losses on securities classified as available-for-sale, foreign currency translation adjustments and minimum pension liability adjustments. ~~F-10~~ Comprehensive income was the same as net income in fiscal 2004, 2003 and 2002.
(o) Reclassifications
Certain reclassifications have been made to previously reported consolidated financial statements to conform to the fiscal 2004 presentation.
F-11
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Acquisitions
In ~~January 2000,~~July 2002, the Company acquired certain assets and assumed certain liabilities of ~~Hill Engineering~~Advanced Hardware Architectures, Inc. ~~("Hill"~~(“AHA”) ~~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; (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. Since neither of such profit goals were met, if Hill does not meet cumulative profit goals by January 31, 2005, the 20,000 escrow shares will be returned to the Company. The acquisition has been accounted for as a purchase. The purchase price amounted to approximately $371,000, which principally represents the fair value of the initial 30,000 shares of common stock issued to Hill. The remaining 20,000 shares will be recorded at fair value on the date if and when the profit goals are met. This business operates in the RF microwave amplifiers segment. The accompanying consolidated financial statements reflect this acquisition at the fair value of the assets acquired ($652,000) and liabilities assumed ($871,000) and include the operations of Hill from the date of acquisition.The excess of the purchase price over the net assets acquired of approximately $606,000 is included in goodwill and other intangibles with indefinite lives in the accompanying consolidated balance sheet. See Note 15 for discussion regarding the Company's adoption of SFAS No. 142, including the amortization of goodwill. The operations of Hill are not material to the operations of the Company. Pro forma results of operations were not provided as their effect on the consolidated operations was not material. In July 2000, the Company acquired the business of EF Data, the satellite communications division of Adaptive Broadband Corporation, at an adjusted cost of $54,158,000. The preliminary cash purchase price of $61,500,000 was partially financed with $40 million supplied through institutional secured borrowings. Direct acquisition costs amounted to $1,696,000.Based upon the acquisition agreement, an adjustment to the purchase price in the amount of $9,038,000 was due the Company. This amount was received by the Company in September 2000. The acquisition was accounted for under the purchase method of accounting. The cost of the acquisition has been allocated to the assets and the liabilities assumed based on their estimated fair values at the date of the acquisition. The purchase price allocation reflects $930,000 of adjustments for pre-acquisition contingencies recorded in fiscal 2001. The excess of the cost over the fair value of the net assets acquired amounted to approximately $26,818,000, 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 were being amortized over five to seven years and $5,515,000 was recorded as goodwill. See Note 15 for discussion regarding the Company's adoption of SFAS No. 142, including the amortization of goodwill. The in-process research and development charge is included in the accompanying consolidated statement of operations for the year ended July 31, 2000. The acquisition cost was allocated as follows (in thousands): Historical book value of net assets acquired $27,340 Adjustments to record assets and liabilities at fair value: Fair value of in-process research and development 10,218 Fair value of existing technology 7,508 Fair value of assembled workforce 2,835 Fair value of customer base 742 Excess of the purchase price over the fair value of net assets 5,515 ------- $54,158 ======= An independent third-party appraiser was used to assess and value the purchased in-process research and development, existing technology, assembled workforce and customer base from the acquisition. The valuation of existing technology and in-process research and development was determined for products under development, based upon the estimated future revenues to be earned upon commercialization of the products. The percentage of the cash flows allocated to the purchased in-process research and development was derived from the estimated percentage complete for each of the projects. These cash flows were discounted back to their net present value. The resulting projected net cash flows from such projects reflects management's estimates of revenues and operating profits related to such projects. The workforce and customer base valuation was based upon replacement cost. F-11 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The operating results of EF Data have been included in the consolidated statements of operations from the acquisition date (July 10, 2000). The Company's unaudited pro forma results for fiscal year 2000 assuming the merger occurred on August 1, 1999 is as follows:
~~(in thousands, except per share amounts) 2000 --------~~ Net revenues $153,479 Net income 187 Basic income per share 0.03 Diluted income per share 0.03 Weighted average shares 5,663 Weighted average shares assuming dilution 6,280
These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the merger been in effect August 1, 1999, or the future results of operations. In April 2001, the Company acquired certain assets and product lines of MPD Technologies, Inc. for $12,718,000$6,985,000, including transaction costs of ~~$764,000.~~$185,000. The purchase price was subject to adjustment based on AHA's net tangible assets as of July 31, 2002. In January 2003, the purchase price was finalized and the Company received $551,000, net of related costs. Sales and income for fiscal 2002 relating to the AHA assets acquired would not have been material to the Company's results of operations. 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~~their estimated fair values at the date of acquisition. The excess of the purchase price over the fair values of the net tangible assets acquired was approximately $9,791,000 of which $1,800,000 was allocated to customer base which was being amortized over eight years, $1,800,000 was allocated to existing technology which is being amortized over six years and $6,191,000 was allocated to goodwill. See Note 15 for discussion regarding the Company's adoption of SFAS No. 142, including the amortization of goodwill. The purchase price of $12,718,000 was financed through $10 million of institutional secured borrowings and the balance from internal company funds. The acquisition cost was allocated as follows (in thousands): Historical book value of net assets acquired $ 2,927 Adjustments to record assets and liabilities at fair value: Fair value of existing technology 1,800 Fair value of customer base 1,800 Excess of the purchase price over the fair value of net assets 6,191 ------- $12,718 ======= An independent third-party appraiser was used to assess and value the existing technology and customer base from the acquisition. The valuation of existing technology was determined for products acquired, based upon the estimated future revenues to be earned from the products. The customer base valuation was based upon replacement cost. The operating results of MPD Technologies have been included in the consolidated statements of operations from the acquisition date (April 30, 2001). The Company's unaudited pro forma results for fiscal years 2000 and 2001 assuming the merger occurred on August 1, 1999 and August 1, 2000 are as follows:
~~(in thousands, except per share amounts) 2000 2001 -------- -------~~ Net revenues $ 88,848 153,485 Net income (loss) (6,117) 7,104 Basic income (loss) per share (1.08) 0.97 Diluted income (loss) per share (1.08) 0.90 Weighted average shares 5,663 7,348 Weighted average shares assuming dilution 5,663 7,910
~~F-12~~ COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the merger been in effect August 1, 1999 and August 1, 2000, or the future results of operations. On July 31, 2002,$6,312,000.
In May 2004, the Company acquired certain assets and product lines and assumed certain liabilities of ~~Advanced Hardware Architectures,~~Memotec, Inc. ~~("AHA"~~(“Memotec”), a subsidiary of Kontron AG, and at the same time, purchased related inventory owned by Kontron Canada Inc., for ~~$6,985,000,~~an aggregate purchase price of $5,187,000, including transaction costs of ~~$185,000. The purchase price is subject~~$161,000. Sales and income for fiscal 2004, 2003 and 2002 relating to ~~adjustment based on AHA's net tangible~~the Memotec assets asacquired would not have been material to the Company's results of ~~July 31, 2002.~~operations for those periods. 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~~their estimated fair values at the date of acquisition. The excess of the purchase price over the fair values of the net tangible assets acquired was ~~approximately $6,312,000 of which $2,192,000 was allocated to in-process research~~$3,245,000.
The AHA 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 in-process research and development charge is included in the accompanying consolidated statement of operations for the year ended July 31, 2002. The acquisition cost wasMemotec purchase prices were allocated as ~~follows (in thousands): Historical book value~~follows:
AHA
Memotec
Estimated
Useful Lives

Fair value of net tangible assets acquired
     $ 673,000      1,942,000
Adjustments to record intangible assets and liabilities at fair value:

In-process research and development
     2,192,000      940,000      —
Core technology
     1,315,000      820,000      8-9 years
Existing technology
     2,542,000      190,000      7-9 years
Trade name
     175,000      50,000      5-7 years
Order backlog
     88,000      100,000      6 mos. to 1 year
Customer relationships
     —      260,000      10 years
Goodwill
     —      995,000      Indefinite
Deferred tax liability
     —      (110,000 )



