Enhance Position as an 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,lines, develop new capabilities and solidify and strengthen our position in our principal markets.
Key Products, Systems and Services | | | | | | | Business
Segment
| | Products/Systems
and Services
| | Representative
Customers
| | End-User
Applications
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| 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 16 megabits 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 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 turnkey employee mobility solutions
| | U.S. Army logistics command and prime contractors to the U.S. Armed Forces and commercial customers such as Praxair and Golden State Overnight
| | 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 IFF and commercial applications such as medical applications (oncology treatment systems) and satellite communications (including air-to-satellite-to-ground communications)
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Business
Segment | | Products/Systems
and Services | | Representative
Customers | | End-User
Applications |
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| | Telecommunications transmission | | Satellite earth station equipment and systems including: analog and digital modems, frequency converters, power amplifiers, transceivers, access devices, voice gateways and network management systems | | Satellite systems integrators, wireless and other communication service providers and defense contractors such as Intelsat, 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 16 Mbps adaptive modems | | Military customers and related prime manufacturers, as well as oil companies such as 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 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 satellite transceivers, network services, installation, training and maintenance | | U.S. Army logistics community, CECOM, and prime contractors to the U.S. Armed Forces and commercial customers | | Two-way satellite-based mobile tracking, messaging services (U.S. Army’s MTS), battlefield command and control applications (FBCB2 or BFT), RFID applications 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 integrators such as Rockwell Collins | | Defense applications including communications, radar, jamming and 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 of businessbusinesses and enabling technologies during the past three years and have followed a disciplined approach in identifying, executing and capitalizing on these acquisitions. 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 equipment and systems market. The software enables our customers to utilize bandwidth management techniques to enable applications such as video teleconferencing, distance learning, telemedicine and Internet content delivery. This operation is part of our telecommunications transmission segment. In May 2004, we acquired certain assets and product lines and assumed certain liabilities of Memotec, Inc. (“Memotec,”Memotec”), a subsidiary of Kontron AG, and at the same time, purchased inventory owned by Kontron Canada Inc., for an aggregate purchase price of approximately $5.2 million in cash. The products acquired allow us to offer customers a multi-service platform that converges voice, IPinternet protocol (“IP”) and legacy data over packet-based networks with reduced bandwidth requirements. This operation is part of our telecommunications transmission segment.
In February 2005, we acquired certain assets and assumed certain liabilities of Tolt Technologies, Inc. (“Tolt”) for an aggregate purchase price of $3.7 million, including transaction costs of $0.2 million. Based on Tolt’s achievement of itsIn fiscal 2006, we significantly de-emphasized stand-alone sales goals, we may be required to pay an earn-out of $0.5 million. Tolt, which is based in Gig Harbor, Washington, has significant experience in providingTolt’s turnkey employee mobility solutions, to large enterprises, including hands-onand are focusing our |
experience with customers that have trucking fleets.efforts on selling commercial satellite-based mobile data applications. This operation is part of our mobile data communications segment.
In August 2006, we acquired certain assets and assumed certain liabilities of Insite Consulting, Inc. (“Insite”), a logistics application software company, for $2.7 million, plus certain earn-out payments based on the achievement of future sales targets. The first part of the earn-out cannot exceed $1.4 million and is limited to a five-year period. The second part of the earn-out, which is for a ten-year period, is unlimited and based on a per unit future sales target primarily relating to new commercial satellite-based mobile data communications markets. Insite has developed the geoOps™ Enterprise Location Monitoring System, a software-based solution that allows customers to integrate legacy data systems with near-real time logistics and operational data systems. This operation was combined with our existing business and is part of our mobile data communications segment. 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. We intend to continue to expand international marketing efforts by engaging additional independent sales representatives, distributors and value-added resellers and by establishing additional Comtech foreign sales offices. As appropriate and as guided by corporate senior management, our three business segments capitalize on manufacturing, technology, sales, marketing and customer support synergies between them. Our management, technical and marketing personnel establish and maintain relationships with customers. Our strategy includes a commitment to provide ongoing customer support for our systems and equipment. This support involves providing direct access to engineering staff or trained technical representatives to resolve technical or operational issues. Over-the-horizonOur over-the-horizon microwave systems, mobile data tracking and messagingcommunications products and services and a portion of our solid-state, high-power, broadband RF microwave amplifier product linelines have long sales cycles. Once a product is designed into a system, customers may be reluctant to change the incumbent supplier due to the extensive qualification process and potential redesign required in using alternative sources. Accordingly, senior management is actively involved in key aspects of relations with our major customers.
Sales by geography and customer type, as a percentage of consolidated net sales, are as follows: | | | | | | | | | | | | | |
| | | | Fiscal Years Ended July 31, | | | | |
| | | | 2005 | | 2004 | | 2003 | | | |
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| | United States | | | | | | | | | | | U.S. government | | | 42.1 | % | | 40.1 | % | | 44.2 | % | Commercial customers | | | 13.9 | % | | 14.5 | % | | 16.1 | % | | |
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| | Total United States | | | 56.0 | % | | 54.6 | % | | 60.3 | % | | | | | | | | | | | | International | | | | | | | | | | | North African country | | | 13.2 | % | | 14.1 | % | | 10.2 | % | Other international customers | | | 30.8 | % | | 31.3 | % | | 29.5 | % | | |
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| | Total International | | | 44.0 | % | | 45.4 | % | | 39.7 | % |
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| Fiscal Years Ended July 31, | | |
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| | 2006 | | | 2005 | | | 2004 | | |
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| | | | | United States | | | | | | | | | | | | | U.S. government | | 47.3 | % | | 42.1 | % | | 40.1 | % | | | | Commercial customers | | 17.1 | % | | 13.9 | % | | 14.5 | % | | | | | |
| | |
| | |
| | | | | Total United States | | 64.4 | % | | 56.0 | % | | 54.6 | % | | | | | | | | International | | | | | | | | | | | | | North African country | | 9.7 | % | | 13.2 | % | | 14.1 | % | | | | Other international customers | | 25.9 | % | | 30.8 | % | | 31.3 | % | | | | | |
| | |
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| | | | | Total International | | 35.6 | % | | 44.0 | % | | 45.4 | % | |
| International sales include sales to U.SU.S. domestic companies for inclusion in products that will be sold to international customers. In fiscal 2005, except for sales to the U.S. government, oneOne customer, a prime contractor, represented 10.2% of consolidated net sales.sales in both fiscal 2006 and 2005. In fiscal 2004, and 2003, except for sales to the U.S. government, one customer, another prime contractor, represented 12.5% and 19.8% of consolidated net sales, respectively.sales. Backlog Our backlog as of July 31, 2006 and 2005 and 2004 was approximately $153.3$186.0 million and $83.5$153.3 million, respectively. We expect that a majority of the backlog as of July 31, 20052006 will be recognized as sales during fiscal 2006. We received advance payments and deposits aggregating approximately $5.3 million as of July 31, 2005 in connection with orders included in the backlog at that date.2007. At July 31, 2005, approximately 37.7%2006, 60.4% of the backlog consisted of U.S. government contracts, subcontracts and government funded programs, approximately 51.9%28.4% consisted of orders for use by foreigninternational customers (including sales to prime contractors’U.S. domestic companies for inclusion in products that will be sold to international customers) and approximately 10.4%11.2% consisted of orders for use by domesticU.S. commercial customers. |
Our backlog consists solely of 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. All8
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Almost 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. In the case of contracts with departments or agencies of the U.S. government, including the MTS contract discussed above, orders are only included in backlog to the extent funding has been obtained for such orders. Variations in backlog from time to time are attributable, in part, to the timing of contract proposals, the timing of contract awards and the delivery schedules on specific contracts. Our satellite earth station equipment forward error correction product lines, turnkey employee mobility solutions and a portion of our RF microwave amplifiers business operateline operates under short lead times and usually generategenerates sales out of inventory. 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. 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. 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 Standard Organization’s (“ISO-9000”) quality procedure registration programs. 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. Although we obtain certain components and subsystems from a single source or a limited number of sources, we believe that most components and equipment are available from multiple sources. Research and Development We reported research and development expenses for financial reporting purposes of $25.8 million, $21.2 million $15.9 million and $12.8$15.9 million in fiscal 2006, 2005 2004 and 2003,2004, respectively, representing 6.9%6.6%, 7.1%6.9% and 7.4%7.1% of total net sales, respectively, for these periods. A portion of our research and development efforts relates to the adaptation of our basic technology to specialized customer requirements and is recoverable under contracts, and such expenditures are not included in our research and development expenses for financial reporting purposes. During fiscal 2006, 2005 2004 and 2003,2004, we were reimbursed by customers for such activities in the amounts of $4.4 million, $3.0 million $5.7 million and $3.7$5.7 million, respectively. Our aggregate research and development expenditures (internal and customer funded) were $30.2 million, $24.2 million and $21.7 million or 7.7%, 7.8% and $16.5 million or 7.8%, 9.7% and 9.5% of total net sales in fiscal 2006, 2005 2004 and 2003,2004, respectively. Intellectual Property We rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. The products we sell require significant engineering design and manufacturing expertise. The majority of these technological capabilities, however, are not protected by patents and licenses. We rely on the expertise of our employees and our learned experiences in both the design and manufacture of our products and the delivery of our services. Some of our telecommunications transmission technology is protected by patents, which are significant to protecting our proprietary technology. We have been issued several U.S. patents relating to forward error correction technology that is utilized in our TPC-enabled satellite modems. The earliest of these patents expires in 2012. Competition Our businesses are highly competitive and are characterized by rapid technological change. A significant technological breakthrough by others, including new companies or our customers, could have a material adverse effect on our business. Our growth and financial condition depend on, among other things, 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 and transmission technologies. |
Certain of our competitors are substantially larger, have significantly greater financial, marketing, research and development, technological and operating resources and broader product lines than we do. The principal competitors in our telecommunications transmission segment include ViaSat, Inc., Radyne Corporation, Miteq Inc., iDirect, Inc. and Marconi Corporation plc.Paradise Datacom LLC. The principal competitors in our mobile data communications segment include Qualcomm, Inc. and EMS Technologies, Inc. The principal competitors in our RF microwave amplifiers 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 some cases, we partner or team with companies (both large orand mid-tier) to compete against other teams for large defense programs. In some cases, these same companies may be competitors as it relates to certain aspects of our business. We believe that competition in all of our markets is based primarily on technology innovation, product performance, reputation, delivery times, customer support and price. Due to our flexible organizational structure and proprietary know-how, we believe we have the ability to develop, produce and deliver products on a cost-effective basis faster than many of our competitors. Employees At July 31, 2005,2006, we had 1,0901,228 employees (including temporary employees and contractors), 589700 of whom were engaged in production and production support, 289297 in research and development and other engineering support and 212231 in marketing and administrative functions. None of our employees are represented by a labor union. We believe that our employee relations are good. 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, including those of the Federal Communications Commission (“FCC”). Our manufacturing facilities, which may store, handle, emit, generate and dispose of hazardous substances that are used in the manufacture of our products, are subject to a variety of local, state and federal regulations, including those issued by the Environmental Protection Agency. Our international sales are subject to U.S. and foreign regulations and may require licenses from U.S. government agencies or require the payment of certain tariffs. In addition, we are subject to recent directives buyby the European Union (“EU”) related to the recycling of electrical and electronic equipment. 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 (“SEC”). As a U.S. government contractor and subcontractor, we are subject to a variety of rules and regulations, such as the Federal Acquisition Regulations. To date, we have incurred costs in connection with compliance with these regulations in the normal course of business. ITEM 1A. RISK FACTORS Forward-Looking Statements This Form 10-K contains “forward-looking statements” including statements concerning the future of our industry, product development, business strategy, continued acceptance of our products, market growth, and dependence on significant customers. These statements can be identified by the use of forward-looking terminology such as “may,” “expect,” “anticipate,” “estimate,” “continue,” or other similar words. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-K. The risk factors noted below and other factors noted throughout this Form 10-K could cause our actual financial condition or results to differ significantly from those contained in any forward-looking statement. |
Due to many factors, including the amount of business represented by large contracts, new orders, net sales and our operating results are difficult to forecast and may be volatile. We have experienced, and will experience in the future, significant fluctuations in new orders, net sales and operating results, including our net income and earnings per share, from quarter-to-quarter. One reason for this is that a significant portion of our business — primarily the over-the-horizon microwave systems of our telecommunications transmission segment, our RF microwave amplifiers segment and our mobile data communications segment — is derived from a limited number of relatively large customer contracts, the timing of which cannot be predicted. 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 subsystems; political instability; regulatory developments; the price and expected volatility of our stock (which will impact, among other items, the amount of stock based compensation expense we may record); and general economic conditions. Accordingly, you should not experiencedrely on period-to-period comparisons as indications of our future performance because these comparisons may not be meaningful. Our business, results of operations, liquidity and financial position depend on our ability to maintain our level of U.S. 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 47.3%, 42.1% and 40.1% of our consolidated net sales for the fiscal years ended July 31, 2006, 2005 and 2004, respectively. Approximately 60.4% of our backlog at July 31, 2006 consisted of orders from the U.S. government. We expect such business to represent a significant portion of our consolidated net sales for the foreseeable future. U.S. government business exposes us to various risks, including: | |
| • | unexpected contract or project terminations or suspensions; | | | | | • | unpredictable order placements, reductions or cancellations; | | | | | • | reductions in government funds available for our projects due to government policy changes, budget cuts and other spending priorities; | | | | | • | penalties arising from post-award contract audits; | | | | | • | cost audits in which the value of our contracts may be reduced; | | | |
| • | higher-than-expected final costs, particularly relating to software and hardware development, for work performed under contracts where we commit to specified deliveries for a fixed price; and | | | | | • | unpredictable cash collections of unbilled receivables that may be subject to acceptance of contract deliverables by the customer and contract close out procedures, including government approval of final indirect rates. |
| All of our U.S. government contracts can be terminated by the U.S. government for its convenience. Termination for convenience provisions provide only for our recovery of costs incurred or committed, settlement expenses and profit on work completed prior to termination. In addition to the right of the U.S. government to terminate, U.S. government contracts are conditioned upon the continuing approval by Congress of the necessary spending. Congress usually appropriates funds for a given program on a fiscal year basis even though contract performance may take more than one year. Consequently, at the beginning of a major program, the contract may not be fully funded, and additional monies are normally committed to the contract only if, as and when appropriations are made by Congress for future fiscal years. 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. |
If we are unable to comply with complex U.S. government regulations governing security and contracting practices, we could be disqualified as a supplier to the U.S government. As a supplier to the U.S. government we must comply with numerous regulations, including those governing security and contracting practices. Failure to comply with these procurement regulations and practices could result in fines being imposed against us or our suspension for a period of time from eligibility for bidding on, or for award of, new government contracts. If we are disqualified as a supplier to government agencies, we would lose most, if not all, of our U.S. government customers and revenues from sales of our products would decline significantly. Among the potential causes for disqualification are violations of various statutes, including those related to procurement integrity, export control, U.S. government security regulations, employment practices, protection of the environment, accuracy of records in the recording of costs, and foreign corruption. The government could investigate and make inquiries of our business practices and conduct audits of contract performance and cost accounting. Based on the results of such audits, the U.S. government could adjust our contract-related costs and fees. Depending on the results of these audits and investigations, the government could make claims against us, and if it were to prevail, certain incurred costs would not be recoverable by us. Our dependence on international sales and international sales agents may adversely affect us. Sales for use by international customers (including sales to U.S. domestic companies for inclusion in products that will be sold to international customers) represented approximately 35.6%, 44.0% and 45.4% of our consolidated net sales for the fiscal years ended July 31, 2006, 2005 and 2004, respectively. Approximately 28.4% of our backlog at July 31, 2006 consisted of orders for use by foreign customers. Direct and indirect sales to a North African country during the fiscal year ended July 31, 2006 were 9.7% of consolidated net sales. We expect that international sales will continue to be a substantial portion of our consolidated net sales. These sales expose us to certain risks, including barriers to trade, fluctuations in foreign currency exchange rates (which may make our products less price-competitive), political and economic instability, exposure to public health epidemics, 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 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. In some countries, such as the aforementioned North African country, we rely upon one international sales agent. We attempt to reduce our reliance on sales agents by establishing additional foreign sales offices and by engaging, where practicable, more than one independent sales representative in a territory. 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 U.S., 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 U.S. 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 any of our products and services obsolete or non-competitive. The technology used in our products and services evolves rapidly, and our business position depends, in large part, on the continuous refinement of our scientific and engineering expertise and the development, either through internal research and development or acquisitions, of new or enhanced products and technologies. We may not have the economic or technological resources to be successful in such efforts and we may not be able to identify and respond to technological improvements made by our competitors in a timely or cost-effective fashion. A significant technological breakthrough by others, including smaller competitors or new firms, could have a material adverse impact on our business, results of operations and financial condition. |
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 sector. Since 2003, the telecommunications sector has stabilized and is growing again; however, if the economy slows, 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. Our mobile data communications business is subject to unique risks. Although sales and earnings have increased significantly in the past few years, our mobile data communications business has a relatively limited operating history compared to our other business segments. It is subject to many 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 business include the following: | |
| • | Our contract for the U.S. Army logistics community’s MTS system currently obligates us to provide hardware, including mobile satellite transceivers, and satellite and other services, through July 2007, at fixed prices and other terms set forth in the contract. The U.S. Army is not obligated to purchase any equipment or services under the contract. Orders and related sales relating to this contract are subject to unpredictable funding and deployment decisions. | | | | | • | The MTS contract is not subject to automatic renewal or extension upon its scheduled expiration in July 2007. As such, the U.S. Army may decide to recompete the contract in which case a new MTS contract for all or a portion of our efforts could be awarded to another party in the future. If the MTS contract is not renewed, extended or if we fail to succeed in a recompete process, it would have a material adverse impact on our business and results of operations. | | | | | • | In general, as we seek to grow our mobile data communications business, we anticipate that we will need to maintain a substantial inventory in order to provide terminals to our customers on a timely basis. Certain components that we need have purchasing lead-times of four months or longer, and the MTS contract requires us to provide mobile terminals within 90 days after we receive an order. If forecasted orders are not received, we may be left with large inventories of slow moving or unusable parts or terminals that would result in an adverse impact on our business, results of operations and financial position. | | | | | • | We lease the satellite capacity necessary to operate our system from a limited number of third party satellite networks. Our ability to grow and remain profitable depends on the ability of our satellite network providers to provide sufficient network capacity, reliability and security to our customers. If our satellite network providers were to increase the prices of their services, or to suffer operational or technical failures, our business, results of operation and financial condition could be adversely affected. | | | | | • | Our systems occasionally experience downtime. 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 impact on our business, results of operations and financial condition. Should we be required to restore service on another system in the event of a satellite failure, our costs could increase which would have an adverse effect on our business, results of operations and financial condition. | | | | | • | To date, commercial satellite-based mobile data applications have not been a material part of our business. Our future 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. We may have to increase our operating expenses to be successful in the commercial satellite-based mobile data market. | | | | | • | There are several existing commercial and defense-related competitors, such as Qualcomm, Inc. and Northrop Grumman Corporation, that participate in the mobile data communications market and who have much greater financial resources than us. Existing competitors, including terrestrial-based 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 also enter the mobile data communications market in the future. This |
| could impact our penetration into the commercial market in a significant way and could negatively impact our existing business, results of operation and financial condition. |
| Our backlog is subject to customer cancellation or modification and such cancellation could result in decreased sales and increased provisions for excess and obsolete inventory. We currently have a backlog of orders, mostly under contracts that the customer may modify or terminate. Almost 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. We cannot assure you that our backlog will result in net sales. We record a provision for excess and obsolete inventory based on historical and future usage trends including the consideration of the amount of backlog we have on hand at any particular point in time. If our backlog is cancelled or modified, our estimates of future product demand may prove to be inaccurate, in which case we may have understated 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 our financial statements at the time of such determination. Any such charges could be material to our results of operations and financial position. Our dependence on component availability, subcontractor availability and performance and key suppliers, including the core manufacturing expertise of our high-volume technology manufacturing center located in Tempe, Arizona, may adversely affect us. None of our business segments generally maintain a substantial inventory of components and subsystems. Although we obtain certain components and subsystems from a single source or a limited number of sources, we 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 adverse impact on our business, results of operations and financial condition. In recent years, we have increased the company-wide dependency on our high-volume technology manufacturing center located in Tempe, Arizona, which is part of our telecommunications transmission segment. In fiscal 2006, 2005 and 2004, intersegment sales by the telecommunications transmission segment to the mobile data communications segment were $55.7 million, $19.5 million, and $12.8 million, respectively. Intersegment sales in fiscal 2006, 2005 and 2004 by the telecommunications transmission segment to the RF microwave amplifiers segment were $7.5 million, $8.6 million and $3.6 million, respectively. If a natural disaster or other business interruption occurred, we do not have immediate access to other manufacturing facilities, and as a result, our business would suffer. In addition, if our high-volume technology manufacturing center is unable to produce sufficient product or maintain quality, it could have a material adverse impact on all three of our business segments, our results of operations and our financial condition. Contract cost growth on our fixed price contracts and other contracts that cannot be justified as an increase in contract value due from customers exposes us to reduced profitability and the potential loss of future business and other risks. 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 other increases in the cost of performance. Operating margin is adversely affected when contract costs that cannot be billed to the customer are incurred. This cost growth can occur if initial estimates used for calculating the contract price were incorrect, or if estimates to complete increase. The cost estimation process requires significant judgment and expertise. Reasons for cost growth may include unavailability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of any delays in performance, availability and timing of funding from the customer, natural disasters, and the inability to recover any claims included in the estimates to complete. A significant change in an estimate on one or more programs could have a material impact on our business, results of operations and financial position. Adverse regulatory changes could impair our ability to sell products. Our products are incorporated into wireless communications systems that must comply with various U.S. government regulations, including those of the FCC, as well as international laws and regulations. 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 (i) restricting development efforts by us and our customers, (ii) making our current products less attractive or obsolete, or (iii) increasing the opportunity for additional competition. |
Changes in, or our failure to comply with, applicable laws and regulations could materially harm our business. In addition, the increasing demand for wireless communications has exerted pressure on regulatory bodies worldwide to adopt new standards and reassign bandwidth for these products and services. The reduced number of available frequencies for other products and services and the time delays inherent in the government approval process of new products and services have caused and may continue to cause our customers to cancel, postpone or reschedule their installation of communications systems including their satellite, over-the-horizon microwave, or terrestrial line-of-sight microwave communication systems. This, in turn, could have a material adverse effect on our sales of products to our customers. The EU has recently adopted two directives to facilitate the recycling of electrical and electronic equipment sold in the EU. The first of these is the Waste from Electrical and Electronic Equipment directive, which directs EU member states to enact laws, regulations, and administrative provisions to ensure that producers of electrical and electronic equipment are financially responsible for the collection, recycling, treatment, and environmentally sound disposal of certain products placed on the market after August 13, 2005, and from products in use prior to that date that are being replaced. The EU has also adopted the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) directive. The RoHS directive restricts the use of lead, mercury, and certain other substances in electrical and electronic products placed on the market in the EU after July 1, 2006. Similar laws and regulations have been or may be enacted in other regions, including in the U.S., China and Japan. Other environmental regulations may require us to reengineer our products to utilize components that are more environmentally compatible, and such reengineering and component substitution may result in additional costs to us. There can be no assurance that such existing or future laws will not have a material adverse effect on our business. 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 expenses or in process research and development charges related to intangible assets. Acquisitions involve numerous risks, including: | |
| • | difficulties in the integration and assimilation of the operations, technologies, products and personnel of an acquired business; | | | | | • | diversion of management’s attention from other business concerns; | | | | | • | increased expenses associated with the acquisition; and | | | | | • | potential loss of key employees or customers of any acquired business. |
| We cannot assure you that our acquisitions will be successful and will not adversely affect our business, results of operations or financial condition. We have investments in recorded goodwill as a result of prior acquisitions, and changes in future business conditions could cause these investments to become impaired, requiring substantial write-downs that would reduce our operating income. Goodwill recorded on our balance sheet as of July 31, 2006 was $22.2 million. We evaluate the recoverability of recorded goodwill amounts annually, or when evidence of potential impairment exists. The annual impairment test is based on several factors requiring judgment. Changes in our operating performance or business conditions, in general, could result in an impairment of goodwill which could be material to our results of operations. 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 business and operating results may be negatively impacted if we are unable to continue to manage growth of our businesses. Certain of our businesses have experienced periods of rapid growth that have placed, and may continue to place, significant demands on our managerial, operational and financial resources. In order to manage this growth, we must continue to improve and expand our management, operational and financial systems and controls. We also need to continue to recruit and retain personnel and train and manage our employee base. We must carefully manage research and development capabilities and production and inventory levels to meet product demand, new product introductions and product and technology transitions. If we are not able to timely and effectively manage our growth and maintain the quality standards required by our existing and potential customers, we could experience a material adverse impact on our business, results of operations and financial condition. Our markets are highly competitive. The markets for our products are highly competitive. We cannot assure you that we will be able to successfully compete or that our competitors will not develop new technologies and products that are more effective than our own. We expect the DoD’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 have financial, technical, marketing, sales and distribution resources greater than ours. Protection of our intellectual property is limited; we are subject to the risk of third party claims of infringement. Our businesses rely in large part upon our proprietary scientific and engineering “know-how” and production techniques. Historically, patents have not been an important part of our protection of our intellectual property rights. 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 impact on our business, results of operations and financial condition. Our ability to compete successfully and achieve future revenue growth will depend, in part, on our ability to protect our proprietary technology and operate without infringing upon the rights of others. We may fail to do so. In addition, the laws of certain countries in which our products are or may be sold may not protect our products and intellectual property rights to the same extent as the laws of the U.S. 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 that we use in our business or if we are required to change our business practices, we could be prohibited from making and selling our products or providing certain telecommunications services. Our operations are subject to environmental laws and regulations and we may be subject to environmental liabilities. We engage in manufacturing and are subject to a variety of local, state and federal governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture our products, particularly in the fabrication of fiberglass antennas by our Comtech Antenna Systems, Inc. subsidiary. We are also subject to the RoHS directive which restricts the use of lead, mercury and other substances in electrical and electronic products. The failure to comply with current or future environmental requirements could result in the imposition of substantial fines, suspension of production, alteration of our manufacturing processes or cessation of operations that could have a material adverse impact on our business, results of operations and financial condition. |
In addition, the handling, treatment or disposal of hazardous substances by us or our predecessors may have resulted or could in the future result in contamination requiring investigation or remediation, or leading to other liabilities, any of which could have a material adverse impact on our business, results of operations and financial condition. Our fiscal 2004 Federal income tax return is being audited by the Internal Revenue Service, other returns may be selected for audit and a resulting tax assessment or settlement could have a material adverse impact on our results of operations and financial position. We are subject to income taxes in both the U.S. and certain foreign jurisdictions, including Canada. Significant judgment is required in determining the provision for income taxes. Although we believe our tax estimates are reasonable, the final determination of tax examinations and any related litigation could be materially different than what is reflected in historical income tax provisions and accruals. In fiscal 2006, we were informed by the Internal Revenue Service that our Federal income tax return for the fiscal year ended July 31, 2004 was selected for a general tax audit. The audit is in the early stages and additional income tax returns for other fiscal years may be examined. If the outcome of the audit differs materially from our original income tax provisions, it could have a material impact on our results of operations and financial position. Recently enacted securities laws and regulations are increasing our costs. The Sarbanes-Oxley Act of 2002 required changes in some of our corporate governance, public disclosure and compliance practices. For example, the SEC has promulgated new rules on a variety of subjects. In addition, the NASDAQ Stock Market LLC (“NASDAQ”) has revised its requirements for companies, such as us, that are listed on the NASDAQ. These changes are increasing our legal and financial compliance costs including making it more difficult and more expensive for us to obtain director and officer liability insurance or maintain our current liability coverage. We believe that these new laws and regulations 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. We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002. Identification of material weaknesses in internal controls, if identified, could indicate a lack of proper controls to generate accurate financial statements. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and related SEC rules, we are required to furnish a report of management’s assessment of the effectiveness of our internal controls as part of our Annual Report on Form 10-K. Our auditors are required to attest to and report on management’s assessment, as well as provide a separate opinion. To issue our report, we document our internal control design and the testing processes that support our evaluation and conclusion, and then we test and evaluate the results. There can be no assurance, however, that we will be able to remediate material weaknesses, if any, that may be identified in future periods, or maintain all of the controls necessary for continued compliance. There likewise can be no assurance that we will be able to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly traded companies. Changes in financial accounting standards related to stock option expenses are expected to continue to have a significant effect on our reported results. In fiscal 2006, we adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” a revised standard that requires that we record compensation expense in the statement of operations for employee stock options using a fair value method. The adoption of the new standard had a significant effect on our reported earnings, and could adversely impact our ability to provide accurate guidance on our future reported financial results due to the variability of the factors used to estimate the value of stock options. As a result, the ongoing application of the new standard could impact the future value of our common stock and may result in greater stock price volatility. In addition, since our inception, we have used stock options and other long-term equity incentives as a fundamental component of our employee compensation packages. We believe that stock options and other long-term equity incentives directly motivate our employees to maximize long-term stockholder value and, through the use of long-term vesting, encourage employees to remain with us. To the extent that this accounting standard makes it less attractive to grant options to employees, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could have a material adverse impact on our business, results of operations and financial condition. |
We face risks from the uncertainty of prevailing economic and political conditions. Current global political and economic conditions are uncertain. As a result, it is difficult to estimate the level of expansion, if any, for the global or U.S. economies generally or the markets in which we participate. Because our budgeting and forecasting process relies on estimates of growth in the 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 have a material adverse impact on our business, results of operations and financial condition. 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. Terrorist attacks, the U.S. government’s and other governments’ responses thereto, and threats of war could adversely impact our business, results of operations and financial condition. 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 could 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 provisions could prevent us from being acquired. In addition, our certificate of incorporation grants our 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” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes 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. The level of our indebtedness, among other things, could: | |
| • | make it difficult for us to make payments on our debt; | | | | | • | make it difficult for us to obtain any necessary financing in the future for working capital, acquisitions, capital expenditures, debt service requirements or competitive position causedother purposes; | | | | | • | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and | | | | | • | make us more vulnerable in the event of a downturn in our business. |
Our stock price is volatile. The stock market in general, and the stock prices of technology-based companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of any specific public 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 could have a significant impact on the market price of our stock are described throughout the Risk Factors section and include: | |
| • | strategic transactions, such as acquisitions and divestures; | | | | | • | future announcements concerning us or our competitors; | | | | | • | receipt or non-receipt of substantial orders for products and services; | | | | | • | quality deficiencies in services or products; | | | | | • | 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 securities market conditions, generally; | | | | | • | energy blackouts; | | | | | • | acts of terrorism or war; | | | | | • | inflation or deflation; and | | | | | • | rumors or allegations regarding our financial disclosures or practices. |
| Shortfalls in our sales or earnings in any given period relative to the levels expected by unexpected expendituressecurities analysts could immediately, significantly and adversely affect the trading price of our common stock. We have never declared or paid cash dividends. We have never declared or paid a cash dividend and do not intend to declare any cash dividends on our common stock in connection with complying with such regulations.the foreseeable future. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Our corporate officesheadquarters are located in an office building complex in Melville, New York. The lease, which is for 9,600 square feet, provides for our use of the premises for seven years through July 2013. Our RF microwave amplifiers segment is primarily located in a portion of a 46,000-square46,000 square foot engineering and manufacturing facility on more than two acres of land in Melville, New York. This facility is primarily used by our RF microwave amplifiers 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 they now exist for a term of ten years through December 2011. We have a right of first refusal in the event of a sale of the facility. The base annual rentalrent under the lease is subject to customary adjustments. Although primarily used for our satellite earth station product lines which are part of ourthe telecommunications transmission segment, all three of our business segments utilize our recently expanded 126,000136,000 square foot, high-volume technology manufacturing center located in 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 for this facility expires in fiscal 2011 and we have the option to extend the term of the lease for an additional five-year period. Our telecommunications transmission segment leases an additional ten facilities, five of which are located in the U.S. The U.S. facilities (excluding our Tempe, Arizona facility) aggregate 112,000118,000 square feet and are primarily utilized for manufacturing, engineering, and general office use. Our telecommunications transmission segment also |
operates five small offices in China, North Africa, Thailand, the United Kingdom and Canada that are primarily utilized for customer support, engineering and sales. Our mobile data communications segment operates in a 31,000 square foot facility located in Germantown, Maryland and a 13,000 square foot facility located in Gig Harbor, Washington.Maryland. The lease terms for all of these facilities are generally for multi-year periods and we believe that we will be able to renew these leases or find comparable facilities elsewhere.
