UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549FORM 10-K
(Mark(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTIONT Annual Report Pursuant to Section 13
ORor 15(d)OF THE SECURITIES EXCHANGE ACT OFof the Securities Exchange Act of 1934For the fiscal year ended July 31,
2002 |_| TRANSITION REPORT PURSUANT TO SECTION2004£ Transition Report Pursuant to Section 13
ORor 15(d)OF THE SECURITIES EXCHANGE ACT OFof the Securities Exchange Act of 1934Commission
file number:File Number: 0-7928COMTECH TELECOMMUNICATIONS CORP. (Exact Name(Exact name of
Registrantregistrant asSpecifiedspecified in itsCharter) 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, 2002January 30, 2004 was approximately $46,547,000.
$456,651,000.
The number of shares of the registrant's common stock outstanding on October 11,
2002September 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 ShareholdersStockholders to be held December 10, 20027, 2004 Part III
INDEX PART I ITEM 1. ITEM 2. ITEM 3. ITEM 4. ITEM 5. ITEM 6. ITEM 7. 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
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 PROPERTIES 10 LEGAL PROCEEDINGS 10 SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS10 PART II MARKET FOR REGISTRANT'S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES11 Dividends 11 Recent Sales of Unregistered Securities 11 Issuer Purchases of Equity Securities 12 Approximate Number of Equity Security Holders 12 SELECTED CONSOLIDATED FINANCIAL DATA 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS14 �� Overview 14
ITEM 7A. ITEM 8. ITEM 9. ITEM 9A. ITEM 10. ITEM 11. ITEM 12. ITEM 13. ITEM 14. ITEM 15. ii
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 QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK28 FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA28 CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE28 CONTROLS AND PROCEDURES 29 PART III DIRECTORS AND EXECUTIVE OFFICERS
OF REGISTRANT29 EXECUTIVE COMPENSATION 29 SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS29 CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS29 PRINCIPAL ACCOUNTANT FEES AND SERVICES 29 PART IV EXHIBITS, FINANCIAL STATEMENT
SCHEDULE AND REPORTS ON FORM 8-K29 SIGNATURES 32 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULEF-1
Note: As used in this Annual Report on Form 10-K, the terms PART I ITEM 1. BUSINESS We design, develop, produce and market In the past several years, we have expanded our product lines, completed strategic acquisitions, increased our research and 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 We continue to benefit from the 1"Comtech," "we"“Comtech,” “we,” “us,” “our” and "our company"“our company” mean Comtech Telecommunications Corp. and Comtech's subsidiaries.
Overview
sophisticated wirelessinnovative 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 forinto commercial and government purposes. Our telecommunications productsmarkets where we believe we have technological, engineering, systems design or other expertise that differentiate our product offerings. We believe we are useda leader in point-to-pointthe market segments that we serve.point-to-multipoint telecommunications transmissiondevelopment efforts and reception applications such as satellite communications, over-the-horizon
microwave systems, and cable and broadcast television. Our broadband amplifier
products are usedbroadened 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.
Demandsignificant 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 overcompany. 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 yearsnet proceeds from our January 2004 2.0% convertible senior notes offering.domestic government expansion of telecommunications services such
as satellite systems, broadcast, cellular telephone systems, over-the-horizon
microwave systemsdefense 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. Internet. However, fiscal 2002 was adversely impacted
by the significant downturn in capital spendingforegoing trends in the telecommunications
sector.
Telecommunications Industry Trends
The demand for telecommunications is largely tied to emerging economies
seeking to modernize their infrastructureindustry 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 significantdevelopment resources to or place a high priority
on developingproduce 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.
Businessneeds.
Corporate Strategies We manage our business with the following principal corporate business strategies: 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 2
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. decentralized basis to maximize responsiveness to
customers.
o Continue product innovationresult 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 Telecommunications Overview Our telecommunications transmission segment, which is our 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 Over-the-Horizon Microwave Systems. We design, develop, produce and market Forward Error Correction and Data 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, 3investment in researchthree complementary business segments: telecommunications transmission, mobile data communications and development.
2
o Capitalize on synergies amongRF microwave amplifiers. This allows each of our business segments to secure
larger contracts.
o Pursue acquisitionsmaintain a high level of focus and investments in complementarycustomer attentiveness. As appropriate and as guided by corporate senior management, our businesses technologies, productscapitalize on synergies that exist between them with respect to manufacturing, technology, sales, marketing and services.
Specific operating strategies forcustomer support. Financial information about our business segments include:
can be found in Note 11 to the consolidated financial statements beginning on page F-20.transmission.
o Continue broadeningTransmission Segmentlinelargest 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.to better serveand 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 greaterutilize satellite network bandwidth management techniques to more cost-effectively enable, among others, applications such as emerging applications for wirelessvideo teleconferencing, distance learning, telemedicine and Internet access.
o Maintain ourcontent delivery. leadership in over-the-horizon microwave technologies by broadening applicationscommunications 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 distancesunfriendly or inaccessible terrain from 30 to 600 miles by reflection ofreflecting 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 capacitya 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-multipointgas companies for whom it is essential to maintain communication transmissionwith offshore oil rigs and other remote exploration activities. We believe the U.S. military market is desirable. As fewalso an area of potential growth as three GEO satellites can provide global
communications coverage. These systems, which useadvancements in our over-the-horizon microwave technology are well suitedenabling 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 EFthe transmission of video.Corp. operating unit, located in Tempe, Arizona, designs,
develops, manufacturesCompression 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 codingcompression technology solutions which allow for telecommunications systems customers. This
new subsidiary was formed as a resultmore efficient transmission of our acquisition on July 31, 2002 of
certain assetsvoice, video and liabilities of Advanced Hardware Architectures, Inc. Comtech
AHA Corporation's products include the latest generationdata 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 patentedinto 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.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 dataU.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 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 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 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 4copiersOver-the-Horizon Microwave Systems and tape storage.
Our Comtech Systems, Inc. operating unit, locatedUpgrades – As the leading supplier in Orlando, Florida, has athis specialized product line, consistingwe 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.for over-the-horizon microwaveand 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.networks. It has a turnkey capability that ranges from systemoperation of the satellite packet data network and network planning throughgateways, and associated systems support and maintenance.and system training and operation and
maintenance programs. It also supplies satellite telecommunications systems by
combining its products with equipment manufactured byfleets 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 oiltrack the location of their vehicles and gas companiesto communicate with them en route and other commercial users, foreign defense commandsbetter 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 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 RF Microwave Amplifier 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 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 Medical and Health – Our amplifiers are key components in oncology treatment systems and allow doctors to Satellite communications – Our amplifiers are used to amplify signals carrying voice, data and fax transmission for Instrumentation and testing – Manufacturers use our amplifiers 5Comtech Systems, Inc.'sthere are a number of opportunities with other military commands. The U.S. Army Reserve has received funding to purchase some of our products which employand 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.patented adaptive modem digital transmission technology, offer
high-speed data (8 mbs) benefits oversystem in the traditional analog and digital (2 mbs)
over-the-horizon microwave products offered by its competition.
Our Comtech Antenna Systems, Inc. operating unit, locatedmilitary 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.Business Segment
Amplifiersamplitude.
Indispensableamplitude 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:worldperformance and quality of signal processing,our amplifiers can be as tiny asshould enable us to capitalize on increased defense spending. For example, we recently received an order from a microchip forU.S. military customer who is using our amplifiers in a hearing aid or as massive as a multi-story building for
transmitting radio signalssystem to submerged submarines orcounteract improvised explosive devices.outer space.