     6,312,000      3,245,000



Aggregate purchase price
     $ 6,985,000      5,187,000



For AHA, the valuation of net assets acquired $ 673 Adjustments to record assets and liabilities at fair value: Fair value of in-process research and development 2,192 Fair value of existing and core technology and trade name 4,032 Fair value of order backlog 88 ------ $6,985 ====== An independent third-party appraiser was used to assess and value the in-process research and development, existing technology ~~core technology, trade name~~ and ~~order backlog. The valuation of the in-process research and development and existing technology~~customer relationships was based on the value of the discounted cash flows that the ~~asset~~assets can be expected to generate in the future. The valuation of the core technology and trade name was based on the discounted capitalization of the royalties saved ~~because~~since the Company owns the asset. The valuation of the order backlog was based on the replacement cost approach. ~~Sales~~
For Memotec, the valuation of the in-process research and ~~income for fiscal 2002~~development, existing technology customer relationships and ~~2001 relating~~order backlog was based on the value of the discounted cash flows that the assets can be expected to generate in the ~~AHA assets~~future. The valuation of the core technology and trade name was based on the discounted capitalization of the royalties saved since the Company owns the asset.
The value ascribed to in-process research and development was expensed in the period the related acquisition occurred. The following table includes the specific nature and fair value allocated to each significant in-process research and development project acquired, ~~would not have been material~~as well as significant appraisal assumptions used as of the acquisition date and the current project status.
F-12
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to ~~the Company's results of operations for those periods.~~ Consolidated Financial Statements, Continued
Entity
Acquired
   Specific Nature
of R&D Projects
Fair Market
Value
Allocated
% of
Estimated
Efforts
Complete
   Original
Anticipated
Completion
Date
Discount
Rate
   Fiscal Year
Cash Flows
Projected To
Commence
   Project
Status as of
July 31,
2004

AHA
   Technology for high speed
modem chip #1    $ 1,228,000    51 %    December 2004    40 %    Cancelled    Cancelled
   Technology for high speed
modem chip #2    964,000    79 %    December 2004    30 %    Cancelled    Cancelled


   Total    $ 2,192,000


Memotec
   Technology for bandwidth
optimization #1    $ 680,000    78 %    January 2005    35 %    2005    Active
   Technology for bandwidth
optimization #2    260,000    24 %    August 2005    40 %    2006    Active


   Total    $ 940,000



Our purchased in-process research and development efforts are complex and unique in light of the nature of the technology, which is generally state-of-the-art. Risks and uncertainties associated with completing the projects in-process include the availability of skilled engineers, the introduction of similar technologies by others, changes in market demand for the technologies and changes in industry standards effecting the technology. In fiscal 2004, the in-process research and development projects acquired relating to the AHA acquisition were cancelled due to changes in market conditions. However, the underlying technology in these chips is being used in other research and development projects. The Company does not believe that the failure to complete the AHA projects or the currently active Memotec projects will have a material impact on the Company's consolidated results of operations.

(3) Accounts Receivable
Accounts receivable ~~consists~~consist of the following at July 31, ~~2002~~2004 and ~~2001:~~
~~2002 2001 ----------- ----------~~ Accounts receivable from commercial customers $15,424,000 18,336,000 Unbilled receivables (including retainages) on contracts-in-progress 9,304,000 5,939,000 Amounts receivable from the United States government and its agencies 3,502,000 3,944,000 ----------- ---------- 28,230,000 28,219,000 Less allowance for doubtful accounts 795,000 845,000 ----------- ---------- Accounts receivable, net $27,435,000 27,374,000 =========== ==========
2003:
2004
2003



Accounts receivable from commercial customers
     $ 27,845,000      10,952,000

Unbilled receivables (including retainages) on contracts-in-progress
     6,684,000      10,084,000

Amounts receivable from the U.S. government and its agencies
     9,205,000      6,572,000




     43,734,000      27,608,000

Less allowance for doubtful accounts
     732,000      912,000




Accounts receivable, net
     $ 43,002,000      26,696,000





There were no retainages included in unbilled receivables at July 31, 2004 or 2003. In the opinion of management, substantially all of the unbilled balances will be billed and collected ~~during fiscal 2003. F-13~~ ~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued~~ within one year.
As of July 31, 2004, a North African country represented 34.4% of total net accounts receivable.
(4) Inventories
Inventories consist of the following at July 31, ~~2002~~2004 and ~~2001: 2002 2001 ----------- ----------- Raw materials~~2003:
2004
2003



Raw materials and components
     $ 22,502,000      16,431,000

Work-in-process and finished goods
     22,878,000      22,716,000




     45,380,000      39,147,000

Less reserve for anticipated losses on contracts and inventory reserves
     5,622,000      5,099,000




Inventories, net
     $ 39,758,000      34,048,000



F-13
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Inventories directly related to long-term contracts were $8,550,000 and ~~components $15,920,000 18,718,000 Work-in-process~~$13,742,000 at July 31, 2004 and finished goods 21,365,000 20,294,000 ----------- ----------- 37,285,000 39,012,000 Less: Reserve for anticipated losses on contracts and inventory reserves 3,289,000 2,280,000 ----------- ----------- Inventories, net $33,996,000 36,732,000 =========== =========== 2003, respectively.
(5) Property, Plant and Equipment
Property, plant and equipment consists of the following at July 31, ~~2002~~2004 and 2001: 2002 2001 ----------- ----------- Equipment $24,481,000 22,681,000 Leasehold improvements 2,030,000 1,964,000 Facilities financed by capital lease -- 2,450,000 Equipment financed by capital lease 2,345,000 2,146,000 ----------- ----------- 28,856,000 29,241,000 Less accumulated depreciation and amortization 16,967,000 17,463,000 ----------- ----------- $11,889,000 11,778,000 =========== =========== Depreciation and amortization expense on property, plant and equipment amounted to approximately $3,527,000, $3,711,000, and $1,562,000, for the years ended July 31, 2002, 2001 and 2000, respectively. (6) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following at July 31, 2002 and 2001: 2002 2001 ----------- ----------- Customer advances and deposits $ 2,173,000 2,089,000 Accrued wages and benefits 2,918,000 3,663,000 Accrued commissions 1,125,000 1,021,000 Accrued warranty 2,975,000 4,336,000 Other 2,668,000 2,506,000 ----------- ----------- $11,859,000 13,615,000 =========== =========== (7) 2003:
2004
2003

Equipment
     $ 35,615,000      28,855,000
Leasehold improvements
     2,474,000      2,170,000
Equipment financed by capital lease
     1,473,000      2,140,000



     39,562,000      33,165,000
Less accumulated depreciation and amortization
     24,910,000      20,837,000



     $ 14,652,000      12,328,000



Depreciation and amortization expense on property, plant and equipment amounted to approximately $4,341,000, $3,915,000 and $3,527,000, for the fiscal years ended July 31, 2004, 2003 and 2002, respectively.

(6) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at July 31, 2004 and 2003:
2004
2003

Accrued wages and benefits
     $ 9,972,000      5,724,000
Accrued commissions
     3,255,000      1,993,000
Accrued warranty
     4,990,000      3,139,000
Other
     2,298,000      2,411,000



     $ 20,515,000      13,267,000



The Company provides standard warranty coverage for most of its products for a period of at least one year from the date of shipment. The Company records a liability for estimated warranty expense based on historical claims, product failure rates and other factors. Changes in the Company's product warranty liability during the fiscal years ended July 31, 2004 and 2003 were as follows:
          Fiscal Year ended July 31,

2004
2003

Balance at beginning of period
     $ 3,139,000      2,975,000
Provision for warranty obligations
     4,553,000      2,593,000
Charges incurred
     (2,702,000 )      (2,429,000 )



Balance at end of period
     $ 4,990,000      3,139,000



(7) Capital Lease Obligations

Capital lease obligations consist of the following at July 31, 2004 and 2003:

2004
2003

Obligations under capital leases
     $ 392,000      1,292,000
Less current installments
     234,000      899,000



     $ 158,000      393,000



Capital Lease Obligations Capital lease obligations consist of the following at July 31, 2002 and 2001: 2002 2001 ----------- ----------- Obligations under capital leases $ 2,356,000 3,254,000 Less current installments 1,062,000 1,097,000 ----------- ----------- $ 1,294,000 2,157,000 =========== =========== The obligations under capital leases which related to the Melville, New York facility were included in fiscal 2001 only. The balance of the capital lease obligations in both years related to certain equipment and a technology license. The net carrying value of assets under capital lease was ~~$3,207,000~~$1,882,000 and ~~$3,789,000~~$2,531,000 at July 31, ~~2002~~2004 and ~~2001,~~2003, respectively.
F-14
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Future minimum lease payments under capital leases as of July 31, ~~2002~~2004 are: Years ending July 31, 2003 $1,214,000 2004 946,000 2005 254,000 2006 159,000 2007 30,000 ---------- Total minimum lease payments 2,603,000 Less amounts representing interest (at rates varying from 6.55% to 9.5%) 247,000 ---------- 2,356,000 Less current installments 1,062,000 ---------- Obligations under capital leases, net of current installments $1,294,000 ==========