ITEM 3. LEGAL PROCEEDINGS We are subject to certain legal actions, which arise in the normal course of business. Although 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. During fiscal 2005, two of our leased facilities located in Florida experienced hurricane damage to both leasehold improvements and personal property. As of July 31, 2005,2006, we have substantially completed all restoration efforts relating to the hurricane damage. Wedamage and have recorded an $0.8 million insurance recovery receivable and accrued a total of $2.2 million for hurricane related costs. Despite a written agreement with ourthe general contractor whichthat we believe limits our liability for the cost of the repairs to the amount of insurance proceeds ultimately received. Our general contractor is inreceived from our insurance company, a dispute has arisen with certain of its subcontractors. As a result, we placed approximately $1.4 million, which represents the amount of insurance proceeds still payable to the general contractor, into an escrow account with the 9th Judicial Circuit Court in Orange County, Florida. We are awaiting the Court’s direction as to how these funds should be disbursed. We are also continuing our efforts to work with the insurance carrier and the general contractor and its subcontractorsa certain subcontractor over the subcontractor’s demand for payment directly from us (by virtue of a purported assignment of rights and other grounds) in an amount exceeding the insurance proceeds by $0.8 million, plus late charges, interest, fees, costs and certain treble damages. As a result of this dispute, we deposited approximately $1.4 million, representing the balance of the insurance proceeds received, in our attorneys’ trust account and filed a complaint for declaratory judgment in the 9th Judicial Circuit Court for Orange County, Florida. The general contractor and the subcontractor have filed separate and independent actions against us and our insurance company, all of which have now been consolidated under our original action. The Court has scheduled December 1, 2006 as the discovery cutoff and trial for February 13, 2007; however, these dates are subject to finalizechange as the amount of any additional insurance proceeds.litigation progresses. We do not expect that the outcome of this matter will have a material effect on our consolidated financial position or results of operations.position. 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, 2005.2006. PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock trades on the Nasdaq NationalNASDAQ Stock Market LLC (“NASDAQ”) under the symbol “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,NASDAQ, as adjusted to reflect the three-for-two stock split effected in April 2005. Such prices do not include retail markups, markdowns or commissions. | | | | | | | | | | Common Stock | | | |
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| | Fiscal Year Ended July 31, 2004 | | | | | | | | First Quarter | | $ | 21.93 | | $ | 9.73 | | Second Quarter | | | 26.35 | | | 17.78 | | Third Quarter | | | 22.80 | | | 10.60 | | Fourth Quarter | | | 15.92 | | | 9.95 | | | | | | | | | | Fiscal Year Ended July 31, 2005 | | | | | | | | First Quarter | | | 19.71 | | | 10.85 | | Second Quarter | | | 25.63 | | | 17.87 | | Third Quarter | | | 36.65 | | | 22.07 | | Fourth Quarter | | | 39.70 | | | 31.80 | |
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| | | | | Fiscal Year Ended July 31, 2005 | | | | | | | | | | | | First Quarter | | | $ | 19.71 | | $ | 10.85 | | | | | Second Quarter | | | | 25.63 | | | 17.87 | | | | | Third Quarter | | | | 36.65 | | | 22.07 | | | | | Fourth Quarter | | | | 39.70 | | | 31.80 | | | | | | | | | | Fiscal Year Ended July 31, 2006 | | | | | First Quarter | | | | 43.36 | | | 30.60 | | | | | Second Quarter | | | | 45.65 | | | 29.42 | | | | | Third Quarter | | | | 33.44 | | | 27.40 | | | | | Fourth Quarter | | | | 33.80 | | | 25.67 | | |
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, weWe sold 3.2 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 $12.89 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, 47,370 and 82,104 shares of our common stock to holders of warrants who exercised purchase rights during fiscal 2004 and 2003, respectively.2004. 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 $2.92 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 $31.50 per share (a conversion rate of 31.7460 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 monthsix-month period beginning February 1, 2009, if the average note price for the applicable trading period equals 120% or more of the accreted principal amount of such notes, we will pay contingent interest at an annual rate of 0.25%. The notes are general unsecured obligations of Comtech Telecommunications Corp. (the “Parent”), ranking equally in right of payment with all of ourits other existing and future unsecured senior indebtedness and senior in right of payment to any of ourits future subordinated indebtedness. All of ourthe Parent’s wholly-owned subsidiaries have issued full and unconditional guarantees in favor of the holders of ourComtech’s 2.0% convertible senior notes (the “Guarantor Subsidiaries”), except for ourthe subsidiary that purchased certain assets and assumed certain liabilities of Memotec, Inc. in fiscal 2004 (the “Memotec“Non-Guarantor 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.Tolt, which was purchased in February 2005, became a guarantor in July 2005. These full and unconditional guarantees are joint and several. Other than supporting the operations of its subsidiaries, Comtech Telecommunications Corp. (the “Parent”)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. Consolidating financial information regarding the Parent, the Guarantor Subsidiaries and the Non-Guarantor Subsidiary can be found in Note 17 to the consolidated financial statements beginning on page F-29. 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 2005.2006. Approximate Number of Equity Security Holders As of September 14, 2005,15, 2006, there were approximately 786788 holders of our common stock. Such number of record owners was determined from our shareholder records and does not include beneficial owners of our common stock held in the name of various security holders, dealers and clearing agencies. |
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table shows selected historical consolidated financial data for our Company. During the fiscal quarter ended January 31, 2005, the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share.” The Company has restated, for comparative purposes, the historical share and per share data, including earnings per share (“EPS”), to reflect the impact of the assumed conversion of the Company’s 2.0% convertible senior notes in calculating diluted EPS. No restatement of EPS for periods prior to fiscal 2004 was required since the convertible senior notes were not outstanding during these periods. In addition, effective August 1, 2005, we adopted the provisions of SFAS No. 123(R), “Share-Based Payment” using the modified prospective method and, as a result, periods prior to August 1, 2005 do not reflect the recognition of stock-based compensation expense. All share and per share amounts have also been adjusted to reflect the three-for-two stock splits of the Company’s common shares that occurred in April 2005 and July 2003. Detailed historical financial information is included in the audited consolidated financial statements for fiscal 2006, 2005 2004 and 2003.2004. | | | | | | | | | | | | | | | | | | | Fiscal Years Ended July 31,
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Operations Data: | | | | | | | | | | | | | | | | | Net sales | | $ | 307,890 | | | 223,390 | | | 174,035 | | | 119,357 | | | 135,931 | | Cost of sales | | | 180,524 | | | 135,858 | | | 114,317 | | | 78,780 | | | 87,327 | | | |
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| | Gross profit | | | 127,366 | | | 87,532 | | | 59,718 | | | 40,577 | | | 48,604 | | | | | | | | | | | | | | | | | | | Expenses: | | | | | | | | | | | | | | | | | Selling, general and administrative | | | 51,819 | | | 36,016 | | | 28,045 | | | 22,512 | | | 22,707 | | Research and development | | | 21,155 | | | 15,907 | | | 12,828 | | | 11,041 | | | 10,190 | | In-process research and development | | | — | | | 940 | | | — | | | 2,192 | | | — | | Amortization of intangibles | | | 2,328 | | | 2,067 | | | 2,039 | | | 1,471 | | | 2,552 | | | |
|
| | |
| | |
| | |
| | |
| | | | | 75,302 | | | 54,930 | | | 42,912 | | | 37,216 | | | 35,449 | | | |
|
| | |
| | |
| | |
| | |
| | | | | | | | | | | | | | | | | | | Operating income | | | 52,064 | | | 32,602 | | | 16,806 | | | 3,361 | | | 13,155 | | | | | | | | | | | | | | | | | | | Other expenses (income): | | | | | | | | | | | | | | | | | Interest expense | | | 2,679 | | | 1,425 | | | 2,803 | | | 3,061 | | | 4,015 | | Interest income | | | (4,072 | ) | | (921 | ) | | (275 | ) | | (452 | ) | | (2,303 | ) | Other (income) expense, net | | | — | | | — | | | — | | | (28 | ) | | 841 | | | |
|
| | |
| | |
| | |
| | |
| | | | | | | | | | | | | | | | | | | Income before provision (benefit) for
income taxes | | | 53,457 | | | 32,098 | | | 14,278 | | | 780 | | | 10,602 | | | | | | | | | | | | | | | | | | | Provision (benefit) for income taxes | | | 16,802 | | | 10,271 | | | 4,569 | | | (368 | ) | | 3,888 | | | |
|
| | |
| | |
| | |
| | |
| | | | | | | | | | | | | | | | | | | Net income | | $ | 36,655 | | | 21,827 | | | 9,709 | | | 1,148 | | | 6,714 | | | |
|
| | |
| | |
| | |
| | |
| | | | | | | | | | | | | | | | | | | Net income per share: | | | | | | | | | | | | | | | | | Basic | | $ | 1.69 | | | 1.03 | | | 0.57 | | | 0.07 | | | 0.41 | | | |
|
| | |
| | |
| | |
| | |
| | Diluted | | $ | 1.42 | | | 0.92 | | | 0.53 | | | 0.07 | | | 0.38 | | | |
|
| | |
| | |
| | |
| | |
| | | | | | | | | | | | | | | | | | | Weighted average number of common
shares outstanding - basic | | | 21,673 | | | 21,178 | | | 17,168 | | | 16,788 | | | 16,533 | | | |
|
| | |
| | |
| | |
| | |
| | | | | | | | | | | | | | | | | | | Weighted average number of common and common equivalent shares outstanding assuming dilution - diluted | | | 27,064 | | | 24,781 | | | 18,290 | | | 17,562 | | | 17,798 | | | |
|
| | |
| | |
| | |
| | |
| |
| |
|
| |
|---|
| Fiscal Years Ended July 31,
(In thousands, except per share amounts) | |
|---|
|
| |
|---|
| 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
|---|
| | |
| |
| |
| |
| |
| | Consolidated Statement of
Operations Data: | | | | | | | | | | | | | | | | | | Net sales | | $ | 391,511 | | | 307,890 | | | 223,390 | | | 174,035 | | | 119,357 | | | Cost of sales | | | 232,210 | | | 180,524 | | | 135,858 | | | 114,317 | | | 78,780 | | | | |
| |
| |
| |
| |
| | | Gross profit | | | 159,301 | | | 127,366 | | | 87,532 | | | 59,718 | | | 40,577 | | | | |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | | | Expenses: | | | | | | | | | | | | | | | | | | Selling, general and administrative | | | 67,071 | | | 51,819 | | | 36,016 | | | 28,045 | | | 22,512 | | | Research and development | | | 25,834 | | | 21,155 | | | 15,907 | | | 12,828 | | | 11,041 | | | In-process research and development | | | — | | | — | | | 940 | | | — | | | 2,192 | | | | | | | | | Amortization of intangibles | | | 2,465 | | | 2,328 | | | 2,067 | | | 2,039 | | | 1,471 | | | | | | | | | | |
| |
| |
| |
| |
| | | | | | 95,370 | | | 75,302 | | | 54,930 | | | 42,912 | | | 37,216 | | | | |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | | | Operating income | | | 63,931 | | | 52,064 | | | 32,602 | | | 16,806 | | | 3,361 | | | | | | | | | | | | | | | | | | | | | Other expenses (income): | | | | | | | | | | | | | | | | | | Interest expense | | | 2,687 | | | 2,679 | | | 1,425 | | | 2,803 | | | 3,061 | | | Interest income | | | (9,243 | ) | | (4,072 | ) | | (921 | ) | | (275 | ) | | (452 | ) | | | | | | | | Other income, net | | | — | | | — | | | — | | | — | | | (28 | ) | | | |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | | Income before provision (benefit) for
income taxes | | | 70,487 | | | 53,457 | | | 32,098 | | | 14,278 | | | 780 | | | | | | | | | | | Provision (benefit) for income taxes | | | 25,218 | | | 16,802 | | | 10,271 | | | 4,569 | | | (368 | ) | | | | | | | | | |
| |
| |
| |
| |
| | | Net income | | $ | 45,269 | | | 36,655 | | | 21,827 | | | 9,709 | | | 1,148 | | | | |
| |
| |
| |
| |
| | | Net income per share: | | | | | | | | | Basic | | $ | 1.99 | | | 1.69 | | | 1.03 | | | 0.57 | | | 0.07 | | | | | | | | | | |
| |
| |
| |
| |
| | | Diluted | | $ | 1.72 | | | 1.42 | | | 0.92 | | | 0.53 | | | 0.07 | | | | | | | | | | |
| |
| |
| |
| |
| | Weighted average number of common
shares outstanding - basic | | | 22,753 | | | 21,673 | | | 21,178 | | | 17,168 | | | 16,788 | | | | | | | | | | |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | | Weighted average number of common
and common equivalent shares
outstanding assuming dilution —
diluted | | | 27,324 | | | 27,064 | | | 24,781 | | | 18,290 | | | 17,562 | | | | |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | Fiscal Years Ended July 31,
(In thousands) | | | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | |
| | |
| | |
| | |
| | |
| | Other Consolidated Operating Data: | | | | | | | | | | | | | | | | | Backlog at period-end | | $ | 153,314 | | | 83,549 | | | 100,142 | | | 44,121 | | | 50,094 | | New orders | | | 377,655 | | | 206,797 | | | 230,056 | | | 113,384 | | | 135,487 | | Research and development expenditures
- internal and customer funded | | | 24,156 | | | 21,656 | | | 16,504 | | | 13,070 | | | 11,846 | |
| | | | | | | | | | | | | | | | | | | As of July 31,
(In thousands) | | | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | |
| | |
| | |
| | |
| | |
| | Consolidated Balance Sheet Data: | | | | | | | | | | | | | | | | | Total assets | | $ | 382,403 | | | 306,390 | | | 164,250 | | | 126,586 | | | 146,988 | | Working capital | | | 254,690 | | | 201,218 | | | 74,801 | | | 51,577 | | | 67,089 | | Long-term debt | | | — | | | — | | | — | | | 28,683 | | | 42,000 | | Convertible senior notes | | | 105,000 | | | 105,000 | | | — | | | — | | | — | | Other long-term obligations | | | 396 | | | 158 | | | 393 | | | 1,294 | | | 2,157 | | Stockholders’ equity | | | 196,629 | | | 142,398 | | | 117,568 | | | 67,288 | | | 65,565 | |
22
|
|
| |
|---|
| Fiscal Years Ended July 31,
(In thousands) | |
|---|
|
| |
|---|
| 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
|---|
| | |
| |
| |
| |
| |
| | | Other Consolidated Operating Data: | | | | | | | | | | | | | | | | | | Backlog at period-end | | $ | 186,007 | | | 153,314 | | | 83,549 | | | 100,142 | | | 44,121 | | | New orders | | | 424,204 | | | 377,655 | | | 206,797 | | | 230,056 | | | 113,384 | | Research and development expenditures
- internal and customer funded | | | 30,243 | | | 24,156 | | | 21,656 | | | 16,504 | | | 13,070 | |
|
| |
|---|
| As of July 31,
(In thousands) | |
|---|
|
| |
|---|
| 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
|---|
| | |
| |
| |
| |
| |
| | | Consolidated Balance Sheet Data: | | | | | | | | | | | | | | | | | | Total assets | | $ | 455,266 | | | 382,403 | | | 306,390 | | | 164,250 | | | 126,586 | | | Working capital | | | 308,986 | | | 254,690 | | | 201,218 | | | 74,801 | | | 51,577 | | | Long-term debt | | | — | | | — | | | — | | | — | | | 28,683 | | | Convertible senior notes | | | 105,000 | | | 105,000 | | | 105,000 | | | — | | | — | | | Other long-term obligations | | | 243 | | | 396 | | | 158 | | | 393 | | | 1,294 | | | Stockholders’ equity | | | 254,242 | | | 196,629 | | | 142,398 | | | 117,568 | | | 67,288 | |
| ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We design, develop, produce and market innovative products, systems and services for advanced communications solutions. We believe many of our solutions play a vital role in providing or enhancing communication capabilities when terrestrial communications infrastructure is unavailable or ineffective. We conduct our business through three complementary segments: telecommunications transmission, mobile data communications and RF microwave amplifiers. We sell our products intoto a diverse customer base in the global commercial and government markets where we believe we have technological, engineering, systems design or other expertise that differentiate our product offerings.communications markets. We believe we are leadersa leader in the market segments that we serve. Our telecommunications transmission segment, which is currently our largest business segment, provides specialized productssophisticated equipment and systems forthat are used to enhance satellite over-the-horizon microwavetransmission efficiency and that enable wireless line-of-sight microwave telecommunications systems.communications in environments where terrestrial communications are unavailable, inefficient or too expensive. Our mobile data communications segment, currently our fastest growing segment, provides satellite-based mobile location, tracking and messaging services andcustomers with an integrated solution including mobile satellite transceivers primarilyand satellite network support to enable global satellite-based communications when mobile, real-time, secure transmission is required for defense applications including logistics, support and battlefield command and control as well as turnkey employee mobility solutions.applications. Our RF microwave amplifiers segment designs, manufactures and markets solid-state, high-power, broadband RF microwave amplifier products. A substantial portion of our sales may be derived from a limited number of relatively large customer contracts, the timing of revenues from which cannot be predicted. Quarterly and period-to-period sales and operating results may be significantly affected by one or more of such contracts. In addition, our gross profit is affected by a variety of factors, including the mix of products, systems and services sold, production efficiencies, estimates of warranty expense, price competition and general economic conditions. Our gross profit may also be affected by the impact of any cumulative adjustments to contracts that are accounted for under the percentage-of-completion method. Accordingly, we can experience significant fluctuations in sales and operating results from quarter-to-quarter and period-to-period comparisons may not be indicative of future performance. Revenue from the sale of our products is generally recognized when the earnings process is complete, upon shipment or customer acceptance. Revenue from contracts relating to the design, development or manufacturing of complex electronic equipment to a buyer’s specification or to provide services relating to the performance of such contracts is recognized using the percentage-of-completion method. Revenue from contracts that contain multiple elements that are not accounted for under the percentage-of-completion method are accounted for in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple |
| Deliverables.” Revenue from these contracts is allocated to each respective element based on each element’s relative fair value and is recognized when the respective revenue recognition criteria for each element are met. | | | Our contract with the United States (“U.S.”) Army for the Movement Tracking System (“MTS”) is for an eight-year period ending in July 2007 and 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. Through the end of our fiscal quarter ended October 31, 2004, we recognized revenue on the portion of such orders that relate to prepaid service time when the time was
used by the customer. As a result of changes to the manner in which our technology is being deployed and used, commencing November 1, 2004, we are recognizing service time revenue based on a network availability method which recognizes prepaid service time on a straight-line basis from the date of shipment through the end of the contract term in July 2007. Our gross profit is affected by a variety of factors, including the mix of products, systems and services sold, production efficiencies, estimates of warranty expense, price competition and general economic conditions. Our gross profit may also be affected by the impact of any cumulative adjustments to contracts that are accounted for under the percentage-of-completion method.
Selling, general and administrative expenses consist primarily of salaries, commissions and benefits for marketing, sales and administrative employees, advertising and trade show costs, professional fees and other administrative costs.
Our research and development expenses relate to both existing product enhancements and new product development. A portion of our research and development effort is related to specific contracts and is recoverable under those contracts because they are funded by the customers. Such customer funded expenditures are not included in research and development expenses for financial reporting purposes, but are reflected in cost of sales.
| | As more fully described below under“Recent Accounting Pronouncements – Impact of SFAS No. 123(R), Share- Based Payments,”beginning in the first quarter of fiscal 2006, we will be required to recognize compensation expense for previously issued and new share-based compensation awards. Accordingly, the future reported amounts of cost of sales, research and development expenses and selling, general and administrative expenses will include the incremental expense relating to such awards.Acquisitions
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. Commencing in May 2004, Memotec’s results of operations have been included in our telecommunications transmission segment. | | In February 2005, we acquired certain assets and assumed certain liabilities of Tolt Technologies, Inc. (“Tolt”) for an aggregate purchase price of $3.7 million, including transaction costs of $0.2 million. Based on Tolt’s achievement ofIn fiscal 2006, we significantly de-emphasized stand-alone sales goals, we may be required to pay an earn-out of $0.5 million. Commencing in February 2005, Tolt’s resultsturnkey employee mobility solutions, and are focusing our efforts on selling commercial satellite-based mobile data applications. This operation is part of operations have been included in our mobile data communications segment. | | | In August 2006, we acquired certain assets and assumed certain liabilities of Insite Consulting, Inc. (“Insite”), a logistics application software company, for $2.7 million, plus certain earn-out payments based on the achievement of future sales targets. The first part of the earn-out cannot exceed $1.4 million and is limited to a five-year period. The second part of the earn-out, which is for a ten-year period, is unlimited and based on a per unit future sales target primarily relating to new commercial satellite-based mobile data communications markets. Insite has developed the geoOps™ Enterprise Location Monitoring System, a software-based solution that allows customers to integrate legacy data systems with near-real time logistics and operational data systems. This operation was combined with our existing business and is part of our mobile data communications segment. | | Critical Accounting Policies We consider certain accounting policies to be critical due to the estimation process involved in each. | | Revenue Recognition on Long-Term Contracts.Revenues and related costs from long-term contracts relating to the design, development or manufacturing of complex electronic equipment to a buyer’s specification or to provide services relating to the performance of such contracts are recognized using the percentage-of-completion method. 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. The impact of any such adjustments discussed in“Management’s Discussion and Analysis of Financial Condition and Results of Operations”represents the cumulative impact of the adjustment on the relevant financial statement amount as of the beginning of the period being discussed. Estimated losses on long-term contracts are recorded in the period in which the losses become evident. | | | Some of our largest contracts, including our MTS contract with the U.S. Army, 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, expenses and progress toward completion, particularly on larger or longer-term contracts. If we do not accurately estimate the total sales, 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 changes in margins or contract losses could be material to our results of operations and financial position. |
| In addition, most government contracts have termination for convenience clauses that provide the customer with the right to terminate the contract at any time. Such terminations could impact the assumptions regarding total contract revenues and expenses utilized in recognizing profit under the percentage-of-completion method of accounting. Changes to these assumptions could materially impact our results of operations and financial position. Historically, we have not experienced material terminations of our long-term contracts. | | | We also address customer acceptance provisions in assessing our ability to perform our contractual obligations under long-term contracts. Our inability to perform on our long-term contracts could materially impact our results of operations and financial position. Historically, we have been able to perform on our long-term contracts. | | Accounting for Stock-Based Compensation. As discussed further in“Notes to Consolidated Financial Statements – Note 1(j) Accounting for Stock-Based Compensation,” we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R) on August 1, 2005 using the modified prospective method. Through July 31, 2005, we accounted for our stock option and employee stock purchase plans under the intrinsic value method of Accounting Principles Board (“APB”) Opinion No. 25, and as a result no compensation costs had been recognized in our historical consolidated statements of operations. | | | We have used and expect to continue to use the Black-Scholes option pricing model to compute the estimated fair value of stock-based awards. The Black-Scholes option pricing model includes assumptions regarding dividend yields, expected volatility, expected option term and risk-free interest rates. The assumptions used in computing the fair value of stock-based awards reflect our best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of our control. We estimate expected volatility by considering the historical volatility of our stock, the implied volatility of publicly traded stock options in our stock and our expectations of volatility for the expected term of stock-based compensation awards. As a result, if other assumptions or estimates had been used for options granted in 2006 and in prior periods, the stock-based compensation expense that was recorded for fiscal 2006 could have been materially different. Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially impacted in the future. | | Impairment of Goodwill and Other Intangible Assets.As of July 31, 2005,2006, our company’s goodwill and other intangible assets including goodwill, aggregated $31.4$29.1 million. In assessing the recoverability of goodwill and other intangibles, we must make various assumptions regarding estimated future cash flows and other factors in determining the fair values of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets in future periods. Any such resulting impairment charges could be material to our results of operations. | | Provision for Warranty Obligations. We provide warranty coverage for most of our products, including products under long-term contracts, for a period of at least one year from the date of shipment. We record a liability for estimated warranty expense based on historical claims, product failure rates and other factors. There exist inherent risks and uncertainties in estimating warranty expenses, particularly on larger or longer-term contracts. As such, if we do not accurately estimate our warranty costs, any changes to our original estimates could be material to our results of operations and financial position. Accounting for Income Taxes.Our deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. The provision for income taxes is based on domestic and international statutory income tax rates in the tax jurisdictions where we operate, permanent differences between financial reporting and tax reporting and available credits and incentives. Significant judgment is required in determining income tax provisions and tax positions. We may be challenged upon review by the applicable taxing authority and positions taken by us may not be sustained. We provide tax reserves for tax exposures relating to periods subject to audit. The development of reserves for these exposures requires consideration of timing and judgments about tax issues and potential outcomes, and is a subjective critical estimate. In certain circumstances, the ultimate outcome of exposures and risks involves significant uncertainties. If actual outcomes differ materially from these estimates, they could have a material impact on our results of operations and our financial position. | | Provisions for Excess and Obsolete Inventory.We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based on historical and future usage trends. Several factors may influence the sale and use of our inventories, including 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 our financial statements at the time of such determination. Any such charges could be material to our results of operations and financial position. Allowance for Doubtful Accounts.We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness, as determined by our review of our customers’ current credit information. Generally, we will require cash in advance or payment secured by irrevocable letters of credit before an order is accepted from an international customer that we do not do business with regularly. In addition, we seek to obtain insurance for certain international customers. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the allowances established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Measurement of such losses requires consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and the financial health of specific customers. Changes to the estimated allowance for doubtful accounts could be material to our results of operations and financial position. Accounting for Stock-Based Compensation. Through July 31, 2005, we accounted for our stock option and employee stock purchase plans under the intrinsic value method of Accounting Principles Board (“APB”) Opinion No. 25, and as a result no compensation costs to date have been recognized in our historical consolidated statements of operations. As discussed further below under“Recent Accounting Pronouncements – Impact of SFAS No. 123(R), Share-Based Payments,” on August 1, 2005 we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R) using the modified prospective method.
We have used and expect to continue to use the Black-Scholes option-pricing model to compute the estimated fair value of stock-based awards. The Black-Scholes option pricing model includes assumptions regarding dividend yields, expected volatility, expected lives, and risk-free interest rates. The assumptions used in computing the fair value of stock-based awards reflect our best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of our control. As a result, if other assumptions had been used, the stock-based compensation expense that will be recorded beginning in the first quarter of fiscal 2006 could have been materially different. Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially impacted in the future.
Results of Operations The following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of our consolidated net sales: | | | | | | | | | | | | | | Fiscal Years Ended July 31, | | | |
| | | | 2005 | | 2004 | | 2003 | | | |
| |
| |
| Net sales | | | 100.0 | % | | 100.0 | % | | 100.0 | % | Gross margin | | | 41.4 | | | 39.2 | | | 34.3 | | Selling, general and administrative expenses | | | 16.8 | | | 16.1 | | | 16.1 | | Research and development expenses | | | 6.9 | | | 7.1 | | | 7.4 | | In-process research and development | | | — | | | 0.4 | | | — | | Amortization of intangibles | | | 0.8 | | | 0.9 | | | 1.2 | | Operating income | | | 16.9 | | | 14.6 | | | 9.7 | | Interest expense (income), net | | | (0.5 | ) | | 0.2 | | | 1.5 | | Income before provision for income taxes | | | 17.4 | | | 14.4 | | | 8.2 | | Net income | | | 11.9 | | | 9.8 | | | 5.6 | |
| |
|
| |
|---|
| Fiscal Years Ended July 31, | | |
|---|
|
| |
|---|
| 2006 | | 2005 | | 2004 | |
|---|
| | |
| |
| |
| | | Net sales | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | Gross margin | | | 40.7 | | | | 41.4 | | | | 39.2 | | | | Selling, general and administrative expenses | | | 17.1 | | | | 16.8 | | | | 16.1 | | | | Research and development expenses | | | 6.6 | | | | 6.9 | | | | 7.1 | | | | In-process research and development | | | — | | | | — | | | | 0.4 | | | | Amortization of intangibles | | | 0.6 | | | | 0.8 | | | | 0.9 | | | | Operating income | | | 16.3 | | | | 16.9 | | | | 14.6 | | | | Interest expense (income), net | | | (1.7 | ) | | | (0.5 | ) | | | 0.2 | | | | Income before provision for income taxes | | | 18.0 | | | | 17.4 | | | | 14.4 | | | | Net income | | | 11.6 | | | | 11.9 | | | | 9.8 | | |
| Comparison of Fiscal 2006 and 2005 Net Sales. Consolidated net sales were $391.5 million and $307.9 million for fiscal 2006 and 2005, respectively, representing an increase of $83.6 million, or 27.2%. The increase in net sales was driven by an increase in our telecommunications transmission and our mobile data communications segments, partially offset by lower net sales in our RF microwave amplifiers segment. Net sales in our telecommunications transmission segment were $197.9 million and $174.5 million for fiscal 2006 and 2005, respectively, an increase of $23.4 million, or 13.4%. The growth in this segment resulted primarily from an increase in demand for our satellite earth station products and sales related to a contract with a third-party commercial customer to outsource its manufacturing. Fiscal 2005 also includes a $4.0 million cumulative adjustment to net sales which resulted from lower than anticipated costs on two large over-the-horizon microwave system contracts. In late fiscal 2006, we announced that the U.S. Department of Defense (“DoD”) awarded us a $28.3 million contract to purchase our 16 Mbps troposcatter modem upgrade kits for use on the AN/TRC-170 digital troposcatter. Sales related to this U.S. government program in fiscal 2007 are expected to offset any reduction in sales, both direct and indirect, to a North African country. We believe that sales, both direct and indirect, to this North African country, could be lower in fiscal 2007 as we believe our North African end customer is in between major phases of a large program. Sales in the over-the-horizon microwave systems product line can fluctuate dramatically from period to period based on the receipt of large contracts and our performance thereon. Our telecommunications transmission segment represented 50.5% of consolidated net sales for fiscal 2006 as compared to 56.7% for fiscal 2005. |
Net sales in our mobile data communications segment were $149.5 million and $86.1 million for fiscal 2006 and 2005, respectively, an increase of $63.4 million, or 73.6%. The increase in net sales was due to (i) higher sales on the MTS contract, including $9.5 million of sales relating to the gross profit adjustment discussed below under“Gross Profit,” (ii) higher sales of battlefield command and control applications to the U.S. military, and (iii) our acquisition of Tolt in February 2005 which contributed $18.7 million of net sales for fiscal 2006 compared to $11.3 million of net sales for fiscal 2005. In the second half of fiscal 2006, we significantly de-emphasized stand-alone sales of Tolt’s low margin turnkey employee mobility solutions to further focus its sales efforts on commercial satellite-based mobile data applications. Stand-alone sales of these low margin turnkey employee mobility solutions during fiscal 2006 were approximately $15.0 million and such sales in fiscal 2007 are expected to be nominal. Net sales for fiscal 2005 were positively impacted by a favorable cumulative adjustment associated with the change from the usage method to the straight-line method of accounting for MTS prepaid service time revenue, which contributed $3.8 million to net sales. Period-to-period sales and profitability in our mobile data communications segment can fluctuate dramatically due to funding fluctuations. In fiscal 2006, we began to receive orders under our MTS contract for the Army National Guard’s acquisition of MTS equipment, including our MT 2012 transceiver and related services. If we receive additional significant orders from the Army National Guard and if we continue to experience strong demand from the U.S. Army, we expect that sales in this segment will increase in fiscal 2007. The MTS contract is not subject to automatic renewal or extension upon its scheduled expiration in July 2007. If the MTS contract is not renewed, extended or if we fail to succeed in a recompete process, it would have a material adverse impact on our business and results of operations. Our mobile data communications segment represented 38.2% of consolidated net sales for fiscal 2006 as compared to 27.9% for fiscal 2005. Net sales in our RF microwave amplifiers segment were $44.1 million for fiscal 2006 compared to $47.3 million for fiscal 2005, a decrease of $3.2 million, or 6.8%. The decrease in net sales was due primarily to lower sales of our amplifiers that are incorporated into improvised explosive device jamming systems, partially offset by increased demand for other defense-related products in this segment. Our RF microwave amplifiers segment represented 11.3% of consolidated net sales for fiscal 2006 as compared to 15.4% for fiscal 2005. International sales (which include sales to U.S. companies for inclusion in products which are sold to international customers) represented 35.6% and 44.0% of consolidated net sales for fiscal 2006 and 2005, respectively. Domestic commercial sales represented 17.1% and 13.9% of consolidated net sales for fiscal 2006 and 2005, respectively. Sales to the U.S. government (including sales to prime contractors to the U.S. government) represented 47.3% and 42.1% of consolidated net sales for fiscal 2006 and 2005, respectively. One customer, a prime contractor, represented 10.2% of consolidated net sales in both fiscal 2006 and 2005. Direct and indirect sales to a North African country, including certain sales to the prime contractor mentioned above, represented 9.7% and 13.2% of consolidated net sales for fiscal 2006 and 2005, respectively. Gross Profit. Gross profit was $159.3 million and $127.4 million for fiscal 2006 and 2005, respectively, representing an increase of $31.9 million, or 25.0%. Our gross profit percentage was 40.7% for fiscal 2006 as compared to 41.4% for fiscal 2005. Excluding the impact of adjustments to both net sales and gross profit in both periods, as discussed below, our gross profit as a percentage of net sales for fiscal 2006 and 2005 would have been 39.8% and 40.5%, respectively. This decrease was primarily due to a higher proportion of our consolidated net sales being in the mobile data communications segment, which typically realizes lower gross margins than sales in our other two segments. In addition, fiscal 2006 includes higher sales relating to Tolt’s turnkey employee mobility solutions, which have lower gross margins than any of our other product lines. The decline in gross margin percentage due to the change in product mix was partially offset by continued increased operating efficiencies associated with increased usage of our high-volume technology manufacturing facility during fiscal 2006. During fiscal 2006, we recorded favorable cumulative gross profit adjustments of $9.1 million (of which $8.5 million relates to the mobile data communications segment and $0.6 million relates to the RF microwave amplifiers segment). The adjustment in our mobile data communications segment was primarily the result of increased MTS funding from the U.S. Army, as well as improved operating efficiencies. The adjustment in our RF microwave amplifiers segment related to a military contract that was substantially completed in fiscal 2006. These favorable adjustments were partially offset by a $1.7 million warranty provision in our mobile data communications segment relating to certain of our firmware that needs to be modified. During fiscal 2005, we recorded cumulative adjustments related to two large over-the-horizon microwave system contracts and the MTS contract with an aggregate impact of $5.8 million on gross profit (of which $2.2 million relates to the mobile data communications segment and $3.6 million relates to the telecommunications transmission segment). |
In our mobile data communications segment, we continue to rollout our next generation satellite transceiver, known as the MT 2012, and enhance our network and related software to provide increased speed and performance. We continue to work closely with our customers and currently expect to continue these initiatives through fiscal 2007. If the current funding levels of MTS and battlefield command and control applications are maintained or increased, or if and when we receive additional orders from the Army National Guard, we may experience additional increased operating efficiencies in fiscal 2007. Unrelated to the next generation MTS technology upgrade, we are also continuing to upgrade certain of our firmware that needs to be modified. The ultimate amount of warranty expense could differ from our initial estimate and we may incur additional unanticipated costs or delays. Included in cost of sales for fiscal 2006 and 2005 are provisions for excess and obsolete inventory of $2.0 million and $2.1 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 and projected usage assumptions. | | Selling, General and Administrative Expenses.Selling, general and administrative expenses were $67.1 million and $51.8 million for fiscal 2006 and 2005, respectively, representing an increase of $15.3 million, or 29.5%. The increase in expenses was primarily attributable to (i) the increased level of net sales and activity in our telecommunications transmission and mobile data communications segments, (ii) the recording of $4.6 million of stock-based compensation expense during fiscal 2006, and (iii) a full year of expenses associated with Tolt, which was acquired in February 2005. There was no stock-based compensation expense included in selling, general and administrative expenses in fiscal 2005. As a percentage of consolidated net sales, selling, general and administrative expenses were 17.1% and 16.8% for fiscal 2006 and 2005, respectively. Research and Development Expenses.Research and development expenses were $25.8 million and $21.2 million for fiscal 2006 and 2005, respectively, representing an increase of $4.6 million, or 21.7%. Approximately $19.0 million and $17.7 million of such amounts, respectively, related to our telecommunications transmission segment, with the remaining expenses primarily related to our mobile data communications segment and, to a lesser extent, our RF microwave amplifiers segment. In addition, during fiscal 2006, we recorded $0.7 million of stock-based compensation expense in research and development expenses. There was no stock-based compensation expense included in research and development expenses in fiscal 2005. 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 2006 and 2005, customers reimbursed us $4.4 million and $3.0 million, respectively, which is not reflected in the reported research and development expenses, but is included in net sales with the related costs included in cost of sales. | | Amortization of Intangibles.Amortization of intangibles for fiscal 2006 and 2005 was $2.5 million and $2.3 million, respectively. The amortization primarily relates to intangibles with finite lives that we acquired in connection with various acquisitions. Operating Income. Operating income for fiscal 2006 and 2005 was $63.9 million and $52.1 million, respectively. The $11.8 million, or 22.6% increase, was the result of the higher sales and gross profit, discussed above, partially offset by higher operating expenses. Operating income in our telecommunications transmission segment increased to $49.8 million for fiscal 2006 from $40.2 million for fiscal 2005, as a result of increased net sales and gross profit, partially offset by increased operating expenses. In addition, fiscal 2005 included a $3.1 million positive impact on operating income from the cumulative gross margin adjustments discussed above under “Gross Profit” related to two large over-the-horizon microwave system contracts. | | | Our mobile data communications segment generated operating income of $21.7 million for fiscal 2006 compared to $11.9 million for fiscal 2005 due primarily to the significant increase in net sales and gross profit, partially offset by increased operating expenses, including increased research and development expenses. The operations relating to Tolt, which incurred an operating loss of $5.0 million in fiscal 2006, have been combined into our network operations center facility. In fiscal 2007, although we expect to incur lower expenses relating to our commercial satellite-based mobile data applications, we do expect to increase other operating expenses, particularly research and development expenses, as we continue to position ourselves to win an extension or recompete of the MTS contract that expires in July 2007 and as we develop new technologies for other programs, such as Blue Force Tracking. In addition, fiscal 2006 and 2005 included positive impacts on operating income from the cumulative gross margin |
adjustments, net of the warranty provision in the fiscal 2006 period, discussed above under“Gross Profit”of $5.8 million and $2.0 million, respectively. Operating income in our RF microwave amplifiers segment increased to $8.3 million for fiscal 2006 from $8.2 million for fiscal 2005. Operating income for fiscal 2006 includes a $0.5 million benefit from a positive gross margin adjustment on a contract discussed above under“Gross Profit.” Unallocated operating expenses increased to $15.9 million for fiscal 2006 from $8.2 million for fiscal 2005 due primarily to the recording of $5.7 million of stock-based compensation expense associated with SFAS No. 123(R) and increased incentive compensation costs in connection with the significant increase in pre-tax income. Interest Expense. Interest expense was $2.7 million for both fiscal 2006 and 2005. Interest expense primarily relates to our 2.0% convertible senior notes issued in January 2004. Interest Income. Interest income for fiscal 2006 was $9.2 million, as compared to $4.1 million for fiscal 2005. The $5.1 million increase was due primarily to an increase in interest rates and additional investable cash, primarily provided by our operating cash flow. Provision for Income Taxes.The provision for income taxes was $25.2 million and $16.8 million for fiscal 2006 and 2005, respectively. Our effective tax rate for fiscal 2006 was 35.8% as compared to 31.4% for fiscal 2005. The increase in the effective tax rate was primarily attributable to (i) the increased level of pre-tax profit, (ii) the nondeductibility of stock-based compensation expense in fiscal 2006 relating to incentive stock options, (iii) the expiration, in December 2005, of the Federal research and experimentation credit, and (iv) the scheduled phase-out of the extraterritorial income exclusion which was slightly offset by the scheduled phase-in of the deduction for domestic production activities. In fiscal 2006, we recorded a net tax benefit of $0.6 million primarily relating to the favorable settlement of a state tax matter. In fiscal 2005, we recorded a $1.1 million tax benefit related to the reduction in the valuation allowance that was established for the extended write-off period of acquired in-process research and development. We currently expect our effective tax rate for fiscal 2007 to approximate 36.5%. If legislation to extend the Federal research and experimentation credit is not signed into law, our effective tax rate for fiscal 2007 could approximate 38.0%. In fiscal 2006, we were informed by the Internal Revenue Service that our Federal income tax return for the fiscal year ended July 31, 2004 was selected for audit. The audit is in the early stages and additional income tax returns for other fiscal years may be examined. If the outcome of the audit differs materially from our original income tax provisions, it could have a material adverse impact on our results of operations and financial position. Comparison of Fiscal 2005 and 2004 Net Sales.Consolidated net sales were $307.9 million and $223.4 million for fiscal 2005 and 2004, respectively, representing an increase of $84.5 million, or 37.8%. The increase in net sales was driven by increased demand for our products in all three business segments.segments. Net sales in our telecommunications transmission segment were $174.5 million and $141.5 million for fiscal 2005 and 2004, respectively, an increase of $33.0 million, or 23.3%. The growth in this segment resulted primarily from a significant increase in demand for our satellite earth station products and incremental sales of our over-the-horizon microwave systems. In addition, favorable cumulative gross margin adjustments, resulting from lower than anticipated costs on two large over-the-horizon microwave system contracts, contributed $4.0 million and $0.8 million in net sales for fiscal 2005 and 2004, respectively. Memotec, which we acquired in May 2004, contributed $6.3 million and $1.3 million to net sales for fiscal 2005 and 2004, respectively. Our telecommunications transmission segment represented 56.7% of consolidated net sales for fiscal 2005 as compared to 63.3% for fiscal 2004. Net sales in our mobile data communications segment were $86.1 million and $59.8 million for fiscal 2005 and 2004, respectively, an increase of $26.3 million, or 44.0%. The increase in net sales was due, in part, to increased demand and continued deployment of our MTS system by the U.S. Army and higher sales of battlefield command and control applications to the U.S. military. Tolt, which we acquired in February 2005, contributed $11.3 million of net sales for fiscal 2005. Also, included in net sales for fiscal 2005 is a $3.8 million cumulative adjustment |
associated with the aforementioned change from the usage method to the straight-line method of accounting for MTS prepaid service time revenue. During fiscal 2005, at the request of the U.S. Army, we migrated our technology to the next generation. This migration included modifying our satellite transceivers to incorporate radio frequency identification (“RFID”) and a selected availability anti-spoofing module (“SAASM”). We also began enhancing our network and related software to provide increased speed and performance. In August 2005, we received the first orders from the U.S. Army for our next generation transceiver, known as the MT 2012. We currently expect to complete the technology migration during the first half of fiscal 2006 and expect to begin shipments of the MT 2012 during the first quarter of fiscal 2006. In addition to the normal quarterly funding fluctuations experienced in this segment, we may also see significant quarter-to-quarter fluctuations in the deployment of our MTS products during this product transition.OurOur mobile data communications segment represented 27.9% of consolidated net sales for fiscal 2005 as compared to 26.8% for fiscal 2004. Net sales in our RF microwave amplifiers segment were $47.3 million for fiscal 2005 compared to $22.1 million for fiscal 2004, an increase of $25.2 million, or 114.0%. The significant increase in net sales was primarily the result of increased demand for our defense relateddefense-related products. In particular, we experienced a marked increase in demand for our RF microwave amplifiers that are incorporated into improvised explosive device jamming systems. The sustainability of the defense related revenue base in this segment will be dependent upon the receipt of additional orders for improvised explosive device jamming system amplifiers or participation in additional large electronic warfare programs. Our RF microwave amplifiers segment represented 15.4% of consolidated net sales for fiscal 2005 as compared to 9.9% for fiscal 2004.