In telecommunications, solid state high-powergive patients who are suffering from cancer higher doses of radiation while focusing closer on the tumors, thereby avoiding damage to healthy tissue.radiation from transmitting antennas inair-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,
radarcommunication system, can provide passengers with e-mail, Internet access and electronic jamming systems. In the laboratory, solid state, high-powervideo conferencing. 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 Expand Marketing and Sales Efforts in the Defense Market – We believe there are a number of 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 6Comtech PST Corp. operating unit, locatedfocus on and expertise in Melville, New York,
is one ofdesigning 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.independent companies designing, developing,
manufacturing and marketing broadband high-power large signal amplifierslong-term opportunities in the microwavedefense and RF spectrums. Our recent acquisitionmilitary 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.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 In July 2002, we acquired certain assets and product lines and assumed certain liabilities of Advanced Hardware Architectures, Inc. for 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 In May 2004, we Sales, Marketing and Customer Support 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 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. 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 7fromof MPD Technologies, Inc. discussed above, further expandsfor $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 segmentoperation with our then existing New York-based operation in our RF microwave amplifiers segment.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 mobilechip 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.Throughcompression technology solutions that are used by leading manufacturers of copiers and data storage products. This operation is part of our telecommunications transmission segment.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.can route signals toacquired 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 systemsubsidiary 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 useperformed 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.
Each of our operating units conducts its own sales and marketing efforts. In
some instances, our operating units may bundle other units' products. 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 throughby 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 international(includingcycles. 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 Backlog Our backlog as of July 31, Our backlog consists solely of Variations in backlog from time to time are attributable, in part, to the timing 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 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. Research and Development We reported A portion of our research and development efforts relates to the adaptation of our basic technology to specialized customer requirements and is recoverable under 8prime contractors'domestic companies for inclusion in products which will be sold to international customers) from all three business segmentscustomers. 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, 2001respectively. During fiscal 2004 and 2000, respectively.
We expect that international2003, sales will remainto one customer, a substantial portion of our
total sales for the foreseeable future.
Domestic commercial salesprime 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 constituted2002, 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
forthis 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.
2002.20022004 and 20012003 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, 20022004 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, 20022004 in connection with
6
2002,2004, approximately 40.9%56.1% of thatthe 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.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.
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 Antennasatellite earth station equipment, forward error correction product lines and Comtech EF Data businessesa 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.StandardsStandard 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.
WeAlthough we obtain certain components and subsystems from a single source or a limited number of sources. Wesources, 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.
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. 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, 20012004, 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.such contracts, and such expenditures are not included in our research
and development expenses for financial reporting purposes. During fiscal Intellectual Property We rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. The products we Some of our telecommunications transmission technology is protected by patents, which are significant Competition Our 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. 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 Employees At July 31, 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, 92002, 20012004, 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, $1.7respectively. Our aggregate research and development expenditures (internal and customer funded) were $21.7 million, $16.5 million and $4.3$13.1 million respectively.
Patentsor 9.7%, 9.5% and Licenses
Although11.0% of total net sales in fiscal 2004, 2003 and 2002, respectively.own or hold licenses for a numbersell 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 lawsexpertise of unfair competition, restrictionsour employees and our learned experiences in licensing agreementsboth the design and confidentiality agreements to protect such knowledgemanufacture of our products and techniques. However, Comtech AHA's TPC chips arethe delivery of our services.into protecting thisour proprietary technology. In addition, Comtech
Systems' 8mbs adaptive modem for
7
over-the-horizon microwave applicationsWe have been issued several U.S. patents relating to forward error correction technology that is protected byutilized in our turbo product codec satellite modems. The earliest of these patents and is the only
modemexpires in the world capable of 8mbs of transmission over a troposcatter channel.
2012. product businesses are highly competitive and characterized by rapid technological change. In addition, the number of potentialA significant technological breakthrough by others, including new companies or our customers, forcould 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. Manyusers and transmission technologies.A
significant technological breakthrough by others, including smallerThe principal competitors or new companies could have a material adverse effect onin 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.
decentralizedflexible 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/
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.
2002,2004, we had 626842 employees 316(including temporary employees and contractors), 438 of whom were engaged in production and production support, 178243 in research and development and other engineering support and 132161 in marketing and administrative functions. None of theour employees are represented by a labor union. We believe that our employee relations are good.
Compliance with Federal, State and Local Environment Protection Laws
relating toincluding those of the storage, discharge, handling, emission, generation, manufactureFederal Communications Commission. Our manufacturing facilities, which may store, handle, emit, generate and disposaldispose of toxic or other hazardous substances that are used toin the manufacture of our products, particularlyare 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 ITEM 2. PROPERTIES Our corporate offices are located in a portion of 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, Our telecommunications transmission segment leases an additional ITEM 3. LEGAL PROCEEDINGS We are subject to certain 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, 10the 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 hasthese regulations in the normal course of business. We have not had aexperienced material effect onchanges to our earnings, capital expenditures earnings or competitive position and we do
not expect thatcaused by unexpected expenditures in connection with complying with such compliance will have a material effect in the future.
regulations.thea 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
We lease the 32,000-squarefacility 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. Wethis 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 forfive-year
period.
We lease 10,500-squareseven facilities of which four are located in the United States. The United States facilities aggregate 194,500-square feet of spaceand 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, MarylandMaryland. 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.
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.
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.2002.
9
2004.
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, Our common stock trades on the Nasdaq National Market under the symbol 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 11AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES"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
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 12October 11, 2002September 14, 2004, there were approximately 705793 holders of the Company'sour common stock. Such number of record owners was determined from the Companyour shareholders' records and does not include beneficial owners of the Company'sour 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 Net sales Cost of sales Gross profit Expenses: Selling, general and administrative Research and development In-process research and development Amortization of intangibles Operating income (loss) Other expenses (income): Interest expense Interest income Other (income) expense, net Income (loss) from continuing Provision (benefit) for income taxes Income (loss) from continuing Discontinued operations: Loss from operations of discontinued Net income (loss) Basic income (loss) per share: Income (loss) from continuing Loss from discontinued operations Basic income (loss) Diluted income (loss) per share: Income (loss) from continuing Loss from discontinued operations Diluted income (loss) Weighted average number of common Basic Potential dilutive common shares Weighted average number of common Diluted (Continued) 13theour Company. Detailed historical financial information is included in the audited consolidated financial statements for fiscal years 20022004 and 2001.
10
2003.