Fiscal years ending July 31,


2005
     $ 254,000

2006
     135,000

2007
     30,000



Total minimum lease payments
     419,000

Less amounts representing interest (at rates ranging from 6.55% to 9.50%)
     27,000



     392,000

Less current installments
     234,000



Obligations under capital leases, net of current installments
     $ 158,000




In December 1991, the Company and a partnership controlled by the Company's Chairman, Chief Executive Officer and President entered into an agreement in which the Company leases from the partnership its corporate headquarters and Melville production facility. The lease was for an initial term of ten years. For financial reporting purposes, the Company capitalized the lease at inception in the amount of $2,450,000, net of deferred interest of $1,345,000. In December 2001, the Company exercised its option for an additional ten-year period. For financial reporting purposes, the lease for the extension period is an operating lease. The annual rentals, of approximately ~~$482,000~~$507,000 for fiscal ~~2002,~~2004, are subject to annual adjustments equal to the lesser of 5% or the change in the Consumer Price Index.
(8) Long-term Debt
(a) 2.0% Convertible Senior Notes due 2024
On January 27, 2004, the Company issued $105,000,000 of its 2.0% convertible senior notes in a private offering pursuant to Rule 144A under the Securities Act of 1933, as amended. The net proceeds from this transaction were $101,179,000 after deducting the initial purchaser's discount and other transaction costs.
The notes bear interest at an annual rate of 2.0% and, during certain periods, the notes are convertible into shares of the Company's common stock at an initial conversion price of $47.25 per share (a conversion rate of 21.1640 shares per $1,000 original principal amount of notes), subject to adjustment in certain circumstances. The notes may be converted if, during a conversion period on each of at least 20 trading days, the closing sale price of the Company's common stock exceeds 120% of the conversion price in effect. Upon conversion of the notes, in lieu of delivering common stock, the Company may, in its discretion, deliver cash or a combination of cash and common stock. The Company may, at its option, redeem some or all of the notes on or after February 4, 2009. Holders of the notes will have the right to require the Company to repurchase some or all of the outstanding notes on February 1, 2011, February 1, 2014 and February 1, 2019 and upon certain events, including a change in control. If not redeemed by the Company or repaid pursuant to the holders' right to require repurchase, the notes mature on February 1, 2024.
The 2.0% interest is payable in cash, semi-annually, through February 1, 2011. After such date, the 2.0% interest will be accreted into the principal amount of the notes. Also, commencing with the six month period beginning February 1, 2009, if the average note price for the applicable trading period equals 120% or more of the accreted principal amount of such notes, the Company will pay contingent interest at an annual rate of 0.25%.
F-15
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The notes are general unsecured obligations of the Company, ranking equally in right of payment with all of its other existing and future unsecured senior indebtedness and senior in right of payment to any of its future subordinated indebtedness. All of the Company's subsidiaries have issued full and unconditional guarantees in favor of the holders of the Company's 2.0% convertible senior notes, except for the subsidiary that purchased certain assets and assumed certain liabilities of Memotec (the “Memotec Subsidiary”). The Memotec Subsidiary's total assets, equity, sales, income from continuing operations before income taxes and cash flows from operating activities were less than 3% of the corresponding consolidated amount. These full and unconditional guarantees are joint and several. Other than supporting the operations of its subsidiaries, Comtech Telecommunications Corp. (the “Parent”) has no independent assets or operations and there are currently no significant restrictions on its ability, or the ability of the guarantors, to obtain funds from each other by dividend or loan.
The net proceeds of the offering are being used for working capital and general corporate purposes and potentially may be used for future acquisitions of businesses or technologies or repurchases of the Company's common stock. The Company filed a registration statement with the SEC, which has become effective, for the resale of the notes and the shares of common stock issuable upon conversion of the notes.
(b) Term Loan Agreement
In July 2000, in connection with ~~the~~an acquisition, ~~of EF Data,~~ the Company entered into a secured loan agreement with The Teachers' Retirement System of Alabama, The Employees' Retirement System of Alabama, the Alabama Heritage Trust Fund, PEIRAF -– Deferred Compensation Plan, and State Employees' Health Insurance Fund which provided a term loan in the amount of $40,000,000, expiring on June 30, 2005. Costs incurred to obtain the financing amounted to $289,000 and ~~are~~were included in other assets, net of amortization, in the accompanying consolidated balance sheet. ~~Borrowings under the term loan are evidenced by promissory notes and are secured by all of the Company's assets.~~ The principal amount of the loan outstanding ~~bears~~bore interest at the per annum rate of 9.25%. ~~The loan agreement contains restrictive covenants, which, among other things, requires the Company to maintain certain financial ratios. At July 31,~~In fiscal 2002, ~~the Company was in compliance with such covenants. In August 2001,~~ the Company made a partial principal prepayment of $19,217,000 against the ~~loans,~~loan, in addition to scheduled principal payments in fiscal 2001 aggregating $2,100,000. The Company prepaid the remainder of the loan in fiscal 2003.
In April 2001, in connection with ~~the~~another acquisition, ~~of MPD Technologies,~~ the Company borrowed an additional $10,000,000 from the Teachers' Retirement System of Alabama, The Employees' Retirement System of Alabama and PEIRAF ~~- Deferred~~-Deferred Compensation Plan. Costs incurred to obtain the financing amounted to $164,000 and ~~are~~were included in other assets, net of amortization, in the accompanying consolidated balance sheet. The loan ~~which is evidenced by promissory notes and is secured by all of the Company's assets, bears~~bore interest on the principal amount outstanding at the per annum rate of 8.50%~~. The loan requires~~ and required interest only payments through June 2005, at which time the entire principal ~~is due and is subject to~~was due. The Company prepaid the ~~same restrictive covenants discussed above. F-15~~ COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Future minimum debt payments as of July 31, 2002 are: Years ended July 31, 2003 $ -- 2004 9,833,000 2005 18,850,000 ----------- Total minimum debt payments 28,683,000 Less current installments -- ----------- Long-term debt, less current installments $28,683,000 =========== loan in fiscal 2003.
(9) Income Taxes
The provision (benefit) for income taxes ~~on continuing operations~~ included in the accompanying consolidated statements of operations consists of the following: Year ended July 31, ------------------- 2002 2001 2000 ----------- --------- ---------- Federal - current $ (706,000) 2,834,000 1,004,000 Federal - deferred 306,000 503,000 (1,204,000) State and local - current 38,000 474,000 446,000 State and local - deferred (6,000) 77,000 (161,000) ----------- --------- ---------- $ (368,000) 3,888,000 85,000 =========== ========= ==========
Year ended July 31,
2004
2003
2002

Federal – current
     $ 7,664,000      6,185,000      (706,000 )
Federal – deferred
     2,122,000      (1,894,000 )      306,000

State and local – current
     504,000      386,000      38,000
State and local – deferred
     133,000      (108,000 )      (6,000 )

Foreign – current
     24,000      —      —
Foreign – deferred
     (176,000 )      —      —




     $ 10,271,000      4,569,000      (368,000 )




F-16
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The provision (benefit) for income taxes ~~on income from continuing operations~~ differed from the amounts computed by applying the U.S. Federal income tax rate ~~of 34%~~ as a result of the following:
2002 2001 2000 ---- ---- ---- Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- Computed "expected" tax expense $ 265,000 34.0% 3,605,000 34.0% (1,338,000) (34.0%) Increase (reduction) in income taxes resulting from: Change in the beginning of the year valuation allowance for deferred tax assets 100,000 12.8 (300,000) (2.8) 1,623,000 41.2 Generation of research and experimentation credits: Current year (400,000) (51.3) -- -- -- -- Prior years (416,000) (53.4) -- -- -- -- State and local income taxes, net of Federal benefit 21,000 2.7 363,000 3.4 188,000 4.8 Other 62,000 8.0 220,000 2.1 (388,000) (9.8) ---------- ---------- ---------- ---------- ---------- ---------- $ (368,000) (47.2%) 3,888,000 36.7% 85,000 2.2% ========== ========== ========== ========== ========== ==========
~~F-16~~ ~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued~~
Fiscal years ended July 31,
2004
2003
2002
Amount
Rate
Amount
Rate
Amount
Rate
Computed “expected” tax expense
     $ 11,234,000      35.0%      4,997,000      35.0%      265,000      34.0%
Increase (reduction) in income taxes
resulting from:

Change in the beginning of the
year valuation allowance
for deferred tax assets
     (350,000 )      (1.1 )      (350,000 )      (2.4 )      100,000      12.8
Generation of research and
experimentation credits:

Current year
     (454,000 )      (1.4 )      (400,000 )      (2.8 )      (400,000 )      (51.3 )
Prior years
     —      —      —      —      (416,000 )      (53.4 )
Extraterritorial income
exclusion
     (856,000 )      (2.7 )      (286,000 )      (2.0 )      —      —
State and local income taxes,
net of Federal benefit
     414,000      1.3      181,000      1.3      21,000      2.7
Other
     283,000      0.9      427,000      2.9      62,000      8.0







     $ 10,271,000      32.0%      4,569,000      32.0%      (368,000 )      (47.2% )







The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at July 31, ~~2002~~2004 and ~~2001~~2003 are presented below.
~~2002 2001 ------------ ------------~~ Deferred tax assets: Allowance for doubtful accounts receivable $ 95,000 98,000 Intangibles 4,673,000 4,796,000 Inventory and warranty reserves 1,226,000 1,303,000 Plant and equipment, principally due to capitalized leases and differences in depreciation -- 481,000 Compensation and commissions, principally due to accrual for financial reporting purposes 736,000 423,000 Deferred compensation 211,000 116,000 Other 226,000 243,000 Alternative minimum tax credit carryforward 209,000 -- Less valuation allowance (2,200,000) (2,100,000) ------------ ------------ Total deferred tax assets 5,176,000 5,360,000 Deferred tax liabilities: Plant and equipment, principally due to capitalized leases and differences in depreciation (116,000) -- ----------- ------------ Net deferred tax assets $ 5,060,000 5,360,000 ============ ============
2004
2003

Deferred tax assets:
Allowance for doubtful accounts receivable
     $ 272,000      181,000
Intangibles
     4,029,000      4,606,000
Inventory and warranty reserves
     3,895,000      2,854,000
Compensation and commissions
     1,571,000      2,187,000
Deferred compensation
     287,000      248,000
Other
     763,000      477,000
Less valuation allowance
     (1,500,000 )      (1,850,000 )



Total deferred tax assets
     9,317,000      8,703,000

Deferred tax liabilities:

Convertible senior notes
     (1,297,000 )      —
Plant and equipment
     (3,147,000 )      (1,641,000 )



Total deferred tax liabilities
     (4,444,000 )      (1,641,000 )



Net deferred tax assets
     $ 4,873,000      7,062,000



The Company provides for income taxes under the provisions of SFAS No. 109, ~~"Accounting~~“Accounting for Income ~~Taxes".~~Taxes.” SFAS No. 109 requires an asset and liability based approach in accounting for income taxes. In assessing the realizability of deferred tax assets and liabilities, management considers whether it is more likely than not that some portion or all of them will not be realized. As of July 31, ~~2002~~2004 and ~~2001,~~2003, the Company's deferred tax asset has been offset by a valuation allowance related to the extended write off period of in-process research and development from the acquisitions of EF Data and AHA. The Company must generate approximately ~~$19,600,000~~$29,100,000 of taxable income to fully utilize its deferred tax assets. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.
F-17
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Stockholders' Equity
(a) Stock Split
In July 2003, the Company completed a three-for-two stock split, which was effected in the form of a 50% stock dividend. All share and per share information in the consolidated financial statements and notes thereto has been adjusted to reflect the stock split.
(b) Private Placement of Common Stock ~~Offering~~
In ~~February and March 2000,~~July 2003, the Company sold ~~an aggregate of 2,645,000~~2,100,000 shares of its common stock in a ~~public offering resulting in net~~private placement transaction. The aggregate proceeds to the Company were $38,191,000, net of ~~$42,434,000. (b)~~related costs of $2,402,000. The shares were registered with the Securities and Exchange Commission in August 2003.
(c) Stock Option, Stock Purchase and Warrant Agreements
The Company has stock option and stock purchase plans and warrant agreements as follows:
1993 Incentive Stock Option Plan - – The 1993 Incentive Stock Option Plan, as amended, provides for the granting to key employees and officers of incentive and non-qualified stock options to purchase up to ~~1,042,500~~1,563,750 shares of the Company's common stock at prices generally not less than the fair market value at the date of grant with the exception of anyone who, prior to the grant, owns more than 10% of the voting power, in which case the exercise price cannot be less than 110% of the fair market value. In addition, it provided formula grants to non-employee members of the Board of Directors. The term of the options may be no more than ten years. However, for incentive stock options granted to any employee who, prior to the granting of the option, owns stock representing more than 10% of the voting power, the option term may be no more than five years. As of July 31, ~~2002,~~2004, the Company had granted incentive stock options representing the right to purchase an aggregate of ~~1,086,515~~1,400,396 shares (net of 229,377 canceled options) at prices ranging between ~~$1.50 - $11.94~~$1.00 – $7.96 per share, of which ~~140,468 options were canceled and 544,540~~302,675 are outstanding at July 31, ~~2002.To~~2004. To date, ~~401,507~~1,097,721 shares have been exercised. Outstanding awards have been transferred to the 2000 Stock ~~F-17~~ ~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued~~ Incentive Plan. The terms applicable to these awards prior to the transfer continue to apply. The plan was terminated by the Board of Directors in December 1999 due to the approval by the shareholders of the 2000 Stock Incentive Plan.
2000 Stock Incentive Plan - – The 2000 Stock Incentive Plan, as amended, provides for the granting to all employees and consultants of the Company (including prospective employees and consultants) non-qualified stock options, stock appreciation rights, restricted stock, performance shares, performance units and other stock-based awards. In addition, employees of the Company are eligible to be granted incentive stock options. Non-employee directors of the Company are eligible to receive non-discretionary grants of nonqualified stock options subject to certain limitations. The aggregate number of shares of common stock which may be issued may not exceed ~~1,100,000~~2,375,000 plus the shares that were transferred to the Plan relating to outstanding awards that were previously granted under the 1982 Incentive Stock Option Plan and the 1993 Incentive Stock Option Plan. The Stock Option Committee of the Board of Directors, consistent with the terms of the Plan, will determine the types of awards to be granted, the terms and conditions of each award and the number of shares of common stock to be covered by each award. Grants of incentive and ~~non-qualified~~non- qualified stock options may not have a term exceeding ten years or no more than five years in the case of an incentive stock option granted to a stockholder who owns stock representing more than 10% of the voting power. As of July 31, ~~2002,~~2004, the Company had granted incentive stock options representing the right to purchase an aggregate of ~~669,700~~2,169,300 shares at prices ranging between ~~$9.35 - $17.84~~$4.70 – $30.38 of which ~~50,500~~175,300 options were canceled and ~~619,200~~1,767,930 are outstanding at July 31, ~~2002. There~~2004. As of July 31, 2004, 226,070 incentive stock options have been ~~no exercises.~~exercised. All options granted have ~~been incentive stock options at~~had exercise prices equal to the fair market value of the stock on the date of grant.
F-18
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Warrants Issued Pursuant to Acquisition - – In connection with an acquisition in fiscal 1999, the Company issued warrants to the acquiree's owners and creditors to purchase ~~150,000~~225,000 shares of the Company's common stock at an exercise price of ~~$6.57. The~~$4.38. All warrants ~~which contain transferability restrictions, are exercisable for a period~~were exercised as of five years commencing September 24, 1998, and shares purchased through the exercise of these warrants contain voting restrictions. Through fiscal 2002, warrants to purchase 87,020 shares were exercised. July 31, 2004.
Employee Stock Purchase Plan - – The Comtech Telecommunications Corp. 2001 Employee Stock Purchase Plan ("(“The Purchase ~~Plan"~~Plan”) was approved by the shareholders on December 12, 2000. Pursuant to the Purchase Plan, ~~300,000~~450,000 shares of the Company's common stock ~~will be~~were reserved for issuance. The Purchase Plan is intended to provide eligible employees of the Company the opportunity to acquire common stock in the Company at 85% of fair market value at date of issuance through participation in the payroll-deduction based employee stock purchase plan. Through fiscal ~~2002,~~2004, the Company issued ~~40,531~~119,898 shares of its common stock to participating employees in connection with the Purchase Plan. ~~F-18~~ ~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (c)~~
(d) Option Activity
The following table sets forth summarized information concerning the Company's stock options: Weighted average Number of shares exercise price ---------------- -------------- Outstanding at July 31, 1999 904,395 $ 3.40 Granted 109,500 12.02 Expired/canceled (40,268) 5.69 Exercised (189,949) 2.71 ---------- ---------- Outstanding at July 31, 2000 783,678 4.65 Granted 434,700 12.62 Expired/canceled (21,400) 9.05 Exercised (98,950) 3.13 ---------- ---------- Outstanding at July 31, 2001 1,098,028 7.86 Granted 183,000 13.79 Expired/canceled (59,700) 9.38 Exercised (57,588) 2.98 ---------- ---------- Outstanding at July 31, 2002 1,163,740 $ 8.95 ========== ========== Options exercisable at July 31, 2002 433,380 $ 6.33 ========== ========== Options available for grant at July 31, 2002 571,710 ==========
Number of shares
Weighted average
exercise price