International sales (which include sales to domestic companies for inclusion in products which are sold to international customers) represented 44.0% and 45.4% of consolidated net sales for fiscal 2005 and 2004, respectively. Domestic commercial sales represented 13.9% and 14.5% of consolidated net sales for fiscal 2005 and 2004, respectively. Sales to the U.S. government (including sales to prime contractors to the U.S. government) represented 42.1% and 40.1% of consolidated net sales for fiscal 2005 and 2004, respectively. During fiscal 2005, except for sales to the U.S. government, one customer, a prime contractor, represented 10.2% of consolidated net sales. During fiscal 2004, except for sales to the U.S. government, one customer, another prime contractor, represented 12.5% of consolidated net sales. Direct and indirect sales to a North African country, including certain sales to the prime contractors mentioned above, during fiscal 2005 and 2004 represented 13.2% and 14.1%, respectively, of consolidated net sales. Gross Profit.Gross profit was $127.4 million and $87.5 million for fiscal 2005 and 2004, respectively, representing an increase of $39.9 million, or 45.6%. The increase in gross profit was primarily attributable to the increase in net sales and the gross profit percentage, which increased from 39.2% for fiscal 2004 to 41.4% for fiscal 2005. Fiscal 2005 includes favorable cumulative gross margin adjustments on two large over-the-horizon microwave system contracts and the MTS contract (including the MTS prepaid service time adjustment as discussed above), which had an aggregate impact of $5.8 million on gross profit compared to favorable cumulative gross margin adjustments during fiscal 2004 of $1.9 million. Excluding the sales and gross profit relating to prior periods from these adjustments, our gross margin percentage still improved significantly due to increased operating efficiencies. As mentioned above, in fiscal 2005, we continued to realize increased operating efficiencies. 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 addition, as part of our strategy to leverage the high-volume technology manufacturing center and further develop a diversified customer base, we produced and currently have on-hand $1.6 million of inventory relating to a contract from a third-party commercial customer to outsource its manufacturing. We currently expect to realize sales associated with this inventory during early fiscal 2006. In our mobile data communications segment, operating efficiencies were the result of incremental MTS and battlefield command and control applications funding from the U.S. Army. If the current levels of MTS and battlefield command and control applications funding are maintained or increased and if our transition to the next generation product line occurs without major unanticipated costs or delays, we believe we may continue to realize increased operating efficiencies. Our RF microwave amplifiers segment experienced increased operating efficiencies associated with significant operating leverage driven by the increase in sales and a more favorable product mix. Included in cost of sales for fiscal 2005 and 2004 are provisions for excess and obsolete inventory of $2.1 million and $1.2 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 and projected usage assumptions. Selling, General and Administrative Expenses.Selling, general and administrative expenses were $51.8 million and $36.0 million for fiscal 2005 and 2004, respectively, representing an increase of $15.8 million, or 43.9%. The increase in expenses is primarily attributable to (i) the increased level of net sales in all three of our business segments, (ii) expenses associated with the Memotec and Tolt acquisitions in May 2004 and February 2005, respectively, and (iii) costs of compliance with recent corporate governance regulations. As a percentage of consolidated net sales, selling, general and administrative expenses were 16.8% and 16.1% for fiscal 2005 and 2004, respectively. Research and Development Expenses.Research and development expenses were $21.2 million and $15.9 million for fiscal 2005 and 2004, respectively representing an increase of $5.3 million or 33.3%. Approximately $17.7 |
million and $14.2 million of such amounts, respectively, related to our 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 2005 and 2004, customers reimbursed us $3.0 million and $5.7 million, respectively, which is not reflected in the reported research and development expenses, but is included in net sales with the related costs included in cost of sales.
In-Process Research and Development Expense.In connection with the purchase of certain assets and liabilities of Memotec in fiscal 2004, we recorded a charge of $0.9 million for the write-off of in-process research and development. There was no in-process research and development expense in fiscal 2005. Amortization of Intangibles.Amortization of intangibles for fiscal 2005 and 2004 was $2.3 million and $2.1 million, respectively. The increase was attributable to the Memotec and Tolt acquisitions. Operating Income.Operating income for fiscal 2005 and 2004 was $52.1 million and $32.6 million, respectively. The $19.5 million, or 59.8%, increase was the result of the higher sales and gross profit, discussed above, partially offset by higher operating expenses. Operating income in our telecommunications transmission segment increased to $40.2 million for fiscal 2005 from $29.2 million for fiscal 2004 as a result of increased sales and associated operating efficiencies. Fiscal 2005 operating income included favorable cumulative gross margin adjustments on two large over-the-horizon microwave system contracts which aggregated $3.1 million, compared to $0.6 million in 2004. Our mobile data communications segment generated operating income of $11.9 million for fiscal 2005 compared to $9.5 million for fiscal 2004 as a result of increased sales and associated operating efficiencies. In addition, fiscal 2005 operating income included a $2.0 million favorable impact of the cumulative MTS contract adjustments discussed above in“Gross Profit,”compared to $1.0 million in fiscal 2004. This was partially offset by increased operating costs, including expenses associated with Tolt and our continued initiation of commercial marketing efforts. Operating income in our RF microwave amplifiers segment increased to $8.2 million for fiscal 2005 from $0.3 million for fiscal 2004 primarily as a result of the significant increase in net sales and improved operating efficiencies. Unallocated operating expenses increased to $8.2 million for fiscal 2005 from $6.4 million for fiscal 2004, due primarily to increased compensation expense and increased costs in connection with recent corporate governance regulations. Interest Expense.Interest expense increased from $1.4 million for fiscal 2004 to $2.7 million for fiscal 2005. Interest expense primarily represents interest expense associated with our 2.0% convertible senior notes issued in January 2004. Interest Income.Interest income for fiscal 2005 was $4.1 million, as compared to $0.9 million for fiscal 2004. The $3.2 million increase was due primarily to a higher average cash position resulting from the proceeds received from the issuance of our 2.0% convertible senior notes in January 2004 and cash provided by our operating activities, as well as an increase in interest rates. Provision for Income Taxes.The provision for income taxes was $16.8 million and $10.3 million for fiscal 2005 and 2004, respectively. The increase was the result of the significant increase in pre-tax profit in fiscal 2005. The effective tax rate was 31.4% and 32.0% in fiscal 2005 and 2004, respectively. The fiscal 2005 provision for income taxes was offset by a tax benefit of $1.1 million primarily relating to the reduction in the valuation allowance that was established for the extended write-off period of acquired in-process research and development. During fiscal 2005, it became more likely than not that the related deferred tax asset would be recoverable. Excluding the tax benefit, the effective tax rate for fiscal 2005 was 33.5%. Comparison of Fiscal 2004 and 2003
Net Sales.Consolidated net sales were $223.4 million and $174.0 million for fiscal 2004 and 2003, respectively, representing an increase of $49.4 million, or 28.4%. The increase was driven by significant growth in our telecommunications transmission and mobile data communications segments, as described below.
Net sales in our telecommunications transmission segment were $141.5 million for fiscal 2004, as compared to sales of $102.6 million for fiscal 2003, an increase of $38.9 million, or 37.9%. The significant sales growth in this segment resulted primarily from (i) increased demand for our satellite earth station products and (ii) incremental sales of over-the-horizon microwave systems relating to two contract awards received in fiscal 2003. Our telecommunications transmission segment represented 63.3% of consolidated net sales for fiscal 2004 as compared to 59.0% for fiscal 2003.
Net sales in our mobile data communications segment increased $11.7 million, or 24.3%, from $48.1 million for fiscal 2003 to $59.8 million for fiscal 2004. The significant sales growth in this segment was primarily the result of (i) increased demand for battlefield command and control applications by the U.S. Army and (ii) the continued rollout of our MTS system to the U.S. Army. Our mobile data communications segment represented 26.8% of consolidated net sales for fiscal 2004 as compared to 27.6% for fiscal 2003.
Net sales from our RF microwave amplifiers 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 certain of our commercial product lines, partially offset by increasing demand for our defense-related products. Our RF microwave amplifiers segment represented 9.9% of consolidated net sales for fiscal 2004 as compared to 13.4% for fiscal 2003.
International sales (including sales to domestic companies for inclusion in products which are sold to international customers) represented 45.4% and 39.7% of consolidated net sales for fiscal 2004 and 2003, respectively. Domestic commercial sales represented 14.5% and 16.1% of consolidated net sales for fiscal 2004 and 2003, respectively. Sales to the U.S. government (including sales to prime contractors to the U.S. government) represented 40.1% and 44.2% of consolidated net sales for fiscal 2004 and 2003, respectively.
During fiscal 2004 and 2003, sales to one customer, a prime contractor, represented 12.5% and 19.8% of consolidated net sales, respectively. 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 consolidated net sales.
Gross Profit.Gross profit was $87.5 million and $59.7 million for fiscal 2004 and 2003, respectively, representing an increase of $27.8 million, or 46.6%. The increase in gross profit was due to the significant increase in net sales, as well as an increase in the gross profit percentage. Gross profit, as a percentage of net sales, was 39.2% for fiscal 2004, as compared to 34.3% for fiscal 2003.
The increase in the gross profit, as a percentage of sales, was primarily due to (i) the higher proportion of our sales being in the telecommunications transmission segment, which typically realize higher margins than sales in our other two segments, (ii) a more favorable product mix within the mobile data communications segment, and (iii) increased operating efficiencies and overhead absorption in both the telecommunications transmission and mobile data communications segments. These increases were partially offset by a decrease in gross profit in our RF microwave amplifiers segment due to higher than anticipated costs to complete two contracts.
As mentioned above, in fiscal 2004, we realized increased operating efficiencies in our two largest segments. In our telecommunications transmission segment, such efficiencies were achieved, in part, by our continuing efforts to expand the usage of our high-volume manufacturing facility in Tempe, Arizona. The increased utilization and resulting operating efficiencies were the result of higher demand for our satellite earth station products, as well as the continued use of the facility by our other two segments for certain high-volume manufacturing requirements. In our mobile data communications segment, such efficiencies were the result of incremental MTS and battlefield command and control application funding from the U.S. Army.
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 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.
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 and projected usage assumptions. The provision for fiscal 2003 includes $0.4 million relating to certain product line discontinuances in our telecommunications transmission segment.
Selling, General and Administrative Expenses.Selling, general and administrative expenses were $36.0 million and $28.0 million for fiscal 2004 and 2003, respectively, representing an increase of $8.0 million, or 28.6%. The
increase was due to higher expenses relating to the significant increases in sales and profitability during fiscal 2004, including expenses related to recent acquisitions. Also contributing to the increase were higher insurance costs and compliance costs incurred in connection with recently enacted corporate governance regulations. As a percentage of consolidated net sales, selling, general and administrative expenses were 16.1% for fiscal 2004 and 2003.
Research and Development Expenses.Research and development expenses were $15.9 million and $12.8 million for fiscal 2004 and 2003, respectively. Approximately $14.2 million and $11.6 million of such amounts, respectively, related to our 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 2004 and 2003, customers reimbursed us $5.7 million and $3.7 million, respectively, which amounts are not reflected in the reported research and development expenses, but are included in net sales with the related costs included in cost of sales.
In-Process Research and Development Expense.In connection with the purchase of certain assets and liabilities of Memotec in fiscal 2004, we recorded a charge of $0.9 million for the write-off of in-process research and development. There was no in-process research and development expense in fiscal 2003.
Amortization of Intangibles.Amortization of intangibles for fiscal 2004 and 2003 was $2.1 million and $2.0 million, respectively. The amortization relates to intangibles with definite lives which we acquired in connection with various acquisitions.
Operating Income.Operating income for fiscal 2004 and 2003 was $32.6 million and $16.8 million, respectively. The $15.8 million increase was the result of the higher sales and gross profit, discussed above, partially offset by higher operating expenses.
Operating income 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 RF microwave amplifiers 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 higher than anticipated costs to complete two contracts. Unallocated operating expenses increased to $6.4 million for fiscal 2004 from $4.4 million for fiscal 2003 due primarily to higher incentive compensation expense, increased costs associated with recent corporate governance regulations and higher insurance costs.
Interest Expense.Interest expense decreased from $2.8 million for fiscal 2003 to $1.4 million for fiscal 2004. The decrease was due to the prepayment of our term loan, which bore interest at approximately 9.0%, in July 2003. Interest expense for fiscal 2004 primarily represents interest expense associated with our 2.0% convertible senior notes issued in January 2004.
Interest Income.Interest income for fiscal 2004 was $0.9 million, as compared to $0.3 million for fiscal 2003. The $0.6 million increase was due primarily to a higher average cash position resulting from the proceeds received from our private placement of common stock in July 2003 and issuance of our 2.0% convertible senior notes in January 2004.
Provision for Income Taxes.The provision for income taxes was $10.3 million and $4.6 million for fiscal 2004 and 2003, respectively, as a result of the significant increase in pre-tax profit. The effective tax rate was 32.0% in both periods.
Liquidity and Capital Resources Our unrestricted cash and cash equivalents increased to $251.6 million at July 31, 2006 from $214.4 million at July 31, 2005, from $163.3 million at July 31, 2004, representing an increase of $51.1$37.2 million. The increase in cash was driven by strong cash flow from operations, partially offset by capital expenditures necessary to support our anticipated future growth and the acquisition of Tolt. |
Net cash provided by operating activities net of effects of acquisitions, was $56.1$44.3 million for fiscal 2005.2006. Such amount primarily reflects (i) net income of $36.7$45.3 million, plus the impact of depreciation and amortization and the provisions for doubtful accounts and inventory reserves aggregating $12.0 million and the income tax benefit from stock-related transactions
aggregating $20.5 million, (ii) deferred income taxstock-based compensation expense of $2.8$5.7 million, and (iii)offset by changes in working capital balances.balances, most notably an increase in accounts receivable and inventory associated with the increase in net sales.
Net cash used in investing activities for fiscal 20052006 was $12.3$13.5 million, primarily representing capital expenditures andincluding expenditures related to the acquisitioncontinued expansion of Tolt. During the year, our mobile data communications segment completed the move to its new facility in Germantown, Maryland, including the construction of a state-of-the-art network operations center, and we expanded our high-volume technology manufacturing center located in Tempe, Arizona.Arizona, as well as continued enhancements to our network operations facility in Germantown, Maryland. We currently expect capital expenditures for fiscal 20062007 to be between $12.0 million and $14.0 million. Net cash provided by financing activities for fiscal 20052006 was $7.4$6.4 million, due primarily to the proceeds from stock option exercises and the sale of shares under our employee stock purchase plan.plan shares aggregating $2.5 million and a $4.1 million excess income tax benefit from the exercise of stock options. Financing Arrangement On January 27, 2004, we issued $105.0 million of our 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 $101.2 million after deducting the initial purchaser’s discount and other transaction costs. For further information concerning this financing, see“Notes to Consolidated Financial Statements – Note 8(a)8 - 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, 20052006 will materially adversely affect our liquidity. At July 31, 2005,2006, we had contractual cash obligations to repay our 2.0% convertible senior notes, capital lease and operating lease obligations (including satellite lease expenditures relating to our mobile data communications segment contracts) and the financing of a purchase of proprietary technology. Payments due under these long-term obligations, excluding interest on the 2.0% convertible senior notes, are as follows: | | | | | | | | | | | | | | | | | | | | | | Obligations due by fiscal years | | | | |
| | | | | Total | | 2006 | | 2007
and
2008 | | 2009
and
2010 | | After
2010 | | | | |
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| | | | | | | | | | | | | | | | | | | | 2.0% convertible senior notes | | $ | 105,000,000 | | | — | | | — | | | — | | | 105,000,000 | | | | | | | | | | | | | | | | | | | | Operating lease commitments | | | 17,562,000 | | | 8,492,000 | | | 4,503,000 | | | 3,356,000 | | | 1,211,000 | | | | | | | | | | | | | | | | | | | | Other obligations | | | 719,000 | | | 276,000 | | | 330,000 | | | 113,000 | | | — | | | | |
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| | | | | | | | | | | | | | | | | | | | Total contractual cash obligations | | $ | 123,281,000 | | | 8,768,000 | | | 4,833,000 | | | 3,469,000 | | | 106,211,000 | | | | |
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| Obligations Due by Fiscal Years | |
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| |
|---|
| Total | | 2007 | | 2008
and
2009 | | 2010
and
2011 | | After
2011 | |
|---|
|
| |
|---|
| | Maturity of our 2.0% convertible
senior notes | $ | 105,000,000 | | — | | — | | — | | 105,000,000 | | | | | | | | | | | | | | | | Operating lease commitments | | 17,956,000 | | 8,565,000 | | 5,325,000 | | 3,268,000 | | 798,000 | | | | | | | | | | | | | | | | Other obligations | | 443,000 | | 180,000 | | 263,000 | | — | | — | | | | | | | | | | | | | | | |
| |
| |
| |
| |
| | | | | Total contractual cash obligations | $ | 123,399,000 | | 8,745,000 | | 5,588,000 | | 3,268,000 | | 105,798,000 | | | |
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| |
| |
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| As further discussed in“Notes to Consolidated Financial Statements – Note 8 - 2.0% Convertible Senior Notes due 2024,” we may, at our option, redeem some or all of the notes on or after February 4, 2009. Holders of our 2% convertible senior 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, 2009 and upon certain events. 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, 2005,2006, the balance of these agreements was $1.3$2.8 million. Cash we have pledged against such agreements aggregating $1.0 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 funds or raise additional equity capital. |
Legal Proceedings We are subject to certain legal actions, which arise in the normal course of business. Although 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.
During fiscal 2005, two of our leased facilities located in Florida experienced hurricane damage to both leasehold improvements and personal property. As of July 31, 2005,2006, we have substantially completed all restoration efforts relating to the hurricane damage. Wedamage and have recorded an $0.8 million insurance recovery receivable and accrued a total of $2.2 million for hurricane related costs. Despite a written agreement with ourthe general contractor whichthat we believe limits our liability for the cost of the repairs to the amount of insurance proceeds ultimately received. Our general contractor is inreceived from our insurance company, a dispute has arisen with certain of its subcontractors. As a result, we placed approximately $1.4 million, which represents the amount of insurance proceeds still payable to the general contractor, into an escrow account with the 9th Judicial Circuit Court in Orange County, Florida. We are awaiting the Court’s direction as to how these funds should be disbursed. We are also continuing our efforts to work with the insurance carrier and the general contractor and its subcontractorsa certain subcontractor over the subcontractor’s demand for payment directly from us (by virtue of a purported assignment of rights and other grounds) in an amount exceeding the insurance proceeds by $0.8 million, plus late charges, interest, fees, costs and certain treble damages. As a result of this dispute, we deposited approximately $1.4 million, representing the balance of the insurance proceeds received, in our attorneys’ trust account and filed a complaint for declaratory judgment in the 9th Judicial Circuit Court for Orange County, Florida. The general contractor and the subcontractor have filed separate and independent actions against us and our insurance company, all of which have now been consolidated under our original action. The Court has scheduled December 1, 2006 as the discovery cutoff and trial for February 13, 2007; however, these dates are subject to finalizechange as the amount of any additional insurance proceeds.litigation progresses. We do not expect that the outcome of this matter will have a material effect on our consolidated financial position or results of operations.position. Recent Accounting Pronouncements Impact of SFAS No. 123(R),“Share-Based Payments”
In December 2004,On September 13, 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), which requires companies to expense the estimated fair value of employee stock optionsSecurities and similar awards. SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB Opinion No. 25. In March 2005, the Securities Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”108”) which generally provides the SEC staff’s views regarding SFAS No. 123(R). SAB 107 providesinterpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The guidance is applicable for our fiscal 2007. We are not yet in a position to determine the expected volatility and expected term inputs into a valuation model used to determine the fair value of share-based payments.what, if any, effects SAB 107 also provides guidance related to numerous aspects of the adoption of SFAS No. 123(R) such as income taxes, capitalization of compensation costs, modification of share-based payments prior to adoption and the classification of expenses. We108 will apply the principles of SAB 107 in conjunction with our adoption of SFAS No. 123(R).
Beginning with the first quarter of fiscal 2006, we will adopt the provisions of SFAS No. 123(R) using a modified prospective application. Under the modified prospective application, SFAS No. 123(R), which provides certain changes to the methodology for valuing share-based compensation among other changes, will apply to new awards and to awards outstanding on the effective date that are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under SFAS No. 123.
At July 31, 2005, the total unamortized compensation expense related to the 2,328,690 unvested options that were outstanding, as determined in accordance with SFAS No. 123, was approximately $8.5 million before income taxes. This amount will be amortized over the remaining vesting periods. In addition, during the first quarter of fiscal 2006 (through September 22, 2005), our Executive Compensation Committee granted a total of 606,000 nonqualified stock options. Based on the total number of outstanding options (through September 22, 2005), we expect to record amortization of stock compensation expense in fiscal 2006 of approximately $5.3 million before income taxes, of which $1.3 million is expected to be recognized during the first quarter of fiscal 2006.
SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under current accounting rules. This requirement will reduce net operating cash flow and increase net financing cash flow in periods after adoption. Total cash flow will remain unchanged.
Impact of Other Recent Accounting Pronouncements
In October 2004, the FASB ratified the consensus reached by the EITF with respect to Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings Per Share.” The EITF’s 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. EITF No. 04-8 was effective for reporting periods ending after December 15, 2004. As further discussed in Note 1 to the Consolidated Financial Statements, we have (i) included the impact of the assumed conversion of our 2.0% convertible senior notes in calculating diluted EPS commencing in the fiscal quarter ended January 31, 2005 and (ii) restated prior periods’ diluted EPS for comparative purposes.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs - an amendment of Accounting Research Bulletin No. 43, Chapter 4. SFAS No. 151 requires all companies to recognize a current period charge for abnormal amounts of idle facility expense, freight, handling costs and wasted materials. This statement also requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. We adopted this statement on August 1, 2005 and it has not had a material impact on our consolidated financial statements.
In January 2003, as revised in December 2003,July 2006, the FASB issuedFinancial Accounting Standards Board (“FASB”) released FASB Interpretation No. (“FIN”) 46, “Consolidation48, “Accounting for Uncertainty in Income Taxes, an interpretation of Variable Interest Entities, an InterpretationFASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law and prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of ARB No. 51.” FIN 46 requires certain variable interest entities (“VIE”)uncertain tax positions taken or expected to be consolidated bytaken in income tax returns. FIN 48 prescribes a two-step evaluation process for tax positions. The first step is recognition based on a determination of whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the primary beneficiarytechnical merits of the entity ifposition. The second step is to measure a tax position that meets the equity investorsmore-likely-than-not threshold. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties. In March 2005, the FASB issued FASB Staff Positionstatements. FIN 46 (R)-5, which addresses whether a reporting enterprise should consider whether it holds an implicit variable interest48 is effective beginning in a VIE or a potential VIE when specific conditions exist. The guidance, which applies to certain leases between related parties, became effective during the fourthour first quarter of fiscal 2005. As discussed2008. The cumulative effects, if any, of applying FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. We have commenced the process of evaluating the potential effects of FIN 48 on our consolidated financial statements and are not yet in Note 13(a)a position to the Consolidated Financial Statements, we lease our corporate headquarters and Melville, New York manufacturing facility from a partnership controlled by our Chairman, Chief Executive Officer and President. We evaluated the relationship between us and this partnership and determined that we do notdetermine what, if any, effects FIN 48 will have an implicit variable interest in the partnership. Accordingly, there was no impact on our consolidated financial statements. In June 2006, the EITF reached a consensus on EITF 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” (“EITF 06-3”). EITF 06-3 provides that taxes imposed by a governmental authority on a revenue producing transaction between a seller and a customer should be shown in the income statement on either a gross or a net basis, based on the entity’s accounting policy, which should be disclosed pursuant to APB Opinion No. 22, “Disclosure of Accounting Policies.” If such taxes are significant, and are presented on a gross basis, the amounts of those taxes should be disclosed. EITF 06-3 will be effective beginning with our third quarter of fiscal 2007. We are currently evaluating the impact EITF 06-3 will have on the presentation of our consolidated financial statements. In June 2006, the EITF reached a consensus on EITF 05-1, “Accounting for the Conversion of an Instrument that Becomes Convertible Upon the Issuer’s Exercise of a Call Option” (“EITF 05-1”). This guidance requires that the issuance of equity securities to settle an instrument (pursuant to the instrument’s original conversion terms) that becomes convertible upon the issuer’s exercise of a call option should be accounted for as a conversion if the debt instrument contained a substantive conversion feature as of its issuance date (i.e., no gain or loss should be recognized related to the equity securities issued to settle the instrument). The guidance is effective for all conversions within its scope that result from the exercise of call options in interim or annual reporting periods beginning after June 28, 2006. In the future, if we issue common stock pursuant to the conversion terms to settle our 2% convertible senior notes, we would not recognize a gain or loss because our notes have substantive conversion features as defined by EITF 05-1. |
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which changes the requirements for the accounting and reporting of a change in accounting principle.principle (“SFAS No. 154”). SFAS No. 154 applies to all voluntary changes in accounting principles, as well as to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS No. 154 eliminates the requirement to include the cumulative effect of changes in accounting principle in the income statement and instead requires that changes in accounting principle be retroactively applied. A change in accounting estimate continues to be accounted for in the period of change and future periods if necessary. A correction of an error continues to be reported by restating prior period financial statements. SFAS No. 154 applies to accounting changes and correctionsis effective for our first quarter of errors made on or after January 1, 2006.fiscal 2007. In JuneMarch 2005, the FASB issued FASB Staff Positioninterpretation FIN No. 143-1,47, “Accounting for Electronic Equipment WasteConditional Asset Retirement Obligations” to address the accounting for obligations associated with Directive 2002/96/EC on Waste Electrical and Electronic Equipment adopted by the European Union (“EU”FIN 47”). This guidance is effective beginningFIN 47 clarifies that the term conditional asset retirement obligation as used in SFAS 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the latercontrol of the first reporting period ending after June 8, 2005 or the date of adoption of the law by the applicable EU member country. As of July 31, 2005, the EU member countries where the majority ofentity. We adopted FIN 47 in fiscal 2006 and it had no material effect on our sales within the EU are made have not yet implemented the Directive. The impact of this guidance for the fiscal year ended July 31, 2005 for our “historical waste” (as defined by the EU) was not material and we continue to evaluate these new laws and the related financial impact in the countries in which our products are sold. 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 10-K. The risk factors noted below and other factors noted throughout this Form 10-K could cause our actualconsolidated financial condition or results to differ significantly from those contained in any forward-looking statement.
Due to many factors, including the amount of business represented by large contracts, new orders, net sales and our operating results are difficult to forecast and may be volatile.
We have experienced, and will experience in the future, significant fluctuations in new orders, net sales and operating results, including our net income and earnings per share, from quarter-to-quarter. One reason for this is that a significant portion of our business — primarily the over-the-horizon microwave systems of our telecommunications transmission segment, a portion of our RF microwave amplifiers 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. 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 subsystems; political instability; regulatory developments; and general economic conditions. Accordingly, you should not rely on period-to-period comparisons as indications of our future performance because these comparisons may not be meaningful.
Our business, results of operations, liquidity and financial position 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 42.1%, 40.1% and 44.2% of our consolidated net sales for the fiscal years ended July 31, 2005, 2004 and 2003, respectively. Approximately 37.7% of our backlog at July 31, 2005 consisted of orders from the U.S. government. We expect such business to represent a significant portion of our consolidated net sales for the foreseeable future. U.S. government business exposes us to various risks, including:
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| unexpected contract or project terminations or suspensions;
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| unpredictable order placements, reductions or cancellations;
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| reductions in government funds available for our projects due to government policy changes, budget cuts and other spending priorities;
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| penalties arising from post-award contract audits;
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| cost audits in which the value of our contracts may be reduced;
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| 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
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| 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.
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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 results of such audits, the U.S. government may adjust our contract-related costs and fees.
We obtain U.S. government contracts through a competitive bidding process. We cannot assure you that we will continue to win competitively awarded contracts or that awarded contracts will generate sufficient net sales to result in profitability.
All of our businesses are subject to rapid technological change; we must keep pace with changes to compete successfully.
We are engaged in businesses characterized by rapid technological change, evolving industry standards, frequent new product announcements and enhancements, and changing customer demands. The introduction of products and services embodying new technologies and the emergence of new industry standards could render our products and services obsolete or non-competitive. The technology used in our products and services evolves rapidly, and our business position depends, in large part, on the continuous refinement of our scientific and engineering expertise and the development, either through internal research and development or acquisitions, of new or enhanced products and technologies. We may not have the economic or technological resources to be successful in such efforts and we may not be able to identify and respond to technological improvements made by our competitors in a timely or cost-effective fashion. A significant technological breakthrough by others, including smaller competitors or new firms, could have a material adverse impact on our business, results of operations and financial condition.
Our dependence on international sales may adversely affect us.
Sales for use by international customers (including sales to prime contractors’ international customers) represented approximately 44.0%, 45.4% and 39.7% of our consolidated net sales for the fiscal years ended July 31, 2005, 2004 and 2003, respectively. Approximately 51.9% of our backlog at July 31, 2005 consisted of orders for use by foreign customers. Direct and indirect sales to a North African country during the fiscal year ended July 31, 2005 were 13.2% of consolidated net sales. We expect that international sales will continue to be a substantial portion of our consolidated sales.
These sales expose us to certain risks, including barriers to trade, fluctuations in foreign currency exchange rates (which may make our products less price-competitive), political and economic instability, exposure to public health epidemics, 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 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 U.S., 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 U.S.
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. Since 2003, the telecommunications and aviation sectors have stabilized and are starting to grow again; however, if the economy slows some of our customers may reduce their budgets for spending on telecommunications and aviations 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 amplifiers segments, which are exposed to the telecommunications and aviation sectors.
Our mobile data communications business is subject to unique risks.
Although sales and earnings have increased significantly in the past few years, our mobile data communications business has a relatively limited operating history compared to our other business segments. It is subject to many 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 business include the following:
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| Our contract for the U.S. Army logistics command’s MTS system currently obligates us to provide (i) hardware, including mobile satellite transceivers, through July 2006, and (ii) satellite and other services, through July 2007, at fixed prices and other terms set forth in the contract. The U.S. Army is not obligated to purchase any equipment or services under the contract. Orders and related sales relating to this contract are subject to unpredictable funding and deployment decisions.
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| The MTS contract is not subject to automatic renewal or extension upon its scheduled expiration in July 2007. As such, the U.S. Army may decide to recompete the contract in which case all or a portion of our efforts relating to MTS could be awarded to another party in the future. If the MTS contract is not renewed, extended or if we fail to succeed in a recompete process, our business, results of operations and financial condition would be materially and adversely impacted.
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| 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.
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| 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.
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| In general, as we seek to grow our mobile data communications 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 position.
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| We lease the satellite capacity necessary to operate our system from third party satellite networks. Our ability to grow and remain profitable depends on the ability of our satellite network providers to provide sufficient network capacity, reliability and security to our customers. If our satellite network providers were to increase the prices of their services, or to suffer operational or technical failures, our business, results of operation and financial condition could be adversely affected.
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| 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-based 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 penetration into the commercial market in a significant way.
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| All satellite communications are subject to the risk that a satellite or ground station failure or a natural disaster may interrupt service. Interruptions in service could have a material adverse impact on our business, results of operations and financial condition. Should we be required to restore service on another system in the event of a satellite failure, our costs could increase which would have an adverse effect on our business, results of operations and financial condition.
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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 net 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 adverse impact on our business, results of operations and financial condition.
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 other increases in the cost of performance.
Adverse regulatory changes could impair our ability to sell products.
Our products are incorporated into wireless communications systems that must comply with various government regulations, including those of the Federal Communications Commission (“FCC”). Regulatory changes, including changes in the allocation and availability of frequency spectrum, and in the military standards and specifications that define the current satellite networking environment, could materially harm our business by (i) restricting development efforts by us and our customers, (ii) making our current products less attractive or obsolete, or (iii) increasing the opportunity for additional competition.
Changes in, or our failure to comply with, applicable regulations could materially harm our business. In addition, the increasing demand for wireless communications has exerted pressure on regulatory bodies worldwide to adopt new standards and reassign bandwidth for these products and services. The reduced number of available frequencies for other products and services and the time delays inherent in the government approval process of new products and services have caused and may continue to cause our customers to cancel, postpone or reschedule their installation of communications systems including their satellite, over-the-horizon microwave, or terrestrial line-of-sight microwave communication systems. This, in turn, could have a material adverse effect on our sales of products to our customers.
In addition, the EU has adopted two directives to facilitate the recycling of electrical and electronic equipment sold in the EU. The first of these is the Waste Electrical and Electronic Equipment directive, which directs EU member states to enact laws, regulations, and administrative provisions to ensure that producers of electrical and electronic equipment are financially responsible for the collection, recycling, treatment, and environmentally sound disposal of certain products placed on the market after August 13, 2005, and from products in use prior to that date that are being replaced. The EU has also adopted the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) directive. The RoHS directive restricts the use of lead, mercury, and certain other substances in electrical and electronic products placed on the market in the EU after July 1, 2006.
Similar laws and regulations have been or may be enacted in other regions, including in the U.S., China, and Japan. Other environmental regulations may require us to reengineer our products to utilize components that are more environmentally compatible, and such reengineering and component substitution may result in additional costs to us. There can be no assurance that such existing or future laws will not have a material adverse effect on our business.
We face risks from the uncertainty of prevailing economic and political conditions.
Current global political and economic conditions are uncertain. As a result, it is difficult to estimate the level of expansion, if any, for the global or U.S. economies generally or the markets in which we participate. Because our budgeting and forecasting process relies on estimates of growth in the 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 have a material adverse impact on our business, results of operations and financial condition.
Acquisitions and strategic investments may divert our resources and management attention; results may fall short of expectations.
We intend to continue pursuing selected acquisitions of and investments in businesses, technologies and product lines as a key component of our growth strategy. Any future acquisition or investment may result in the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of debt and amortization expenses or in process research and development charges related to intangible assets. Acquisitions involve numerous risks, including:
| | | | •
| difficulties in the integration and assimilation of the operations, technologies, products and personnel of an acquired business;
| | | | | •
| diversion of management’s attention from other business concerns;
| | | | | •
| increased expenses associated with the acquisition; and
| | | | | •
| potential loss of key employees or customers of any acquired business.
|
We cannot assure you that our acquisitions will be successful and will not adversely affect our business, results of operations or financial condition.
The loss of key technical or management personnel could adversely affect our business.
Our success depends on the continued contributions of key technical management personnel, including the key corporate and operating unit management at each of our subsidiaries. Many of our key personnel, particularly the key engineers of our subsidiaries, would be difficult to replace, and are not subject to employment or noncompetition agreements. Our growth and future success will depend in large part upon our ability to attract and retain highly qualified engineering, sales and marketing personnel. Competition for such personnel from other companies, academic institutions, government entities and other organizations is intense. Although we believe that we have been successful to date in recruiting and keeping key personnel, we may not be successful in attracting and
retaining the personnel we will need to continue to grow and operate profitably. Also, the management skills that have been appropriate for us in the past may not continue to be appropriate if we continue to grow and diversify.