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
========= ========= ========= ========= =========
Years Ended July 31,
(In thousands, except per share amounts) 2000 2001 2002 2003 2004 Consolidated Statement of
Operations Data: $ 66,444 135,931 119,357 174,035 223,390 45,942 87,327 78,780 114,317 135,858 20,502 48,604 40,577 59,718 87,532 12,058 22,707 22,512 28,045 36,016 2,644 10,190 11,041 12,828 15,907 10,218 — 2,192 — 940 230 2,552 1,471 2,039 2,067 25,150 35,449 37,216 42,912 54,930 (4,648 ) 13,155 3,361 16,806 32,602 381 4,015 3,061 2,803 1,425 (1,511 ) (2,303 ) (452 ) (275 ) (921 ) 201 841 (28 ) — —
operations before income taxes (3,719 ) 10,602 780 14,278 32,098 85 3,888 (368 ) 4,569 10,271
operations (3,804 ) 6,714 1,148 9,709 21,827
segment (less applicable income
tax benefit of $79 in 2000) (137 ) — — — — $ (3,941 ) 6,714 1,148 9,709 21,827
operations $ (0.45 ) 0.61 0.10 0.85 1.55 (0.01 ) — ��� — — $ (0.46 ) 0.61 0.10 0.85 1.55
operations $ (0.45 ) 0.57 0.10 0.80 1.42 (0.01 ) — — — — $ (0.46 ) 0.57 0.10 0.80 1.42
shares outstanding – 8,495 11,022 11,192 11,445 14,119 — 843 516 748 1,261
and common equivalent shares
outstanding assuming dilution – 8,495 11,865 11,708 12,193 15,380 11
Other Consolidated Operating Data: Backlog at period-end New orders Research and development expenditures Consolidated Balance Sheet Data: Total assets Working capital Long-term debt Convertible senior notes Long-term capital lease obligations Stockholders' equity ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF Overview We design, develop, produce and market Our telecommunications transmission segment, our largest business segment, provides specialized products and systems 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 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, 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). 14
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
$ 50,538 50,094 44,121 100,142 83,549 78,345 135,487 113,384 230,056 206,797
– 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 $ 126,031 146,988 126,586 164,250 306,390 65,267 67,089 51,577 74,801 201,218 37,900 42,000 28,683 — — — — — — 105,000 908 2,157 1,294 393 158 57,782 65,565 67,288 117,568 142,398
FINANCIAL CONDITION AND RESULTS OF OPERATIONSsophisticated wirelessinnovative 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.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 defensewireless 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 domesticRF 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.quarter to quarter.
Sales consistquarter-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.incomerevenue is recognized on the percentage-of-completion method. Profits expected to be realized on contracts are based on total estimated sales value as relatedcompared 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
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 Our research and development expenses relate to both existing product enhancement and new product development. A portion of our research and development In July 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 We consider certain accounting policies to be critical due to the estimation process involved in each. Revenue Recognition on Long-Term Some of In addition, most government contracts have termination for convenience clauses that provide the 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. 15amortization of deferred compensation.
other administrative costs.effortseffort is related to specific contracts and is recoverable under those contracts because they areit 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.
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 Company considersContracts
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.the Company'sour largest contracts, including itsour 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 doeswe 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 reductionschanges in margins or contract losses could be material to the Company'sour results of operations and financial position.
The cumulative orders to-date underMovement Tracking System contract have
been far below the Army's initial requirements. The Company is currently in
active discussionscustomer with the Armyright to addressterminate the funding shortfalls experienced
to date on this program. The ultimate resolution of these discussionscontract at any time. Such terminations could resultimpact the assumptions regarding total contract revenues and expenses utilized in among other things, material changes to the estimates used in
applyingrecognizing 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.
Impairment of Intangible Provisions for Excess and Obsolete Allowance for Doubtful 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:Assets
Assets. As of July 31, 2002, the Company's2004, 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 Companywe 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 Companywe may be required to record impairment charges for these assets in future periods. Any such resulting impairment charges could be material to the Company'sour results of operations.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'sour financial statements at the time of such determination. Any such charges could be material to the Company'sour results of operations and financial position.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 creditseek 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
the Company'sour results of operations and financial position.
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 20022004 and 2001
2003
Net Sales. Consolidated net sales were $119.4$223.4 million and $135.9$174.0 million for fiscal 20022004 and 2001,2003, respectively, representing a decreasean increase of $16.5$49.4 million, or 12.1%28.4%. The decreaseincrease was primarily due to the weak economic environment,
particularlydriven 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 decrease2003, an increase of $27.7$38.9 million, or 26.1%37.9%. We believeThe significant sales growth in this segment will continueresulted 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 conditionstwo 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 20022004 as compared to 78.2% in59.0% for fiscal 2001. In fiscal 2002,2003.
16
Mobile data communications segment sales 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 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 During fiscal 2004 and 2003, sales to one customer, a prime contractor, represented Gross Profit. Gross profit was The 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 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 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. 17from our
RF microwave amplifier segment were $22.8 million as compared to $16.4 million
in fiscal 2001. This increase of $6.4increased $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 principallyprimarily the result of (i) increased demand for battlefield command and control applications by the acquisition in April 2001 of certain assetsU.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 thisOur 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.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 ofcommercial product lines, partially offset by increasing demand for our total net sales. International salesdefense-related products. Our RF microwave amplifier segment represented 41.2%9.9% of total net sales infor fiscal 20022004 as compared to 46.2%13.4% for fiscal 2003.2001.2004 and 2003, respectively. Domestic commercial sales represented 25.0%14.5% and 16.1% of total net sales as compared to 30.7% infor fiscal 20012004 and sales2003, respectively. Sales to the U.S. government (including sales to prime contractors to the U.S. government) represented 40.1% and its agencies44.2% of total net sales for fiscal 2004 and 2003, respectively.33.8%12.5% and 23.1% in19.8% 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 20022004 and 2001, respectively.
2003 represented 14.1% and 10.2%, respectively, of total net sales.$40.6$87.5 million and $48.6$59.7 million for fiscal 20022004 and 2001,2003, respectively, representing a decreasean increase of $8.0$27.8 million, or 16.5%46.6%. This
decreaseThe increase in gross profit was primarily due to the reduced total level ofsignificant 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% inwas 39.2% for fiscal 20022004, as compared to 35.8% in34.3% for fiscal 2001. 2003.decreaseincrease in the gross marginprofit, as a percentage of sales, was driven byprimarily due to (i) the significant decreasehigher proportion of our sales being in the telecommunications transmission segment, sales which generally carrytypically 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.otherU.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.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.
Selling, General and Research and In-Process Research and Amortization of Intangibles. Amortization of intangibles for fiscal 2004 and 2003 was Operating Income. Operating income 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 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 18Administrative. Administrative Expenses. Selling, general and administrative expenses were $22.5$36.0 million and $22.7$28.0 million infor fiscal 20022004 and 2001,2003, respectively, representing a decreasean increase of $0.2 million.$8.0 million, or 28.6%. The decrease isincrease 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 reductionincrease were higher insurance costs and compliance costs incurred in connection with recently enacted corporate governance regulations. As a percentage of net sales, duringselling, general and administrative expenses were 16.1% for fiscal 2002.
2004 and 2003.Development. Development Expenses. Research and development expenses were $11.0$15.9 million and $10.2$12.8 million infor fiscal 20022004 and 2001,2003, respectively. DespiteApproximately $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 bycontinually 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 20022004 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
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.$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.
Interestvarious acquisitions.InterestOperating 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 otherhigher operating expenses.
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 offeringsRF 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 broadenedhigher 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.customer baseterm 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.$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
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 Mobile data communications segment sales increased $30.1 million, or Sales from our RF microwave amplifier segment were $23.3 million in fiscal 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 Gross Profit. Gross profit was Gross margin, as a percentage of net sales, was Included in cost of Selling, General and Research and 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 Amortization of Intangibles. Amortization of intangibles was $2.0 million and $1.5 million in fiscal 1920012003 as compared to $53.365.9% in fiscal 2002.80.2% of our total net sales167.2%, from $18.0 million in fiscal 2000. Substantially all of the increase2002 to $48.1 million in the telecommunications
transmissionfiscal 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 salesOur mobile data communications segment represented 46.2%27.6% of total net sales in fiscal 20012003 as compared to 71.4%15.0% in fiscal 2000. The
decrease in the percentage of international sales reflects the absence2002.2001 of significant revenues from one customer for over-the-horizon microwave
equipment which occurred2003 versus $22.8 million in fiscal 2000. Domestic2002. 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 20012003 as compared to 19.8%19.1% in fiscal 2000.2002.23.1%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 customers2003 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.$48.6$59.7 million and $20.5$40.6 million forin fiscal 20012003 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 increasehigher sales levels in sales volume. fiscal 2003 as compared to fiscal 2002.35.8%34.3% and 30.9%34.0% in fiscal 20012003 and 2000,2002, respectively. TheAlthough 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 tomargins than our other businesses, the overall increase in the salesales resulted in greater operating efficiencies and overhead absorption.satellite earth station equipment products bysales 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.Administrative. Administrative Expenses. Selling, general and administrative expenses were $22.7$28.0 million and $12.1$22.5 million in fiscal 20012003 and 2000,2002, respectively, representing an increase of $10.6 million or 88.3%. This$5.5 million. The increase was due to the resultaddition of additionalAHA, as well as higher expenses including additional personnel, sales and
marketing expenses and other administrative expenses, requiredrelating to support the higher sales volume.and profit levels in fiscal 2003. As a percentage of net sales, theseselling, general and administrative expenses were 16.7%16.1% and 18.1% of total net sales for18.9% in fiscal 20012003 and 2000,2002, respectively.Development. Development Expenses. Research and development expenses were $10.2$12.8 million and $2.6$11.0 million in fiscal 20012003 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 20012003 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.