Outstanding at July 31, 2001
     1,647,042      $ 5.24

Granted
     274,500      9.19

Expired/canceled
     (89,550 )      6.25

Exercised
     (86,382 )      1.99




Outstanding at July 31, 2002
     1,745,610      5.97

Granted
     505,500      5.51

Expired/canceled
     (94,875 )      7.66

Exercised
     (421,380 )      3.77




Outstanding at July 31, 2003
     1,734,855      6.27

Granted
     659,250      19.60

Expired/canceled
     (23,350 )      8.82

Exercised
     (300,150 )      5.04




Outstanding at July 31, 2004
     2,070,605      $ 10.66




Options exercisable at July 31, 2004
     544,685      $ 4.07




Options available for grant at July 31, 2004
     536,040




The options outstanding as of July 31, ~~2002~~2004 are summarized in ranges as follows: Range of exercise Weighted average Number of options Weighted average price exercise price outstanding remaining life ----------------- ----------------- ----------------- ---------------- $1.50 - 3.99 $ 2.97 391,140 5 years 4.00 - 7.50 6.48 113,100 6 years 7.51 - 12.00 11.19 297,000 8 years 12.01 - 17.84 14.34 362,500 9 years (d) Stock-Based Compensation Plans The Company accounts for its stock option plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income (loss) and income (loss) per share would have been reduced to the following pro forma amounts:
~~2002 2001 2000 ---------- --------- ----------~~ Net income (loss) As reported $1,148,000 6,714,000 (3,941,000) Pro forma $ 628,000 5,818,000 (4,617,000) Net income (loss) per share As reported Basic $ 0.15 0.91 (0.69) Diluted $ 0.15 0.85 (0.69) Pro forma Basic $ 0.08 0.79 (0.82) Diluted $ 0.08 0.74 (0.82)
Range of
exercise price
Weighted average
exercise price
Number of options
outstanding
Weighted average
remaining life
$ 1.00– 5.00
                        $ 2.74                         285,425                         4 years
   5.01– 8.00
                        6.33                         711,030                         7 years
   8.01–18.00
                        13.59                         857,650                         8 years
18.01–30.38
                        23.75                         216,500                         10 years
F-19
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued The per share weighted-average fair value of stock options granted during 2002, 2001 and 2000 was $6.48, $9.07 and $9.14, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 2002 - expected dividend yield of 0%, risk-free interest rate of 4.29%, expected volatility of 54.10% and an expected option life of 5 years. 2001 - expected dividend yield of 0%, risk-free interest rate of 5.16%, expected volatility of 72.94% and an expected option life of 5 years. 2000 - expected dividend yield of 0%, risk-free interest rate of 6.04%, expected volatility of 82.74% and an expected option life of 5 years.
(e) Restricted Common Stock In February 1994, a total of 180,000 restricted shares of the Company's common stock were granted by the Board of Directors to the principal officers of one of the Company's operating units, Comtech Communications Corp, ("CCC"), at a cost of $.10 per share. The award related to services to be provided over future years and, as a result, the stock awards were subject to certain restriction which could be removed earlier upon CCC attaining certain business plan milestones, as provided in the agreement, but no later than ten years from the date of the award. The excess of market value over cost of the shares awarded of $633,000 was recorded as deferred compensation and was being amortized to expense over a ten-year period subject to the aforementioned accelerated provisions, if appropriate, as evaluated on an annual basis. The deferred compensation was reflected as a reduction of stockholders' equity in the accompanying consolidated balance sheet. In July 2000, the Company combined the operations of CCC with Comtech EF Data and the principal officers of CCC were made principal officers of the combined companies. The remaining unamortized balance of $136,000 of deferred compensation was expensed in fiscal 2000.
In October 1998, a total of 225,000 restricted shares of the Company's common stock were granted by the Board of Directors to the principal officers and employees of the Company's ~~new~~ subsidiary, Comtech Mobile Datacom Corp. ~~("CMDC"~~(“CMDC”), at a cost of $.10 per share. The award relates to services to be provided over future years and, as a result, the stock awards are subject to certain restrictions which may be removed earlier upon CMDC attaining certain business plan milestones, as provided in the agreement, but no later than ten years from the date of the award. These awards also automatically vest upon the employees' retirement or termination of employment by the Company without cause. The excess of market value over cost of the shares awarded of $1,041,000 was recorded as deferred compensation and is being amortized to expense over a ten-year period subject to the aforementioned accelerated provisions, if appropriate, as evaluated on an annual basis. The deferred compensation is reflected as a reduction of stockholders' equity in the accompanying consolidated balance sheets. As of July 31, 2004, the deferred compensation was fully amortized.
(11) Segment and Principal Customer 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.~~Communications. Telecommunications Transmission products include analog and digital modems, frequency converters, power amplifiers, satellite VSAT transceivers and antennas, voice gateways and over-the-horizon microwave communications products and systems. RF Microwave Amplifier products include solid-state high-power amplifier products that use the microwave and radio frequency spectrums. Mobile Data Communications ~~Services include two-way~~provide satellite-based mobile tracking and messaging ~~links between mobile platforms or remote sites~~hardware and ~~user headquarters using satellite, terrestrial microwave or Internet links.~~related services. Unallocated assets consist principally of cash, deferred financing costs and deferred tax ~~assets and intercompany receivables.~~assets. Unallocated ~~losses~~expenses result from such corporate expenses as legal, accounting and executive. ~~Intersegment~~Interest expense associated with the Company's 2.0% convertible senior notes is not allocated to the operating segments. Substantially all of the Company's long-lived assets are located in the U.S.
Corporate management defines and reviews segment profitability based on the same allocation methodology as presented in the segment data tables. Inter-segment sales in fiscal 2004, 2003 and 2002 by the telecommunications transmission segment to the RF microwave amplifiers ~~F-20~~ ~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued~~ segment were $3,598,000, $3,617,000 and $3,250,000, ~~at approximately break-even. Intersegment~~respectively. In fiscal 2004 and 2003, inter-segment sales inby the telecommunications transmission segment to the mobile data communications segment were $12,776,000 and $14,858,000, respectively. Inter-segment sales have been eliminated from the tables below. In fiscal ~~2000~~2004 and ~~2001 were not material. Fiscal~~fiscal 2002, ~~and 2000~~ operating income in the telecommunications transmission segment includes in-process research and development charges of $940,000 and $2,192,000, ~~and $10,218,000,~~ respectively.
(in thousands)

Fiscal 2004
   Telecommunications
Transmission
   RF Microwave
Amplifiers
   Mobile Data
Communications
   Unallocated
   Total

Net sales
   $141,514    22,092    59,784    —    223,390
Operating income (expense)
   29,210    261    9,526    (6,395)    32,602
Interest income
   4    —    3    914    921
Interest expense
   33    22    —    1,370    1,425
Depreciation and amortization
   4,832    1,082    413    187    6,514
Expenditure for long-lived assets,
including intangibles
   6,473    652    1,552    494    9,171
Total assets
   88,629    22,934    21,276    173,551    306,390
F-20
(in thousands) Mobile Data Fiscal 2002 Telecommunications RF Microwave Communications Un- - ----------- Transmission Amplifiers Services Allocated Total ------------ ---------- -------- --------- ----- Net sales $78,613 22,822 17,922 -- 119,357 Operating income (loss) 5,250 1,209 207 (3,305) 3,361 Interest income 99 3 5 345 452 Interest expense 2,157 904 -- -- 3,061 Depreciation and amortization 3,718 1,188 194 130 5,230 Expenditure for long-lived assets, including intangibles 8,640 930 510 14 10,094 Total assets 62,738 25,564 19,308 18,976 126,586 (in thousands) Mobile Data Fiscal 2001 Telecommunications RF Microwave Communications Un- - ----------- Transmission Amplifiers Services Allocated Total ------------ ---------- -------- --------- ----- Net sales $ 106,348 16,385 13,198 -- 135,931 Operating income (loss) 17,051 (470) (191) (3,235) 13,155 Interest income 211 8 4 2,080 2,303 Interest expense 3,728 287 -- -- 4,015 Depreciation and amortization 4,995 1,159 229 192 6,575 Expenditure for long-lived assets, including intangibles 4,506 11,895 142 128 16,671 Total assets 64,116 25,067 16,596 41,209 146,988 (in thousands) Mobile Data Fiscal 2000 Telecommunications RF Microwave Communications Un- - ----------- Transmission Amplifiers Services Allocated Total ------------ ---------- -------- --------- ----- Net sales $53,311 10,968 2,165 -- 66,444 Operating income (loss) 254 52 (2,350) (2,604) (4,648) Interest income -- -- -- 1,511 1,511 Interest expense 282 99 -- -- 381 Depreciation and amortization 974 763 159 253 2,149 Expenditure for long-lived assets, including intangibles 27,166 1,356 286 5 28,813 Total assets 68,018 9,693 4,286 44,034 126,031
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands)