Our markets are highly competitive.
The markets for our products are highly competitive. We cannot assure you that we will be able to successfully compete or that our competitors will not develop new technologies and products that are more commercially effective than our own. We expect the 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 telecommunications services. Many of our competitors have financial, technical, marketing, sales and distribution resources greater than ours.
Protection of our intellectual property is limited; we are subject to the risk of third party claims of infringement.
Our businesses rely in large part upon our proprietary scientific and engineering “know-how” and production techniques. Historically, patents have not been an important part of our protection of our intellectual property rights. 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 impact on our business, results of operations and financial condition.
Our ability to compete successfully and achieve future revenue growth will depend, in part, on our ability to protect our proprietary technology and operate without infringing upon the rights of others. We may fail to do so. In addition, the laws of certain countries in which our products are or may be sold may not protect our products and intellectual property rights to the same extent as the laws of the U.S.
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.
Our operations are subject to environmental laws and regulations and we may be subject to environmental liabilities.
We engage in manufacturing and are subject to a variety of local, state and federal governmental 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. The failure to comply with current or future environmental requirements could result in the imposition of substantial fines, suspension of production, alteration of our manufacturing processes or cessation of operations that could have a material adverse impact on our business, results of operations and financial condition.
In addition, the handling, treatment or disposal of hazardous substances by us or our predecessors may have resulted or could in the future result in contamination requiring investigation or remediation, or leading to other liabilities, any of which could have a material adverse impact on our business, results of operations and financial condition.
Recently enacted and proposed changes in securities laws and regulations are increasing our costs.
The Sarbanes-Oxley Act of 2002 that became law in July 2002 requires changes in some of our corporate governance, public disclosure and compliance practices. The Act also requires the Securities and Exchange Commission 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.
We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002. Identification of material weaknesses in internal controls, if identified, could indicate a lack of proper controls to generate accurate financial statements.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and related SEC rules, we are required to furnish a report of management’s assessment of the effectiveness of our internal controls as part of our Annual Report on Form 10-K. Our auditors are required to attest to and report on management’s assessment, as well as provide a separate opinion. To issue our report, we document our internal control design and the testing processes that support our evaluation and conclusion, and then we test and evaluate the results. There can be no assurance, however, that we will be able to remediate material weaknesses, if any, that may be identified in future periods, or maintain all of the controls necessary for continued compliance. There likewise can be no assurance that we will be able to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly traded companies.
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 U.S. 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 in the future 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” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes 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.
The level of our indebtedness, among other things, could:
| | | | •
| make it difficult for us to make payments on our debt;
|
| | | | •
| make it difficult for us to obtain any necessary financing in the future for working capital, acquisitions, capital expenditures, debt service requirements or other purposes;
| | | | | •
| limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and
| | | | | •
| make us more vulnerable in the event of a downturn in our business.
|
Changes in financial accounting standards related to stock option expenses are expected to have a significant effect on our reported results.
The FASB recently issued SFAS No. 123(R), a revised standard that requires that we record compensation expense in the statement of operations for employee stock options using the fair value method. The adoption of the new standard is expected to have a significant effect on our reported earnings, although it will not affect our total cash flows, and could adversely impact our ability to provide accurate guidance on our future reported financial results due to the variability of the factors used to establish the value of stock options. As a result, the adoption of the new standard in fiscal 2006 could impact the value of our common stock and may result in greater stock price volatility.
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 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:
| | | | •
| future announcements concerning us or our competitors;
| | | | | •
| receipt or non-receipt of substantial orders for products and services;
| | | | | •
| results of technological innovations;
| | | | | •
| new commercial products;
| | | | | •
| changes in recommendations of securities analysts;
| | | | | •
| government regulations;
| | | | | •
| proprietary rights or product or patent litigation;
| | | | | •
| changes in economic conditions generally, particularly in the telecommunications sector;
| | | | | •
| changes in market conditions generally, particularly in the market for small cap stocks; and
| | | | | •
| limited public float.
|
Shortfalls in our sales or earnings in any given period relative to the levels expected by securities analysts could immediately, significantly and adversely affect the trading price of our common stock.
We have never declared or paid cash dividends.
We have never declared or paid a cash dividend and do not intend to declare any cash dividends on our common stock in the foreseeable future.
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 investment of available cash balances. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. If the interest rate we receive on our investment of available cash balances were to change by 10%, our interest income would be impacted by approximately $0.4$1.1 million. 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 Reports of Independent Registered Public Accounting Firm, Consolidated Financial Statements, Notes to Consolidated Financial Statements and Related Financial Schedule are listed in the Index to Consolidated Financial Statements and Schedule annexed hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure 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. |
Management’s Report on Internal Control Over Financial Reporting Management of Comtech is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accounted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of July 31, 2005.2006. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on our assessment, we determined that, as of July 31, 2005,2006, the Company’s internal control over financial reporting was effective based on those criteria. The Company acquired certain assets and assumed certain liabilities of Tolt in February 2005. Excluded from the Company’s assessment of internal controls over financial reporting as of July 31, 2005, is the internal control over financial reporting of Tolt. Tolt had total assets of $9.8 million and net sales of $11.3 million as of and for the fiscal year ended July 31, 2005.
KPMG LLP (“KPMG”), our independent registered public accounting firm, has performed an audit of our assessment of the effectiveness of the Company’s internal control over financial reporting as of July 31, 2005.2006. This audit is required to be performed in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our independent auditors were given unrestricted access to all financial records and related data. KPMG’s audit reports appear on pages F-2 and F-3 of this annual report. Changes In Internal Control Over Financial Reporting There have been no changes in our internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during our fiscal quarter ended July 31, 2005,2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Certain information concerning directors and officers is incorporated by reference to our Proxy Statement for the Annual Meeting of Stockholders to be held December 6, 20055, 2006 (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. 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 our fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information regarding securities authorized for issuance under equity compensation plans and certain information regarding security ownership of certain beneficial owners and management is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions 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. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding principal accountant fees and services is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year. |
PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES | | | (a)
| (1)
| The Registrant’s financial statements together with a separate index are annexed hereto.
| | (2)
| The Financial Statement Schedule listed in a separate index is annexed hereto.
| | (3)
| (a) (1) The Registrant’s financial statements together with a separate index are annexed hereto. (2) The Financial Statement Schedule listed in a separate index is annexed hereto. (3) Exhibits required by Item 601 of Regulation S-K are listed below. | |
| Exhibit Number | | Description of Exhibit | | Incorporated By
| | | | | Reference to Exhibit | | |
| |
| |
| | | 3(a)(i) | | Restated Certificate of Incorporation of the Registrant | | | | | | | | | | | | 3(a)(ii) | | Amended and Restated By-Laws of the Registrant | | Exhibit 3(c) to the Registrant’s 1998 Form 10-K | | | | | | | | | | 4(a) | | Rights Agreement dated as of December 15, 1998 between the Registrant and American Stock Transfer and Trust Company, as Rights Agent | | Exhibit 4(1) to the Registrant’s Form 8-A/A dated December 23, 1998 | | | | | | | | | | 4(b) | | Indenture by and between the Registrant and The Bank of New York, as trustee, dated as of January 27, 2004, including form of Note | | Exhibit 4.2 to the Registrant’s Form S-3 (File No. 333-114268) | | | | | | | | | | 4(c) | | Registration Rights Agreement dated as of January 27, 2004, between the Registrant and Bear, Stearns & Co. Inc., as Initial Purchaser | | Exhibit 4.4 to the Registrant’s Form S-3 (File No. 333-114268) | | | | | | | | | | 10(a)* | | Amended and restated Employment Agreement dated June 2, 2003, between the Registrant and Fred Kornberg | | Exhibit 10(a) to the Registrant’s Form 10-Q for quarter ended April 30, 2003 | | | | | | | | | | 10(b)* | | Amended and restated Employment Agreement dated June 2, 2003, between the Registrant and Robert G. Rouse | | Exhibit 10(b) to the Registrant’s Form 10-Q for quarter ended April 30, 2003 | | | | | | | | | | 10(c) | | Lease and amendment thereto on the Melville, New York Facility | | Exhibit 10(k) to the Registrant’s 1992 Form 10-K | | | | | | | | | | 10(d)* | | Amended and restated 1993 Incentive Stock Option Plan | | Appendix A to the Registrant’s Proxy Statement dated November 3, 1997 | | | | | | | | | | 10(e) | | Movement Tracking System Contract between Comtech Mobile Datacom Corp. and U.S. Army’s CECOM Acquisition Center dated June 24, 1999 (certain portions of this agreement have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment) | | Exhibit 10(g) to the Registrant’s 1999 Form 10-K | | | | | | | | | | 10(f)(1)* | | 2000 Stock Incentive Plan | | Appendix A to the Registrant’s Proxy Statement dated November 8, 1999 | | | | | | | | | | 10(f)(2)* | | Amendment to the 2000 Stock Incentive Plan | | Appendix A to the Registrant’s Proxy Statement dated November 6, 2000 | | | | | | | | | | 10(f)(3)* | | Amendment to the 2000 Stock Incentive Plan | | Exhibit 10(g)(3) to the Registrant’s 2002 Form 10-K | | | | | | | | | | 10(f)(4)* | | Amendment to the 2000 Stock Incentive Plan | | Exhibit 10(h)(4) to the Registrant’s 2003 Form 10-K | | | | | | | | | | 10(f)(5)* | | Amendment to the 2000 Stock Incentive Plan | | Exhibit 10(g)(5) to the Registrant’s 2004 Form 10-K | | | | | | | | | | 10(f)(6)* | | Amendment to the 2000 Stock Incentive Plan | | Exhibit 10.1 to the Registrant’s Form 8-K filed December 12, 2005 | | | | | | | | | | 10(f)(7)* | | Form of Stock Option Agreement pursuant to the 2000 Stock Incentive Plan | | Exhibit 10(f)(7) to the Registrant’s 2005 Form 10-K | | | | | | | | | | 10(f)(8)* | | Form of Stock Option Agreement for Non-employee Directors pursuant to the 2000 Stock Incentive Plan | | | | | | | | | | |
| Exhibit Number | | Description of Exhibit | | Incorporated By
Reference to Exhibit | |
| |
| |
| | | 10(g)* | | 2001 Employee Stock Purchase Plan | | Appendix B to the Registrant’s Proxy Statement dated November 6, 2000 | | | 21 | | Subsidiaries of the Registrant | | | | | | | | | | | | 23 | | Consent of Independent Registered Public Accounting Firm | | | | | | | | | | | | 31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | | | 31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | | | 32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | | | 32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | |
| | * | Management contract or compensatory plan or arrangement. |
| Exhibit
Number
| | Description of Exhibit
| | Incorporated By
Reference to Exhibit
|
| |
| |
| | 3(a)
| | Certificate of Incorporation of the Registrant
| | Exhibit 3(a) to the Registrant’s 1987 Form 10-K
| | | | | | | | 3(b)
| | Amendment of the Certificate of Incorporation effecting the 5 to 1 reverse stock split
| | Exhibit 3(b) to the Registrant’s 1991 Form 10-K
| | | | | | | | 3(c)
| | Amended and restated By-Laws of the Registrant
| | Exhibit 3(c) to Registrant’s 1998 Form 10-K
| | | | | | | | 3(d)
| | Amendment to the Certificate of Incorporation increasing authorized shares to 12 million
| | Exhibit 3(d) to the Registrant’s 1994 Form 10-K
| | | | | | | | 3(e)
| | Amendment to the Certificate of Incorporation increasing the authorized shares to 17 million
| | Exhibit 3(e) to Registrant’s 1998 Form 10-K
| | | | | | | | 3(f)
| | Form of Certificate of Designation of the Series A Junior Participating Preferred Stock
| | Exhibit 4(1) to the Registrant’s Form 8-A/A dated December 23, 1998
| | | | | | | | 3(g)
| | Amendment to the Certificate of Incorporation increasing the authorized shares to 32 million
| | Exhibit 3(g) to Registrant’s 2000 Form 10-K
| | | | | | | | 4(a)
| | Rights Agreement dated as of December 15, 1998 between the Registrant and American Stock Transfer and Trust Company, as Rights Agent
| | Exhibit 4(1) to the Registrant’s Form 8-A/A dated December 23, 1998
| | | | | | | | 4(b)
| | Indenture by and between the Registrant and The Bank of New York, as trustee, dated as of January 27, 2004, including form of Note
| | Exhibit 4.2 to the Registrant’s Form S-3 (File No. 333-114268)
| | | | | | | | 4(c)
| | Registration Rights Agreement dated as of January 27, 2004, between the Registrant and Bear, Stearns & Co. Inc., as Initial Purchaser
| | Exhibit 4.4 to the Registrant’s Form S-3 (File No. 333-114268)
| | | | | | | | 10(a)
| | Amended and restated Employment Agreement dated June 2, 2003, between the Registrant and Fred Kornberg
| | Exhibit 10(a) to the Registrant’s Form 10-Q for quarter ended April 30, 2003
| | | | | | | | 10(b)
| | Amended and restated Employment Agreement dated June 2, 2003, between the Registrant and Robert G. Rouse
| | Exhibit 10(b) to the Registrant’s Form 10-Q for quarter ended April 30, 2003
| | | | | | | | 10(c)
| | Lease and amendment thereto on the Melville, New York Facility
| | Exhibit 10(k) to the Registrant’s 1992 Form 10-K
| | | | | | | | 10(d)
| | Amended and restated 1993 Incentive Stock Option Plan
| | Appendix A to the Registrant’s Proxy Statement dated November 3, 1997
| | | | | | | | 10(e)
| | Movement Tracking System Contract between Comtech Mobile Datacom Corp. and U.S. Army’s CECOM Acquisition Center dated June 24, 1999 (certain portions of this agreement have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment)
| | Exhibit 10(g) to the Registrant’s 1999 Form 10-K
| | | | | | | | 10(f)(1)
| | 2000 Stock Incentive Plan
| | Appendix A to the Registrant’s Proxy Statement dated November 8, 1999
| | | | | | | | 10(f)(2)
| | Amendment to the 2000 Stock Incentive Plan
| | Appendix A to the Registrant’s Proxy Statement dated November 6, 2000
|
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. The information is also available on our Internet website atwww.comtechtel.com. | |
| SIGNATURES | | Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | COMTECH TELECOMMUNICATIONS CORP.
| | | September 22, 2005
| | By: /s/Fred Kornberg
|
| |
| (Date)
| | Fred Kornberg, Chairman of the Board
and Chief Executive Officer
|
| | COMTECH TELECOMMUNICATIONS CORP. | | | | | | | | September 20, 2006 | | By: /s/Fred Kornberg | | (Date) | | Fred Kornberg, Chairman of the Board | | | and Chief Executive Officer | | | |
| Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. | |
| | Signature | | Title | | | | | | | September 20, 2006 | | /s/Fred Kornberg | | Chairman of the Board | | (Date) | | Fred Kornberg | | Chief Executive Officer and President | | | | | (Principal Executive Officer) | | | | | | | September 20, 2006 | | /s/Michael D. Porcelain | | Senior Vice President and | | (Date) | | Michael D. Porcelain | | Chief Financial Officer | | | | | (Principal Financial and Accounting Officer) | | | | | | | September 20, 2006 | | /s/George Bugliarello | | Director | | (Date) | | George Bugliarello | | | | | | | | | | | | | | September 20, 2006 | | /s/Richard L. Goldberg | | Director | | (Date) | | Richard L. Goldberg | | | | | | | | | | | | | | September 20, 2006 | | /s/Edwin Kantor | | Director | | (Date) | | Edwin Kantor | | | | | | | | | | | | | | September 20, 2006 | | /s/Ira Kaplan | | Director | | (Date) | | Ira Kaplan | | | | | | | | | | | | | | September 20, 2006 | | /s/Gerard R. Nocita | | Director | | (Date) | | Gerard R. Nocita | |
| | | | | | | Signature
| | Title
| | |
| |
| | | | | | | | | | | September 22, 2005
| | /s/Fred Kornberg
| | Chairman of the Board
|
| |
| | Chief Executive Officer and President
| (Date)
| | Fred Kornberg
| | (Principal Executive Officer)
| | | | | | | | | | | September 22, 2005
| | /s/Robert G. Rouse
| | Executive Vice President and
|
| |
| | Chief Financial Officer
| (Date)
| | Robert G. Rouse
| | (Principal Financial and Accounting Officer)
| | | | | | | | | | | September 22, 2005
| | /s/George Bugliarello
| | Director
|
| |
| | | (Date)
| | George Bugliarello
| | | | | | | | | | | | | September 22, 2005
| | /s/Richard L. Goldberg
| | Director
|
| |
| | | (Date)
| | Richard L. Goldberg
| | | | | | | | | | | | | September 22, 2005
| | /s/Edwin Kantor
| | Director
|
| |
| | | (Date)
| | Edwin Kantor
| | | | | | | | | | | | | September 22, 2005
| | /s/Ira Kaplan
| | Director
|
| |
| | | (Date)
| | Ira Kaplan
| | | | | | | | | | | | | September 22, 2005
| | /s/Gerard R. Nocita
| | Director
|
| |
| | | (Date)
| | Gerard R. Nocita
| | |
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Index to Consolidated Financial Statements and Schedule | Page | |
| | | | Reports of Independent Registered Public Accounting Firm | F-2, F-3 | | | | Consolidated Financial Statements: | | | | | | Balance Sheets as of July 31, 2006 and 2005 | F-4 | | | | | Statements of Operations for each of the years in the three-year period ended July 31, 2006 | F-5 | | | | | Statements of Stockholders’ Equity and Comprehensive Income for each of the years in the
three-year period ended July 31, 2006 | F-6 | | | | | Statements of Cash Flows for each of the years in the three-year period ended July 31, 2006 | F-7, F-8 | | | | | Notes to Consolidated Financial Statements | F-9 to F-36 | | | | Additional Financial Information Pursuant to the Requirements of Form 10-K: | | | | | | Schedule II – Valuation and Qualifying Accounts and Reserves | S-1 | | | | Page
| | |
| Reports of Independent Registered Public Accounting Firm
| | F-2, F-3
| | | | Consolidated Financial Statements:
| | | | | | Balance Sheets at July 31, 2005 and 2004
| | F-4
| | | | Statements of Operations for each of the years in the three-year period ended July 31, 2005
| | F-5
| | | | Statements of Stockholders’ Equity and Comprehensive Income for each of the years in the three-year period ended July 31, 2005
| | F-6
| | | | Statements of Cash Flows for each of the years in the three-year period ended July 31, 2005
| | F-7, F-8
| | | | Notes to Consolidated Financial Statements
| | F-9 to F-27
| | | | Additional Financial Information Pursuant to the Requirements of Form 10-K:
| | | | | | Schedule II – Valuation and Qualifying Accounts and Reserves
| | S-1
|
Schedules not listed above have been omitted because they are either not applicable or the required information has been provided elsewhere in the consolidated financial statements or notes thereto.
|
| | | KPMG LLP
| | Suite 200
| | 1305 Walt Whitman Road
| | Melville, NY 11747-4302
|
 | | | | KPMG LLP | | Suite 200 | | 1305 Walt Whitman Road | | Melville, NY 11747-4302 | | |
| Report of Independent Registered Public Accounting Firm | | The Board of Directors and Stockholders of Comtech Telecommunications Corp.: We have audited the accompanying consolidated balance sheets of Comtech Telecommunications Corp. and subsidiaries as of July 31, 20052006 and 2004,2005, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended July 31, 2005.2006. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in the accompanying index. These consolidated financial statements and the 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 financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Comtech Telecommunications Corp. and subsidiaries as of July 31, 20052006 and 2004,2005, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 2005,2006, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related 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. As discussed in Notes 1(j) and 10 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” effective August 1, 2005. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Comtech Telecommunications Corp.’s internal control over financial reporting as of July 31, 2005,2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 22, 2005,19, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, the Company’s internal control over financial reporting. Such report contains an explanatory paragraph relating to the exclusion of internal control over financial reporting associated with one entity acquired during 2005 from management’s assessment and our assessment of the effectiveness of internal control over financial reporting of the Company as of July 31, 2005. | | |  | | | Melville, New York
September 22, 200519, 2006 |
| | | | | | Suite 200 | | 1305 Walt Whitman Road | | Melville, NY 11747-4302 | | |
| | | KPMG LLP
| | Suite 200
| | 1305 Walt Whitman Road
| | Melville, NY 11747-4302
|
Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of Comtech Telecommunications Corp.: We have audited management’s assessment, included in the accompanyingManagement’s Report on Internal Control Over Financial Reporting,that Comtech Telecommunications Corp. maintained effective internal control over financial reporting as of July 31, 2005,2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Comtech Telecommunications Corp’sCorp.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assessment that Comtech Telecommunications Corp. maintained effective internal control over financial reporting as of July 31, 2005,2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Comtech Telecommunications Corp. maintained, in all material respects, effective internal control over financial reporting as of July 31, 2005,2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Comtech Telecommunications Corp. acquired certain assets and assumed certain liabilities of Tolt Technologies, Inc. during 2005, and management excluded from its assessment of the effectiveness of Comtech Telecommunications Corp’s internal control over financial reporting as of July 31, 2005, internal control over financial reporting associated with this entity comprising aggregate total assets of $9,827,000 and net sales of $11,344,000 included in Comtech Telecommunications Corp’s consolidated financial statements as of and for the year ended July 31, 2005. Our audit of internal control over financial reporting of Comtech Telecommunications Corp. also excluded an evaluation of the internal control over financial reporting of Tolt Technologies, Inc.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Comtech Telecommunications Corp. and subsidiaries as of July 31, 20052006 and 2004,2005, and the related consolidated statements of income,operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended July 31, 2005,2006, and our report dated September 22, 2005,19, 2006, expressed an unqualified opinion on those consolidated financial statements. | | | 
|
| | | | | | Melville, New York
September 22, 200519, 2006 | |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
As of July 31, 20052006 and 20042005 | | | | | | | | | | 2005 | | 2004 | | | |
| |
| | Assets | | | | | | Current assets: | | | | | | | | Cash and cash equivalents | | $ | 214,413,000 | | | 163,292,000 | | Restricted cash | | | 1,034,000 | | | 4,054,000 | | Accounts receivable, net | | | 56,052,000 | | | 43,002,000 | | Inventories, net | | | 45,103,000 | | | 39,758,000 | | Prepaid expenses and other current assets | | | 4,387,000 | | | 1,817,000 | | Deferred tax asset - current | | | 8,092,000 | | | 6,501,000 | | | |
|
| |
|
| | Total current assets | | | 329,081,000 | | | 258,424,000 | | | | | | | | | | Property, plant and equipment, net | | | 18,683,000 | | | 14,652,000 | | Goodwill | | | 22,244,000 | | | 18,721,000 | | Intangibles with definite lives, net | | | 9,123,000 | | | 10,706,000 | | Deferred financing costs, net | | | 2,995,000 | | | 3,541,000 | | Other assets, net | | | 277,000 | | | 346,000 | | | |
|
| |
|
| | Total assets | | $ | 382,403,000 | | | 306,390,000 | | | |
|
| |
|
| | | | | | | | | | Liabilities and Stockholders’ Equity | | | | | | | | Current liabilities: | | | | | | | | Accounts payable | | $ | 23,577,000 | | | 9,566,000 | | Accrued expenses and other current liabilities | | | 34,497,000 | | | 20,515,000 | | Customer advances and deposits | | | 5,282,000 | | | 7,290,000 | | Deferred service revenue | | | 8,210,000 | | | 13,716,000 | | Current installments of other obligations | | | 235,000 | | | 234,000 | | Interest payable | | | 1,050,000 | | | 1,073,000 | | Income taxes payable | | | 1,540,000 | | | 4,812,000 | | | |
|
| |
|
| | Total current liabilities | | | 74,391,000 | | | 57,206,000 | | | | | | | | | | Convertible senior notes | | | 105,000,000 | | | 105,000,000 | | Other obligations, less current installments | | | 396,000 | | | 158,000 | | Deferred tax liability – non-current | | | 5,987,000 | | | 1,628,000 | | | |
|
| |
|
| | Total liabilities | | | 185,774,000 | | | 163,992,000 | | | | | | | | | | Commitments and contingencies (See Note 13) | | | | | | | | | | | | | | | | 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 22,781,678 shares and 21,557,002 shares at July 31, 2005 and 2004, respectively | | | 2,278,000 | | | 2,156,000 | | Additional paid-in capital | | | 127,170,000 | | | 109,716,000 | | Retained earnings | | | 67,366,000 | | | 30,711,000 | | | |
|
| |
|
| | | | | 196,814,000 | | | 142,583,000 | | Less: | | | | | | | | Treasury stock (210,937 shares) | | | (185,000 | ) | | (185,000 | ) | | |
|
| |
|
| | Total stockholders’ equity | | | 196,629,000 | | | 142,398,000 | | | |
|
| |
|
| | Total liabilities and stockholders’ equity | | $ | 382,403,000 | | | 306,390,000 | | | |
|
| |
|
| |
| |
| Assets | 2006 | | 2005 | | |
| |
| | | Current assets: | | | | | | | | Cash and cash equivalents | $ | 251,587,000 | | | 214,413,000 | | | Restricted cash | | 1,003,000 | | | 1,034,000 | | | Accounts receivable, net | | 70,047,000 | | | 56,052,000 | | | Inventories, net | | 61,043,000 | | | 45,103,000 | | | Prepaid expenses and other current assets | | 7,178,000 | | | 4,387,000 | | | Deferred tax asset – current | | 7,591,000 | | | 8,092,000 | | |
| |
| | | Total current assets | | 398,449,000 | | | 329,081,000 | | | | | Property, plant and equipment, net | | 24,732,000 | | | 18,683,000 | | | Goodwill | | 22,244,000 | | | 22,244,000 | | | Intangibles with finite lives, net | | 6,855,000 | | | 9,123,000 | | | Deferred financing costs, net | | 2,449,000 | | | 2,995,000 | | | Other assets, net | | 537,000 | | | 277,000 | | |
| |
| | | Total assets | $ | 455,266,000 | | | 382,403,000 | | |
| |
| | | | | Liabilities and Stockholders’ Equity | | | | | | | | | Current liabilities: | | | | | | | | Accounts payable | $ | 28,337,000 | | | 23,577,000 | | | Accrued expenses and other current liabilities | | 41,230,000 | | | 34,497,000 | | | Customer advances and deposits | | 3,544,000 | | | 5,282,000 | | | Deferred service revenue | | 9,896,000 | | | 8,210,000 | | | Current installments of other obligations | | 154,000 | | | 235,000 | | | Interest payable | | 1,050,000 | | | 1,050,000 | | | Income taxes payable | | 5,252,000 | | | 1,540,000 | | |
| |
| | | Total current liabilities | | 89,463,000 | | | 74,391,000 | | | | | Convertible senior notes | | 105,000,000 | | | 105,000,000 | | | Other obligations, less current installments | | 243,000 | | | 396,000 | | | Deferred tax liability – non-current | | 6,318,000 | | | 5,987,000 | | |
| |
| | | Total liabilities | | 201,024,000 | | | 185,774,000 | | | | | Commitments and contingencies (See Note 13) | | | | | | | | | | Stockholders’ equity: | | | | | | | Preferred stock, par value $.10 per share; shares authorized
and unissued 2,000,000 | | — | | | — | | Common stock, par value $.10 per share; authorized 100,000,000
shares and 30,000,000 shares at July 31, 2006 and July 31, 2005,
respectively; issued 23,052,593 shares and 22,781,678 shares at
July 31, 2006 and 2005, respectively | | 2,305,000 | | | 2,278,000 | | | Additional paid-in capital | | 139,487,000 | | | 127,170,000 | | | Retained earnings | | 112,635,000 | | | 67,366,000 | | |
| |
| | | | | 254,427,000 | | | 196,814,000 | | | | | Less: | | | | | | | | Treasury stock (210,937 shares) | | (185,000 | ) | | (185,000 | ) | |
| |
| | | | | Total stockholders’ equity | | 254,242,000 | | | 196,629,000 | | |
| |
| | | Total liabilities and stockholders’ equity | $ | 455,266,000 | | | 382,403,000 | | |
| |
| |
| See accompanying notes to consolidated financial statements. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
Fiscal Years endedEnded July 31, 2006, 2005 2004 and 20032004 | | | | | | | | | | | | | 2005 | | 2004 | | 2003 | | | |
| |
| |
| | | | | | | | | | Net sales | | $ | 307,890,000 | | | 223,390,000 | | | 174,035,000 | | Cost of sales | | | 180,524,000 | | | 135,858,000 | | | 114,317,000 | | | |
|
| |
|
| |
|
| | Gross profit | | | 127,366,000 | | | 87,532,000 | | | 59,718,000 | | | | | | | | | | | | | Expenses: | | | | | | | | | | | Selling, general and administrative | | | 51,819,000 | | | 36,016,000 | | | 28,045,000 | | Research and development | | | 21,155,000 | | | 15,907,000 | | | 12,828,000 | | In-process research and development | | | — | | | 940,000 | | | — | | Amortization of intangibles | | | 2,328,000 | | | 2,067,000 | | | 2,039,000 | | | |
|
| |
|
| |
|
| | | | | 75,302,000 | | | 54,930,000 | | | 42,912,000 | | | |
|
| |
|
| |
|
| | | | | | | | | | | | | Operating income | | | 52,064,000 | | | 32,602,000 | | | 16,806,000 | | | | | | | | | | | | | Other expenses (income): | | | | | | | | | | | Interest expense | | | 2,679,000 | | | 1,425,000 | | | 2,803,000 | | Interest income | | | (4,072,000 | ) | | (921,000 | ) | | (275,000 | ) | | |
|
| |
|
| |
|
| | | | | | | | | | | | | Income before provision for income taxes | | | 53,457,000 | | | 32,098,000 | | | 14,278,000 | | Provision for income taxes | | | 16,802,000 | | | 10,271,000 | | | 4,569,000 | | | |
|
| |
|
| |
|
| | Net income | | $ | 36,655,000 | | | 21,827,000 | | | 9,709,000 | | | |
|
| |
|
| |
|
| | | | | | | | | | | | | Net income per share (See Note 1): | | | | | | | | | | | Basic | | $ | 1.69 | | | 1.03 | | | 0.57 | | | |
|
| |
|
| |
|
| | Diluted | | $ | 1.42 | | | 0.92 | | | 0.53 | | | |
|
| |
|
| |
|
| | | | | | | | | | | | | Weighted average number of common shares outstanding - basic | | | 21,673,000 | | | 21,178,000 | | | 17,168,000 | | | |
|
| |
|
| |
|
| | | | | | | | | | | | | Weighted average number of common and common equivalent shares outstanding assuming dilution - diluted | | | 27,064,000 | | | 24,781,000 | | | 18,290,000 | | | |
|
| |
|
| |
|
| |
| |
| 2006 | | 2005 | | 2004 | |
|---|
|
| |
| |
| |
|---|
| |
|---|
| Net sales | $ | 391,511,000 | | | 307,890,000 | | | 223,390,000 | | | Cost of sales | | 232,210,000 | | | 180,524,000 | | | 135,858,000 | | |
| |
| |
| |
|---|
| Gross profit | | 159,301,000 | | | 127,366,000 | | | 87,532,000 | | |
| |
| |
| |
|---|
| |
|---|
| Expenses: | | | | | | | | | | | Selling, general and administrative | | 67,071,000 | | | 51,819,000 | | | 36,016,000 | | | Research and development | | 25,834,000 | | | 21,155,000 | | | 15,907,000 | | | In-process research and development | | — | | | — | | | 940,000 | | | | | | | Amortization of intangibles | | 2,465,000 | | | 2,328,000 | | | 2,067,000 | | | | | | |
| |
| |
| |
|---|
| | | 95,370,000 | | | 75,302,000 | | | 54,930,000 | | |
| |
| |
| |
|---|
| |
|---|
| Operating income | | 63,931,000 | | | 52,064,000 | | | 32,602,000 | | | |
|---|
| Other expenses (income): | | Interest expense | | 2,687,000 | | | 2,679,000 | | | 1,425,000 | | | | | | | Interest income | | (9,243,000 | ) | | (4,072,000 | ) | | (921,000 | ) | |
| |
| |
| |
|---|
| |
|---|
| Income before provision for income taxes | | 70,487,000 | | | 53,457,000 | | | 32,098,000 | | | | | | | Provision for income taxes | | 25,218,000 | | | 16,802,000 | | | 10,271,000 | | | | | | |
| |
| |
| |
|---|
| Net income | $ | 45,269,000 | | | 36,655,000 | | | 21,827,000 | | | | | | |
| |
| |
| |
|---|
| |
|---|
| Net income per share (See Note 1(i)): | | | | | | | | | | | Basic | $ | 1.99 | | | 1.69 | | | 1.03 | | | | | | |
| |
| |
| |
|---|
| Diluted | $ | 1.72 | | | 1.42 | | | 0.92 | | | | | | |
| |
| |
| |
|---|
| |
|---|
Weighted average number of common shares
outstanding – basic | | 22,753,000 | | | 21,673,000 | | | 21,178,000 | | | | | | |
| |
| |
| |
|---|
| |
|---|
Weighted average number of common and common
equivalent shares outstanding assuming dilution – diluted | | 27,324,000 | | | 27,064,000 | | | 24,781,000 | | |
| |
| |
| |
|---|
| See accompanying notes to consolidated financial statements. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
Fiscal Years Ended July 31, 2006, 2005 and 2004 | |
| Common Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Treasury Stock | | Deferred
Compensation | | Stockholders’
Equity | | Comprehensive
Income | |
|---|
| |
| | | |
| | | | |
|---|
| Shares | | Amount | | | | Shares | | Amount | | | | |
|---|
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | | Balance July 31, 2003 | 21,031,153 | | $ | 2,103,000 | | $ | 106,872,000 | | $ | 8,884,000 | | | 210,937 | | $ | (185,000 | ) | $ | (106,000 | ) | $ | 117,568,000 | | $ | 9,709,000 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Amortization of deferred
compensation | — | | | — | | | — | | | — | | | — | | | — | | | 106,000 | | | 106,000 | | | — | | Issuance of shares - stock options
exercised and related income
tax benefit | 450,210 | | | 45,000 | | | 2,470,000 | | | — | | | — | | | — | | | — | | | 2,515,000 | | | — | | Issuance of shares - employee
stock purchase plan | 28,269 | | | 3,000 | | | 352,000 | | | — | | | — | | | — | | | — | | | 355,000 | | | — | | Issuance of shares - warrants
exercised | 47,370 | | | 5,000 | | | 22,000 | | | — | | | — | | | — | | | — | | | 27,000 | | | — | | | Net income | — | | | — | | | — | | | 21,827,000 | | | — | | | — | | | — | | | 21,827,000 | | | 21,827,000 | | | |
| |
| |
| |
| |
| |
| |
| |
| |
| | | | | Balance July 31, 2004 | 21,557,002 | | | 2,156,000 | | | 109,716,000 | | | 30,711,000 | | | 210,937 | | | (185,000 | ) | | — | | | 142,398,000 | | | 21,827,000 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Issuance of shares - stock options
exercised and related income
tax benefit | 1,209,799 | | | 121,000 | | | 17,012,000 | | | — | | | — | | | — | | | — | | | 17,133,000 | | | — | | Issuance of shares - employee
stock purchase plan | 28,827 | | | 3,000 | | | 517,000 | | | — | | | — | | | — | | | — | | | 520,000 | | | — | | Termination of unvested restricted
shares issued pursuant to
employee stock award
agreement | (13,950 | ) | | (2,000 | ) | | (75,000 | ) | | — | | | — | | | — | | | — | | | (77,000 | ) | | Net income | — | | | — | | | — | | | 36,655,000 | | | — | | | — | | | — | | | 36,655,000 | | | 36,655,000 | | | |
| |
| |
| |
| |
| |
| |
| |
| |
| | | | | Balance July 31, 2005 | 22,781,678 | | | 2,278,000 | | | 127,170,000 | | | 67,366,000 | | | 210,937 | | | (185,000 | ) | | — | | | 196,629,000 | | | 36,655,000 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Stock-based compensation
programs | — | | | — | | | 5,742,000 | | | — | | | — | | | — | | | — | | | 5,742,000 | | | — | | Issuance of shares - stock
options exercised and related
income tax benefit | 244,737 | | | 24,000 | | | 5,904,000 | | | — | | | — | | | — | | | — | | | 5,928,000 | | | — | | Issuance of shares - employee