Amortizationexpenses, 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.2001. In2003.2000,2003 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, $10.2AHA.
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 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 Interest Expense. Interest expense decreased to $2.8 million in fiscal 2003 from $3.1 million in fiscal 2002. The decrease was the Interest Income. Interest income was Provision for Income Taxes. The Liquidity and Capital Resources Our unrestricted cash and cash equivalents Net cash provided by operating activities, excluding the effects of the Memotec acquisition, was Net cash used in investing activities Net cash Financing Arrangement On January 27, 2004, we issued $105.0 million of our 2.0% convertible senior notes in a private offering pursuant to 20purchase price was allocatedhigher sales and gross profit, discussed above, partially offset by higher operating expenses.financial statements formobile data communications segment's operating income increased from $0.2 million in fiscal 2000
include a one-time charge of $10.22002 to $5.2 million for the write-off of this amount in accordance with generally accepted accounting principles.
Operating Income (Loss). Asfiscal 2003 as a result of the foregoing factors, we had operatingsignificant 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 compared2002 to an operating loss from continuing operations$1.8 million in fiscal 20002003 as a result of $4.6 million.
Excluding the impact of the in-process research and development chargea more favorable product mix in fiscal 2000, operating income was $5.6 million.
Interest Expense. Interest2003. 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.acquisitionresult of EF Dataa 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.$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 20012003 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
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 for2002 more than offset the tax expense on the lower level of pre-tax income, taxes was effected byresulting 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.position decreasedincreased to $15.5$163.3 million at July 31, 20022004 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.$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 ofinventory 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.infor fiscal 20022004 was $10.2$11.8 million. Cash of
$3.2We 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.used inprovided 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 $19.9January 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. PrincipalThese amounts were partially offset by principal payments on capital lease obligations amountedof $0.9 million.$1.1 million. These usesRule 144A under the Securities Act of cash were offset by1933, as amended. The net proceeds from this transaction were $101.2 million after deducting the sale of stockinitial 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.”
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, At July 31, 20022004 will materially or adversely affect our liquidity.20022004 we had contractual cash obligations to repay debt (includingour 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 FASBFinancial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. 144, "Accounting148 provides alternative methods of transition for a voluntary change to the Impairment or
Disposalfair value method of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Company
adoptedstock-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 materialany impact on the Company'sour consolidated financial statements.
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In April 2002,
On March 31, 2004, the FASB issued SFASa 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, "Recission25, “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
21
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 Forward-Looking Statements and Risk Factors 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 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 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: 22Statementsannounced that it had reached a tentative consensus with respect to Issue No. 4, 44, and 64, Amendment04-8, “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 haveexact amount of a material impactrestatement, 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.
Many10-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 expressedcontained in any forward-looking statement.impliedsubsystems; 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.• unexpected contract or project terminations or suspensions; • unpredictable order placements, reductions or cancellations;
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 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 Our dependence on international sales may adversely affect us. Sales for use by international customers (including sales to prime contractors' international customers) represented approximately These sales expose us to certain risks, including barriers to trade, fluctuations in foreign currency exchange rates (which may make our products less 23• 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. statements.
audits, the U.S. government may adjust our contract-related costs and fees.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.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, 20012004, 2003 and 2000,2002, respectively. Approximately 33.9%29.4% of our backlog at July 31, 20022004 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.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.
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: 24• 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.
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 Our Almost all of Adverse regulatory changes could impair our ability to Our products are incorporated into wireless communications systems that must comply with various government regulations, including those of the Changes in, or our failure to 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 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 25effectadverse impact on our business, and results of operations.
operations and financial condition.backlog isfixed price contracts subject us to customer cancellation or modification.
We currently have a backlogrisk. 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.agenciessell products.U.S. governmentFederal 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.contractors or subcontractors under contractscomply with, U.S. agencies. These sales
accountedapplicable 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 marginsregulatory 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 lossthe government approval process of new products and services have caused and may continue to cause our customers to cancel, postpone or significant cutbackreschedule 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 programmaterial adverse effect on our sales of products to our customers.participate, such asparticipate. 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 affecthave a material adverse impact on our futurebusiness, 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.
expenses or in process research and development charges related to intangible assets. Acquisitions involve numerous risks, including: We cannot assure you that 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. Our The markets for our products are highly competitive. We cannot assure you that we will be able to 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 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. 26
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. weour acquisitions will be able to successfully compete or that our competitorssuccessful and will not develop
new technologies and products that are more commercially effective thanadversely affect our own.
We expect the Departmentbusiness, 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.
22
success also dependsmarkets are highly competitive.a significant extent uponsuccessfully compete or that our Presidentcompetitors will not develop new technologies and Chief
Executive Officer, Fred Kornberg. The lossproducts 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 couldtelecommunications 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."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 effectimpact on our business, financial condition and results of operations.
operations and financial condition.
Our operations are subject to environmental 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. 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. 27regulation.
laws and regulations and we may be subject to environmental liabilities.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, theThe failure to comply with current or future regulationsenvironmental requirements could result in the imposition of substantial fines, suspension of production, alteration of our manufacturing processes or cessation of operations that could materially adverselyhave a material adverse impact on our business, results of operations and financial condition.
The level of our indebtedness, among other things, could: 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 Shortfalls in our 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from 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 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON None. 28• 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. 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. revenuessales 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.
23
The Company'sitsour investment of available cash balances in
money market funds and short-term U.S. treasury securities.balances. Under itsour current policies, the Company doeswe 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.related financial scheduleRelated Financial Schedule are listed in the Index to Consolidated Financial Statements and Schedule annexed hereto.
ACCOUNTING AND FINANCIAL DISCLOSURE
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 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 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 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 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is incorporated by reference to the ITEM 14. 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:the directors and officers of the Company is incorporated by reference to theour Proxy Statement of the Company for the Annual Meeting of Stockholders to be held December 10, 20027, 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 itsour fiscal year.itsour fiscal year.
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSitsour fiscal year. Company's Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of itsour fiscal year.CONTROLSPRINCIPAL ACCOUNTANT FEES AND PROCEDURES
Not applicable.