Fiscal 2003
   Telecommunications
Transmission
   RF Microwave
Amplifiers
   Mobile Data
Communications
   Unallocated
   Total

Net sales
   $102,634    23,322    48,079    —    174,035
Operating income (expense)
   14,219    1,745    5,202    (4,360)    16,806
Interest income
   10    1    —    264    275
Interest expense
   1,863    940    —    —    2,803
Depreciation and amortization
   4,498    1,184    319    257    6,258
Expenditure for long-lived assets,
including intangibles
   3,623    427    682    75    4,807
Total assets
   65,105    20,462    21,244    57,439    164,250


(in thousands)

Fiscal 2002
   Telecommunications
Transmission
   RF Microwave
Amplifiers
   Mobile Data
Communications
   Unallocated
   Total

Net sales
   $78,613    22,822    17,922    —    119,357
Operating income (expense)
   5,250    1,209    207    (3,305)    3,361
Interest income
   99    3    5    345    452
Interest expense
   2,157    904    —    —    3,061
Depreciation and amortization
   3,718    1,188    194    130    5,230
Expenditure for long-lived assets,
including intangibles
   8,640    930    510    14    10,094
Total assets
   62,738    25,564    19,308    18,976    126,586

In fiscal ~~2002,~~2004 and 2003, sales ~~to the U.S. Army by our mobile data communications segment represented 13.2% of total net sales. Sales~~ to one customer, a prime contractor, represented 12.5% and 19.8% of our net sales, respectively. There were no customers in fiscal ~~2000~~2002, other than the U.S. government, that represented ~~43.1%~~10% or more of ~~total~~our net sales. ~~Such sales were made from the telecommunications transmission business segment. No customer represented more than 10% of sales in fiscal 2001.~~ During fiscal 2004, 2003 and 2002, ~~2001~~approximately 40.1%, 44.2% and ~~2000, approximately~~ 33.8%~~, 23.1% and 8.8%~~, respectively, of the Company's net sales resulted from contracts with the ~~United States~~U.S. government or prime contractors to the U.S. government. Direct and ~~its agencies. Export~~indirect sales to a North African country, including certain sales to the prime contractor mentioned above, in fiscal 2004 and 2003 represented 14.1% and 10.2%, respectively, of net sales. Sales to this North African country did not exceed 10.0% in fiscal 2002. International sales comprised ~~41.2%~~45.4%, ~~46.2%~~39.7% and ~~71.4%~~41.2% of net sales in fiscal 2004, 2003 and 2002, ~~2001 and 2000,~~ respectively. ~~Export~~International sales include sales to domestic companies for inclusion in products, which will be sold to international customers. ~~F-21~~ ~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued~~
(12) Commitments and Contingencies
(a) Operating Leases
The Company is obligated under noncancellable operating lease ~~agreements.~~agreements, including satellite lease expenditures relating to our mobile data communications segment contracts. At July 31, ~~2002,~~2004, the future minimum lease payments under operating leases are as follows: 2003 $ 3,484,000 2004 3,175,000 2005 2,957,000 2006 1,514,000 2007 820,000 Thereafter 2,409,000 ----------- Total $14,359,000 ===========



2005
     $ 6,505,000

2006
     2,394,000

2007
     1,360,000

2008
     989,000

2009
     620,000

Thereafter
     1,372,000



Total
     $ 13,240,000


F-21
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Lease expense charged to operations was ~~$3,318,000, $2,236,000~~$2,866,000, $2,558,000 and ~~$474,000~~$2,381,000 in fiscal 2004, 2003 and 2002, ~~2001~~respectively. Lease expense excludes satellite lease expenditures incurred of approximately $11,233,000, $10,043,000 and ~~2000, respectively.~~ $937,000 in fiscal 2004, 2003 and 2002, respectively, relating to our mobile data communications segment contracts.
(b) United States Government Contracts
Certain of the Company's contracts are subject to audit by applicable governmental agencies. Until such audits are completed, the ultimate profit on these contracts cannot be determined; however, it is management's belief that the final contract settlements will not have a material adverse effect on the Company's consolidated financial position or results of operations.
(c) Litigation In or about December 2000, two former employees, Shiv Verma and Robert Levin, commenced an action in the United States District Court, District of New Jersey, against the Company and others asserting, among other things, breach of certain restricted stock agreements and seeking unspecified monetary damages, specific performance of the restricted stock agreements, including the issuance of an aggregate 225,000 shares of the Company's common stock for a purchase price of $.10 per share, and other relief. The Company asserted defenses against the claims and interposed certain counterclaims and third-party claims against NJL, Inc., a company then controlled by Mr. Verma. In April 2002, Mr. Levin dismissed his claims against the Company, and the Company in return dismissed its counterclaims against him, without payment of any monies by either party, with both the Company and Mr. Levin executing general releases. On July 22, 2002, the District Judge dismissed Verma's complaint with prejudice and the Company's counterclaims against Verma without prejudice. On August 8, 2002, the Company voluntarily dismissed its third-party claims against defendant NJL, Inc., without prejudice. As a result, there are no claims or counterclaims pending by or against any party to the action, and the case has been closed on the Court's docket.
We are subject to certain ~~other~~ legal actions, which arise in the normal course of business. WeAlthough the ultimate outcome of litigation is difficult to accurately predict, we believe that the outcome of these actions will not have a material effect on our consolidated financial position or results of operations.
(d) Employment ~~Contract Mr. Kornberg, the Company's~~Contracts
The Company has employment agreements with its Chairman of the Board, ~~of Directors,~~ Chief Executive Officer and President ~~is employed pursuant to an~~(the “Chairman”), and its Senior Vice President and Chief Financial Officer (the “Chief Financial Officer”).
The Chairman's agreement which was amended and restated in ~~October 2001, which~~June 2003 provides, among other things, for his employment until ~~2003~~July 31, 2008 at a current base compensation of ~~$395,000~~$505,000 per annum and incentive compensation equal to 3.5% of the Company's pre-tax income, not to exceed his base salary, plus such additional amounts, if any, as the Board of Directors may from time to time determine. The employment period is automatically extended for successive two year periods unless either party gives notice of non-extension at ~~F-22~~ ~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued~~ least six months in advance of the scheduled termination date. The agreement also provides for payment to ~~Mr. Kornberg~~the Chairman in the event of a change in control of the Company. ~~(13) Discontinued Operations In early fiscal 1999, the Company acquired the assets~~
The Chief Financial Officer's agreement which was amended and assumed certain liabilities of Comtech Wireless, Inc. ("CWI"). Based upon CWI's disappointing fiscal 1999 results of operations and its uncertain future prospects, effectiverestated in June 2003 provides, among other things, for his employment until July 31, ~~1999,~~2005 at a current base compensation of $300,000 per annum and incentive compensation equal to 1.5% of the Company's pre-tax income, not to exceed his base salary, plus such additional amounts, if any, as the Board of Directors ~~approved a plan~~may from time to ~~liquidate CWI by January 31, 2000. Costs and expenses, and cash flows associated with CWI have been excluded from~~time determine. The employment period is automatically extended for successive one year periods unless either party gives notice of non-extension at least three months in advance of the ~~respective captions~~scheduled termination date. The agreement also provides for payment, in certain circumstances, to the Chief Financial Officer in the ~~accompanying statements~~event of ~~operations and statements~~a change in control of ~~cash flows. During fiscal 2000,~~ the ~~Company liquidated the operations of CWI and recorded a loss of $137,000 net of applicable income taxes. (14)~~Company.
(13) Stockholder Rights Plan
On December 15, 1998, the Company's Board of Directors approved the adoption of a stockholder rights plan in which one stock purchase right ~~("Right"~~(“Right”) was distributed as a dividend on each outstanding share of the Company's common stock to stockholders of record at the close of business on January 4, 1999. Under the plan, the Rights will be exercisable only if triggered by a person or group's acquisition of 15% or more of the Company's common stock. If triggered, each Right, other than Rights held by the acquiring person or group, would entitle its holder to purchase a specified number of the Company's common shares for 50% of their market value at that time. Unless a 15% acquisition has occurred, the Rights may be redeemed by the Company at any time prior to the termination date of the plan.
F-22
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
This Right to purchase common stock at a discount will not be triggered by a person or group's acquisition of 15% or more of the common stock pursuant to a tender or exchange offer which is for all outstanding shares at a price and on terms that Comtech's Board of Directors determines (prior to acquisition) to be adequate and in the best interest of the Company and its stockholders. The Rights will expire on December 15, 2008. ~~(15) Accounting for Business Combinations, Goodwill and Other~~
(14) Intangible Assets In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 specifies the criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. This pronouncement also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". The Company adopted the provisions of SFAS No. 141 effective July 1, 2001 and SFAS No. 142 effective August 1, 2001. As of July 31, 2001, $4,609,000 of intangibles, net of accumulated amortization of $768,000, were reclassified as intangibles with indefinite lives. F-23 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", we discontinued the amortization of goodwill and intangible assets with indefinite lives as of the beginning of fiscal 2002. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of amortization of goodwill and intangible assets with indefinite lives, net of the related income tax effect, follows:
(in thousands, except per share amounts) 2001 2000 --------- ------- Reported net income (loss) $ 6,714 (3,941) Exclude amortization of goodwill and intangible assets with indefinite lives, net of income taxes 889 168 --------- ----- Adjusted proforma net income (loss) $ 7,603 (3,773) Basic earnings (loss) per share: As reported $ 0.91 (0.69) Adjusted proforma $ 1.03 (0.67) Diluted earnings (loss) per share: As reported $ 0.85 (0.69) Adjusted proforma $ 0.96 (0.67)
Intangibles with definite lives arising from acquisitions as of July 31, ~~2002~~2004 and 2003 are as follows: Gross Carrying Accumulated Net Amount Amortization Book Value -------------- ------------ ----------- Existing technology $11,851,000 2,582,000 9,269,000 Core Technology 1,315,000 -- 1,315,000 Technology license 2,154,000 99,000 2,055,000 Trade name 175,000 -- 175,000 Order backlog 88,000 -- 88,000 ----------- ----------- ----------- Total $15,583,000 2,681,000 12,902,000 =========== =========== ===========
2004
2003
Gross
Carrying
Amount
     Accumulated
Amortization
     Gross
Carrying
Amount
     Accumulated
Amortization