stock purchase plan | 26,178 | | | 3,000 | | | 671,000 | | | — | | | — | | | — | | | — | | | 674,000 | | | — | | | Net income | — | | | — | | | — | | | 45,269,000 | | | — | | | — | | | — | | | 45,269,000 | | | 45,269,000 | | | |
| |
| |
| |
| |
| |
| |
| |
| |
| | | | | Balance July 31, 2006 | 23,052,593 | | $ | 2,305,000 | | $ | 139,487,000 | | $ | 112,635,000 | | | 210,937 | | $ | (185,000 | ) | $ | — | | $ | 254,242,000 | | $ | 45,269,000 | | | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | See accompanying notes to consolidated financial statements. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal Years Ended July 31, 2006, 2005 and 2004 | |
| 2006 | | 2005 | | 2004 | |
|---|
| |
| |
| |
| | | Cash flows from operating activities: | | | | | | | | | Net income | $ | 45,269,000 | | 36,655,000 | | 21,827,000 | | Adjustments to reconcile net income to net cash provided by
operating activities: | | | | | | | | | Depreciation and amortization of property, plant and equipment | | 6,242,000 | | 5,315,000 | | 4,341,000 | | | Amortization of intangible assets with finite lives | | 2,465,000 | | 2,328,000 | | 2,067,000 | | | Amortization of stock-based compensation | | 5,681,000 | | — | | — | | | Amortization of deferred compensation | | — | | — | | 106,000 | | | Amortization of deferred financing costs | | 546,000 | | 546,000 | | 280,000 | | | Loss on disposal of property, plant and equipment | | 36,000 | | 284,000 | | 91,000 | | | Write-off of in-process research and development | | — | | — | | 940,000 | | | Provision for allowance for doubtful accounts | | 748,000 | | 287,000 | | 147,000 | | | Provision for excess and obsolete inventory | | 2,030,000 | | 2,098,000 | | 1,193,000 | | | Income tax benefit from stock option exercises | | — | | 9,896,000 | | 1,001,000 | | | Excess income tax benefit from stock option exercises | | (4,065,000 | ) | — | | — | | | Deferred income tax expense | | 832,000 | | 2,768,000 | | 2,079,000 | | Changes in assets and liabilities, net of effects of
acquisitions: | | Restricted cash securing letter of credit obligations | | 31,000 | | 3,020,000 | | 234,000 | | | Accounts receivable | | (14,743,000 | ) | (13,337,000 | ) | (16,453,000 | ) | | Inventories | | (17,909,000 | ) | (7,236,000 | ) | (5,152,000 | ) | | Prepaid expenses and other current assets | | (2,791,000 | ) | (2,373,000 | ) | 284,000 | | | Other assets | | (260,000 | ) | 69,000 | | 44,000 | | | Accounts payable | | 4,760,000 | | 14,011,000 | | (1,961,000 | ) | | Accrued expenses and other current liabilities | | 7,733,000 | | 12,532,000 | | 6,915,000 | | | Customer advances and deposits | | (1,738,000 | ) | (2,008,000 | ) | 4,799,000 | | | Deferred service revenue | | 1,686,000 | | (5,506,000 | ) | 2,556,000 | | | Interest payable | | — | | (23,000 | ) | 1,073,000 | | | | | | | Income taxes payable | | 7,777,000 | | (3,272,000 | ) | (2,133,000 | ) | | |
| |
| |
| | | Net cash provided by operating activities | | 44,330,000 | | 56,054,000 | | 24,278,000 | | | |
| |
| |
| | | | | Cash flows from investing activities: | | | | | | | | | Purchases of property, plant and equipment | | (12,327,000 | ) | (9,532,000 | ) | (6,591,000 | ) | | Purchases of other intangibles with finite lives | | (197,000 | ) | (75,000 | ) | — | | | | | | | Payments for business acquisitions | | (1,000,000 | ) | (2,735,000 | ) | (5,187,000 | ) | | |
| |
| |
| | | Net cash used in investing activities | | (13,524,000 | ) | (12,342,000 | ) | (11,778,000 | ) | | |
| |
| |
| | | | | Cash flows from financing activities: | | | | | | | | | Net proceeds from issuance of convertible senior notes | | — | | — | | 101,179,000 | | | Principal payments on other obligations | | (234,000 | ) | (271,000 | ) | (900,000 | ) | | | | | | Excess income tax benefit from stock option exercises | | 4,065,000 | | — | | — | | | Proceeds from exercises of stock options and warrants | | 1,863,000 | | 7,160,000 | | 1,541,000 | | | | | | | Proceeds from issuance of employee stock purchase plan shares | | 674,000 | | 520,000 | | 355,000 | | | |
| |
| |
| | | Net cash provided by financing activities | | 6,368,000 | | 7,409,000 | | 102,175,000 | | | |
| |
| |
| |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, 2006, 2005 and 2004 | |
| 2006 | | 2005 | | 2004 | |
|---|
| |
| |
| |
| | | | | Net increase in cash and cash equivalents | $ | 37,174,000 | | | 51,121,000 | | | 114,675,000 | | | | | | | Cash and cash equivalents at beginning of period | | 214,413,000 | | | 163,292,000 | | | 48,617,000 | | | |
| | |
| | |
| | | Cash and cash equivalents at end of period | $ | 251,587,000 | | | 214,413,000 | | | 163,292,000 | | | | | | | |
| | |
| | |
| | | Supplemental cash flow disclosure | | | | Cash paid during the period for: | | Interest | $ | 2,142,000 | | | 2,156,000 | | | 55,000 | | | |
| | |
| | |
| | | | | Income taxes | $ | 16,573,000 | | | 7,456,000 | | | 9,324,000 | | | |
| | |
| | |
| | | Non cash investing activities: | | | | | | | Purchase of proprietary technology through financing
obligation | $ | — | | | 509,000 | | | — | | | | | | | |
| | |
| | |
| | | Accrued business acquisition payments (See Note 2) | $ | — | | | 1,000,000 | | | — | | | |
| | |
| | |
| |
| See accompanying notes to consolidated financial statements. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting and Reporting Policies | |
| (a) | Principles of Consolidation | | | |
| The accompanying consolidated financial statements include the accounts of Comtech Telecommunications Corp. and its subsidiaries (“the Company”), all of which are wholly owned. All significant intercompany balances and transactions have been eliminated in consolidation. | | |
| | The Company designs, develops, produces and markets innovative products, systems and services for advanced communications solutions. | | | | | | The Company’s business is highly competitive and characterized by rapid technological change. 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, and have significantly greater financial, marketing and operating resources and broader product lines than the Company. A significant technological breakthrough by others, including smaller competitors or new companies, could have a material adverse effect on the Company’s business. In addition, certain of the Company’s customers have technological capabilities in the Company’s product areas and could choose to replace the Company’s products with their own. | | | | | | International sales expose the Company to certain risks, including barriers to trade, fluctuations in foreign currency exchange rates (which may make the Company’s products less price competitive), political and economic instability, availability of suitable export financing, export license requirements, tariff regulations, and other United States (“U.S.”) and foreign regulations that may apply to the export of the Company’s products, as well as the generally greater difficulties of doing business abroad. The Company attempts to reduce the risk of doing business in foreign countries by seeking contracts denominated in U.S. dollars, advance or milestone payments, credit insurance and irrevocable letters of credit in its favor. | | | | | | Pursuant to a contract award issued in July 1999, the Company is currently the sole provider of the U.S. Army logistics community’s Movement Tracking System (“MTS”). The contact expires in July 2007, can be terminated at any time, and is not subject to automatic renewals or extension. The loss of the MTS contract would have a material adverse effect on the Company’s future business, results of operations and financial condition. | | | |
| Revenue is generally recognized when the earnings process is complete, upon shipment or customer acceptance. Revenue from contracts relating to the design, development or manufacturing of complex electronic equipment to a buyer’s specification or to provide services relating to the performance of such contracts is recognized using the percentage-of-completion method. Revenue recognition using the percentage-of-completion method is based on the relationship of total costs incurred to total projected costs, or, alternatively, based on output measures, such as units delivered. Provision for anticipated losses on uncompleted contracts is made in the period in which such losses become evident. | | | | 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. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | |
| Revenue recognized in excess of amounts billable under long-term contracts accounted for under the percentage-of-completion method are recorded as unbilled receivables in the accompanying consolidated balance sheets. Unbilled receivables are billable upon various events, including the attainment of performance milestones, delivery of hardware, submission of progress bills based on time and materials, or completion of the contract. | | | | In the case of the Company’s mobile data communications segment’s MTS 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. MTS service-time revenue is recognized based on a network availability method which recognizes prepaid service time on a straight-line basis from the date of shipment through the end of the contract term in July 2007. | | | | Most government contracts have termination for convenience clauses that provide the customer with the right to terminate the contract at any time. Historically, the Company has not experienced material contract terminations or write-offs of unbilled receivables. The Company addresses customer acceptance provisions in assessing its ability to perform its contractual obligations under long-term contracts. Historically, the Company has been able to perform on its long-term contracts. | | | | Revenue from contracts that contain multiple elements that are not accounted for under the percentage-of-completion method are accounted for in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Revenue from these contracts is allocated to each respective element based on each element’s relative fair value and is recognized when the respective revenue recognition criteria for each element are met. | | |
| (d) | Cash, Cash Equivalents and Restricted Cash | | | |
| Cash equivalents are temporary cash investments with a maturity of three months or less when purchased. Cash equivalents, primarily U.S. treasury securities with a maturity of three months or less, at July 31, 2006 and 2005 amounted to $231,261,000 and $205,527,000, respectively. These investments are carried at cost, which approximates fair market value. Restricted cash as of July 31, 2006 and 2005 represents the amount the Company has pledged against guarantees of performance on certain of its contracts. | | |
| Work-in-process inventory reflects all accumulated production costs, which are comprised of direct production costs and overhead, and is reduced by amounts recorded in cost of sales as the related revenue is recognized. 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 finished goods inventory are stated at the lower of cost or market, computed on the first-in, first-out (“FIFO”) method. | | |
| The Company’s machinery and equipment, which are recorded at cost, are depreciated or amortized over their estimated useful lives (three to eight years) under the straight-line method. Capitalized values of properties and leasehold improvements under leases are amortized over the life of the lease or the estimated life of the asset, whichever is less. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | |
| Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. In accordance with the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized. 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 segments. | | | | The Company assesses the recoverability of the carrying value of its other long-lived assets, including identifiable intangible assets with finite useful lives, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company evaluates the recoverability of such assets based upon the expectations of undiscounted cash flows from such assets. If the sum of the expected future undiscounted cash flows were less than the carrying amount of the asset, a loss would be recognized for the difference between the fair value and the carrying amount. | | |
| (g) | 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 2006, 2005 and 2004, the Company was reimbursed by customers for such activities in the amount of $4,409,000, $3,001,000 and $5,749,000, respectively. | | |
| 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. | | |
| The Company calculates earnings per share (“EPS”) in accordance with SFAS No. 128, “Earnings per 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 exercise of stock options, warrants and convertible senior notes, if dilutive, outstanding during each period. Stock options to purchase 712,000, 49,000 and 105,000 shares for fiscal 2006, 2005 and 2004, respectively, were not included in the EPS calculation because their effect would have been anti-dilutive. | | | | In accordance with EITF Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share,” the Company has (i) included the impact of the assumed conversion of its 2.0% convertible senior notes in calculating diluted EPS commencing in the fiscal quarter ended January 31, 2005 and (ii) restated prior periods’ diluted EPS for comparative purposes. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | |
| The following table reconciles the numerators and denominators used in the basic and diluted EPS calculations: | | |
| | |
| |
|---|
| | | Fiscal Years Ended July 31, | |
|---|
| | |
| |
|---|
| | | 2006 | | 2005 | | 2004 | |
|---|
| | |
| |
| |
| | | | Numerator: | | | | | | | | | | Net income for basic calculation | $ | 45,269,000 | | 36,655,000 | | 21,827,000 | | | | Effect of dilutive securities: | | | | | | | | | | Interest expense (net of tax) on
convertible senior notes | | 1,662,000 | | 1,817,000 | | 925,000 | | | | |
| |
| |
| | | | Numerator for diluted calculation | $ | 46,931,000 | | 38,472,000 | | 22,752,000 | | | | |
| |
| |
| | | | | | Denominator: | | | | | | | | | | Denominator for basic calculation | | 22,753,000 | | 21,673,000 | | 21,178,000 | | | | Effect of dilutive securities: | | | Stock options | | 1,238,000 | | 2,058,000 | | 1,890,000 | | | | Conversion of convertible
senior notes | | 3,333,000 | | 3,333,000 | | 1,713,000 | | | | |
| |
| |
| | | | Denominator for diluted calculation | | 27,324,000 | | 27,064,000 | | 24,781,000 | | | | |
| |
| |
| |
| | | | (j) | Accounting for Stock-Based Compensation | | | |
| Effective August 1, 2005, the Company adopted the provisions of SFAS No. 123(R), “Share-Based Payment,” which establishes the accounting for employee stock-based awards. Under the provisions of SFAS No. 123(R), stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). The Company adopted SFAS No. 123(R) using the modified prospective method and, as a result, periods prior to August 1, 2005 have not been restated. | | | | The Company recognized stock-based compensation for awards issued under the Company’s Stock Option Plans and 2001 Employee Stock Purchase Plan (the “ESPP”), in the following line items in the Consolidated Statement of Operations: | | |
| |
| | |
|---|
| Fiscal Year Ended
July 31, 2006 | | |
|---|
| | |
| | | | | Cost of sales | $ | 385,000 | | | | | Selling, general and administrative expenses | | 4,585,000 | | | | | Research and development expenses | | 711,000 | | | | | |
| | | | | Stock-based compensation expense before income tax benefit | | 5,681,000 | | | | | Income tax benefit | | (1,312,000 | ) | | | | |
| | | | | Net compensation expense | $ | 4,369,000 | | | | | |
| | |
| | | Of the $5,681,000 of stock-based compensation expense before income tax benefit, $163,000 relates to awards issued pursuant to the ESPP. Stock-based compensation that was capitalized and included in ending inventory at July 31, 2006 was $61,000. | | | | During fiscal 2005 and 2004 (and for periods prior to August 1, 2005), the Company recorded compensation expense for employee stock options based upon their intrinsic value on the date of grant pursuant to Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Since the exercise price for such options was equal to the fair market value of the Company’s stock at the date of grant, the stock options had no intrinsic value upon grant and, therefore, no expense was recorded in those respective Consolidated Statements of Operations. | | | | Stock-based compensation expense, net of the related income tax benefit, resulted in a decrease of $0.19 and $0.14 in basic and diluted earnings per share, respectively, for fiscal 2006. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | |
| Had the compensation cost of the Company’s employee stock award plans for fiscal 2005 and 2004 been determined in accordance with SFAS No. 123, the Company’s pro forma net income and net income per share would have been: | | |
| | |
| | |
|---|
| | | Fiscal Years Ended July 31, | | |
|---|
| | |
| | |
|---|
| | | 2005 | | 2004 | | |
|---|
| | |
| | | | | Net income, as reported | $ | 36,655,000 | | 21,827,000 | | | | | Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects | | (4,236,000 | ) | (1,615,000 | ) | | | | |
| |
| | | | | Pro forma net income | $ | 32,419,000 | | 20,212,000 | | | | | |
| |
| | | | | Net income per share: | | | | | | | | | | As reported | Basic | $ | 1.69 | | 1.03 | | | | | | Diluted | $ | 1.42 | | 0.92 | | | | | | Pro forma | Basic | $ | 1.50 | | 0.95 | | | | | | Diluted | $ | 1.28 | | 0.85 | | | | | | |
| | | Under the modified prospective method, SFAS No. 123(R) applies to new awards and to awards outstanding on the effective date that are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of July 31, 2005 is being recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under SFAS No. 123. The Company has elected to value graded vesting awards based on vesting tranches. Prior to the adoption of SFAS No. 123(R), the Company valued graded vesting awards based on the entire award for purposes of pro forma disclosure. The Company amortizes the fair values of all awards on a straight-line basis over the total requisite service period. Cumulative compensation expense recognized at any date will at least equal the grant date fair value of the vested portion of the award at that time. Additionally, the Company includes the excess hypothetical tax benefit related to stock options which were fully vested upon adoption of SFAS No. 123(R) when calculating earnings per share. | | | | The Company estimates the fair value of stock options using the Black-Scholes option pricing model. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted during fiscal 2006. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the employees who receive equity awards. | | | | The per share weighted average fair value of stock options granted during fiscal 2006, 2005 and 2004 was $14.03, $8.52 and $6.59, respectively. In addition to the exercise and grant date prices of the awards, certain weighted average assumptions that were used to estimate the fair value of stock option grants in the respective periods are listed in the table below: | | |
| |
| | | | | Fiscal Years Ended July 31, | | | |
| | |
|---|
| | 2006 | | 2005 | | 2004 | | | | | | | | |
| |
| |
| | | | | Expected dividend yield | | | | 0 | % | 0 | % | 0 | % | | | | Expected volatility | | | | 51.44 | % | 64.83 | % | 53.67 | % | | | | Risk-free interest rate | | | | 4.20 | % | 3.70 | % | 3.31 | % | | | | Expected life (years) | | | | 3.63 | | 5.00 | | 5.00 | | |
| | | Options granted during fiscal 2006 have exercise prices equal to the fair market value of the stock on the date of grant, a contractual term of five years and a vesting period of three years. All options granted through July 31, 2005 had exercise prices equal to the fair market value of the stock on the date of grant, a contractual term of ten years and generally a vesting period of five years. As of July 31, 2006, the weighted average estimated forfeiture rate was 8.2%. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | |
| The Company estimates expected volatility by considering the historical volatility of the Company’s stock, the implied volatility of publicly traded stock options in the Company’s stock and the Company’s expectations of volatility for the expected term of stock-based compensation awards. The risk-free interest rate is based on the U.S. treasury yield curve in effect at the time of grant. The expected option term is the number of years that the Company estimates that options will be outstanding prior to exercise. The expected term of the awards issued after July 31, 2005 was determined using the “simplified method” prescribed in SEC Staff Accounting Bulletin (“SAB”) No. 107. | | | | The actual income tax benefit recorded relating to the exercise of stock option awards was $4,065,000 for fiscal 2006 and is classified as a financing cash inflow in the Company’s Consolidated Statement of Cash Flows. Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits related to stock-based compensation as an operating cash inflow. The actual income tax benefit recorded relating to the exercise of stock option awards was $9,896,000 and $1,001,000 for fiscal 2005 and 2004, respectively. The Company settles employee stock option exercises with new shares. | | | | At July 31, 2006, total remaining unrecognized compensation cost related to unvested stock-based payment awards was $12,541,000, net of estimated forfeitures. That cost is expected to be recognized over a weighted average period of 2.4 years. | | | | On August 1, 2006, the first day of the Company’s 2007 fiscal year, the Company authorized, in accordance with the Company’s 2000 Stock Incentive Plan, the award of stock options to purchase a total of 635,100 shares of common stock. Total unrecognized compensation cost, net of estimated forfeitures, related to this award was $6,359,000. The compensation cost related to these options will be recognized on a straight-line basis over the related three-year service period. | | |
| 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 of July 31, 2006, the Company estimates the fair market value of its 2.0% convertible senior notes to be $109,000,000 based on recent trading activity. | | |
| 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. The Company makes significant estimates in many areas of its accounting, including but not limited to the following: long-term contracts, stock-based compensation, intangible assets, provision for excess and obsolete inventory, allowance for doubtful accounts, warranty obligations and income taxes. Actual results may differ from those estimates. | | |
| The Company has adopted SFAS No. 130, “Reporting Comprehensive Income,” which requires companies to report all changes in equity during a period, except those resulting from investment by owners and distribution to owners, for the period in which they are recognized. Comprehensive income is the total of net income and all other 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. Comprehensive income was the same as net income in fiscal 2006, 2005 and 2004. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | |
| Certain reclassifications have been made to previously reported consolidated financial statements to conform to the fiscal 2006 presentation. |
| In May 2004, the Company acquired certain assets and product lines 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 $5,187,000, including transaction costs of $161,000. Sales and income for fiscal 2004 relating to the Memotec assets acquired would not have been material to the Company’s results of operations for that period. | | | | In February 2005, the Company acquired certain assets and assumed certain liabilities of Tolt Technologies, Inc. (“Tolt”). Sales and income for fiscal 2005 and 2004 relating to the Tolt assets acquired would not have been material to the Company’s results of operations for those periods. The purchase price of the business was $3,735,000, including transaction costs of $235,000. Of the total purchase price excluding transaction costs, $2,500,000 was paid at closing and the remaining $1,000,000 was paid in fiscal 2006. | | | | The Memotec and Tolt purchase prices were allocated as follows: | | |
| | | Memotec | | Tolt | | Estimated Useful Lives | | | | |
| |
| |
| | | | Fair value of net tangible
assets acquired | $ | 1,990,000 | | | 4,000 | | | | | | | | Adjustments to record
intangible assets and
liabilities at fair value: | | | | | | | | | | | In-process research and
development | | 940,000 | | | — | | — | | | | Proprietary and core
technology | | 820,000 | | | — | | 8-9 years | | | | Existing technology | | 190,000 | | | — | | 7-9 years | | | | Other intangibles | | 410,000 | | | 160,000 | | 6 months to 10 years | | | | Goodwill | | 947,000 | | | 3,571,000 | | Infinite | | | | Deferred tax liability | | (110,000 | ) | | — | | | | | | |
| |
| | | | | | | | 3,197,000 | | | 3,731,000 | | | | | | |
| |
| | | | | | Aggregate purchase price | $ | 5,187,000 | | | 3,735,000 | | | | | | |
| |
| | | |
| | | For Memotec, the valuation of the in-process research and development, existing technology and most other intangibles was based on the value of the discounted cash flows that the assets could be expected to generate in the future. The valuation of the core technology was based on the discounted capitalization of the royalty expense saved since the Company owns the asset. For Tolt, the purchase price was substantially allocated to goodwill (which includes assembled workforce). |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | |
| The value ascribed to the Memotec in-process research and development acquired was expensed in fiscal 2004. The following table includes the specific nature and fair value allocated to each significant in-process research and development project acquired, as well as significant appraisal assumptions used as of the acquisition date and the current project status. | | |
| | | | As of the Acquisition Date | | | | | | | |
| | | | | | 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,
2006 | | | |
| |
| |
| |
| |
|
| |
| | | | Technology for bandwidth
optimization #1 | | $ | 680,000 | | 78% | | January 2005 | | 35% | 2005 | | Complete | | | | | | Technology for bandwidth
optimization #2 | | | 260,000 | | 24% | | August 2005 | | 40% | 2006 | | Cancelled | | | | | |
| | | | | | | | | | | | | 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. The Company does not believe that the failure to complete the cancelled Memotec project will have a material impact on the Company’s consolidated results of operations. | | | | As discussed in Note 18, in August 2006, the Company acquired certain assets and assumed certain liabilities of Insite Consulting, Inc. (“Insite”), a logistics application software company, for $2.7 million, plus certain earn-out payments based on the achievement of future sales targets. |
| Accounts receivable consist of the following at July 31, 2006 and 2005: | | |
| | | 2006 | | 2005 | | | | |
| |
| | | | Accounts receivable from commercial customers | $ | 36,700,000 | | | 30,967,000 | | | | Unbilled receivables (including retainages) on contracts-in-progress | | 10,361,000 | | | 8,811,000 | | | | Amounts receivable from the U.S. government and its agencies | | 24,362,000 | | | 16,910,000 | | | | |
| |
| | | | | | 71,423,000 | | | 56,688,000 | | | | Less allowance for doubtful accounts | | 1,376,000 | | | 636,000 | | | | |
| |
| | | | Accounts receivable, net | $ | 70,047,000 | | | 56,052,000 | | | | |
| |
| |
| | | There was no retainage included in unbilled receivables at July 31, 2006. There was $2,684,000 of retainage included in unbilled receivables at July 31, 2005. | | | | As of July 31, 2006, a prime contractor represented 16.6% of total net accounts receivable which primarily relates to a large over-the-horizon microwave system contract in our telecommunications transmission segment. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (4)Inventories Inventories consist of the following at July 31, 2006 and 2005: | |
| | | | 2006 | | 2005
| | | | | |
| |
| | | | Raw materials and components | | $ | 35,835,000 | | | 26,816,000 | | | | Work-in-process and finished goods | | | 31,331,000 | | | 24,796,000 | | | | | |
| |
| | | | | | | 67,166,000 | | | 51,612,000 | | | | Less reserve for excess and obsolete inventories | | | 6,123,000 | | | 6,509,000 | | | | | |
| |
| | | | Inventories, net | | $ | 61,043,000 | | | 45,103,000 | | | | | |
| |
| |
| | | Inventories directly related to long-term contracts were $8,349,000 and $8,925,000 at July 31, 2006 and 2005, respectively. At July 31, 2006, $3,406,000 of the inventory balance above related to a contract from a third party commercial customer to outsource its manufacturing. The decrease in the reserve from July 31, 2005 to July 31, 2006, primarily related to the write-off of previously reserved inventory during fiscal 2006, largely offset by the fiscal 2006 provision for excess and obsolete inventory. | | | | (5)Property, Plant and Equipment | | | | Property, plant and equipment consists of the following at July 31, 2006 and 2005: |
| | | | | | | | | | | | 2006 | | 2005
| | | | | |
| |
| | | | Machinery and equipment | | $ | 54,305,000 | | | 43,060,000 | | | | Leasehold improvements | | | 4,338,000 | | | 3,715,000 | | | | Equipment financed by capital lease | | | 522,000 | | | 522,000 | | | | | |
| |
| | | | | | | 59,165,000 | | | 47,297,000 | | | | Less accumulated depreciation and amortization | | | 34,433,000 | | | 28,614,000 | | | | | |
| |
| | | | Property, plant and equipment, net | | $ | 24,732,000 | | | 18,683,000 | | | | | |
| |
| |
| | | Depreciation and amortization expense on property, plant and equipment amounted to approximately $6,242,000, $5,315,000 and $4,341,000, for the fiscal years ended July 31, 2006, 2005 and 2004, respectively. | | | | (6)Accrued Expenses and Other Current Liabilities | | | | Accrued expenses and other current liabilities consist of the following at July 31, 2006 and 2005: |
| | | | | | | | | | | | 2006 | | 2005
| | | | | |
| |
| | | | Accrued wages and benefits | | $ | 17,361,000 | | | 14,439,000 | | | | Accrued commissions | | | 5,745,000 | | | 5,049,000 | | | | Accrued warranty | | | 10,468,000 | | | 7,910,000 | | | | Accrued hurricane related costs (See Note 13(c)) | | | 2,240,000 | | | 2,331,000 | | | | Accrued business acquisition payments | | | — | | | 1,000,000 | | | | Other | | | 5,416,000 | | | 3,768,000 | | | | | |
| |
| | | | Accrued expenses and other current liabilities | | $ | 41,230,000 | | | 34,497,000 | | | | | |
| |
| |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | |
| 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, 2006 and 2005 were as follows: | | |
| | | | 2006
| | 2005
| | | | | |
| |
| | | | Balance at beginning of period | | $ | 7,910,000 | | | 4,990,000 | | | | Provision for warranty obligations | | | 7,260,000 | | | 5,958,000 | | | | Acquired obligations | | | — | | | 450,000 | | | | Charges incurred | | | (4,702,000 | ) | | (3,488,000 | ) | | | | |
| |
| | | | Balance at end of period | | $ | 10,468,000 | | | 7,910,000 | | | | | |
| |
| |
| (7)Other Obligations Other obligations consist of the following at July 31, 2006 and 2005: | |
| | | | 2006
| | 2005
| | | | | |
| |
| | | | Obligations under capital leases and for technology purchase | | $ | 397,000 | | | 631,000 | | | | Less current installments | | | 154,000 | | | 235,000 | | | | | |
| |
| | | | | | $ | 243,000 | | | 396,000 | | | | | |
| |
| |
| | | Other obligations in both years related to certain equipment and a technology license. The net carrying value of assets under these obligations was $830,000 and $864,000 at July 31, 2006 and 2005, respectively. |
| | | Future minimum lease payments under other obligations as of July 31, 2006 are as follows: | | |
| | Fiscal years ending July 31, | | | | | | | | 2007 | $ | 180,000 | | | | | | 2008 | | 150,000 | | | | | | 2009 | | 113,000 | | | | | |
| | | | | Total minimum lease payments | | 443,000 | | | | | Less amounts representing interest (at rates ranging from 6.90% to 8.0%) | | 46,000 | | | | | |
| | | | | | | 397,000 | | | | | Less current installments | | 154,000 | | | | | |
| | | | | Other obligations, net of current installments | $ | 243,000 | | | | | |
| | |
| (8)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 of $3,821,000. | | | | 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 $31.50 per share (a conversion rate of 31.7460 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 |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | |
| 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%. | | | | 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 Comtech Telecommunications Corp.’s (the “Parent”) wholly-owned subsidiaries have issued full and unconditional guarantees in favor of the holders of the Company’s 2.0% convertible senior notes (the “Guarantor Subsidiaries”), except for the subsidiary that purchased Memotec, Inc. in fiscal 2004 (the “Non-Guarantor Subsidiary”). Tolt, which was purchased in February 2005, became a guarantor in July 2005. These full and unconditional guarantees are joint and several. Other than supporting the operations of its subsidiaries, 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. Consolidating financial information regarding the Parent, the Guarantor Subsidiaries and the Non-Guarantor Subsidiary can be found in Note 17 to the consolidated financial statements beginning on page F-29. | | | | 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 Securities and Exchange Commission (“SEC”), which has become effective, for the resale of the notes and the shares of common stock issuable upon conversion of the notes. |
| The provision for income taxes included in the accompanying consolidated statements of operations consists of the following: | | |
| | | |
| | | | | | Fiscal Years Ended July 31,
| | | | | |
| | | | | | 2006 | | 2005
| | 2004 | | | | | |
| |
| |
| | | | Federal – current | | $ | 22,085,000 | | | 13,135,000 | | | 7,664,000 | | | | Federal – deferred | | | 854,000 | | | 2,605,000 | | | 2,122,000 | | | | | | | | | | | | | | | | | State and local – current | | | 1,539,000 | | | 931,000 | | | 504,000 | | | | State and local – deferred | | | 85,000 | | | 163,000 | | | 133,000 | | | | | | | | | | | | | | | | | Foreign – current | | | 762,000 | | | (32,000 | ) | | 24,000 | | | | Foreign – deferred | | | (107,000 | ) | | — | | | (176,000 | ) | | | | |
| |
| |
| | | | | | $ | 25,218,000 | | | 16,802,000 | | | 10,271,000 | | | | | |
| |
| |
| |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | |
| The provision for income taxes differed from the amounts computed by applying the U.S. Federal income tax rate as a result of the following: | | |
| |
| | | | Fiscal Years Ended July 31, | | | | 2006 | | 2005 | | 2004 | | | |
| |
| |
| | | | Amount | | Rate | | Amount | | Rate | | Amount | | Rate | | | |
| |
| |
| |
| |
| |
| | | Computed “expected” tax expense | $ | 24,670,000 | | | 35.0 | % | | 18,710,000 | | | 35.0 | % | | 11,234,000 | | | 35.0 | % | Increase (reduction) in income taxes
resulting from: | | | | | | | | | | | | | | | | | | | | Nondeductible compensation | | 961,000 | | | 1.4 | | | 906,000 | | | 1.7 | | | — | | | — | | State and local income taxes,
net of Federal benefit | | 922,000 | | | 1.3 | | | 711,000 | | | 1.3 | | | 414,000 | | | 1.3 | | Nondeductible stock-based
compensation | | 615,000 | | | 0.9 | | | — | | | — | | | — | | | — | | Extraterritorial income
exclusion | | (726,000 | ) | | (1.0 | ) | | (1,862,000 | ) | | (3.5 | ) | | (856,000 | ) | | (2.7 | ) | Domestic production activities
deduction | | (646,000 | ) | | (0.9 | ) | | — | | | — | | | — | | | — | | Research and experimentation
credits | | (415,000 | ) | | (0.6 | ) | | (694,000 | ) | | (1.3 | ) | | (454,000 | ) | | (1.4 | ) | Change in the beginning of the
year valuation allowance for
deferred tax assets | | (111,000 | ) | | (0.2 | ) | | (1,189,000 | ) | | (2.2 | ) | | (350,000 | ) | | (1.1 | ) | | | | | | | | | Other | | (52,000 | ) | | (0.1 | ) | | 220,000 | | | 0.4 | | | 283,000 | | | 0.9 | | | |
| |
| |
| |
| |
| |
| | | | $ | 25,218,000 | | | 35.8 | % | | 16,802,000 | | | 31.4 | % | | 10,271,000 | | | 32.0 | % | | |
| |
| |
| |
| |
| |
| | | | | | | | |
| | | The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at July 31, 2006 and 2005 are presented below. | | |
| | | | 2006 | | 2005 | | | | | | |
| |
| | | | | Deferred tax assets: | | | | | | | | | | | Allowance for doubtful accounts receivable | | $ | 404,000 | | | 236,000 | | | | | Intangibles | | | 675,000 | | | 848,000 | | | | | Inventory and warranty reserves | | | 5,025,000 | | | 4,930,000 | | | | | Compensation and commissions | | | 2,049,000 | | | 1,925,000 | | | | | State research and experimentation credits | | | 1,162,000 | | | 1,158,000 | | | | | Stock-based compensation | | | 1,312,000 | | | — | | | | | Other | | | 1,245,000 | | | 1,001,000 | | | | | Less valuation allowance | | | (1,362,000 | ) | | (1,470,000 | ) | | | | | |
| |
| | | | | Total deferred tax assets | | | 10,510,000 | | | 8,628,000 | | | | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | | Convertible senior notes | | | (6,374,000 | ) | | (3,836,000 | ) | | | | Plant and equipment | | | (2,863,000 | ) | | (2,687,000 | ) | | | | | |
| |
| | | | | Total deferred tax liabilities | | | (9,237,000 | ) | | (6,523,000 | ) | | | | | |
| |
| | | | | Net deferred tax assets | | $ | 1,273,000 | | | 2,105,000 | | | | | | |
| |
| | |
| | | The Company provides for income taxes under the provisions of SFAS No. 109, “Accounting for Income 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, 2006 and 2005, the Company’s deferred tax asset has been offset by a valuation allowance primarily related to state research and experimentation credits which may not be utilized in future periods. The Company must generate approximately $32,000,000 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. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | |
| In fiscal 2006, the Company’s Federal income tax return for the fiscal year ended July 31, 2004 was selected for audit by the Internal Revenue Service. The audit is in the early stages and additional income tax returns for other fiscal years may be examined. If the outcome of the audit differs materially from our original income tax provisions, the Company’s results of operations and financial position could be materially impacted. |
| In April 2005, 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) Stock Option, Stock Purchase and Warrant Agreements | | |
| The Company has stock option and stock purchase plans and warrant agreements as follows: | | | | 1993 Incentive Stock Option Plan – The 1993 Incentive Stock Option Plan, as amended, provided for the granting to key employees and officers of incentive and non-qualified stock options to purchase up to 2,345,625 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 Company’s Board of Directors. The term of the options could 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 could be no more than five years. As of July 31, 2006, the Company had granted stock options representing the right to purchase an aggregate of 2,070,218 shares (net of 374,441 canceled options) at prices ranging between $0.67 - $5.31 per share, of which 207,262 are outstanding at July 31, 2006. To date, 1,862,956 shares have been exercised. Outstanding awards have been transferred to the 2000 Stock Incentive Plan. The terms applicable to these awards prior to the transfer continue to apply. The plan was terminated by the Company’s Board of Directors in December 1999 due to the approval by the shareholders of the 2000 Stock Incentive Plan. | | | | 2000 Stock Incentive Plan – The 2000 Stock Incentive Plan, as amended, provides for the granting to all employees and consultants of the Company (including prospective employees and consultants) non-qualified stock options, stock appreciation rights, restricted stock, performance shares, performance units and other stock-based awards. In addition, employees of the Company are eligible to be granted incentive stock options. Non-employee directors of the Company are eligible to receive non-discretionary grants of nonqualified stock options subject to certain limitations. The aggregate number of shares of common stock which may be issued may not exceed 5,737,500 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 Company’s Board of Directors, consistent with the terms of the Plan, will determine the types of awards to be granted, the terms and conditions of each award and the number of shares of common stock to be covered by each award. Grants of incentive and non- qualified 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, 2006, the Company had granted stock options representing the right to purchase an aggregate of 4,692,700 shares at prices ranging between $3.13 - $41.51 of which 403,590 options were canceled and 2,711,980 are outstanding at July 31, 2006. As of July 31, 2006, 1,577,130 stock options have been exercised. All options granted through July 31, 2005 had exercise prices equal to the fair market value of the stock on the date of grant and a term of ten years. All options granted since August 1, 2006 have had exercise prices equal to the fair market value of the stock on the date of grant and a term of five years. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | |
| The following table summarizes stock option activity during the three years ended July 31, 2006: | | |
| | | Number of
Shares | | Weighted
Average
Exercise Price
| | Weighted
Average
Remaining
Contractual
Term (Years) | | Aggregate
Intrinsic
Value
| | | | |
| | | | Outstanding at July 31, 2003 | | 2,602,281 | | | $ | 4.18 | | | | | | | | | | | Granted | | 988,875 | | | | 13.07 | | | | | | | | | | | Expired/canceled | | (35,025 | ) | | | 5.88 | | | | | | | | | | | Exercised | | (450,225 | ) | | | 3.36 | | | | | | | | | | | |
| | |
| | | | | | | | | | | | | Outstanding at July 31, 2004 | | 3,105,906 | | | | 7.11 | | | | | | | | | | | Granted | | 732,750 | | | | 15.20 | | | | | | | | | | | Expired/canceled | | (61,975 | ) | | | 10.25 | | | | | | | | | | | Exercised | | (1,209,799 | ) | | | 5.98 | | | | | | | | | | | |
| | |
| | | | | | | | | | | | | Outstanding at July 31, 2005 | | 2,566,882 | | | | 9.87 | | | | | | | | | | | Granted | | 706,000 | | | | 35.30 | | | | | | | | | | | Expired/canceled | | (108,903 | ) | | | 16.00 | | | | | | | | | | | Exercised | | (244,737 | ) | | | 7.61 | | | | | | | | | | | |
| | |
| | | | | | | | | | | | | Outstanding at July 31, 2006 | | 2,919,242 | | | $ | 15.99 | | | 5.9 | | | $ | 34,373,000 | | | | |
| | |
| | |
| | |
| | | | | | Exercisable at July 31, 2006 | | 732,692 | | | $ | 9.68 | | | 6.4 | | | $ | 13,246,000 | | | | |
| | |
| | |
| | |
| | | | | | Expected to vest at July 31, 2006 | | 2,008,425 | | | $ | 18.10 | | | 5.7 | | | $ | 21,127,000 | | | | |
| | |
| | |
| | |
| |
| | | The total intrinsic value of stock options exercised during the years ended July 31, 2006, 2005 and 2004 was $6,602,000, $32,590,000 and $7,164,000, respectively. | | | | Warrants Issued Pursuant to Acquisition– In connection with an acquisition in fiscal 1999, the Company issued warrants to the acquiree’s owners and creditors to purchase 337,500 shares of the Company’s common stock at an exercise price of $2.92. All warrants were exercised as of July 31, 2004. | | | | 2001 Employee Stock Purchase Plan – The ESPP was approved by the shareholders on December 12, 2000, and 675,000 shares of the Company’s common stock were reserved for issuance. The ESPP 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 ESPP. Through fiscal 2006, the Company issued 234,851 shares of its common stock to participating employees in connection with the ESPP. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (11) Customer and Geographic Information Sales by geography and customer type, as a percentage of consolidated net sales, are as follows: | |
| | |
| | | | | | Fiscal Years Ended July 31, | | | | | |
| | | | | | 2006 | | 2005 | | 2004 | | | | | |
| |
| |
| | | | | United States | | | | | | | | | | | | | U.S. government | | 47.3 | % | | 42.1 | % | | 40.1 | % | | | | Commercial customers | | 17.1 | % | | 13.9 | % | | 14.5 | % | | | | |
| |
| |
| | | | | Total United States | | 64.4 | % | | 56.0 | % | | 54.6 | % | | | | | | | | | | | | | | | | | International | | | | | | | | | | | | | North African country | | 9.7 | % | | 13.2 | % | | 14.1 | % | | | | Other international customers | | 25.9 | % | | 30.8 | % | | 31.3 | % | | | | |
| |
| |
| | | | | Total International | | 35.6 | % | | 44.0 | % | | 45.4 | % | |
| | | International sales include sales to U.S. domestic companies for inclusion in products that will be sold to international customers. One customer, a prime contractor, represented 10.2% of consolidated net sales in both fiscal 2006 and 2005. In fiscal 2004, one customer, another prime contractor, represented 12.5% of consolidated net sales. |
| 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 decisions about resources to be allocated and assessing their 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 operating segments: (i) telecommunications transmission, (ii) mobile data communications and (iii) RF microwave amplifiers. Telecommunications transmission products include satellite earth station products (such as analog and digital modems, frequency converters, power amplifiers, and voice gateways) and over-the-horizon microwave communications products and systems. Mobile data communications products include satellite-based mobile location, tracking and messaging hardware and related services. RF microwave amplifier products include solid-state, high-power, broadband amplifier products that use the microwave and radio frequency spectrums. | | | | Unallocated expenses result from such corporate expenses as legal, accounting and executive compensation. In addition, for fiscal 2006, unallocated expenses include $5,681,000 of stock-based compensation expense. There was no stock-based compensation expense recorded for fiscal 2005 or 2004. Interest expense associated with the Company’s 2.0% convertible senior notes is not allocated to the operating segments. Unallocated assets consist principally of cash, deferred financing costs and deferred tax assets. Substantially all of the Company’s long-lived assets are located in the U.S. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | |
| Corporate management defines and reviews segment profitability based on the same allocation methodology as presented in the segment data tables below. | | |
| |
| |
|---|
| Fiscal Year Ended July 31, 2006 | |
|---|
| |
| |
|---|
| (in thousands) | Telecommunications
Transmission | | Mobile Data
Communications | | RF Microwave
Amplifiers | | Unallocated | | Total | |
|---|
| | | Net sales | $ | 197,891 | | | 149,463 | | | 44,157 | | | — | | $ | 391,511 | | | Operating income (expense) | | 49,797 | | | 21,730 | | | 8,311 | | | (15,907 | ) | | 63,931 | | | Interest income | | 48 | | | 2 | | | — | | | 9,193 | | | 9,243 | | | Interest expense | | 38 | | | — | | | 3 | | | 2,646 | | | 2,687 | | | Depreciation and amortization | | 6,086 | | | 1,193 | | | 1,317 | | | 111 | | | 8,707 | | Expenditure for long-lived assets,
including intangibles | | 8,914 | | | 1,545 | | | 1,477 | | | 588 | | | 12,524 | | | Total assets at July 31, 2006 | | 134,567 | | | 45,641 | | | 24,588 | | | 250,470 | | | 455,266 | |
| |
| |
|---|
| Fiscal Year Ended July 31, 2005 | |
|---|
| |
| |
|---|
| (in thousands) | Telecommunications
Transmission | | Mobile Data
Communications | | RF Microwave
Amplifiers | | Unallocated | | Total | |
|---|
| | | Net sales | $ | 174,488 | | | 86,084 | | | 47,318 | | | — | | $ | 307,890 | | | Operating income (expense) | | 40,194 | | | 11,848 | | | 8,224 | | | (8,202 | ) | | 52,064 | | | Interest income | | (2 | ) | | 1 | | | 3 | | | 4,070 | | | 4,072 | | | Interest expense | | 22 | | | — | | | 11 | | | 2,646 | | | 2,679 | | | Depreciation and amortization | | 5,497 | | | 796 | | | 1,262 | | | 88 | | | 7,643 | | Expenditure for long-lived assets,
including intangibles | | 6,962 | | | 5,344 | | | 1,604 | | | 65 | | | 13,975 | | | Total assets at July 31, 2005 | | 99,197 | | | 32,827 | | | 25,320 | | | 225,059 | | | 382,403 | |
| |
| |
|---|
| Fiscal Year Ended July 31, 2004 | |
|---|
| |
| |
|---|
| (in thousands) | Telecommunications
Transmission | | Mobile Data
Communications | | RF Microwave
Amplifiers | | Unallocated | | Total | |
|---|
| | | Net sales | $ | 141,514 | | | 59,784 | | | 22,092 | | | — | | $ | 223,390 | | | Operating income (expense) | | 29,210 | | | 9,526 | | | 261 | | | (6,395 | ) | | 32,602 | | | Interest income | | 4 | | | 3 | | | — | | | 914 | | | 921 | | | Interest expense | | 33 | | | — | | | 22 | | | 1,370 | | | 1,425 | | | Depreciation and amortization | | 4,832 | | | 413 | | | 1,082 | | | 187 | | | 6,514 | | Expenditure for long-lived assets,
including intangibles | | 6,473 | | | 1,552 | | | 652 | | | 494 | | | 9,171 | | | Total assets at July 31, 2004 | | 88,629 | | | 21,276 | | | 22,934 | | | 173,551 | | | 306,390 | |
| | Intersegment sales in fiscal 2006, 2005 and 2004 by the telecommunications transmission segment to the RF microwave amplifiers segment were $7,512,000, $8,579,000 and $3,598,000, respectively. In fiscal 2006, 2005 and 2004, intersegment sales by the telecommunications transmission segment to the mobile data communications segment were $55,667,000, $19,466,000 and $12,776,000, respectively. Intersegment sales have been eliminated from the tables above. In fiscal 2004, operating income in the telecommunications transmission segment includes an in-process research and development charge of $940,000. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (13)Commitments and Contingencies | |
| The Company is obligated under noncancellable operating lease agreements, including satellite lease expenditures relating to its mobile data communications segment contracts. At July 31, 2006, the future minimum lease payments under operating leases are as follows: | | |
| | 2007 | $ | 8,565,000 | | | | 2008 | | 2,901,000 | | | | 2009 | | 2,424,000 | | | | 2010 | | 2,061,000 | | | | 2011 | | 1,207,000 | | | | Thereafter | | 798,000 | | | | |
| | | | Total | $ | 17,956,000 | | | | |
| |
| | | Lease expense charged to operations was $3,379,000, $3,018,000 and $2,866,000 in fiscal 2006, 2005 and 2004, respectively. Lease expense excludes satellite lease expenditures incurred of approximately $13,382,000, $11,854,000 and $11,233,000 in fiscal 2006, 2005 and 2004, respectively, relating to the Company’s mobile data communications segment. Satellite lease expenditures are allocated to individual contracts and expensed to cost of sales. | | | | 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 Melville, New York production facility. The lease was for an initial term of ten years. 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 $532,000 for fiscal 2006, are subject to annual adjustments equal to the lesser of 5% or the change in the Consumer Price Index. | | |
| (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. | | |
| The Company is subject to certain legal actions, which arise in the normal course of business. Although the ultimate outcome of litigation is difficult to accurately predict, the Company believes that the outcome of these actions will not have a material effect on its consolidated financial position or results of operations. | | | | During fiscal 2005, two of the Company’s leased facilities located in Florida experienced hurricane damage to both leasehold improvements and personal property. As of July 31, 2006, the Company has completed all restoration efforts relating to the hurricane damage and has recorded an $816,000 insurance recovery receivable and accrued a total of $2,240,000 for hurricane related costs. Despite a written agreement with the general contractor that the Company believes limits its liability for the cost of the repairs to the amount of insurance proceeds ultimately received from its insurance company, a dispute has arisen with the general contractor and a certain subcontractor over the subcontractor’s demand for payment directly from the Company (by virtue of a purported assignment of rights and other grounds) in an amount exceeding the insurance proceeds by $816,000, plus late charges, interest, fees, costs and certain treble damages. As a result of this dispute, the Company deposited $1,422,000, representing the balance of the insurance proceeds it has received, in its attorneys’ trust account and filed a complaint for declaratory judgment in the 9th Judicial Circuit Court for Orange County, Florida. The general contractor and the subcontractor have |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | |
| filed separate and independent actions against the Company and its insurance company, all of which have now been consolidated under the Company’s original action. The Court has scheduled December 1, 2006 as the discovery cutoff and trial for February 13, 2007; however, these dates are subject to change as the litigation progresses. The Company does not expect that the outcome of this matter will have a material effect on its consolidated financial position. | | |
| The Company has employment agreements with its Chairman of the Board, Chief Executive Officer and President (the “Chairman”), and its Executive Vice President and Chief Operating Officer (the “Chief Operating Officer”). | | | | The Chairman’s agreement which was amended and restated in June 2003 provides, among other things, for his employment until July 31, 2008 at a current base compensation of $625,000 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 least six months in advance of the scheduled termination date. The agreement also provides for payment to the Chairman in the event of a change in control of the Company. Such payment, as defined in the employment agreement, would include, among other items: (i) at least three times the Chairman’s Base Salary then in effect; plus, (ii) the amount of any unpaid Incentive Compensation, plus (iii) an amount equal to the number of shares of Common Stock of the Company subject to unexercised options (whether or not then exercisable) held by the Chairman multiplied by the intrinsic value of the options, in lieu of exercising such options. | | | | The Chief Operating Officer’s agreement which was amended and restated in June 2003 provides, among other things, for his employment until July 31, 2007 at a current base compensation of $370,000 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 may from time to time determine. The employment period is automatically extended for successive one-year periods unless either party gives notice of non-extension at least three months in advance of the scheduled termination date. The agreement also provides for payment, in certain circumstances, to the Chief Operating Officer in the event of a change in control of the Company. Such payment would be equal to 299% of the Chief Operating Officer’s Annual Base Salary then in effect. |
| (14)Stockholder Rights Plan | |
| On December 15, 1998, the Company’s Board of Directors approved the adoption of a stockholder rights plan in which one stock purchase right (“Right”) was distributed as a dividend on each outstanding share of the Company’s common stock to stockholders of record at the close of business on January 4, 1999. Under the plan, the Rights will be exercisable only if triggered by a person or group’s acquisition of 15% or more of the Company’s common stock. If triggered, each Right, other than Rights held by the acquiring person or group, would entitle its holder to purchase a specified number of the Company’s common shares for 50% of their market value at that time. Unless a 15% acquisition has occurred, the Rights may be redeemed by the Company at any time prior to the termination date of the plan. | | | | This Right to purchase common stock at a discount will not be triggered by a person 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. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (15)Intangible Assets | |
| Intangible assets with finite lives arising from acquisitions as of July 31, 2006 and 2005 are as follows: | | |
| | 2006 | | 2005 | |
|---|
| | | |
| |
| |
|---|
| Weighted Average
Amortization Period | | Gross
Carrying
Amount | | Accumulated
Amortization | | Gross
Carrying
Amount | | Accumulated
Amortization | |
|---|
| |
| |
| |
| |
| |
| | | Existing technology | 7.23 | | $ | 12,456,000 | | | 9,494,000 | | | 12,456,000 | | | 7,741,000 | | Proprietary, core and
licensed technology | 8.57 | | | 5,145,000 | | | 1,554,000 | | | 4,948,000 | | | 1,032,000 | | | Other | 5.23 | | | 834,000 | | | 532,000 | | | 834,000 | | | 342,000 | | | | | |
| |
| |
| |
| | | Total | | | $ | 18,435,000 | | | 11,580,000 | | | 18,238,000 | | | 9,115,000 | | | | | |
| |
| |
| |
| |
| | | Amortization expense for the years ended July 31, 2006, 2005 and 2004 was $2,465,000, $2,328,000 and $2,067,000, respectively. The estimated amortization expense for the fiscal years ending July 31, 2007, 2008, 2009, 2010 and 2011 is $2,213,000, $978,000, $952,000, $837,000 and $712,000, respectively. | | | | The changes in carrying amount of goodwill by segment for the fiscal year ended July 31, 2005 is as follows: | | |
| | | Telecommunications
Transmission | | Mobile Data
Communications | | RF Microwave
Amplifiers | | Total | |
|---|
| | |
| |
| |
| |
| | | | Balance at July 31, 2004 | $ | 8,865,000 | | | 1,434,000 | | | 8,422,000 | | $ | 18,721,000 | | | | Acquisition of Tolt | | — | | | 3,571,000 | | | — | | | 3,571,000 | | | | Memotec adjustment | | (48,000 | ) | | — | | | — | | | (48,000 | ) | | | | | | | | | |
| |
| |
| |
| | | | Balance at July 31, 2005 | $ | 8,817,000 | | | 5,005,000 | | | 8,422,000 | | $ | 22,244,000 | | | | |
| |
| |
| |
| |
| | | There were no changes in the carrying amount of goodwill in fiscal 2006. |
| (16)Recent Accounting Pronouncements | |
| On September 13, 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”) which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The guidance is applicable for the Company’s fiscal 2007. The Company is not yet in a position to determine what, if any, effect SAB No. 108 will have on its consolidated financial statements. | | | | In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law and prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 prescribes a two-step evaluation process for tax positions. The first step is recognition based on a determination of whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is to measure a tax position that meets the more-likely-than-not threshold. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. FIN 48 is effective beginning in the Company’s first quarter of fiscal 2008. The cumulative effects, if any, of applying FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. The Company has commenced the process of evaluating the potential effects of FIN 48 on our consolidated financial statements and is not yet in a position to determine what, if any, effects FIN 48 will have on its consolidated financial statements. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | |
| In June 2006, the EITF reached a consensus on EITF 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” (“EITF 06-3”). EITF 06-3 provides that taxes imposed by a governmental authority on a revenue producing transaction between a seller and a customer should be shown in the income statement on either a gross or a net basis, based on the entity’s accounting policy, which should be disclosed pursuant to APB Opinion No. 22, “Disclosure of Accounting Policies.” If such taxes are significant, and are presented on a gross basis, the amounts of those taxes should be disclosed. EITF 06-3 will be effective beginning with the Company’s third quarter of fiscal 2007. The Company is currently evaluating the impact EITF 06-3 will have on the presentation of its consolidated financial statements. | | | | In June 2006, the EITF reached a consensus on EITF 05-1, “Accounting for the Conversion of an Instrument that Becomes Convertible Upon the Issuer’s Exercise of a Call Option” (“EITF 05-1”). This guidance requires that the issuance of equity securities to settle an instrument (pursuant to the instrument’s original conversion terms) that becomes convertible upon the issuer’s exercise of a call option should be accounted for as a conversion if the debt instrument contained a substantive conversion feature as of its issuance date (i.e., no gain or loss should be recognized related to the equity securities issued to settle the instrument). Additionally, the issuance of equity securities to settle an instrument that, as of its issuance date, does not contain a substantive conversion feature should be accounted for as a debt extinguishment and the fair value of the equity securities issued should be considered a component of the reacquisition price of the debt. The guidance is effective for all conversions within its scope that result from the exercise of call options in interim or annual reporting periods beginning after June 28, 2006. In the future, if the Company issues common stock pursuant to the conversion terms to settle its 2% convertible senior notes, it would not recognize a gain or loss because the notes have substantive conversion features as defined by EITF 05-1. | | | | In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which changes the requirements for the accounting and reporting of a change in accounting principle (“SFAS No. 154”). SFAS No. 154 applies to all voluntary changes in accounting principles, as well as to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS No. 154 eliminates the requirement to include the cumulative effect of changes in accounting principle in the income statement and instead requires that changes in accounting principle be retroactively applied. A change in accounting estimate continues to be accounted for in the period of change and future periods if necessary. A correction of an error continues to be reported by restating prior period financial statements. SFAS No. 154 is effective for the Company’s first quarter of fiscal 2007. | | | | In March 2005, the FASB issued interpretation FIN No. 47, “Accounting for Conditional Asset Retirement Obligations (“FIN 47”). FIN 47 clarifies that the term conditional asset retirement obligation as used in SFAS 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The Company adopted FIN 47 in fiscal 2006 and it had no material effect on the Company’s consolidated financial condition or results of operations. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | | | (17) Consolidating Financial Information | |
| The consolidating financial information presented below reflects information regarding the Parent, the Guarantor Subsidiaries and the Non-Guarantor Subsidiary of the Company’s 2.0% convertible senior notes. Tolt is included in the guarantor column for all periods presented. The Parent’s expenses associated with supporting the operations of its subsidiaries are allocated to the respective Guarantor Subsidiaries and Non–Guarantor Subsidiary. The consolidating financial information presented herein is not utilized by the chief operating decision-maker in making operating decisions and assessing performance. | | | | The following reflects the consolidating balance sheet as of July 31, 2006: | | |
| | | Parent | | | Guarantor
Subsidiaries
| | | Non-Guarantor
Subsidiary
| | | Consolidating
Entries
| | | Consolidated
Total
| |
|---|
| |
| |
| |
| |
| |
| | | Assets | | | | | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | | | | | Cash and cash equivalents | $ | 238,298,000 | | | 9,949,000 | | | 3,340,000 | | | — | | $ | 251,587,000 | | | Restricted cash | | — | | | 1,003,000 | | | — | | | — | | | 1,003,000 | | | Accounts receivable, net | | — | | | 66,025,000 | | | 4,022,000 | | | — | | | 70,047,000 | | | Inventories, net | | — | | | 61,043,000 | | | — | | | — | | | 61,043,000 | | | Prepaid expenses and other current assets | | 1,101,000 | | | 5,565,000 | | | 512,000 | | | — | | | 7,178,000 | | | Deferred tax asset - current | | 551,000 | | | 7,040,000 | | | — | | | — | | | 7,591,000 | | | |
| |
| |
| |
| |
| | | Total current assets | | 239,950,000 | | | 150,625,000 | | | 7,874,000 | | | — | | | 398,449,000 | | | | | Property, plant and equipment, net | | 914,000 | | | 23,295,000 | | | 523,000 | | | — | | | 24,732,000 | | | Investment in subsidiaries | | 191,046,000 | | | 5,496,000 | | | — | | | (196,542,000 | ) | | — | | | Goodwill | | — | | | 21,297,000 | | | 947,000 | | | — | | | 22,244,000 | | | Intangibles with finite lives, net | | — | | | 5,933,000 | | | 922,000 | | | — | | | 6,855,000 | | | Deferred tax asset – non-current | | — | | | — | | | 174,000 | | | (174,000 | ) | | — | | | Deferred financing costs, net | | 2,449,000 | | | — | | | — | | | — | | | 2,449,000 | | | Other assets, net | | 56,000 | | | 459,000 | | | 22,000 | | | — | | | 537,000 | | | Intercompany receivables | | — | | | 59,824,000 | | | — | | | (59,824,000 | ) | | — | | | |
| |
| |
| |
| |
| | | Total assets | $ | 434,415,000 | | | 266,929,000 | | | 10,462,000 | | | (256,540,000 | ) | $ | 455,266,000 | | | |
| |
| |
| |
| |
| | | | | Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | | | | | Accounts payable | $ | 390,000 | | | 27,497,000 | | | 450,000 | | | — | | $ | 28,337,000 | | | Accrued expenses and other current liabilities | | 6,683,000 | | | 32,806,000 | | | 1,741,000 | | | — | | | 41,230,000 | | | Customer advances and deposits | | — | | | 3,502,000 | | | 42,000 | | | — | | | 3,544,000 | | | Deferred service revenue | | — | | | 9,896,000 | | | — | | | — | | | 9,896,000 | | | Current installments of other obligations | | — | | | 154,000 | | | — | | | — | | | 154,000 | | | Interest payable | | 1,050,000 | | | — | | | — | | | — | | | 1,050,000 | | | Income taxes payable | | 4,428,000 | | | — | | | 824,000 | | | — | | | 5,252,000 | | | |
| |
| |
| |
| |
| | | Total current liabilities | | 12,551,000 | | | 73,855,000 | | | 3,057,000 | | | — | | | 89,463,000 | | | | | Convertible senior notes | | 105,000,000 | | | — | | | — | | | — | | | 105,000,000 | | | Other obligations, less current installments | | — | | | 243,000 | | | — | | | — | | | 243,000 | | | Deferred tax liability – non-current | | 4,707,000 | | | 1,785,000 | | | ��� | | | (174,000 | ) | | 6,318,000 | | | Intercompany payables | | 57,915,000 | | | — | | | 1,908,000 | | | (59,823,000 | ) | | — | | | |
| |
| |
| |
| |
| | | Total liabilities | | 180,173,000 | | | 75,883,000 | | | 4,965,000 | | | (59,997,000 | ) | | 201,024,000 | | | | | Commitments and contingencies | | | | | | | | | | | | | | | | | | | Stockholders’ equity: | | | | | | | | | | | | | | | | | Preferred stock | | — | | | — | | | — | | | — | | | — | | | Common stock | | 2,305,000 | | | 4,000 | | | — | | | (4,000 | ) | | 2,305,000 | | | Additional paid-in capital | | 139,487,000 | | | 81,410,000 | | | 5,187,000 | | | (86,597,000 | ) | | 139,487,000 | | | Retained earnings | | 112,635,000 | | | 109,632,000 | | | 310,000 | | | (109,942,000 | ) | | 112,635,000 | | | |
| |
| |
| |
| |
| | | | | 254,427,000 | | | 191,046,000 | | | 5,497,000 | | | (196,543,000 | ) | | 254,427,000 | | | | | Less: | | | | | | | | | | | | | | | | | Treasury stock | | (185,000 | ) | | — | | | — | | | — | | | (185,000 | ) | | |
| |
| |
| |
| |
| | | Total stockholders’ equity | | 254,242,000 | | | 191,046,000 | | | 5,497,000 | | | (196,543,000 | ) | | 254,242,000 | | | |
| |
| |
| |
| |
| | | Total liabilities and stockholders’ equity | $ | 434,415,000 | | | 266,929,000 | | | 10,462,000 | | | (256,540,000 | ) | $ | 455,266,000 | | | |
| |
| |
| |
| |
| |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | | | (17) Consolidating Financial Information (continued) | |
| The following reflects the consolidating balance sheet as of July 31, 2005: | | |
| | | Parent | | | Guarantor
Subsidiaries
| | | Non-Guarantor
Subsidiary
| | | Consolidating
Entries
| | | Consolidated
Total
| | | |
| |
| |
| |
| |
| | | Assets | | | | | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | | | | | Cash and cash equivalents | $ | 212,579,000 | | | 1,111,000 | | | 723,000 | | | — | | $ | 214,413,000 | | | Restricted cash | | 31,000 | | | 1,003,000 | | | — | | | — | | | 1,034,000 | | | Accounts receivable, net | | — | | | 54,807,000 | | | 1,245,000 | | | — | | | 56,052,000 | | | Inventories, net | | — | | | 45,103,000 | | | — | | | — | | | 45,103,000 | | | Prepaid expenses and other current assets | | 888,000 | | | 3,303,000 | | | 196,000 | | | — | | | 4,387,000 | | | Deferred tax asset - current | | 592,000 | | | 7,500,000 | | | — | | | — | | | 8,092,000 | | | |
| |
| |
| |
| |
| | | Total current assets | | 214,090,000 | | | 112,827,000 | | | 2,164,000 | | | — | | | 329,081,000 | | | | | Property, plant and equipment, net | | 474,000 | | | 17,925,000 | | | 284,000 | | | — | | | 18,683,000 | | | Investment in subsidiaries | | 149,889,000 | | | 4,040,000 | | | — | | | (153,929,000 | ) | | — | | | Goodwill | | — | | | 21,297,000 | | | 947,000 | | | — | | | 22,244,000 | | | Intangibles with finite lives, net | | — | | | 8,024,000 | | | 1,099,000 | | | — | | | 9,123,000 | | | Deferred tax asset – non-current | | — | | | — | | | 66,000 | | | (66,000 | ) | | — | | | Deferred financing costs, net | | 2,995,000 | | | — | | | — | | | — | | | 2,995,000 | | | Other assets, net | | — | | | 265,000 | | | 12,000 | | | — | | | 277,000 | | | Intercompany receivables | | — | | | 53,591,000 | | | 50,000 | | | (53,641,000 | ) | | — | | | |
| |
| |
| |
| |
| | | Total assets | $ | 367,448,000 | | | 217,969,000 | | | 4,622,000 | | | (207,636,000 | ) | $ | 382,403,000 | | | |
| |
| |
| |
| |
| | | | | Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | | | | | Accounts payable | $ | 351,000 | | | 23,105,000 | | | 121,000 | | | — | | $ | 23,577,000 | | | Accrued expenses and other current liabilities | | 5,502,000 | | | 28,534,000 | | | 461,000 | | | — | | | 34,497,000 | | | Customer advances and deposits | | — | | | 5,282,000 | | | — | | | — | | | 5,282,000 | | | Deferred service revenue | | — | | | 8,210,000 | | | — | | | — | | | 8,210,000 | | | Current installments of other obligations | | — | | | 235,000 | | | — | | | — | | | 235,000 | | | Interest payable | | 1,050,000 | | | — | | | — | | | — | | | 1,050,000 | | | Income taxes payable | | 1,540,000 | | | — | | | — | | | — | | | 1,540,000 | | | |
| |
| |
| |
| |
| | | Total current liabilities | | 8,443,000 | | | 65,366,000 | | | 582,000 | | | — | | | 74,391,000 | | | | | Convertible senior notes | | 105,000,000 | | | — | | | — | | | — | | | 105,000,000 | | | Other obligations, less current installments | | — | | | 396,000 | | | — | | | — | | | 396,000 | | | Deferred tax liability – non-current | | 3,735,000 | | | 2,318,000 | | | — | | | (66,000 | ) | | 5,987,000 | | | Intercompany payables | | 53,641,000 | | | — | | | — | | | (53,641,000 | ) | | — | | | |
| |
| |
| |
| |
| | | Total liabilities | | 170,819,000 | | | 68,080,000 | | | 582,000 | | | (53,707,000 | ) | | 185,774,000 | | | | | Commitments and contingencies | | | | | | | | | | | | | | | | | | | Stockholders’ equity: | | | | | | | | | | | | | | | | | Preferred stock | | — | | | — | | | — | | | — | | | — | | | Common stock | | 2,278,000 | | | 4,000 | | | — | | | (4,000 | ) | | 2,278,000 | | | Additional paid-in capital | | 127,170,000 | | | 81,410,000 | | | 5,187,000 | | | (86,597,000 | ) | | 127,170,000 | | | Retained earnings (deficit) | | 67,366,000 | | | 68,475,000 | | | (1,147,000 | ) | | (67,328,000 | ) | | 67,366,000 | | | |
| |
| |
| |
| |
| | | | | 196,814,000 | | | 149,889,000 | | | 4,040,000 | | | (153,929,000 | ) | | 196,814,000 | | | | | Less: | | | | | | | | | | | | | | | | | Treasury stock | | (185,000 | ) | | — | | | — | | | — | | | (185,000 | ) | | |
| |
| |
| |
| |
| | | Total stockholders’ equity | | 196,629,000 | | | 149,889,000 | | | 4,040,000 | | | (153,929,000 | ) | | 196,629,000 | | | |
| |
| |
| |
| |
| | | Total liabilities and stockholders’ equity | $ | 367,448,000 | | | 217,969,000 | | | 4,622,000 | | | (207,636,000 | ) | $ | 382,403,000 | | | |
| |
| |
| |
| |
| |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | | | (17) Consolidating Financial Information (continued) | |
| The following reflects the consolidating statement of operations for the year ended July 31, 2006: | | |
| | | Parent | | | Guarantor
Subsidiaries
| | | Non-Guarantor
Subsidiary
| | | Consolidating
Entries
| | | Consolidated
Total
| | | |
| |
| |
| |
| |
| | | Net sales | $ | — | | | 377,003,000 | | | 14,971,000 | | | (463,000 | ) | $ | 391,511,000 | | | Cost of sales | | — | | | 227,042,000 | | | 5,631,000 | | | (463,000 | ) | | 232,210,000 | | | |
| |
| |
| |
| |
| | | Gross Profit | | — | | | 149,961,000 | | | 9,340,000 | | | — | | | 159,301,000 | | | | | Expenses: | | | | | | | | | | | | | | | | | Selling, general and administrative | | — | | | 61,467,000 | | | 5,604,000 | | | — | | | 67,071,000 | | | Research and development | | — | | | 24,392,000 | | | 1,442,000 | | | — | | | 25,834,000 | | | Amortization of intangibles | | — | | | 2,288,000 | | | 177,000 | | | — | | | 2,465,000 | | | | | | | | | |
| |
| |
| |
| |
| | | | | — | | | 88,147,000 | | | 7,223,000 | | | — | | | 95,370,000 | | | |
| |
| |
| |
| |
| | | | | Operating income (loss) | | — | | | 61,814,000 | | | 2,117,000 | | | — | | | 63,931,000 | | | | | Other expense (income): | | | | | | | | | | | | | | | | | Interest expense | | 2,646,000 | | | 41,000 | | | — | | | — | | | 2,687,000 | | | Interest (income) | | (9,193,000 | ) | | (60,000 | ) | | 10,000 | | | — | | | (9,243,000 | ) | | |
| |
| |
| |
| |
| | | | Income before provision for income taxes and equity
in undistributed earnings of subsidiaries | | 6,547,000 | | | 61,833,000 | | | 2,107,000 | | | — | | | 70,487,000 | | | Provision for income taxes | | 2,435,000 | | | 22,133,000 | | | 650,000 | | | — | | | 25,218,000 | | | |
| |
| |
| |
| |
| | Net earnings (loss) before equity in undistributed
earnings of subsidiaries | | 4,112,000 | | | 39,700,000 | | | 1,457,000 | | | — | | | 45,269,000 | | | Equity in undistributed earnings of subsidiaries | | 41,157,000 | | | 1,457,000 | | | — | | | (42,614,000 | ) | | — | | | |
| |
| |
| |
| |
| | | | | Net income | $ | 45,269,000 | | | 41,157,000 | | | 1,457,000 | | | (42,614,000 | ) | $ | 45,269,000 | | | |
| |
| |
| |
| |
| |
| | | The following reflects the consolidating statement of operations for the year ended July 31, 2005: | | |
| | | Parent | | | Guarantor
Subsidiaries
| | | Non-Guarantor
Subsidiary
| | | Consolidating
Entries
| | | Consolidated
Total
| | | |
| |
| |
| |
| |
| | | Net sales | $ | — | | | 301,749,000 | | | 6,334,000 | | | (193,000 | ) | $ | 307,890,000 | | | Cost of sales | | — | | | 178,099,000 | | | 2,618,000 | | | (193,000 | ) | | 180,524,000 | | | |
| |
| |
| |
| |
| | | Gross Profit | | — | | | 123,650,000 | | | 3,716,000 | | | — | | | 127,366,000 | | | | | Expenses: | | | | | | | | | | | | | | | | | Selling, general and administrative | | — | | | 48,710,000 | | | 3,109,000 | | | — | | | 51,819,000 | | | Research and development | | — | | | 20,261,000 | | | 894,000 | | | — | | | 21,155,000 | | | Amortization of intangibles | | — | | | 2,076,000 | | | 252,000 | | | — | | | 2,328,000 | | | | | | | | | |
| |
| |
| |
| |
| | | | | — | | | 71,047,000 | | | 4,255,000 | | | — | | | 75,302,000 | | | |
| |
| |
| |
| |
| | | | | Operating income (loss) | | — | | | 52,603,000 | | | (539,000 | ) | | — | | | 52,064,000 | | | | | | | | | | | | | | | | | | | | Other expense (income): | | | | | | | | | | | | | | | | | Interest expense | | 2,646,000 | | | 33,000 | | | — | | | — | | | 2,679,000 | | | Interest (income) | | (4,070,000 | ) | | (14,000 | ) | | 12,000 | | | — | | | (4,072,000 | ) | | |
| |
| |
| |
| |
| | | | Income (loss) before provision (benefit) for income
taxes and equity in undistributed earnings (loss)
of subsidiaries | | 1,424,000 | | | 52,584,000 | | | (551,000 | ) | | — | | | 53,457,000 | | | Provision (benefit) for income taxes | | 530,000 | | | 16,318,000 | | | (46,000 | ) | | — | | | 16,802,000 | | | |
| |
| |
| |
| |
| | Net earnings (loss) before equity in undistributed
earnings (loss) of subsidiaries | | 894,000 | | | 36,266,000 | | | (505,000 | ) | | — | | | 36,655,000 | | Equity in undistributed earnings (loss) of