24
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
3 3 3 3 3 3 3 4 4 4 10 10 10 10 10 10 10 10 10 30 10 10 10 10 10 21 23 31 31 32 32 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. 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. 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. 32 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Report of Independent Registered Public Accounting Firm Consolidated Financial Statements: Balance Sheets at July 31, 2004 and 2003 Statements of Operations for each of the years in the three-year period ended July 31, 2004 Statements of Stockholders' Equity for each of the years in the three-year period ended July 31, 2004 Statements of Cash Flows for each of the years in the three-year period ended July 31, 2004 Notes to Consolidated Financial Statements Additional Financial Information Pursuant to the Requirements of Form 10-K: Schedule II – Valuation and Qualifying Accounts and Reserves 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 Report of Independent The Board of Directors and Stockholders We have audited the accompanying consolidated We conducted our audits in accordance with 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, Melville, New York F-2 COMTECH TELECOMMUNICATIONS CORP. Current assets: Cash and cash equivalents Restricted cash Accounts receivable, less allowance for doubtful accounts of Inventories, net Prepaid expenses and other current assets Deferred tax asset – current Property, plant and equipment, net Goodwill Intangibles with definite lives, net of accumulated amortization of Deferred financing costs, net Other assets, net Deferred tax asset – non-current Total assets Liabilities and Stockholders' Equity Current liabilities: Current installments of capital lease obligations Accounts payable Accrued expenses and other current liabilities Customer advances and deposits Deferred service revenue Interest payable Income taxes payable Convertible senior notes Capital lease obligations, less current installments Deferred tax liability – non-current Total liabilities Stockholders' equity: Preferred stock, par value $.10 per share; shares authorized and Common stock, par value $.10 per share; authorized 30,000,000 Additional paid-in capital Retained earnings Less: Treasury stock (140,625 shares) Deferred compensation Total stockholders' equity Total liabilities and stockholders' equity Commitments and contingencies See accompanying notes to consolidated financial statements. F-3 COMTECH TELECOMMUNICATIONS CORP. Net sales Cost of sales Gross profit Expenses: Selling, general and administrative Research and development In-process research and development Amortization of intangibles Operating income Other expenses (income): Interest expense Interest income Other, net Income before provision for income taxes Provision (benefit) for income taxes Net income Net income per share: Basic Diluted Weighted average number of common shares Potential dilutive common shares Weighted average number of common and See accompanying notes to consolidated financial statements. F-4 COMTECH TELECOMMUNICATIONS CORP. Balance July 31, 2001 Amortization of deferred compensation Termination of unvested restricted shares issued pursuant to employee stock award agreement Stock options exercised Employee stock purchase plan shares issued Warrants exercised Net income Balance July 31, 2002 Amortization of deferred compensation Shares issued in connection with private placement, net of related costs Stock options exercised and related income tax benefit Employee stock purchase plan shares issued Warrants exercised Net income Balance July 31, 2003 Amortization of deferred compensation Stock options exercised and related income tax benefit Employee stock purchase plan shares issued Warrants exercised Net income Balance July 31, 2004 See accompanying notes to consolidated financial statements. F-5 COMTECH TELECOMMUNICATIONS CORP. Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Amortization of deferred financing costs Loss on disposal of property, plant and equipment Write-off of in-process research and development Provision for doubtful accounts Provision for inventory reserves Income tax benefit from stock option exercises Deferred income tax expense (benefit) Changes in assets and liabilities, net of effects of acquisitions: Restricted cash securing letter of credit obligations Accounts receivable Inventories Prepaid expenses and other current assets Other assets Accounts payable Accrued expenses and other current liabilities Customer advances and deposits Deferred service revenue Interest payable Income taxes payable Other liabilities Net cash provided by operating activities Cash flows from investing activities: Purchases of property, plant and equipment Purchases of technology licenses Payments for business acquisitions Cash received in connection with business acquisitions Net cash used in investing activities Cash flows from financing activities: Repayment of borrowings under loan agreement Principal payments on capital lease obligations Proceeds from issuance of convertible senior notes, net of related costs of $3,821,000 Proceeds from issuance of common stock, net Proceeds from exercises of stock options, warrants and employee stock purchase plan shares Net cash provided by (used in) financing activities (Continued) F-6 COMTECH TELECOMMUNICATIONS CORP. Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental cash flow disclosure Cash paid during the period for: Interest Income taxes Non cash investing activities: Acquisition of property, equipment and technology license through capital leases See accompanying notes to consolidated financial statements. F-7 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES (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 (b) Nature of Business We design, develop, produce and market The Company's business is highly competitive and characterized by rapid technological change. 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 (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 Revenue recognition on long-term contracts under the percentage-of-completion method is based on the relationship of total costs, including warranty costs, incurred 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 Revenue 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 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, 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, (e) Statement of Cash Flows The Company acquired equipment and a technology license financed by capital leases in the (f) Inventories 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 (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 F-9 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES 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 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. (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 (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. (j) Earnings Per Share The Company calculates earnings per share 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 As reported Pro forma 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 (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) The Company has adopted SFAS No. 130, (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 (2) Acquisitions In In May 2004, the Company acquired certain assets and product lines and assumed certain liabilities of The AHA and Fair value of net tangible assets acquired Adjustments to record intangible assets and liabilities at fair value: In-process research and development Core technology Existing technology Trade name Order backlog Customer relationships Goodwill Deferred tax liability Aggregate purchase price For AHA, the valuation of For Memotec, the valuation of the in-process research and 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, F-12 COMTECH TELECOMMUNICATIONS CORP. AHA Memotec (3) Accounts Receivable Accounts receivable Accounts receivable from commercial customers Unbilled receivables (including retainages) on contracts-in-progress Amounts receivable from the U.S. government and its agencies Less allowance for doubtful accounts Accounts receivable, net 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 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, Raw materials and components Work-in-process and finished goods Less reserve for anticipated losses on contracts and inventory reserves Inventories, net F-13 COMTECH TELECOMMUNICATIONS CORP. Inventories directly related to long-term contracts were $8,550,000 and (5) Property, Plant and Equipment Property, plant and equipment consists of the following at July 31, Equipment Leasehold improvements Equipment financed by capital lease Less accumulated depreciation and amortization Accrued wages and benefits Accrued commissions Accrued warranty Other Balance at beginning of period Provision for warranty obligations Charges incurred Balance at end of period Obligations under capital leases Less current installments Capital F-14 COMTECH TELECOMMUNICATIONS CORP. Future minimum lease payments under capital leases as of July 31, Fiscal years ending July 31, 2005 2006 2007 Total minimum lease payments Less amounts representing interest (at rates ranging from 6.55% to 9.50%) Less current installments Obligations under capital leases, net of current installments 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 (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. 