Existing technology
     $ 12,456,000      5,992,000      12,266,000      4,261,000
Core technology
     2,135,000      318,000      1,315,000      146,000
Existing customer
relationships
     260,000      9,000      —      —
Technology license
     2,229,000      314,000      2,229,000      206,000
Trade name
     225,000      41,000      175,000      19,000
Order backlog
     188,000      113,000      88,000      88,000




Total
     $ 17,493,000      6,787,000      16,073,000      4,720,000





Amortization expense for the ~~twelve months~~years ended July 31, 2004, 2003 and 2002 ~~2001~~was $2,067,000, $2,039,000 and ~~2000 was~~ $1,471,000, ~~$2,552,000 and $230,000,~~ respectively. The estimated amortization expense for the fiscal years ending July 31, ~~2003, 2004,~~ 2005, 2006, 2007, 2008 and ~~2007~~2009 is ~~$2,016,000, $1,928,000, $1,928,000, $1,928,000~~$2,264,000, $2,189,000 $2,053,000, $817,000 and ~~$1,792,000,~~$791,000, respectively. ~~Intangibles with indefinite lives~~
Goodwill by reporting unit as of July 31, ~~2002~~2004 are as follows: ~~Telecommunications~~



Telecommunications transmission
     $ 8,865,000

RF microwave amplifiers
     8,422,000

Mobile data communications
     1,434,000



     $ 18,721,000




Goodwill in the Company's telecommunications transmission ~~$ 7,870,000 RF microwave amplifiers 8,422,000 Mobile data communications~~segment increased during fiscal 2004 by $995,000 as a result of the Memotec acquisition in May 2004.
(15) Recent Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as originally provided by SFAS No. 123 “Accounting for Stock-Based Compensation.” Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 in both annual and interim financial statements. The Company adopted the disclosure portion of this statement during fiscal 2003. The adoption did not have any impact on the Company's consolidated financial statements.
On March 31, 2004, the FASB issued a proposed statement, “Share-Based Payment – An Amendment to Statement Nos. 123 and 95,” that addresses the accounting for share-based payment transactions in which an enterprise receives employee services 1,434,000 ----------- $17,726,000 =========== F-24 in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. The proposed statement would eliminate the ability to account for share-based compensation transactions using Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally would require, instead, that such transactions be accounted for using a fair value based method. As proposed, this standard would be applied prospectively for fiscal years beginning after December 15, 2004 (the Company's 2006 fiscal year), as if all
F-23
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
share-based compensation awards granted, modified or settled after December 15, 1994 had been accounted for using the fair value based method of accounting. The Company will monitor the FASB's progress on the issuance of this proposed statement and its impact on its consolidated financial statements.
In July 2004, the Emerging Issues Task Force (“EITF”) of the FASB announced that it had reached a tentative consensus with respect to Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings Per Share.” The EITF's tentative consensus states that shares of common stock contingently issuable pursuant to contingent convertible securities should be included in diluted earnings per share computations (if dilutive) regardless of whether their market price triggers (or other contingent features) have been met. Additionally, in its efforts to converge with international accounting standards, the FASB has issued an Exposure Draft, “Earnings Per Share – an amendment of FASB Statement No. 128.” This Exposure Draft requires contracts that contain an option to settle in cash or stock be assumed to settle in stock for diluted earnings per share computations. As discussed in Note 8(a) to the Consolidated Financial Statements, the Company issued $105,000,000 of its 2.0% convertible senior notes in January 2004. If these proposals become effective, the Company would be required to include an additional 2,222,000 shares (relating to the convertible senior notes) using the “if-converted” method (under which net income would also be adjusted to exclude the related interest expense) in its computation of diluted earnings per share for the Company's fiscal year ending July 31, 2005 and subsequent years and would require the Company to restate earnings per share for fiscal 2004 for comparative purposes. No restatement of earnings per share for fiscal 2003 or 2002 would be required since the convertible senior notes were not outstanding during these periods. The exact amount of a restatement, if any, would be based on the provisions of any final changes in the applicable accounting principles.
(16) Unaudited Quarterly Financial Data
The following is a summary of unaudited quarterly operating results ~~(amount~~(amounts in thousands, except per share data):
Fiscal 2004
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
    Total

Net sales
$56,296 56,794 51,244 59,056 223,390
Gross profit
20,980 20,613 20,609 25,330 87,532
Net income
5,743 5,243 4,753 6,088 21,827
Diluted income per share
$0.37 0.34 0.31 0.40 1.42

Fiscal 2003
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
    Total

Net sales
$31,273 42,326 48,753 51,683 174,035
Gross profit
11,677 13,543 16,491 18,007 59,718
Net income
799 1,853 3,470 3,587 9,709
Diluted income per share
$0.07 0.16 0.29 0.27 0.80*

Fiscal 2002 First Quarter Second Quarter Third Quarter Fourth Quarter Total ----------- ------------- -------------- ------------- -------------- ------- Net sales $ 31,045 30,525 29,262 28,525 119,357 Gross profit 10,805 9,119 9,898 10,755 40,577 Net income 902 148 409 (311)
** 1,148** Diluted income Income per share $0.11 0.02 0.05 (0.04) 0.15*
Fiscal 2001 First Quarter Second Quarter Third Quarter Fourth Quarter Total ----------- ------------- -------------- ------------- -------------- ------- Net sales $ 39,846 33,111 32,322 30,652 135,931 Gross profit 13,108 12,656 12,343 10,497 48,604 Net income 2,007 1,872 1,527 1,308 6,714 Diluted income per share $0.25 0.24 0.19 0.16 0.85* information for the full fiscal year may not equal the total of the quarters within the year as a result of (i) a loss in a quarter or the full year, and (ii) rounding.
* Income per share information for the full fiscal year may not equal the total of the quarters within the year as a result of (i) a loss in a quarter or the full year, and (ii) rounding. ** Includes pre-tax in-process research and development charge in the fourth quarter of fiscal 2002 of $2,192,000. F-25
F-24
Schedule II
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended July 31, ~~2002, 2001~~2004, 2003 and ~~2000~~ 2002
Column A
Column B
Column C Additions
Column D
Column E
Description
Balance at
beginning
of period
(1)
Charged to
cost and
expenses
   (2)
Charged to
other accounts
– describe
Transfers
(deductions)
– describe
Balance at
end of
period