subsidiaries | | 35,761,000 | | | (505,000 | ) | | — | | | (35,256,000 | ) | | — | | | |
| |
| |
| |
| |
| | | | | Net income (loss) | $ | 36,655,000 | | | 35,761,000 | | | (505,000 | ) | | (35,256,000 | ) | $ | 36,655,000 | | | |
| |
| |
| |
| |
| |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued | | | (17) Consolidating Financial Information (continued) | |
| The following reflects the consolidating statement of operations for the year ended as of July 31, 2004: | | |
| Parent | | Guarantor
Subsidiaries | | Non-Guarantor
Subsidiary | | Consolidating
Entries | | Consolidated
Total | |
|---|
| |
| |
| |
| |
| |
| | | Net sales | $ | — | | | 222,132,000 | | 1,258,000 | | — | | $ 223,390,000 | | | Cost of sales | | — | | | 135,418,000 | | 440,000 | | — | | 135,858,000 | | | |
| |
| |
| |
| |
| | | Gross Profit | | — | | | 86,714,000 | | 818,000 | | — | | 87,532,000 | | | | | Expenses: | | | | | | | | | | | | | | Selling, general and administrative | | — | | | 35,472,000 | | 544,000 | | — | | 36,016,000 | | | Research and development | | — | | | 15,709,000 | | 198,000 | | — | | 15,907,000 | | | In-process research and development | | — | | | — | | 940,000 | | — | | 940,000 | | | Amortization of intangibles | | — | | | 1,998,000 | | 69,000 | | — | | 2,067,000 | | | | | | | | | | |
| |
| |
| |
| |
| | | | | — | | | 53,179,000 | | 1,751,000 | | — | | 54,930,000 | | | |
| |
| |
| |
| |
| | | | | Operating income (loss) | | — | | | 33,535,000 | | (933,000 | ) | — | | 32,602,000 | | | | | Other expense (income): | | | | | | | | | | | | | | Interest expense | | 1,370,000 | | | 61,000 | | (6,000 | ) | — | | 1,425,000 | | | Interest (income) | | (914,000 | ) | | (7,000 | ) | — | | — | | (921,000 | ) | | |
| |
| |
| |
| |
| | | | Income (loss) before provision (benefit)
for income taxes and equity in
undistributed earnings (loss) of
subsidiaries | | (456,000 | ) | | 33,481,000 | | (927,000 | ) | — | | 32,098,000 | | | Provision (benefit) for income taxes | | (146,000 | ) | | 10,702,000 | | (285,000 | ) | — | | 10,271,000 | | | |
| |
| |
| |
| |
| | Net earnings (loss) before equity in undistributed
earnings (loss) of subsidiaries | | (310,000 | ) | | 22,779,000 | | (642,000 | ) | — | | 21,827,000 | | Equity in undistributed earnings (loss) of
subsidiaries | | 22,137,000 | | | (642,000 | ) | — | | (21,495,000 | ) | — | | | |
| |
| |
| |
| |
| | | | | Net income (loss) | $ | 21,827,000 | | | 22,137,000 | | (642,000 | ) | (21,495,000 | ) | $ 21,827,000 | | | |
| |
| |
| |
| |
| |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (17) Consolidating Financial Information (continued) | |
| The following reflects the consolidating statement of cash flows for the year ended July 31, 2006: | | |
| | | Parent | | | Guarantor
Subsidiaries
| | | Non-Guarantor
Subsidiary
| | | Consolidating
Entries
| | | Consolidated
Total
| | | |
| |
| |
| |
| |
| | | Cash flows from operating activities: | | | | | | | | | | | | | | | | | Net income | $ | 45,269,000 | | | 41,157,000 | | | 1,457,000 | | | (42,614,000 | ) | $ | 45,269,000 | | Adjustments to reconcile net income to net cash
provided by operating activities: | | — | | | — | | | — | | | — | | | — | | Depreciation and amortization of property, plant
and equipment | | 111,000 | | | 6,019,000 | | | 112,000 | | | — | | | 6,242,000 | | | Amortization of intangible assets with finite lives | | — | | | 2,289,000 | | | 176,000 | | | — | | | 2,465,000 | | | Amortization of stock-based compensation | | 2,176,000 | | | 3,495,000 | | | 10,000 | | | — | | | 5,681,000 | | | Amortization of deferred financing costs | | 546,000 | | | — | | | — | | | — | | | 546,000 | | | Loss on disposal of property, plant and equipment | | — | | | 35,000 | | | 1,000 | | | — | | | 36,000 | | | Provision for doubtful accounts | | — | | | 556,000 | | | 192,000 | | | — | | | 748,000 | | | Provision for excess and obsolete inventory | | — | | | 1,981,000 | | | 49,000 | | | — | | | 2,030,000 | | Excess income tax benefit from stock option
exercises | | (4,065,000 | ) | | — | | | — | | | — | | | (4,065,000 | ) | | Deferred income tax expense (benefit) | | 1,013,000 | | | (74,000 | ) | | (107,000 | ) | | — | | | 832,000 | | | Equity in undistributed earnings of subsidiaries | | (41,157,000 | ) | | (1,457,000 | ) | | — | | | 42,614,000 | | | — | | | Intercompany accounts | | 7,876,000 | | | (9,822,000 | ) | | 1,946,000 | | | — | | | — | | Changes in assets and liabilities, net of effects of
acquisition: | | | | | | | | | | | | | | | | | Restricted cash securing letter of credit obligations | | 31,000 | | | — | | | — | | | — | | | 31,000 | | | Accounts receivable | | — | | | (11,775,000 | ) | | (2,968,000 | ) | | — | | | (14,743,000 | ) | | Inventories | | — | | | (17,860,000 | ) | | (49,000 | ) | | — | | | (17,909,000 | ) | | Prepaid expenses and other assets | | (213,000 | ) | | (2,262,000 | ) | | (316,000 | ) | | — | | | (2,791,000 | ) | | Other assets | | (56,000 | ) | | (195,000 | ) | | (9,000 | ) | | — | | | (260,000 | ) | | Accounts payable | | 39,000 | | | 4,392,000 | | | 329,000 | | | — | | | 4,760,000 | | | Accrued expenses and other current liabilities | | 1,181,000 | | | 5,271,000 | | | 1,281,000 | | | — | | | 7,733,000 | | | Customer advances and deposits | | — | | | (1,780,000 | ) | | 42,000 | | | — | | | (1,738,000 | ) | | Deferred service revenue | | — | | | 1,686,000 | | | — | | | — | | | 1,686,000 | | | Interest payable | | — | | | — | | | — | | | — | | | — | | | | | | | | | Income taxes payable | | 6,953,000 | | | — | | | 824,000 | | | — | | | 7,777,000 | | | |
| |
| |
| |
| |
| | | Net cash provided by operating activities | | 19,704,000 | | | 21,656,000 | | | 2,970,000 | | | — | | | 44,330,000 | | | |
| |
| |
| |
| |
| | | | | Cash flows from investing activities: | | | | | | | | | | | | | | | | | Purchases of property, plant and equipment | | (587,000 | ) | | (11,387,000 | ) | | (353,000 | ) | | — | | | (12,327,000 | ) | | Purchase of other intangibles with finite lives | | — | | | (197,000 | ) | | — | | | — | | | (197,000 | ) | | | | | | | | Payments for business acquisition | | — | | | (1,000,000 | ) | | — | | | — | | | (1,000,000 | ) | | |
| |
| |
| |
| |
| | | Net cash used in investing activities | | (587,000 | ) | | (12,584,000 | ) | | (353,000 | ) | | — | | | (13,524,000 | ) | | |
| |
| |
| |
| |
| | | | | Cash flows from financing activities: | | | | | | | | | | | | | | | | | Principal payments on other obligations | | — | | | (234,000 | ) | | — | | | — | | | (234,000 | ) | Excess income tax benefit from stock option exercises
| | 4,065,000 | | | — | | | — | | | — | | | 4,065,000 | | | Proceeds from exercises of stock options | | 1,863,000 | | | — | | | — | | | — | | | 1,863,000 | | Proceeds from issuance of employee stock purchase
plan shares | | 674,000 | | | — | | | — | | | — | | | 674,000 | | | |
| |
| |
| |
| |
| | | Net cash provided by (used in) financing activities | | 6,602,000 | | | (234,000 | ) | | — | | | — | | | 6,368,000 | | | |
| |
| |
| |
| |
| | | | | Net increase in cash and cash equivalents | | 25,719,000 | | | 8,838,000 | | | 2,617,000 | | | — | | | 37,174,000 | | | Cash and cash equivalents at beginning of period | | 212,579,000 | | | 1,111,000 | | | 723,000 | | | — | | | 214,413,000 | | | |
| |
| |
| |
| |
| | | Cash and cash equivalents at end of period | $ | 238,298,000 | | | 9,949,000 | | | 3,340,000 | | | — | | $ | 251,587,000 | | | |
| |
| |
| |
| |
| |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (17) Consolidating Financial Information (continued) | |
| The following reflects the consolidating statement of cash flows for the year ended July 31, 2005: | | |
| Parent | | Guarantor
Subsidiaries | | Non-Guarantor
Subsidiary | | Consolidating
Entries | | Consolidated
Total | |
|---|
| |
| |
| |
| |
| |
| |
|---|
| Cash flows from operating activities: | | | | | | | | | | | | | | | | | Net income (loss) | $ | 36,655,000 | | | 35,761,000 | | | (505,000 | ) | | (35,256,000 | ) | $ | 36,655,000 | | Adjustments to reconcile net income (loss) to net
cash provided by operating activities: | | | | | | | | | | | | | | | | Depreciation and amortization of property,
plant and equipment | | 145,000 | | | 5,087,000 | | | 83,000 | | | — | | | 5,315,000 | | | Amortization of intangible assets with finite lives | | — | | | 2,076,000 | | | 252,000 | | | — | | | 2,328,000 | | | Amortization of deferred financing costs | | 546,000 | | | — | | | — | | | — | | | 546,000 | | Loss on disposal of property, plant and
equipment | | — | | | 284,000 | | | — | | | — | | | 284,000 | | | Provision for doubtful accounts | | — | | | 287,000 | | | — | | | — | | | 287,000 | | | Provision for excess and obsolete inventory | | — | | | 2,081,000 | | | 17,000 | | | — | | | 2,098,000 | | | Income tax benefit from stock option exercises | | 9,896,000 | | | — | | | — | | | — | | | 9,896,000 | | | Deferred income tax expense | | 2,164,000 | | | 604,000 | | | — | | | — | | | 2,768,000 | | Equity in undistributed earnings (loss) of
subsidiaries | | (35,761,000 | ) | | 505,000 | | | — | | | 35,256,000 | | | — | | | Intercompany accounts | | 33,407,000 | | | (34,162,000 | ) | | 755,000 | | | — | | | — | | Changes in assets and liabilities, net of effects
of acquisition: | | | | | | | | | | | | | | | | Restricted cash securing letter of credit
obligations | | 10,000 | | | 3,010,000 | | | — | | | — | | | 3,020,000 | | | Accounts receivable | | — | | | (12,674,000 | ) | | (663,000 | ) | | — | | | (13,337,000 | ) | | Inventories | | — | | | (7,267,000 | ) | | 31,000 | | | — | | | (7,236,000 | ) | | Prepaid expenses and other assets | | (478,000 | ) | | (1,731,000 | ) | | (164,000 | ) | | — | | | (2,373,000 | ) | | Other assets | | — | | | 74,000 | | | (5,000 | ) | | — | | | 69,000 | | | Accounts payable | | 22,000 | | | 13,914,000 | | | 75,000 | | | — | | | 14,011,000 | | | Accrued expenses and other current liabilities | | 1,884,000 | | | 10,385,000 | | | 127,000 | | | 136,000 | | | 12,532,000 | | | Customer advances and deposits | | — | | | (2,008,000 | ) | | — | | | — | | | (2,008,000 | ) | | Deferred service revenue | | — | | | (5,506,000 | ) | | — | | | — | | | (5,506,000 | ) | | Interest payable | | (23,000 | ) | | — | | | — | | | — | | | (23,000 | ) | | | | | | | | Income taxes payable | | (3,272,000 | ) | | — | | | — | | | — | | | (3,272,000 | ) | | |
| |
| |
| |
| |
| |
|---|
| Net cash provided by operating activities | | 45,195,000 | | | 10,720,000 | | | 3,000 | | | 136,000 | | | 56,054,000 | | | |
| |
| |
| |
| |
| |
|---|
| | | Cash flows from investing activities: | | | | | | | | | | | | | | | | | Purchases of property, plant and equipment | | (64,000 | ) | | (9,263,000 | ) | | (205,000 | ) | | — | | | (9,532,000 | ) | | | | | | | | Purchase of other intangibles with finite lives | | — | | | (75,000 | ) | | — | | | — | | | (75,000 | ) | | Payments for business acquisition | | (2,735,000 | ) | | (2,735,000 | ) | | — | | | 2,735,000 | | | (2,735,000 | ) | | |
| |
| |
| |
| |
| |
|---|
| Net cash used in investing activities | | (2,799,000 | ) | | (12,073,000 | ) | | (205,000 | ) | | 2,735,000 | | | (12,342,000 | ) | | |
| |
| |
| |
| |
| |
|---|
| | | Cash flows from financing activities: | | | | | | | | | | | | | | | | | Proceeds from issuance of stock in subsidiary | | — | | | 2,735,000 | | | — | | | (2,735,000 | ) | | — | | | Principal payments on other obligations | | — | | | (271,000 | ) | | — | | | — | | | (271,000 | ) | Proceeds from exercises of stock options and
warrants | | 7,160,000 | | | — | | | — | | | — | | | 7,160,000 | | | | | | | | Proceeds from issuance of employee stock
purchase plan shares | | 520,000 | | | — | | | — | | | — | | | 520,000 | | | |
| |
| |
| |
| |
| |
|---|
Net cash provided by (used in) financing
activities | | 7,680,000 | | | 2,464,000 | | | — | | | (2,735,000 | ) | | 7,409,000 | | | |
| |
| |
| |
| |
| |
|---|
| | Net increase (decrease) in cash and cash
equivalents | | 50,076,000 | | | 1,111,000 | | | (202,000 | ) | | 136,000 | | | 51,121,000 | | | | | | | | | Cash and cash equivalents at beginning of period | | 162,503,000 | | | — | | | 925,000 | | | (136,000 | ) | | 163,292,000 | | | |
| |
| |
| |
| |
| |
|---|
| Cash and cash equivalents at end of period | $ | 212,579,000 | | | 1,111,000 | | | 723,000 | | | — | | $ | 214,413,000 | | | |
| |
| |
| |
| |
| |
|---|
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (17) Consolidating Financial Information (continued) | |
| The following reflects the consolidating statement of cash flows for the year ended July 31, 2004: | | |
| Parent | | Guarantor
Subsidiaries | | Non-Guarantor
Subsidiary | | Consolidating
Entries | | Consolidated
Total | |
|---|
| |
| |
| |
| |
| |
| |
|---|
| Cash flows from operating activities: | | | | | | | | | | | | | | | | | Net income (loss) | $ | 21,827,000 | | | 22,137,000 | | | (642,000 | ) | | (21,495,000 | ) | $ | 21,827,000 | | Adjustments to reconcile net income (loss) to
net cash provided by operating activities: | | | | | | | | | | | | | | | | Depreciation and amortization of property, plant
and equipment | | 97,000 | | | 4,236,000 | | | 8,000 | | | — | | | 4,341,000 | | Amortization of intangible assets with finite
lives | | — | | | 1,997,000 | | | 70,000 | | | | | | 2,067,000 | | | Amortization of deferred financing costs | | 280,000 | | | — | | | — | | | — | | | 280,000 | | | Amortization of deferred compensation | | 106,000 | | | — | | | — | | | — | | | 106,000 | | Loss on disposal of property, plant and
equipment | | — | | | 91,000 | | | — | | | — | | | 91,000 | | Write off of in process research and
development | | — | | | — | | | 940,000 | | | — | | | 940,000 | | | Provision for doubtful accounts | | — | | | 147,000 | | | — | | | — | | | 147,000 | | | Provision for excess and obsolete inventory | | — | | | 1,193,000 | | | — | | | — | | | 1,193,000 | | | Income tax benefit from stock option exercises | | 1,001,000 | | | — | | | — | | | — | | | 1,001,000 | | | Deferred income tax expense (benefit) | | 1,600,000 | | | 655,000 | | | (176,000 | ) | | — | | | 2,079,000 | | | Equity in undistributed earnings (loss) of subsidiaries | | (22,137,000 | ) | | 642,000 | | | — | | | 21,495,000 | | | — | | | Intercompany accounts | | 7,276,000 | | | (6,471,000 | ) | | (805,000 | ) | | — | | | — | | Changes in assets and liabilities, net of effects
of acquisition: | | | | | | | | | | | | | | | | Restricted cash securing letter of credit
obligations | | 4,247,000 | | | (4,013,000 | ) | | — | | | — | | | 234,000 | | | Accounts receivable | | — | | | (15,871,000 | ) | | (582,000 | ) | | — | | | (16,453,000 | ) | | Inventories | | — | | | (6,903,000 | ) | | 1,751,000 | | | — | | | (5,152,000 | ) | | Prepaid expenses and other assets | | (189,000 | ) | | 146,000 | | | 327,000 | | | — | | | 284,000 | | | Other assets | | — | | | 51,000 | | | (7,000 | ) | | — | | | 44,000 | | | Accounts payable | | 65,000 | | | (2,072,000 | ) | | 46,000 | | | — | | | (1,961,000 | ) | | Accrued expenses and other current liabilities | | 1,097,000 | | | 5,953,000 | | | 1,000 | | | (136,000 | ) | | 6,915,000 | | | Customer advances and deposits | | — | | | 4,799,000 | | | — | | | — | | | 4,799,000 | | | Deferred service revenue | | — | | | 2,556,000 | | | — | | | — | | | 2,556,000 | | | Interest payable | | 1,073,000 | | | — | | | — | | | — | | | 1,073,000 | | | Income taxes payable | | (2,133,000 | ) | | — | | | — | | | — | | | (2,133,000 | ) | | |
| |
| |
| |
| |
| |
|---|
| Net cash provided by operating activities | | 14,210,000 | | | 9,273,000 | | | 931,000 | | | (136,000 | ) | | 24,278,000 | | | |
| |
| |
| |
| |
| |
|---|
| | | Cash flows from investing activities: | | | | | | | | | | | | | | | | | Purchases of property, plant and equipment | | (493,000 | ) | | (6,092,000 | ) | | (6,000 | ) | | — | | | (6,591,000 | ) | | Payments for business acquisition | | — | | | (5,187,000 | ) | | (5,187,000 | ) | | 5,187,000 | | | (5,187,000 | ) | | |
| |
| |
| |
| |
| |
|---|
| Net cash used in investing activities | | (493,000 | ) | | (11,279,000 | ) | | (5,193,000 | ) | | 5,187,000 | | | (11,778,000 | ) | | |
| |
| |
| |
| |
| |
|---|
| | | Cash flows from financing activities: | | | | | | | | | | | | | | | | | Proceeds from issuance of convertible senior notes | | 101,179,000 | | | — | | | — | | | — | | | 101,179,000 | | | Proceeds from issuance of stock in subsidiary | | — | | | — | | | 5,187,000 | | | (5,187,000 | ) | | — | | | Principal payments on other obligations | | — | | | (900,000 | ) | | — | | | — | | | (900,000 | ) | Proceeds from exercises of stock options and
warrants | | 1,541,000 | | | — | | | — | | | — | | | 1,541,000 | | Proceeds from issuance of employee stock
purchase plan shares | | 355,000 | | | — | | | — | | | — | | | 355,000 | | | |
| |
| |
| |
| |
| |
|---|
Net cash provided by (used in) financing
activities | | 103,075,000 | | | (900,000 | ) | | 5,187,000 | | | (5,187,000 | ) | | 102,175,000 | | | |
| |
| |
| |
| |
| |
|---|
| | Net increase (decrease) in cash and cash
equivalents | | 116,792,000 | | | (2,906,000 | ) | | 925,000 | | | (136,000 | ) | | 114,675,000 | | | Cash and cash equivalents at beginning of period | | 45,711,000 | | | 2,906,000 | | | — | | | — | | | 48,617,000 | | | |
| |
| |
| |
| |
| |
|---|
| Cash and cash equivalents at end of period | $ | 162,503,000 | | | — | | | 925,000 | | | (136,000 | ) | $ | 163,292,000 | | | |
| |
| |
| |
| |
| |
|---|
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (18) Subsequent Event | |
| In August 2006, the Company acquired certain assets and assumed certain liabilities of Insite, a logistics application software company, for $2.7 million, plus certain earn-out payments based on the achievement of future sales targets. The first part of the earn-out cannot exceed $1.4 million and is limited to a five-year period. The second part of the earn-out, which is for a ten-year period, is unlimited and based on a per unit future sales target primarily relating to new commercial satellite-based mobile data communication markets. Insite has developed the geoOps™ Enterprise Location Monitoring System, a software-based solution that allows customers to integrate legacy data systems with near-real time logistics and operational data systems. This operation was combined with the Company’s existing business and is part of the mobile data communications segment. | | |
(19) Unaudited Quarterly Financial Data | |
| The following is a summary of unaudited quarterly operating results (amounts in thousands, except per share data): | | |
| | Fiscal 2006 | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total | |
|---|
| |
|
| |
| |
| |
| |
| |
|---|
| | | Net sales | $ | 106,567 | | | 95,741 | | | 88,997 | | | 100,206 | | | 391,511 | | | | | Gross profit | | 40,204 | | | 41,091 | | | 34,213 | | | 43,793 | | | 159,301 | | | | | Net income | | 11,464 | | | 13,304 | | | 8,722 | | | 11,779 | | | 45,269 | | | | | Diluted income per share | $ | 0.43 | | | 0.50 | | | 0.33 | | | 0.45 | | | 1.72 | * | | | | | | | | |
| Fiscal 2005 | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total | |
|---|
|
|
| |
| |
| |
| |
| |
|---|
| | | Net sales | $ | 56,122 | | | 78,087 | | | 75,388 | | | 98,293 | | | 307,890 | | | | | Gross profit | | 27,121 | | | 32,290 | | | 29,478 | | | 38,477 | | | 127,366 | | | | | Net income | | 7,076 | | | 10,182 | | | 8,372 | | | 11,025 | | | 36,655 | | | | | Diluted income per share | $ | 0.28 | | | 0.39 | | | 0.32 | | | 0.42 | | | 1.42 | * | | | | | | | | |
| | | | * | Income per share information for the full fiscal year may not equal the total of the quarters within the year as a result of rounding. |
| Schedule II | | COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves Fiscal Years Ended July 31, 2006, 2005 and 2004 | |
Column A
| | Column B
| | | Column C Additions
| | | Column D
| | | Column E | |
|
| |
| |
| |
| | Description
| | Balance at
beginning
of period
| | | Charged to
cost and
expenses
| | Charged to
other accounts
- describe
| | | Transfers
(deductions)
- describe
| | | Balance at
end of
period
| |
|
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | Allowance for doubtful accounts —
accounts receivable: | | | | | | | | | | | | | | | | Year ended July 31, | | | | | | | | | | | | | | | | | 2006 | $ | 636,000 | | | 748,000 (C) | | — | | | (8,000) (D) | | $ | 1,376,000 | | | | 2005 | | 732,000 | | | 287,000 (C) | | — | | | (383,000) (D) | | | 636,000 | | | | 2004 | | 912,000 | | | 147,000 (C) | | — | | | (327,000) (D) | | | 732,000 | | | | | | | | | | | | | | | | | | | Inventory reserves: | | | | | | | | | | | | | | | | Year ended July 31, | | | | | | | | | | | | | | | | | 2006 | $ | 6,509,000 | | | 2,030,000 (A) | | — | | | (2,416,000) (B) | | $ | 6,123,000 | | | | 2005 | | 5,622,000 | | | 2,098,000 (A) | | — | | | (1,211,000) (B) | | | 6,509,000 | | | | 2004 | | 5,099,000 | | | 1,193,000 (A) | | — | | | (670,000) (B) | | | 5,622,000 | |
| | (A) | Provision for excess and obsolete inventory. | | | | (B) | Write-off of inventory. | | | | (C) | Provision for doubtful accounts. | | | | (D) | Write-off of uncollectible receivables. |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
Years ended July 31, 2005, 2004 and 2003
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retained
Earnings
(Accumulated
Deficit) | | | | | | | | | | | | | | Common Stock | | Additional
Paid-in
Capital | | | Treasury Stock | | | | | | | | | |
| | | |
| | Deferred
Compensation | | Stockholders’
Equity | | Comprehensive
Income | | | | Shares | | Amount | | | | Shares | | Amount | | | | | | |
| |
| |
| |
| |
| |
| |
| |
| |
| | Balance July 31, 2002 | | | 17,106,573 | | $ | 1,711,000 | | $ | 66,932,000 | | $ | (825,000 | ) | | 210,937 | | $ | (185,000 | ) | $ | (345,000 | ) | $ | 67,288,000 | | $ | 1,148,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization of deferred compensation | | | — | | | — | | | — | | | — | | | — | | | — | | | 239,000 | | | 239,000 | | | — | | Shares issued in connection with private placement, net of related costs | | | 3,150,000 | | | 315,000 | | | 37,876,000 | | | — | | | — | | | — | | | — | | | 38,191,000 | | | — | | Stock options exercised and related income tax benefit | | | 632,092 | | | 63,000 | | | 1,628,000 | | | — | | | — | | | — | | | — | | | 1,691,000 | | | — | | Employee stock purchase plan shares issued | | | 60,384 | | | 6,000 | | | 204,000 | | | — | | | — | | | — | | | — | | | 210,000 | | | — | | Warrants exercised | | | 82,104 | | | 8,000 | | | 232,000 | | | — | | | — | | | — | | | — | | | 240,000 | | | — | | Net income | | | — | | | — | | | — | | | 9,709,000 | | | — | | | — | | | — | | | 9,709,000 | | | 9,709,000 | | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance July 31, 2003 | | | 21,031,153 | | | 2,103,000 | | | 106,872,000 | | | 8,884,000 | | | 210,937 | | | (185,000 | ) | | (106,000 | ) | | 117,568,000 | | | 9,709,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization of deferred compensation | | | — | | | — | | | — | | | — | | | — | | | — | | | 106,000 | | | 106,000 | | | — | | Stock options exercised and related income tax benefit | | | 450,210 | | | 45,000 | | | 2,470,000 | | | — | | | — | | | — | | | — | | | 2,515,000 | | | — | | Employee stock purchase plan shares issued | | | 28,269 | | | 3,000 | | | 352,000 | | | — | | | — | | | — | | | — | | | 355,000 | | | — | | Warrants exercised | | | 47,370 | | | 5,000 | | | 22,000 | | | — | | | — | | | — | | | — | | | 27,000 | | | — | | Net income | | | — | | | — | | | — | | | 21,827,000 | | | — | | | — | | | — | | | 21,827,000 | | | 21,827,000 | | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance July 31, 2004 | | | 21,557,002 | | | 2,156,000 | | | 109,716,000 | | | 30,711,000 | | | 210,937 | | | (185,000 | ) | | — | | | 142,398,000 | | | 21,827,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock options exercised and related income tax benefit | | | 1,209,799 | | | 121,000 | | | 17,012,000 | | | — | | | — | | | — | | | — | | | 17,133,000 | | | — | | Employee stock purchase plan shares issued | | | 28,827 | | | 3,000 | | | 517,000 | | | — | | | — | | | — | | | — | | | 520,000 | | | — | | Termination of unvested restricted shares issued pursuant to employee stock award agreement | | | (13,950 | ) | | (2,000 | ) | | (75,000 | ) | | — | | | — | | | — | | | — | | | (77,000 | ) | | | | Net income | | | — | | | — | | | — | | | 36,655,000 | | | — | | | — | | | — | | | 36,655,000 | | | 36,655,000 | | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | �� | | Balance July 31, 2005 | | | 22,781,678 | | $ | 2,278,000 | | $ | 127,170,000 | | $ | 67,366,000 | | | 210,937 | | $ | (185,000 | ) | $ | — | | $ | 196,629,000 | | $ | 36,655,000 | | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
See accompanying notes to consolidated financial statements.
F-6
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, 2005, 2004 and 2003
| | | | | | | | | | | | | 2005 | | 2004 | | 2003 | | | |
| |
| |
| | Cash flows from operating activities: | | | | | | | | | | | Net income | | $ | 36,655,000 | | | 21,827,000 | | | 9,709,000 | | Adjustments to reconcile net income to net cash provided
by operating activities: | | | | | | | | | | | Depreciation and amortization | | | 7,643,000 | | | 6,514,000 | | | 6,258,000 | | Amortization of deferred financing costs | | | 546,000 | | | 280,000 | | | — | | Loss on disposal of property, plant and equipment | | | 284,000 | | | 91,000 | | | — | | Write-off of in-process research and development | | | — | | | 940,000 | | | — | | Provision for doubtful accounts | | | 287,000 | | | 147,000 | | | 246,000 | | Provision for excess and obsolete inventory | | | 2,098,000 | | | 1,193,000 | | | 2,521,000 | | Income tax benefit from stock option exercises | | | 9,896,000 | | | 1,001,000 | | | — | | Deferred income tax expense (benefit) | | | 2,768,000 | | | 2,079,000 | | | (2,002,000 | ) | Changes in assets and liabilities, net of effects of
acquisitions: | | | | | | | | | | | Restricted cash securing letter of credit obligations | | | 3,020,000 | | | 234,000 | | | (4,288,000 | ) | Accounts receivable | | | (13,337,000 | ) | | (16,453,000 | ) | | 493,000 | | Inventories | | | (7,236,000 | ) | | (5,152,000 | ) | | (2,793,000 | ) | Prepaid expenses and other current assets | | | (2,373,000 | ) | | 284,000 | | | (500,000 | ) | Other assets | | | 69,000 | | | 44,000 | | | 69,000 | | Accounts payable | | | 14,011,000 | | | (1,961,000 | ) | | 1,998,000 | | Accrued expenses and other current liabilities | | | 12,532,000 | | | 6,915,000 | | | 3,540,000 | | Customer advances and deposits | | | (2,008,000 | ) | | 4,799,000 | | | 318,000 | | Deferred service revenue | | | (5,506,000 | ) | | 2,556,000 | | | 6,817,000 | | Interest payable | | | (23,000 | ) | | 1,073,000 | | | — | | Income taxes payable | | | (3,272,000 | ) | | (2,133,000 | ) | | 4,475,000 | | Other liabilities | | | — | | | — | | | (58,000 | ) | | |
|
| |
|
| |
|
| | Net cash provided by operating activities | | | 56,054,000 | | | 24,278,000 | | | 26,803,000 | | | |
|
| |
|
| |
|
| | Cash flows from investing activities: | | | | | | | | | | | Payments for business acquisitions | | | (2,735,000 | ) | | (5,187,000 | ) | | (440,000 | ) | Purchases of property, plant and equipment | | | (9,532,000 | ) | | (6,591,000 | ) | | (4,317,000 | ) | Purchases of proprietary technology | | | (75,000 | ) | | — | | | (75,000 | ) | Cash received in connection with business acquisitions | | | — | | | — | | | 551,000 | | | |
|
| |
|
| |
|
| | Net cash used in investing activities | | | (12,342,000 | ) | | (11,778,000 | ) | | (4,281,000 | ) | | |
|
| |
|
| |
|
| | Cash flows from financing activities: | | | | | | | | | | | Proceeds from issuance of convertible senior notes, net of related costs of $3,821,000 | | | — | | | 101,179,000 | | | — | | Repayment of borrowings under loan agreement | | | — | | | — | | | (28,683,000 | ) | Principal payments on other obligations | | | (271,000 | ) | | (900,000 | ) | | (1,064,000 | ) | Proceeds from issuance of common stock, net of related costs of $2,402,000 | | | — | | | — | | | 38,191,000 | | Proceeds from exercises of stock options, warrants and employee stock purchase plan shares | | | 7,680,000 | | | 1,896,000 | | | 2,141,000 | | | |
|
| |
|
| |
|
| | Net cash provided by financing activities | | | 7,409,000 | | | 102,175,000 | | | 10,585,000 | | | |
|
| |
|
| |
|
| |
(Continued)
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, 2005, 2004 and 2003
| | | | | | | | | | | | | 2005 | | 2004 | | 2003 | | | |
| |
| |
| | Net increase in cash and cash equivalents | | $ | 51,121,000 | | | 114,675,000 | | | 33,107,000 | |
Cash and cash equivalents at beginning of period
| | | 163,292,000 | | | 48,617,000 | | | 15,510,000 | | | |
|
| |
|
| |
|
| | | Cash and cash equivalents at end of period | | $ | 214,413,000 | | | 163,292,000 | | | 48,617,000 | | | |
|
| |
|
| |
|
| | Supplemental cash flow disclosure | | | | | | | | | | | | Cash paid during the period for: | | | | | | | | | | | | Interest | | $ | 2,156,000 | | | 55,000 | | | 2,884,000 | | | |
|
| |
|
| |
|
| | | Income taxes | | $ | 7,456,000 | | | 9,324,000 | | | 2,096,000 | | | |
|
| |
|
| |
|
| | | Non cash investing activities: | | | | | | | | | | | | Purchase of proprietary technology through financing obligation | | $ | 509,000 | | | — | | | — | | | |
|
| |
|
| |
|
| | | Accrued business acquisition payments (See Note 2) | | $ | 1,000,000 | | | — | | | — | | | |
|
| |
|
| |
|
| |
See accompanying notes to consolidated financial statements.
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| | | (1)
| Summary of Significant Accounting and Reporting Policies
| | | | (a)
| Principles of Consolidation
| | | | | | The accompanying consolidated financial statements include the accounts of Comtech Telecommunications Corp. and its subsidiaries (“the Company”), all of which are wholly owned. All significant intercompany balances and transactions have been eliminated in consolidation.
| | | | | (b)
| Nature of Business
| | | | | | The Company designs, develops, produces and markets innovative products, systems and services for advanced communications solutions.
| | | | | | The Company’s business is highly competitive and characterized by rapid technological change. 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, and have significantly greater financial, marketing and operating resources and broader product lines than the Company. A significant technological breakthrough by others, including smaller competitors or new companies, could have a material adverse effect on the Company’s business. In addition, certain of the Company’s customers have technological capabilities in the Company’s product areas and could choose to replace the Company’s products with their own.
| | | | | | International sales expose the Company to certain risks, including barriers to trade, fluctuations in foreign currency exchange rates (which may make the Company’s products less price competitive), political and economic instability, availability of suitable export financing, export license requirements, tariff regulations, and other United States (“U.S.”) and foreign regulations that may apply to the export of the Company’s products, as well as the generally greater difficulties of doing business abroad. The Company attempts to reduce the risk of doing business in foreign countries by seeking contracts denominated in U.S. dollars, advance or milestone payments, credit insurance and irrevocable letters of credit in its favor.
| | | | | (c)
| Revenue Recognition
| | | | | | Revenue is generally recognized when the earnings process is complete, upon shipment or customer acceptance. Revenue from contracts relating to the design, development or manufacturing of complex electronic equipment to a buyer’s specification or to provide services relating to the performance of such contracts is recognized using the percentage-of-completion method. Revenue from contracts that contain multiple elements that are not accounted for under the percentage-of-completion method are accounted for in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Revenue from these contracts is allocated to each respective element based on each element’s relative fair value and is recognized when the respective revenue recognition criteria for each element are met.
| | | | | | Revenue recognition using the percentage-of-completion method is based on the relationship of total costs incurred to total projected costs, or, alternatively, based on output measures, such as units delivered. Provision for anticipated losses on uncompleted contracts is made in the period in which such losses become evident.
| | | | | | 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.
|
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | Revenue recognized in excess of amounts billable under long-term contracts accounted for under the percentage-of-completion method are recorded as unbilled receivables in the accompanying consolidated balance sheets. Unbilled receivables are billable upon various events, including the attainment of performance milestones, delivery of hardware, submission of progress bills based on time and materials, or completion of the contract.
| | | | | | In the case of the Company’s mobile data communications segment’s Movement Tracking System 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 with the right to terminate the contract at any time. Historically, the Company has not experienced material contract terminations or write-offs of unbilled receivables.
| | | | | | The Company addresses customer acceptance provisions in assessing its ability to perform its contractual obligations under long-term contracts. Historically, the Company has been able to perform on its long-term contracts.
| | | | | (d)
| Cash, Cash Equivalents and Restricted Cash
| | | | | | Cash equivalents are temporary cash investments with a maturity of three months or less when purchased. Cash equivalents, primarily U.S. treasury securities with a maturity of three months or less, at July 31, 2005 and 2004 amounted to $205,527,000 and $151,381,000, respectively. These investments are carried at cost, which approximates fair market value. Restricted cash as of July 31, 2005 and 2004 represents the amount the Company has pledged against guarantees of performance on certain of its contracts.
| | | | | (e)
| Inventories
| | | | | | Work-in-process inventory reflects all accumulated production costs, which are comprised of direct production costs and overhead, and is reduced by amounts recorded in cost of sales as the related revenue is recognized. 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 finished goods inventory are stated at the lower of cost or market, computed on the first-in, first-out (“FIFO”) method.
| | | | | (f)
| 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 – 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.
| | | | | | Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized. 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 segments.
| | | | | | The Company assesses the recoverability of the carrying value of its other long-lived assets, including identifiable intangible assets with finite useful lives, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company evaluates the recoverability of such assets based upon the expectations of undiscounted cash flows from such assets. If the sum of the
|
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | 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.
| | | | | (g)
| 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 2005, 2004 and 2003, the Company was reimbursed by customers for such activities in the amount of $3,001,000, $5,749,000 and $3,676,000, respectively.
| | | | | (h)
| 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.
| | | | | (i)
| Earnings Per Share
| | | | | | The Company calculates earnings per share (“EPS”) in accordance with SFAS No. 128, “Earnings per 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 exercise of stock options, warrants and convertible senior notes, if dilutive, outstanding during each period. Stock options to purchase 49,000, 105,000 and 1,070,000 shares for fiscal 2005, 2004 and 2003, respectively, were not included in the EPS calculation because their effect would have been anti-dilutive.
| | | | | | In accordance with EITF Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share,” the Company has (i) included the impact of the assumed conversion of its 2.0% convertible senior notes in calculating diluted EPS commencing in the fiscal quarter ended January 31, 2005 and (ii) restated prior periods’ diluted EPS for comparative purposes.
| | | | | | The following table reconciles the numerators and denominators used in the basic and diluted EPS calculations:
|
| | | | | | | | | | | | | | |
| | | | | Fiscal Years Ended July 31, | | | | |
| | | | | 2005 | | 2004 | | 2003 | | | | |
| |
| |
| | | Numerator: | | | | | | | | | | | | Net income for basic calculation | | $ | 36,655,000 | | | 21,827,000 | | | 9,709,000 | | | Effect of dilutive securities: | | | | | | | | | | | | Interest expense (net of tax) on convertible senior notes | | | 1,817,000 | | | 925,000 | | | — | | | | |
|
| |
|
| |
|
| | | Numerator for diluted calculation | | $ | 38,472,000 | | | 22,752,000 | | | 9,709,000 | | | | |
|
| |
|
| |
|
| | | Denominator: | | | | | | | | | | | | Denominator for basic calculation | | | 21,673,000 | | | 21,178,000 | | | 17,168,000 | | | Effect of dilutive securities: | | | | | | | | | | | | Stock options | | | 2,058,000 | | | 1,890,000 | | | 1,122,000 | | | Conversion of convertible senior notes | | | 3,333,000 | | | 1,713,000 | | | — | | | | |
|
| |
|
| |
|
| | | Denominator for diluted calculation | | | 27,064,000 | | | 24,781,000 | | | 18,290,000 | | | | |
|
| |
|
| |
|
| |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | (j)
| Accounting for Stock-Based Compensation
| | | | | | For fiscal 2005, 2004 and 2003, the Company recorded compensation expense for employee stock options based upon their intrinsic value on the date of grant pursuant to Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Since the exercise price for such options was equal to the fair market value of the Company’s stock at the date of grant, the stock options had no intrinsic value upon grant, and therefore no expense was recorded.