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 In April 2001, in connection with (9) Income Taxes The provision (benefit) for income taxes Federal – current Federal – deferred State and local – current State and local – deferred Foreign – current Foreign – deferred F-16 COMTECH TELECOMMUNICATIONS CORP. The provision (benefit) for income taxes Computed “expected” tax expense Increase (reduction) in income taxes Change in the beginning of the Generation of research and Current year Prior years Extraterritorial income State and local income taxes, Other The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at July 31, Allowance for doubtful accounts receivable Intangibles Inventory and warranty reserves Compensation and commissions Deferred compensation Other Less valuation allowance Total deferred tax assets Deferred tax liabilities: Convertible senior notes Plant and equipment Total deferred tax liabilities Net deferred tax assets The Company provides for income taxes under the provisions of SFAS No. 109, F-17 COMTECH TELECOMMUNICATIONS CORP. (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 In (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 2000 Stock Incentive Plan F-18 COMTECH TELECOMMUNICATIONS CORP. Warrants Issued Pursuant to Acquisition Employee Stock Purchase Plan (d) Option Activity The following table sets forth summarized information concerning the Company's stock options: Outstanding at July 31, 2001 Granted Expired/canceled Exercised Outstanding at July 31, 2002 Granted Expired/canceled Exercised Outstanding at July 31, 2003 Granted Expired/canceled Exercised Outstanding at July 31, 2004 Options exercisable at July 31, 2004 Options available for grant at July 31, 2004 The options outstanding as of July 31, $ 1.00– 5.00 5.01– 8.00 8.01–18.00 18.01–30.38 F-19 COMTECH TELECOMMUNICATIONS CORP. (e) Restricted Common Stock 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 (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 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 Net sales Operating income (expense) Interest income Interest expense Depreciation and amortization Expenditure for long-lived assets, Total assets F-20 COMTECH TELECOMMUNICATIONS CORP. Net sales Operating income (expense) Interest income Interest expense Depreciation and amortization Expenditure for long-lived assets, Total assets Net sales Operating income (expense) Interest income Interest expense Depreciation and amortization Expenditure for long-lived assets, Total assets In fiscal (12) Commitments and Contingencies (a) Operating Leases The Company is obligated under noncancellable operating lease 2005 2006 2007 2008 2009 Thereafter Total F-21 COMTECH TELECOMMUNICATIONS CORP. Lease expense charged to operations was (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 We are subject to certain (d) Employment The Company has employment agreements with its Chairman of the Board, The Chairman's agreement which was amended and restated in The Chief Financial Officer's agreement which was amended and (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 F-22 COMTECH TELECOMMUNICATIONS CORP. 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. (14) Intangible Assets Intangibles with definite lives arising from acquisitions as of July 31, Existing technology Core technology Existing customer Technology license Trade name Order backlog Total Amortization expense for the Goodwill by reporting unit as of July 31, Telecommunications transmission RF microwave amplifiers Mobile data communications Goodwill in the Company's telecommunications transmission (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 F-23 COMTECH TELECOMMUNICATIONS CORP. 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 Net sales Gross profit Net income Diluted income per share Net sales Gross profit Net income Diluted income per share F-24 Schedule II COMTECH TELECOMMUNICATIONS CORP. Year ended July 31, 2004 2003 2002 Inventory reserves: Year ended July 31, 2004 2003 2002 S-1(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, 2001June 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 (a) Certificate of Incorporation of the Registrant Exhibit 3(a) of the Registrant's 1987 Form 10-K (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 (c) Amended and restated By-Laws of the Registrant Exhibit 3(c) of Registrant's 1998 Form 10-K (d) Amendment to the Certificate of Incorporation increasing authorized shares to 12 million Exhibit 3(d) to the Registrant's 1994 Form 10-K (e) Amendment to the Certificate of Incorporation increasing the authorized shares to 17 million Exhibit 3(e) to Registrant's 1998 Form 10-K (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 (g) Amendment to the Certificate of Incorporation increasing the authorized shares to 32 million Exhibit 3(g) to Registrant's 2000 Form 10-K (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 (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) (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) (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 (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 (c) Lease and amendment thereto on the Melville Facility Exhibit 10(k) to the Registrant's 1992 Form 10-K (d) Amended and restated 1993 Incentive Stock Option Plan Appendix A to the Registrant's Proxy Statement dated November 3, 1997 (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 (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 (g) (1) 2000 Stock Incentive Plan Appendix A to the Registrant's Proxy Statement dated November 8, 1999 (g) (2) Amendment to the 2000 Stock Incentive Plan Appendix A to the Registrant's Proxy Statement dated November 6, 2000 (g) (3) Amendment to the 2000 Stock Incentive Plan Exhibit 10(g)(3) to the Registrant's 2002 Form 10-K Exhibit
Number Description of Exhibit Incorporated By
Reference to Exhibit (g) (4) Amendment to the 2000 Stock Incentive Plan Exhibit 10(h)(4) to the Registrant's 2003 Form 10-K (g) (5) Amendment to the 2000 Stock Incentive Plan (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 (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 (j) 2001 Employee Stock Purchase Plan Appendix B to the Registrant's Proxy Statement dated November 6, 2000 Subsidiaries of the Registrant Consent of Independent Registered Public Accounting Firm .1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 .2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 .1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 .2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
26
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 OfficerSignature Title
---------------------------- ------------------------------------
October 16, 2002 /s/September 22, 2004
(Date)/s/ Fred Kornberg
Fred KornbergChairman 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. RouseSenior 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. NocitaDirector
27
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
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 F-2 F-3 F-4 F-5 F-6, F-7 F-8 to F-24 S-1
Suite 200
1305 Walt Whitman Road
Melville, NY 11747-4302Auditors' Report
Registered Public Accounting Firm
Comtech Telecommunications Corp.:financial statementsbalance sheets of Comtech Telecommunications Corp. and subsidiaries as listedof 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.auditingthe standards generally accepted
inof 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.20022004 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, 20022004, in conformity with accounting principlesU.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.
October 15, 2002
September 21, 2004
AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 20022004 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
2003Assets 2004 2003 $ 163,292,000 48,617,000 4,054,000 4,288,000
$732,000 in 2004 and $912,000 in 2003 43,002,000 26,696,000 39,758,000 34,048,000 1,817,000 1,742,000 6,501,000 5,699,000 258,424,000 121,090,000 14,652,000 12,328,000 18,721,000 17,726,000
$6,787,000 in 2004 and $4,720,000 in 2003 10,706,000 11,353,000 3,541,000 — 346,000 390,000 — 1,363,000 $ 306,390,000 164,250,000 $ 234,000 899,000 9,566,000 11,527,000 20,515,000 13,267,000 7,290,000 2,491,000 13,716,000 11,160,000 1,073,000 — 4,812,000 6,945,000 57,206,000 46,289,000 105,000,000 — 158,000 393,000 1,628,000 — 163,992,000 46,682,000