Allowance for doubtful accounts –
   accounts receivable:
Year ended July 31,

2004
   $ 912,000    147,000(C )    —    (327,000)(D )        $ 732,000
2003
   795,000    246,000(C )    —    (129,000)(D )        912,000
2002
   845,000    269,000(C )    —    (319,000)(D )        795,000


Inventory reserves:

Year ended July 31,

2004
   $ 5,099,000    1,193,000(A )    —    (670,000)(B )        $ 5,622,000
2003
   3,289,000    2,521,000(A )    —    (711,000)(B )        5,099,000
2002
   2,280,000    1,698,000(A )    —    (689,000)(B )        3,289,000

Column A Column B Column C Additions Column D Column E ------------- -------------- ---------------------------------------- -------------- ------------- (1) (2) Balance at Charged to other Transfers beginning
(A) Increase in reserves for obsolete and slow moving inventory and losses on contracts.
(B) Write-off of Charged to cost accounts - (deductions) Balance at Description period and expenses describe describe end of period ------------- -------------- ----------------- ------------------ -------------- -------------- ~~~~Allowance~~inventory.~~
(C) Increase in allowance for doubtful ~~accounts - accounts receivable: Year ended July 31, 2002 $ 845,000 269,000 (C) -- (319,000)~~accounts.
(D) $ 795,000 2001 806,000 39,000 (C) -- - 845,000 2000 145,000 -- -- 661,000 (E) 806,000 Inventory reserves: Year ended July 31, 2002 $ 2,280,000 1,698,000 (A) -- (689,000)(B) $ 3,289,000 2001 2,529,000 264,000 (A) -- (513,000)(B) 2,280,000 2000 1,170,000 244,000 (A) -- 1,115,000 (E) 2,529,000 Write-off of uncollectible receivables.
(A) Increase in reserves for obsolete and slow moving inventory and losses on contracts. (B) Write-off of inventory. (C) Increase in allowance for doubtful accounts. (D) Write-off of uncollectible receivables. (E) Acquired in acquisitions.
S-1


	Critical Accounting Policies	15
	Results of Operations	16
	Comparison of Fiscal 2004 and 2003	16
	Comparison of Fiscal 2003 and 2002	18
	Liquidity and Capital Resources	20
	Recent Accounting Pronouncements	21
	Forward-Looking Statements and Risk Factors	22

ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	28

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	28

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	28

ITEM 9A.	CONTROLS AND PROCEDURES	29

	PART III

ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT	29

ITEM 11.	EXECUTIVE COMPENSATION	29

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	29

ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	29

ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	29

	PART IV

ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K	29

SIGNATURES		32

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE		F-1


Other Consolidated Operating Data:
Backlog at period-end	$	50,538	50,094	44,121	100,142	83,549
New orders		78,345	135,487	113,384	230,056	206,797
Research and development expenditures – internal and customer funded		6,916	11,846	13,070	16,504	21,656

	As of July 31, (In thousands)
	2000		2001		2002		2003		2004
Consolidated Balance Sheet Data:
Total assets	$	126,031		146,988		126,586		164,250		306,390
Working capital		65,267		67,089		51,577		74,801		201,218
Long-term debt		37,900		42,000		28,683		—		—
Convertible senior notes		—		—		—		—		105,000
Long-term capital lease obligations		908		2,157		1,294		393		158
Stockholders' equity		57,782		65,565		67,288		117,568		142,398

	Year Ended July 31,
	2004			2003			2002
Net sales		100.0	%		100.0	%		100.0	%
Gross margin		39.2			34.3			34.0
Selling, general and administrative expenses		16.1			16.1			18.9
Research and development expenses		7.1			7.4			9.3
In-process research and development		0.4			—			1.8
Amortization of intangibles		0.9			1.2			1.2
Operating income		14.6			9.7			2.8
Interest expense (income), net		0.2			1.5			2.2
Income before income taxes		14.4			8.2			0.7
Net income		9.8			5.6			1.0

	Obligations due by fiscal years (in thousands)
	Total		2005		2006 and 2007		2008 and 2009		After 2009
2.0% Convertible senior notes	$	105,000		—		—		—		105,000
Capital lease obligations		392		234		158		—		—
Operating lease commitments		13,240		6,505		3,754		1,608		1,373

Total contractual cash obligations	$	118,632		6,739		3,912		1,608		106,373

	•	unexpected contract or project terminations or suspensions;

	•	unpredictable order placements, reductions or cancellations;

	•	reductions in government funds available for our projects due to government policy changes, budget cuts and other spending priorities;

	•	penalties arising from post-award contract audits;

	•	cost audits in which the value of our contracts may be reduced;

	•	higher-than-expected final costs, particularly relating to software and hardware development, for work performed under contracts where we commit to specified deliveries for a fixed price; and

	•	unpredictable cash collections of unbilled receivables that may be subject to acceptance of contract deliverables by the customer and contract close-out procedures, including government approval of final indirect rates.

	•	Although our U.S. Army contract for the logistics command's Movement Tracking System obligates us to provide satellite services and hardware, including mobile satellite transceivers and computers, through 2007, as and when ordered by the U.S. Army and at the fixed prices and other terms set forth in this contract, the U.S. Army is not obligated to purchase any terminals or services under this contract and may terminate this contract. Sales under the U.S. Army contract could be subject to unpredictable funding and deployment decisions. Through July 31, 2004, we have received orders aggregating $112.5 million under the MTS contract, $7.2 million of which relates to battlefield command and control applications.

	•	Certain components that we need have purchasing lead-time of four months or longer, and the U.S. Army contract requires us to provide mobile terminals within 90 days after we receive an order.

	•	Our success in commercial markets will depend on, among other things, our ability to access the best distribution channels, the development or licensing of applications which create value for the customer and our ability to attract and retain qualified personnel. Delays in delivering terminals could also adversely affect our ability to obtain and retain commercial customers.

	•	In general, as we seek to grow our mobile data communications services business, we anticipate that we will need to maintain a substantial inventory in order to provide terminals to our customers on a timely basis. If forecasted orders are not received, we might be left with large inventories of slow moving or unusable parts or terminals. This could result in an adverse effect on our business, results of operations and financial condition.

	•	We lease the satellite capacity necessary to operate our system from third party satellite networks. We currently have a long-term lease that expires on June 30, 2005 with a satellite network operator, Mobile Satellite Ventures, for satellite coverage in North America, Central America and the northern rim of South America. We have leases with other vendors for satellite coverage in other parts of the world as required by the U.S. Army contract. We cannot assure you that we will be able to obtain sufficient satellite capacity or geographical coverage from any vendor to operate our mobile data communications services system on acceptable terms or on a timely basis.

	•	There are several existing competitors in the mobile data communications market that have established systems with sizable customer bases and much greater financial resources than us. The largest of these competitors is Qualcomm, Inc. Existing competitors, including terrestrial service providers, are also aggressively pricing their products and services and may continue to do so in the future. Competitors continue to offer new value added products and services, which we may be unable to match on a timely or cost effective basis. Increased competition may impact margins throughout the industry. We anticipate that new competitors will enter the mobile data communications market in the future. This could impact our entry into the commercial market in a significant way.

	•	difficulties in the integration and assimilation of the operations, technologies, products and personnel of an acquired business;

	•	diversion of management's attention from other business concerns;

	•	increased expenses associated with the acquisition; and

	•	potential loss of key employees or customers of any acquired business.

	•	make it difficult for us to make payments on our debt;

	•	make it difficult for us to obtain any necessary financing in the future for working capital, acquisitions, capital expenditures, debt service requirements or other purposes;

	•	limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and

	•	make us more vulnerable in the event of a downturn in our business.

	•	future announcements concerning us or our competitors;

	•	receipt or non-receipt of substantial orders for products and services;

	•	results of technological innovations;

	•	new commercial products;

	•	changes in recommendations of securities analysts;

	•	government regulations;

	•	proprietary rights or product or patent litigation;

	•	changes in economic conditions generally, particularly in the telecommunications sector;

	•	changes in market conditions generally, particularly in the market for small cap stocks; and

	•	limited public float.