unissued 2,000,000 — —
shares, issued 14,371,335 shares in 2004 and 14,020,769 shares
in 2003 1,437,000 1,402,000 110,435,000 107,573,000 30,711,000 8,884,000 142,583,000 117,859,000 (185,000 ) (185,000 ) — (106,000 ) 142,398,000 117,568,000 $ 306,390,000 164,250,000
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended July 31, 2002, 20012004, 2003 and 2000
2002
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
============= ============= =============
2004 2003 2002 $ 223,390,000 174,035,000 119,357,000 135,858,000 114,317,000 78,780,000 87,532,000 59,718,000 40,577,000 36,016,000 28,045,000 22,512,000 15,907,000 12,828,000 11,041,000 940,000 — 2,192,000 2,067,000 2,039,000 1,471,000 54,930,000 42,912,000 37,216,000 32,602,000 16,806,000 3,361,000 1,425,000 2,803,000 3,061,000 (921,000 ) (275,000 ) (452,000 ) — — (28,000 ) 32,098,000 14,278,000 780,000 10,271,000 4,569,000 (368,000 ) $ 21,827,000 9,709,000 1,148,000 $ 1.55 0.85 0.10 $ 1.42 0.80 0.10
outstanding – Basic 14,119,000 11,445,000 11,192,000 1,261,000 748,000 516,000
common equivalent shares outstanding assuming
dilution – Diluted 15,380,000 12,193,000 11,708,000
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended July 31, 2002, 20012004, 2003 and 2000
2002
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
============ ============ ============ ============ ============
Common Stock Additional
Paid-in
Capital Retained
Earnings
(Accumulated
Deficit) Treasury Stock Deferred
Compensation Stockholders'
Equity Comprehensive
IncomeShares Amount Shares Amount 11,266,658 $ 1,127,000 $ 67,114,000 $ (1,973,000 ) 123,750 $ (184,000 ) $ (519,000 ) $ 65,565,000 — — — — — — 122,000 122,000 $ — — — (52,000 ) — 16,875 (1,000 ) 52,000 (1,000 ) — 88,572 8,000 165,000 — — — — 173,000 — 39,629 4,000 235,000 — — — — 239,000 — 9,523 1,000 41,000 — — — — 42,000 — — — — 1,148,000 — — — 1,148,000 1,148,000 11,404,382 1,140,000 67,503,000 (825,000 ) 140,625 (185,000 ) (345,000 ) 67,288,000 1,148,000 — — — — — — 239,000 239,000 — 2,100,000 210,000 37,981,000 — — — — 38,191,000 — 421,395 42,000 1,649,000 — — — — 1,691,000 — 40,256 4,000 206,000 — — — — 210,000 — 54,736 6,000 234,000 — — — — 240,000 — — — — 9,709,000 — — — 9,709,000 9,709,000 14,020,769 1,402,000 107,573,000 8,884,000 140,625 (185,000 ) (106,000 ) 117,568,000 9,709,000 — — — — — — 106,000 106,000 — 300,140 30,000 2,485,000 — — — — 2,515,000 — 18,846 2,000 353,000 — — — — 355,000 — 31,580 3,000 24,000 — — — — 27,000 — — — — 21,827,000 — — — 21,827,000 21,827,000 14,371,335 $ 1,437,000 $ 110,435,000 $ 30,711,000 140,625 $ (185,000 ) $ — $ 142,398,000 $ 21,827,000
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, 2002, 20012004, 2003 and 2000
2002 2004 2003 2002 $ 21,827,000 9,709,000 1,148,000 6,514,000 6,258,000 5,230,000 280,000 — — 91,000 — — 940,000 — 2,192,000 147,000 246,000 269,000 1,193,000 2,521,000 1,698,000 1,001,000 — — 2,079,000 (2,002,000 ) 300,000 234,000 (4,288,000 ) — (16,453,000 ) 493,000 300,000 (5,152,000 ) (2,793,000 ) 1,199,000 284,000 (500,000 ) 451,000 44,000 69,000 140,000 (1,961,000 ) 1,998,000 (2,030,000 ) 6,915,000 3,540,000 (2,820,000 ) 4,799,000 318,000 84,000 2,556,000 6,817,000 2,270,000 1,073,000 — — (2,133,000 ) 4,475,000 (838,000 ) — (58,000 ) (201,000 ) 24,278,000 26,803,000 9,392,000 (6,591,000 ) (4,317,000 ) (3,081,000 ) — (75,000 ) (91,000 ) (5,187,000 ) (440,000 ) (7,055,000 ) — 551,000 — (11,778,000 ) (4,281,000 ) (10,227,000 ) — (28,683,000 ) (19,217,000 ) (900,000 ) (1,064,000 ) (1,097,000 ) 101,179,000 — — — 38,191,000 — 1,896,000 2,141,000 454,000 102,175,000 10,585,000 (19,860,000 )
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
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, 2002, 20012004, 2003 and 2000
2002
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
============ ========== ==========
2004 2003 2002 $ 114,675,000 33,107,000 (20,695,000 ) 48,617,000 15,510,000 36,205,000 $ 163,292,000 48,617,000 15,510,000 $ 55,000 2,884,000 3,099,000 $ 9,324,000 2,096,000 237,000 $ — — 199,000
Notes to Consolidated Financial Statements
July 31, 20022004 and 2001
2003owned.Allowned. All significant intercompany balances and transactions have been eliminated in consolidation.sophisticatedinnovative 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. 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.United StatesU.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.fixed price contracts are generally recordedis 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. to date to total projected final costs, or, alternatively, as deliveries are made.
Revenuesbased on other contract orders are recognized under the units of
delivery method. Under this method, revenues are recordedoutput 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.
Notes to Consolidated Financial Statements, Continuednot associated withrecognized in excess of amounts billable under long-term contracts is recognized whenaccounted for under the earnings process is complete, generallypercentage-of-completion method are recorded as unbilled receivables in the accompanying consolidated balance sheets. Unbilled receivables are billable upon shipmentvarious events, including the attainment of performance milestones, delivery of hardware, submission of progress bills based on time and materials, or completion of the contract.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.and Cash Equivalents and Restricted Cash20022004 and 20012003 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.amountsamount 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.
Work-in-progresswork-in-processfinished goods inventory are stated at the lower of cost or market, computed on the first-in, first-out ("FIFO"(“FIFO”) method.
(h)- 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.
Notes to Consolidated Financial Statements, Continued("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.
(i)2002, 20012004, 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)
(k)("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 exercisesexercise 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.
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: Basic $ 1.55 0.85 0.10 Diluted $ 1.42 0.80 0.10 Basic $ 1.43 0.79 0.06 Diluted $ 1.31 0.74 0.05 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
believesCompany estimates the fair market value of its long-term debt is2.0% convertible senior notes to be approximately $1.2 million higher than its carrying value.
$85,000,000 based on recent trading activity. 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"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.
Notes to Consolidated Financial Statements, ContinuedJanuary 2000,July 2002, the Company acquired certain assets and assumed certain liabilities of Hill EngineeringAdvanced 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 thetheir 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.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 tangiblethe 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 thetheir 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.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 valuefollows: AHA Memotec Estimated
Useful Lives $ 673,000 1,942,000 2,192,000 940,000 — 1,315,000 820,000 8-9 years 2,542,000 190,000 7-9 years 175,000 50,000 5-7 years 88,000 100,000 6 mos. to 1 year — 260,000 10 years — 995,000 Indefinite — (110,000 ) 6,312,000 3,245,000 $ 6,985,000 5,187,000 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 technologycustomer relationships was based on the value of the discounted cash flows that the assetassets 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 becausesince the Company owns the asset. The valuation of the order backlog was based on the replacement cost approach.
Salesincome for fiscal 2002development, existing technology customer relationships and 2001 relatingorder backlog was based on the value of the discounted cash flows that the assets can be expected to generate in the AHA assetsfuture. 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.would not have been materialas well as significant appraisal assumptions used as of the acquisition date and the current project status.
AND SUBSIDIARIES
Notes to the Company's results of
operations for those periods.
Consolidated Financial Statements, ContinuedEntity
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 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 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. consistsconsist of the following at July 31, 20022004 and 2001:
2003:
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
=========== ==========
2004 2003 $ 27,845,000 10,952,000 6,684,000 10,084,000 9,205,000 6,572,000 43,734,000 27,608,000 732,000 912,000 $ 43,002,000 26,696,000 during fiscal 2003.
F-13
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
within one year.20022004 and 2001:
2002 2001
----------- -----------
Raw materials2003: 2004 2003 $ 22,502,000 16,431,000 22,878,000 22,716,000 45,380,000 39,147,000 5,622,000 5,099,000 $ 39,758,000 34,048,000
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continuedcomponents $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.20022004 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 $ 35,615,000 28,855,000 2,474,000 2,170,000 1,473,000 2,140,000 39,562,000 33,165,000 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 $ 9,972,000 5,724,000 3,255,000 1,993,000 4,990,000 3,139,000 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 $ 3,139,000 2,975,000 4,553,000 2,593,000 (2,702,000 ) (2,429,000 ) $ 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 $ 392,000 1,292,000 234,000 899,000 $ 158,000 393,000 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, 20022004 and 2001,2003, respectively.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued20022004 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
==========
$ 254,000 135,000 30,000 419,000 27,000 392,000 234,000 $ 158,000 $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.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continuedthean 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 arewere 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 bearsbore 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.theanother 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 arewere 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, bearsbore 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
towas 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. 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 $ 7,664,000 6,185,000 (706,000 ) 2,122,000 (1,894,000 ) 306,000 504,000 386,000 38,000 133,000 (108,000 ) (6,000 ) 24,000 — — (176,000 ) — — $ 10,271,000 4,569,000 (368,000 )
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued 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 $ 11,234,000 35.0% 4,997,000 35.0% 265,000 34.0%
resulting from:
year valuation allowance
for deferred tax assets (350,000 ) (1.1 ) (350,000 ) (2.4 ) 100,000 12.8
experimentation credits: (454,000 ) (1.4 ) (400,000 ) (2.8 ) (400,000 ) (51.3 ) — — — — (416,000 ) (53.4 )
exclusion (856,000 ) (2.7 ) (286,000 ) (2.0 ) — —
net of Federal benefit 414,000 1.3 181,000 1.3 21,000 2.7 283,000 0.9 427,000 2.9 62,000 8.0 $ 10,271,000 32.0% 4,569,000 32.0% (368,000 ) (47.2% ) 20022004 and 20012003 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: $ 272,000 181,000 4,029,000 4,606,000 3,895,000 2,854,000 1,571,000 2,187,000 287,000 248,000 763,000 477,000 (1,500,000 ) (1,850,000 ) 9,317,000 8,703,000 (1,297,000 ) — (3,147,000 ) (1,641,000 ) (4,444,000 ) (1,641,000 ) $ 4,873,000 7,062,000 "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, 20022004 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.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued Offering
February and March 2000,July 2003, the Company sold an aggregate of
2,645,0002,100,000 shares of its common stock in a public offering resulting
in netprivate 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. - – 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 1,042,5001,563,750 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 1,086,5151,400,396 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 544,540302,675 are outstanding at July 31, 2002.To2004. To date, 401,5071,097,721 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. - – 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 1,100,0002,375,000 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-qualifiednon- 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 669,7002,169,300 shares at prices ranging between $9.35 - $17.84$4.70 – $30.38 of which 50,500175,300 options were canceled and 619,2001,767,930 are outstanding at July 31, 2002. There2004. As of July 31, 2004, 226,070 incentive stock options have been no
exercises.exercised. All options granted have been incentive stock options athad exercise prices equal to the fair market value of the stock on the date of grant.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - – In connection with an acquisition in fiscal 1999, the Company issued warrants to the acquiree's owners and creditors to purchase 150,000225,000 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
periodwere 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. - – 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, 300,000450,000 shares of the Company's common stock will bewere 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 40,531119,898 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)
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 1,647,042 $ 5.24 274,500 9.19 (89,550 ) 6.25 (86,382 ) 1.99 1,745,610 5.97 505,500 5.51 (94,875 ) 7.66 (421,380 ) 3.77 1,734,855 6.27 659,250 19.60 (23,350 ) 8.82 (300,150 ) 5.04 2,070,605 $ 10.66 544,685 $ 4.07 536,040 20022004 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 $ 2.74 285,425 4 years 6.33 711,030 7 years 13.59 857,650 8 years 23.75 216,500 10 years
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.
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.
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.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-wayprovide satellite-based mobile tracking and messaging links between
mobile platforms or remote siteshardware 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 lossesexpenses result from such corporate expenses as legal, accounting and executive. IntersegmentInterest 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.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. Intersegmentrespectively. 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 20002004 and 2001 were not material. Fiscalfiscal 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 $141,514 22,092 59,784 — 223,390 29,210 261 9,526 (6,395) 32,602 4 — 3 914 921 33 22 — 1,370 1,425 4,832 1,082 413 187 6,514
including intangibles 6,473 652 1,552 494 9,171 88,629 22,934 21,276 173,551 306,390
(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
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued (in thousands)
Fiscal 2003 Telecommunications
Transmission RF Microwave
Amplifiers Mobile Data
Communications Unallocated Total $102,634 23,322 48,079 — 174,035 14,219 1,745 5,202 (4,360) 16,806 10 1 — 264 275 1,863 940 — — 2,803 4,498 1,184 319 257 6,258
including intangibles 3,623 427 682 75 4,807 65,105 20,462 21,244 57,439 164,250 (in thousands)
Fiscal 2002 Telecommunications
Transmission RF Microwave
Amplifiers Mobile Data
Communications Unallocated Total $78,613 22,822 17,922 — 119,357 5,250 1,209 207 (3,305) 3,361 99 3 5 345 452 2,157 904 — — 3,061 3,718 1,188 194 130 5,230
including intangibles 8,640 930 510 14 10,094 62,738 25,564 19,308 18,976 126,586 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 20002002, other than the U.S. government, that represented 43.1%10% or more of totalour 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, 2001approximately 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 StatesU.S. government or prime contractors to the U.S. government. Direct and its agencies.
Exportindirect 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. ExportInternational 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
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
===========
$ 6,505,000 2,394,000 1,360,000 989,000 620,000 1,372,000 $ 13,240,000
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued$3,318,000, $2,236,000$2,866,000, $2,558,000 and $474,000$2,381,000 in fiscal 2004, 2003 and 2002, 2001respectively. 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.
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.
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.Contract
Mr. Kornberg, the Company'sContracts 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”).October 2001, whichJune 2003 provides, among other things, for his employment until 2003July 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. Kornbergthe Chairman in the event of a change in control of the Company.
(13) Discontinued Operations
In early fiscal 1999, the Company acquired the assetsassumed
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 planmay from time to liquidate CWI by January 31, 2000.
Costs and expenses, and cash flows associated with CWI have been
excluded fromtime 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 captionsscheduled termination date. The agreement also provides for payment, in certain circumstances, to the Chief Financial Officer in the accompanying statementsevent of operations and statementsa 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.("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.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15) Accounting for Business Combinations, Goodwill and Other
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)
20022004 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 $ 12,456,000 5,992,000 12,266,000 4,261,000 2,135,000 318,000 1,315,000 146,000
relationships 260,000 9,000 — — 2,229,000 314,000 2,229,000 206,000 225,000 41,000 175,000 19,000 188,000 113,000 88,000 88,000 $ 17,493,000 6,787,000 16,073,000 4,720,000 twelve monthsyears ended July 31, 2004, 2003 and 2002 2001was $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 20072009 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 lives20022004 are as follows:
Telecommunications $ 8,865,000 8,422,000 1,434,000 $ 18,721,000 $ 7,870,000
RF microwave amplifiers 8,422,000
Mobile data communicationssegment increased during fiscal 2004 by $995,000 as a result of the Memotec acquisition in May 2004.1,434,000
-----------
$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
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued(amount(amounts in thousands, except per share data):Fiscal 2004 First Quarter Second Quarter Third Quarter Fourth Quarter Total $56,296 56,794 51,244 59,056 223,390 20,980 20,613 20,609 25,330 87,532 5,743 5,243 4,753 6,088 21,827 $0.37 0.34 0.31 0.40 1.42 Fiscal 2003 First Quarter Second Quarter Third Quarter Fourth Quarter Total $31,273 42,326 48,753 51,683 174,035 11,677 13,543 16,491 18,007 59,718 799 1,853 3,470 3,587 9,709 $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 incomeIncome 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
AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended July 31, 2002, 20012004, 2003 and 2000
2002Column 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: $ 912,000 147,000(C ) — (327,000)(D ) $ 732,000 795,000 246,000(C ) — (129,000)(D ) 912,000 845,000 269,000(C ) — (319,000)(D ) 795,000 $ 5,099,000 1,193,000(A ) — (670,000)(B ) $ 5,622,000 3,289,000 2,521,000(A ) — (711,000)(B ) 5,099,000 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
------------- -------------- ----------------- ------------------ -------------- --------------
Allowanceinventory.(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.