| | | | | | As required under Financial Accounting Standards Board (“FASB”) SFAS No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” the pro forma effects of share-based payments on net income and earnings per common share have been estimated at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no restrictions and are fully transferable and negotiable in a free trading market. This model does not consider the employment, transfer or vesting restrictions that are inherent in the Company’s employee stock options. In addition, use of an option valuation model, as required by SFAS No. 123, also includes highly subjective assumptions based on long-term predictions, including the expected stock price volatility and average life of each stock option grant.
| | | | | | For purposes of pro forma disclosures, the estimated fair value of share-based payments is assumed to be amortized to expense on a straight-line basis over their respective vesting periods. The pro forma effects of recognizing compensation expense under the fair value method on net income and earnings per share were as follows:
|
| | | | | | | | | | | | | | | |
| | | | | Fiscal Years Ended July 31, | | | | |
| | | | | 2005 | | 2004 | | 2003 | | | | |
| |
| |
| | | Net income, as reported | | $ | 36,655,000 | | | 21,827,000 | | | 9,709,000 | | | Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | (4,236,000 | ) | | (1,615,000 | ) | | (629,000 | ) | | | |
|
| |
|
| |
|
| | | Pro forma net income | | $ | 32,419,000 | | | 20,212,000 | | | 9,080,000 | | | | |
|
| |
|
| |
|
| | | Net income per share: | | | | | | | | | | | | As reported | Basic | | $ | 1.69 | | | 1.03 | | | 0.57 | | | | Diluted | | $ | 1.42 | | | 0.92 | | | 0.53 | | | Pro forma | Basic | | $ | 1.50 | | | 0.95 | | | 0.53 | | | | Diluted | | $ | 1.28 | | | 0.85 | | | 0.50 | |
| | | | | The per share weighted average fair value of stock options granted during fiscal 2005, 2004 and 2003 was $8.52, $6.59 and $1.89, respectively, on the date of grant. These fair values were determined using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
| | | | | | | | | | | | | | |
| | | | | Fiscal Years Ended July 31, | | | | |
| | | | | 2005 | | 2004 | | 2003 | | | | |
| |
| |
| | | Expected dividend yield | | | 0 | % | | 0 | % | | 0 | % | | Expected volatility | | | 64.83 | % | | 53.67 | % | | 56.59 | % | | Risk-free interest rate | | | 3.70 | % | | 3.31 | % | | 3.32 | % | | Expected life (years) | | | 5.0 | | | 5.0 | | | 5.0 | |
| | | As discussed further in Note 16(a), the Company will adopt SFAS No. 123(R) in the first quarter of fiscal 2006.
|
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | (k)
| 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 of July 31, 2005, the Company estimates the fair market value of its 2.0% convertible senior notes to be $131,000,000 based on recent trading activity.
| | | | | (l)
| 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.
| | | | | (m)
| Comprehensive Income
| | | | | | The Company has adopted SFAS No. 130, “Reporting Comprehensive Income,” which requires companies to report all changes in equity during a period, except those resulting from investment by owners and distribution to owners, for the period in which they are recognized. Comprehensive income is the total of net income and all other 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. Comprehensive income was the same as net income in fiscal 2005, 2004 and 2003.
| | | | | (n)
| Reclassifications
| | | | | | Certain reclassifications have been made to previously reported consolidated financial statements to conform to the fiscal 2005 presentation.
| | | | (2)Acquisitions
| | | | | | In May 2004, the Company acquired certain assets and product lines 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 $5,187,000, including transaction costs of $161,000. Sales and income for fiscal 2004, 2003 and 2002 relating to the Memotec assets acquired would not have been material to the Company’s results of operations for those periods. The acquisition was accounted for under the purchase method of accounting. Accordingly, the Company recorded the assets purchased and the liabilities assumed based upon their estimated fair values at the date of acquisition. The excess of the purchase price over the fair values of the net tangible assets acquired was $3,197,000.
| | | | | | In February 2005, the Company acquired certain assets and assumed certain liabilities of Tolt Technologies, Inc. (“Tolt”). Tolt provides turnkey employee mobility solutions to large enterprises, including customers that have trucking fleets. Sales and income for fiscal 2005, 2004 and 2003 relating to the Tolt assets acquired would not have been material to the Company’s results of operations for those periods. The purchase price of the business was $3,735,000, including transaction costs of $235,000. Of the total purchase price excluding transaction costs, $2,500,000 was paid at closing and the remaining $1,000,000, which is due in two equal installments in November 2005 and February 2006, is included in “Accrued expenses” in the accompanying consolidated balance sheet at July 31, 2005. Based on the achievement of fiscal 2006 sales goals, the Company may be required to pay an earn-out of $500,000.
|
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | The Memotec and Tolt purchase prices were allocated as follows:
|
| | | | | | | | | | | | | | | Memotec | | Tolt | | Estimated Useful Lives | | | | |
| |
| |
| | | Fair value of net tangible assets acquired | | $ | 1,990,000 | | | 4,000 | | | | | | | | | | | | | | | | | | Adjustments to record intangible assets and liabilities at fair value: | | | | | | | | | | | | In-process research and development | | | 940,000 | | | — | | | — | | | Proprietary and core technology | | | 820,000 | | | — | | | 8-9 years | | | Existing technology | | | 190,000 | | | — | | | 7-9 years | | | Other intangibles | | | 410,000 | | | 160,000 | | | 6 months to 10 years | | | Goodwill | | | 947,000 | | | 3,571,000 | | | Indefinite | | | Deferred tax liability | | | (110,000 | ) | | — | | | | | | | |
|
| |
|
| | | | | | | | | 3,197,000 | | | 3,731,000 | | | | | | | |
|
| |
|
| | | | | | Aggregate purchase price | | $ | 5,187,000 | | | 3,735,000 | | | | | | | |
|
| |
|
| | | | |
| | | For Memotec, the valuation of the in-process research and development, existing technology and most other intangibles was based on the value of the discounted cash flows that the assets can be expected to generate in the future. The valuation of the core technology was based on the discounted capitalization of the royalty expense saved since the Company owns the asset. For Tolt, the purchase price was substantially allocated to goodwill (which includes assembled workforce).
| | | | The value ascribed to the Memotec in-process research and development acquired was expensed in fiscal 2004. The following table includes the specific nature and fair value allocated to each significant in-process research and development project acquired, as well as significant appraisal assumptions used as of the acquisition date and the current project status.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | As of the Acquisition Date | | | | | | | | | |
| | | | | Entity
Acquired | | Specific Nature
of R&D Projects | | Fair Market Value
Allocated | | % of
Estimated
Efforts
Complete | | Original
Anticipated
Completion
Date | | Discount
Rate | | Fiscal Year
Cash Flows
Projected To
Commence | | Project
Status as of
July 31,
2005 | |
| |
| |
| |
| |
| |
| |
| | |
| | Memotec | | | Technology
for bandwidth
optimization #1 | | $ | 680,000 | | 78% | | January 2005 | | 35% | | 2005 | | Complete | | | | | Technology
for bandwidth
optimization #2 | | | 260,000 | | 24% | | August 2005 | | 40% | | 2006 | | Suspended | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | 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. The Company does not believe that the failure to eventually complete the remaining Memotec project will have a material impact on the Company’s consolidated results of operations.
|
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | (3)
| Accounts Receivable
| | | | | | Accounts receivable consist of the following at July 31, 2005 and 2004:
|
| | | | | | | | | | 2005 | | 2004 | | | |
| |
| | Accounts receivable from commercial customers | | $ | 30,967,000 | | | 27,845,000 | | Unbilled receivables (including retainages) on contracts-in-progress | | | 8,811,000 | | | 6,684,000 | | Amounts receivable from the U.S. government and its agencies | | | 16,910,000 | | | 9,205,000 | | | |
|
| |
|
| | | | | 56,688,000 | | | 43,734,000 | | Less allowance for doubtful accounts | | | 636,000 | | | 732,000 | | | |
|
| |
|
| | Accounts receivable, net | | $ | 56,052,000 | | | 43,002,000 | | | |
|
| |
|
| |
| | | There was $2,684,000 of retainage included in unbilled receivables at July 31, 2005. There was no retainage included in unbilled receivables at July 31, 2004. In the opinion of management, substantially all of the unbilled balances will be billed and collected within one year.
| | | | As of July 31, 2005, no one customer or country represented 10% or more of total net accounts receivable.
|
| | | (4)
| Inventories
| | | | | Inventories consist of the following at July 31, 2005 and 2004:
|
| | | | | | | | | | 2005 | | 2004 | | | |
| |
| | Raw materials and components | | $ | 26,816,000 | | | 22,502,000 | | Work-in-process and finished goods | | | 24,796,000 | | | 22,878,000 | | | |
|
| |
|
| | | | | 51,612,000 | | | 45,380,000 | | Less reserve for excess and obsolete inventories | | | 6,509,000 | | | 5,622,000 | | | |
|
| |
|
| | Inventories, net | | $ | 45,103,000 | | | 39,758,000 | | | |
|
| |
|
| |
| | | Inventories directly related to long-term contracts were $8,925,000 and $8,550,000 at July 31, 2005 and 2004, respectively.
|
| | | (5)
| Property, Plant and Equipment
| | | | | Property, plant and equipment consists of the following at July 31, 2005 and 2004:
|
| | | | | | | | | | 2005 | | 2004 | | | |
| |
| | Equipment | | $ | 43,060,000 | | | 35,615,000 | | Leasehold improvements | | | 3,715,000 | | | 2,474,000 | | Equipment financed by capital lease | | | 522,000 | | | 1,473,000 | | | |
|
| |
|
| | | | | 47,297,000 | | | 39,562,000 | | Less accumulated depreciation and amortization | | | 28,614,000 | | | 24,910,000 | | | |
|
| |
|
| | | | $ | 18,683,000 | | | 14,652,000 | | | |
|
| |
|
| |
| | | Depreciation and amortization expense on property, plant and equipment amounted to approximately $5,315,000, $4,341,000 and $3,915,000, for the fiscal years ended July 31, 2005, 2004 and 2003, respectively.
|
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | (6)
| Accrued Expenses and Other Current Liabilities
| | | | | Accrued expenses and other current liabilities consist of the following at July 31, 2005 and 2004:
|
| | | | | | | | | | 2005 | | 2004 | | | |
| |
| | Accrued wages and benefits | | $ | 14,439,000 | | | 9,972,000 | | Accrued commissions | | | 5,049,000 | | | 3,255,000 | | Accrued warranty | | | 7,910,000 | | | 4,990,000 | | Accrued hurricane related costs (See Note 13(c)) | | | 2,331,000 | | | — | | Accrued business acquisition payments (See Note 2) | | | 1,000,000 | | | — | | Other | | | 3,768,000 | | | 2,298,000 | | | |
|
| |
|
| | | | $ | 34,497,000 | | | 20,515,000 | | | |
|
| |
|
| |
| | | 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, 2005 and 2004 were as follows:
|
| | | | | | | | | |
| | | | Fiscal Years Ended July 31, | | | |
| | | | 2005 | | 2004 | | | |
| |
| | Balance at beginning of period | | $ | 4,990,000 | | | 3,139,000 | | Provision for warranty obligations | | | 5,958,000 | | | 4,553,000 | | Acquired obligations | | | 450,000 | | | — | | Charges incurred | | | (3,488,000 | ) | | (2,702,000 | ) | | |
|
| |
|
| | Balance at end of period | | $ | 7,910,000 | | | 4,990,000 | | | |
|
| |
|
| |
| | | (7)
| Other Obligations
| | | | | Other obligations consist of the following at July 31, 2005 and 2004:
|
| | | | | | | | | | 2005 | | 2004 | | | |
| |
| | Obligations under capital leases and for technology purchase | | $ | 631,000 | | | 392,000 | | Less current installments | | | 235,000 | | | 234,000 | | | |
|
| |
|
| | | | $ | 396,000 | | | 158,000 | | | |
|
| |
|
| |
| | | Other obligations in both years related to certain equipment and a technology license. The net carrying value of assets under these obligations was $864,000 and $1,882,000 at July 31, 2005 and 2004, respectively.
| | | | Future minimum lease payments under other obligations as of July 31, 2005 are:
|
| | | | | | Fiscal years ending July 31, | | | | | | 2006 | | $ | 276,000 | | | 2007 | | | 180,000 | | | 2008 | | | 150,000 | | | 2009 | | | 113,000 | | | | |
|
| | Total minimum lease payments | | | 719,000 | | Less amounts representing interest (at rates ranging from 6.90% to 8.0%) | | | 88,000 | | | | |
|
| | | | | | 631,000 | | Less current installments | | | 235,000 | | | |
|
| | Other obligations, net of current installments | | $ | 396,000 | | | |
|
| |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | (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 $31.50 per share (a conversion rate of 31.7460 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%.
| | | | | | 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 Securities and Exchange Commission (“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 an acquisition, 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 were included in other assets, net of amortization, in the accompanying consolidated balance sheet. The principal amount of the loan outstanding bore interest at the per annum rate of 9.25%. In fiscal 2002, the Company made a partial principal prepayment of $19,217,000 against the 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.
|
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | In April 2001, in connection with another acquisition, the Company borrowed an additional $10,000,000 from the Teachers’ Retirement System of Alabama, The Employees’ Retirement System of Alabama and PEIRAF – Deferred Compensation Plan. Costs incurred to obtain the financing amounted to $164,000 and were included in other assets, net of amortization, in the accompanying consolidated balance sheet. The loan bore interest on the principal amount outstanding at the per annum rate of 8.50% and required interest only payments through June 2005, at which time the entire principal was due. The Company prepaid the loan in fiscal 2003.
| | | | (9)
| Income Taxes
| | | | | | The provision for income taxes included in the accompanying consolidated statements of operations consists of the following:
|
| | | | | | | | | | | | |
| | | | Fiscal Years Ended July 31, | | | |
| | | | 2005 | | 2004 | | 2003 | | | |
| |
| |
| | Federal – current | | $ | 13,135,000 | | | 7,664,000 | | | 6,185,000 | | Federal – deferred | | | 2,605,000 | | | 2,122,000 | | | (1,894,000 | ) | | | | | | | | | | | | State and local – current | | | 931,000 | | | 504,000 | | | 386,000 | | State and local – deferred | | | 163,000 | | | 133,000 | | | (108,000 | ) | | | | | | | | | | | | Foreign – current | | | (32,000 | ) | | 24,000 | | | — | | Foreign – deferred | | | — | | | (176,000 | ) | | — | | | |
|
| |
|
| |
|
| | | | $ | 16,802,000 | | | 10,271,000 | | | 4,569,000 | | | |
|
| |
|
| |
|
| |
| | | The provision for income taxes differed from the amounts computed by applying the U.S. Federal income tax rate as a result of the following:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | Fiscal Years Ended July 31, | | | |
| | | | 2005 | | 2004 | | 2003 | | | |
| |
| |
| | | | Amount | | Rate | | Amount | | Rate | | Amount | | Rate | | | |
| |
| |
| |
| |
| |
| | Computed “expected” tax expense | | $ | 18,710,000 | | | 35.0 | % | | 11,234,000 | | | 35.0 | % | | 4,997,000 | | | 35.0 | % | Increase (reduction) in income taxes resulting from: | | | | | | | | | | | | | | | | | | | | Change in the beginning of the year valuation allowance for deferred tax assets | | | (1,189,000 | ) | | (2.2 | ) | | (350,000 | ) | | (1.1 | ) | | (350,000 | ) | | (2.4 | ) | Research and experimentation credits | | | (694,000 | ) | | (1.3 | ) | | (454,000 | ) | | (1.4 | ) | | (400,000 | ) | | (2.8 | ) | Extraterritorial income exclusion | | | (1,862,000 | ) | | (3.5 | ) | | (856,000 | ) | | (2.7 | ) | | (286,000 | ) | | (2.0 | ) | Nondeductible compensation | | | 906,000 | | | 1.7 | | | — | | | — | | | — | | | — | | State and local income taxes, net of Federal benefit | | | 711,000 | | | 1.3 | | | 414,000 | | | 1.3 | | | 181,000 | | | 1.3 | | Other | | | 220,000 | | | 0.4 | | | 283,000 | | | 0.9 | | | 427,000 | | | 2.9 | | | |
|
| |
|
| |
|
| |
|
| |
|
| | |
| | | | $ | 16,802,000 | | | 31.4 | % | | 10,271,000 | | | 32.0 | % | | 4,569,000 | | | 32.0 | % | | |
|
| |
|
| |
|
| |
|
| |
|
| | |
| |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at July 31, 2005 and 2004 are presented below.
|
| | | | | | | | | | 2005 | | 2004 | | | |
| |
| | Deferred tax assets: | | | | | | | | Allowance for doubtful accounts receivable | | $ | 236,000 | | | 272,000 | | Intangibles | | | 848,000 | | | 4,029,000 | | Inventory and warranty reserves | | | 4,930,000 | | | 3,895,000 | | Compensation and commissions | | | 1,925,000 | | | 1,858,000 | | State research and experimentation credits | | | 1,781,000 | | | — | | Other | | | 1,001,000 | | | 763,000 | | Less valuation allowance | | | (2,093,000 | ) | | (1,500,000 | ) | | |
|
| |
|
| | Total deferred tax assets | | | 8,628,000 | | | 9,317,000 | | | | | | | | | | Deferred tax liabilities: | | | | | | | | Convertible senior notes | | | (3,836,000 | ) | | (1,297,000 | ) | Plant and equipment | | | (2,687,000 | ) | | (3,147,000 | ) | | |
|
| |
|
| | Total deferred tax liabilities | | | (6,523,000 | ) | | (4,444,000 | ) | | |
|
| |
|
| | Net deferred tax assets | | $ | 2,105,000 | | $ | 4,873,000 | | | |
|
| |
|
| |
| | | The Company provides for income taxes under the provisions of SFAS No. 109, “Accounting for Income 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, 2005 and 2004, the Company’s deferred tax asset has been offset by a valuation allowance related to (i) the extended write off period of in-process research and development relating to certain acquisitions and (ii) state research and experimentation credits which may not be utilized in future periods. The Company must generate approximately $29,000,000 of taxable income to fully utilize its deferred tax assets. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.
|
| | | (10)
| Stockholders’ Equity
| | | | | (a)
| Stock Splits
| | | | | | In July 2003, the Company completed a three-for-two stock split, which was effected in the form of a 50% stock dividend. Additionally, in April 2005, 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 splits.
| | | | | (b)
| Private Placement of Common Stock
| | | | | | In July 2003, the Company sold 3,150,000 shares of its common stock in a private placement transaction. The aggregate proceeds to the Company were $38,191,000, net of related costs of $2,402,000. The shares were registered with the SEC in August 2003.
|
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | (c)
| Stock Option, Stock Purchase and Warrant Agreements
| | | | The Company has stock option and stock purchase plans and warrant agreements as follows:
| | | | 1993 Incentive Stock Option Plan – The 1993 Incentive Stock Option Plan, as amended, provided for the granting to key employees and officers of incentive and non-qualified stock options to purchase up to 2,345,625 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 could 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 could be no more than five years. As of July 31, 2005, the Company had granted stock options representing the right to purchase an aggregate of 2,100,593 shares (net of 344,066 canceled options) at prices ranging between $0.67 - $5.31 per share, of which 251,587 are outstanding at July 31, 2005. To date, 1,849,006 shares have been exercised. Outstanding awards have been transferred to the 2000 Stock Incentive Plan. The terms applicable to these awards prior to the transfer continue to apply. The plan was terminated by the Board of Directors in December 1999 due to the approval by the shareholders of the 2000 Stock Incentive Plan.
| | | | 2000 Stock Incentive Plan – The 2000 Stock Incentive Plan, 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 4,237,500 plus the shares that were transferred to the Plan relating to outstanding awards that were previously granted under the 1982 Incentive Stock Option Plan and the 1993 Incentive Stock Option Plan. The Stock Option Committee of the Board of Directors, consistent with the terms of the Plan, will determine the types of awards to be granted, the terms and conditions of each award and the number of shares of common stock to be covered by each award. Grants of incentive and non- qualified 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, 2005, the Company had granted stock options representing the right to purchase an aggregate of 3,986,700 shares at prices ranging between $3.13 - $35.79 of which 324,925 options were canceled and 2,315,295 are outstanding at July 31, 2005. As of July 31, 2005, 1,346,480 stock options have been exercised. All options granted through July 31, 2005 have had exercise prices equal to the fair market value of the stock on the date of grant and a term of ten years.
| | | | Warrants Issued Pursuant to Acquisition – In connection with an acquisition in fiscal 1999, the Company issued warrants to the acquiree’s owners and creditors to purchase 337,500 shares of the Company’s common stock at an exercise price of $2.92. All warrants were exercised as of July 31, 2004.
| | | | Employee Stock Purchase Plan – The Comtech Telecommunications Corp. 2001 Employee Stock Purchase Plan (“The Purchase Plan”) was approved by the shareholders on December 12, 2000. Pursuant to the Purchase Plan, 675,000 shares of the Company’s common stock were reserved for issuance. The Purchase Plan is intended to provide eligible employees of the Company the opportunity to acquire common stock in the Company at 85% of fair market value at date of issuance through participation in the payroll-deduction based employee stock purchase plan. Through fiscal 2005, the Company issued 208,673 shares of its common stock to participating employees in connection with the Purchase Plan.
|
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | The following table sets forth summarized information concerning the Company’s stock options:
|
| | | | | | | | | | Number of shares | | Weighted average
exercise price | | | |
| |
| | Outstanding at July 31, 2002 | | | 2,618,414 | | $ | 3.98 | | Granted | | | 758,250 | | | 3.67 | | Expired/canceled | | | (142,313 | ) | | 5.11 | | Exercised | | | (632,070 | ) | | 2.51 | | | |
|
| |
|
| | | | | | | | | | Outstanding at July 31, 2003 | | | 2,602,281 | | | 4.18 | | Granted | | | 988,875 | | | 13.07 | | Expired/canceled | | | (35,025 | ) | | 5.88 | | Exercised | | | (450,225 | ) | | 3.36 | | | |
|
| |
|
| | | | | | | | | | Outstanding at July 31, 2004 | | | 3,105,906 | | | 7.11 | | Granted | | | 732,750 | | | 15.20 | | Expired/canceled | | | (61,975 | ) | | 10.25 | | Exercised | | | (1,209,799 | ) | | 5.98 | | | |
|
| |
|
| | | | | | | | | | Outstanding at July 31, 2005 | | | 2,566,882 | | $ | 9.87 | | | |
|
| |
|
| | | | | | | | | | Options exercisable at July 31, 2005 | | | 238,192 | | $ | 7.89 | | | |
|
| |
|
| | | | | | | | | | Options available for grant at July 31, 2005 | | | 808,285 | | | | | | |
|
| | | | |
| | | The options outstanding as of July 31, 2005 are summarized in ranges as follows:
|
| | | | | | | | | | | | | | | | | | | | | | Range of
exercise price | | Weighted average
exercise price | | Number of options
outstanding | | Weighted average
remaining life | | |
| |
| |
| |
| | | | $ | 1.00 – 5.00 | | | | $ | 2.78 | | | | | 652,762 | | | | | 5 years | | | | | | 5.01 – 8.00 | | | | | 5.79 | | | | | 415,770 | | | | | 6 years | | | | | | 8.01 – 18.00 | | | | | 12.55 | | | | | 1,263,600 | | | | | 9 years | | | | | | 18.01 – 36.00 | | | | | 22.42 | | | | | 234,750 | | | | | 9 years | | |
| | (e)
| Restricted Common Stock
| | | | In October 1998, a total of 506,250 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 subsidiary, Comtech Mobile Datacom Corp. (“CMDC”). The award related to services to be provided over future years and, as a result, the stock awards were subject to certain restrictions which could 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 vested 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 reflected as a reduction of stockholders’ equity in the accompanying consolidated balance sheets. As of July 31, 2004, the deferred compensation was fully amortized.
|
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | (11)
| Customer and Geographic Information
| | | | Sales by geography and customer type, as a percentage of consolidated net sales, are as follows:
|
| |
| | Fiscal Years Ended July 31, |
| 2005 | | | 2004 | | | 2003 | | |
| | |
| | |
| | United States | | | | | | | | | U.S. government | 42.1 | % | | 40.1 | % | | 44.2 | % | Commercial customers | 13.9 | % | | 14.5 | % | | 16.1 | % | |
| | |
| | |
| | Total United States | 56.0 | % | | 54.6 | % | | 60.3 | % | | | | | | | | | | International | | | | | | | | | North African country | 13.2 | % | | 14.1 | % | | 10.2 | % | Other international customers | 30.8 | % | | 31.3 | % | | 29.5 | % | |
| | |
| | |
| | Total International | 44.0 | % | | 45.4 | % | | 39.7 | % |
| International sales include sales to U.S domestic companies for inclusion in products that will be sold to international customers. In fiscal 2005, except for sales to the U.S. government, one customer, a prime contractor, represented 10.2% of consolidated net sales. In fiscal 2004 and 2003, except for sales to the U.S. government, one customer, another prime contractor, represented 12.5% and 19.8% of consolidated net sales, respectively.
| | | (12)
| Segment 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) mobile data communications and (iii) RF microwave amplifiers. Telecommunications transmission products include analog and digital modems, frequency converters, power amplifiers, satellite very small aperture terminal (“VSAT”) transceivers and antennas, voice gateways and over-the-horizon microwave communications products and systems. Mobile data communications provide satellite-based mobile tracking and messaging hardware and related services, as well as turnkey employee mobility solutions. RF microwave amplifier products include solid-state high-power amplifier products that use the microwave and radio frequency spectrums. Unallocated assets consist principally of cash, deferred financing costs and deferred tax assets. Unallocated expenses result from such corporate expenses as legal, accounting and executive compensation. Interest expense associated with the Company’s 2.0% convertible senior notes is not allocated to the operating segments. Substantially all of the Company’s long-lived assets are located in the U.S.
| | | | Corporate management defines and reviews segment profitability based on the same allocation methodology as presented in the segment data tables. Intersegment sales in fiscal 2005, 2004 and 2003 by the telecommunications transmission segment to the RF microwave amplifiers segment were $8,579,000, $3,598,000 and $3,617,000, respectively. In fiscal 2005, 2004 and 2003, intersegment sales by the telecommunications transmission segment to the mobile data communications segment were $19,466,000, $12,776,000 and $14,858,000, respectively. Intersegment sales have been eliminated from the tables below. In fiscal 2004, operating income in the telecommunications transmission segment includes an in-process research and development charge of $940,000.
|
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2005
(in thousands) | | Telecommunications
Transmission | | Mobile Data
Communications | | RF Microwave
Amplifiers | | Unallocated | | Total |
| Net sales | | | $ | 174,488 | | | | | 86,084 | | | | | 47,318 | | | | | — | | | | | 307,890 | | Operating income (expense) | | | | 40,194 | | | | | 11,848 | | | | | 8,224 | | | | | (8,202 | ) | | | | 52,064 | | Interest income | | | | (2 | ) | | | | 1 | | | | | 3 | | | | | 4,070 | | | | | 4,072 | | Interest expense | | | | 22 | | | | | — | | | | | 11 | | | | | 2,646 | | | | | 2,679 | | Depreciation and amortization | | | | 5,497 | | | | | 796 | | | | | 1,262 | | | | | 88 | | | | | 7,643 | | Expenditure for long-lived assets, including intangibles | | | | 6,962 | | | | | 5,344 | | | | | 1,604 | | | | | 65 | | | | | 13,975 | | Total assets | | | | 99,197 | | | | | 32,827 | | | | | 25,320 | | | | | 225,059 | | | | | 382,403 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2004
(in thousands) | | Telecommunications
Transmission | | Mobile Data
Communications | | RF Microwave
Amplifiers | | Unallocated | | Total |
| Net sales | | | $ | 141,514 | | | | | 59,784 | | | | | 22,092 | | | | | — | | | | | 223,390 | | Operating income (expense) | | | | 29,210 | | | | | 9,526 | | | | | 261 | | | | | (6,395 | ) | | | | 32,602 | | Interest income | | | | 4 | | | | | 3 | | | | | — | | | | | 914 | | | | | 921 | | Interest expense | | | | 33 | | | | | — | | | | | 22 | | | | | 1,370 | | | | | 1,425 | | Depreciation and amortization | | | | 4,832 | | | | | 413 | | | | | 1,082 | | | | | 187 | | | | | 6,514 | | Expenditure for long-lived assets, including intangibles | | | | 6,473 | | | | | 1,552 | | | | | 652 | | | | | 494 | | | | | 9,171 | | Total assets | | | | 88,629 | | | | | 21,276 | | | | | 22,934 | | | | | 173,551 | | | | | 306,390 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2003
(in thousands) | | Telecommunications
Transmission | | Mobile Data
Communications | | RF Microwave
Amplifiers | | Unallocated | | Total |
| Net sales | | | $ | 102,634 | | | | | 48,079 | | | | | 23,322 | | | | | — | | | | | 174,035 | | Operating income (expense) | | | | 14,219 | | | | | 5,202 | | | | | 1,745 | | | | | (4,360 | ) | | | | 16,806 | | Interest income | | | | 10 | | | | | — | | | | | 1 | | | | | 264 | | | | | 275 | | Interest expense | | | | 1,863 | | | | | — | | | | | 940 | | | | | — | | | | | 2,803 | | Depreciation and amortization | | | | 4,498 | | | | | 319 | | | | | 1,184 | | | | | 257 | | | | | 6,258 | | Expenditure for long-lived assets, including intangibles | | | | 3,623 | | | | | 682 | | | | | 427 | | | | | 75 | | | | | 4,807 | | Total assets | | | | 65,105 | | | | | 21,244 | | | | | 20,462 | | | | | 57,439 | | | | | 164,250 | |
| | | | (13)
| Commitments and Contingencies
|
| | | | | | (a)
| Operating Leases
| | | | | | | | The Company is obligated under noncancellable operating lease agreements, including satellite lease expenditures relating to its mobile data communications segment contracts. At July 31, 2005, the future minimum lease payments under operating leases are as follows:
|
| | | | | 2006 | | $ | 8,492,000 | | 2007 | | | 2,450,000 | | 2008 | | | 2,053,000 | | 2009 | | | 1,749,000 | | 2010 | | | 1,607,000 | | Thereafter | | | 1,211,000 | | | |
|
| | Total | | $ | 17,562,000 | | | |
|
| |
| COMTECH TELECOMMUNICATIONS CORP.
| AND SUBSIDIARIES
| | Notes to Consolidated Financial Statements, Continued
|
| | | | | Lease expense charged to operations was $3,018,000, $2,866,000 and $2,558,000 in fiscal 2005, 2004 and 2003, respectively. Lease expense excludes satellite lease expenditures incurred of approximately $11,854,000, $11,233,000 and $10,043,000 in fiscal 2005, 2004 and 2003, respectively, relating to the Company’s mobile data communications segment contracts.
| | | | | | 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, New York production facility. The lease was for an initial term of ten years. 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 $524,000 for fiscal 2005, are subject to annual adjustments equal to the lesser of 5% or the change in the Consumer Price Index.
| | | | | (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)
| Legal Proceedings
| | | | | | The Company is subject to certain legal actions, which arise in the normal course of business. Although the ultimate outcome of litigation is difficult to accurately predict, the Company believes that the outcome of these actions will not have a material effect on its consolidated financial position or results of operations.
| | | | | | During the first quarter of fiscal 2005, two of the Company’s leased facilities located in Florida experienced hurricane damage to both leasehold improvements and personal property. As of July 31, 2005, the Company has substantially completed all restoration efforts relating to the hurricane damage and has received $2,787,000 in advances from its insurance carrier. At July 31, 2005, the Company has recorded an $816,000 insurance recovery receivable and has accrued a total of $2,331,000 for hurricane related costs. The Company has a written agreement with its general contractor which the Company believes limits its liability to the amount of insurance proceeds ultimately received. The Company’s general contractor is in a dispute with certain of its subcontractors. As a result, in May 2005, the Company placed approximately $1,422,000, which represents the amount of insurance proceeds still payable to the general contractor, into an escrow account with the 9th Judicial Circuit Court in Orange County, Florida. The Company is awaiting the Court’s direction as to how these funds should be disbursed. The Company is also continuing its efforts to work with the insurance carrier and the general contractor and its subcontractors to finalize the amount of any additional insurance proceeds. The Company does not expect that the outcome of this matter will have a material effect on its consolidated financial position or results of operations.
| | | | | (d)
| Employment Contracts
| | | | | | The Company has employment agreements with its Chairman of the Board, Chief Executive Officer and President (the “Chairman”), and its Executive Vice President and Chief Financial Officer (the “Chief Financial Officer”).
| | | | | | The Chairman’s agreement which was amended and restated in June 2003 provides, among other things, for his employment until July 31, 2008 at a current base compensation of $575,000 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 least six months in advance of the scheduled termination date. The agreement also provides for payment to the Chairman in the event of a change in control of the Company.
| | | | | | The Chief Financial Officer’s agreement which was amended and restated in June 2003 provides, among other things, for his employment until July 31, 2006 at a current base compensation of $340,000 per annum
|
| COMTECH TELECOMMUNICATIONS CORP.
| AND SUBSIDIARIES
| | Notes to Consolidated Financial Statements, Continued
|
| | | | | 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 may from time to time determine. The employment period is automatically extended for successive one year periods unless either party gives notice of non-extension at least three months in advance of the scheduled termination date. The agreement also provides for payment, in certain circumstances, to the Chief Financial Officer in the event of a change in control of the Company.
| | | | (14)
| Stockholder Rights Plan
| | | | | | On December 15, 1998, the Company’s Board of Directors approved the adoption of a stockholder rights plan in which one stock purchase right (“Right”) was distributed as a dividend on each outstanding share of the Company’s common stock to stockholders of record at the close of business on January 4, 1999. Under the plan, the Rights will be exercisable only if triggered by a person or group’s acquisition of 15% or more of the Company’s common stock. If triggered, each Right, other than Rights held by the acquiring person or group, would entitle its holder to purchase a specified number of the Company’s common shares for 50% of their market value at that time. Unless a 15% acquisition has occurred, the Rights may be redeemed by the Company at any time prior to the termination date of the plan.
| | | | | | This Right to purchase common stock at a discount will not be triggered by a person or group’s acquisition of 15% or more of the common stock pursuant to a tender or exchange offer which is for all outstanding shares at a price and on terms that Comtech’s Board of Directors determines (prior to acquisition) to be adequate and in the best interest of the Company and its stockholders. The Rights will expire on December 15, 2008.
| | | (15)
| Intangible Assets
| | | | | | Intangible assets with definite lives arising from acquisitions as of July 31, 2005 and 2004 are as follows:
|
| | | | | | | | | | | | | | | | | | 2005 | | 2004 | | | | |
| |
| | | | | Gross
Carrying
Amount | | Accumulated
Amortization | | Gross
Carrying
Amount | | Accumulated
Amortization | | | | |
| |
| |
| |
| | | Existing technology | | $ | 12,456,000 | | | 7,741,000 | | | 12,456,000 | | | 5,992,000 | | | Technology license | | | 2,154,000 | | | 422,000 | | | 2,154,000 | | | 314,000 | | | Proprietary and core technology | | | 2,794,000 | | | 610,000 | | | 2,210,000 | | | 318,000 | | | Other | | | 834,000 | | | 342,000 | | | 673,000 | | | 163,000 | | | | |
|
| |
|
| |
|
| |
|
| | | Total | | $ | 18,238,000 | | | 9,115,000 | | | 17,493,000 | | | 6,787,000 | | | | |
|
| |
|
| |
|
| |
|
| |
| | | Amortization expense for the years ended July 31, 2005, 2004 and 2003 was $2,328,000, $2,067,000 and $2,039,000, respectively. The estimated amortization expense for the fiscal years ending July 31, 2006, 2007, 2008, 2009 and 2010 is $2,360,000, $2,208,000, $954,000, $910,000 and $812,000, respectively.
| | | | The changes in carrying amount of goodwill by segment for the fiscal years ended July 31, 2005 and 2004 are as follows:
|
| | | | | | | | | | | | | | | | | | Telecommunications
Transmission | | Mobile Data
Communications | | RF Microwave
Amplifiers | | Total | | | | |
| |
| |
| |
| | | | | | | | | | | | | | | | | | Balance at July 31, 2003 | | $ | 7,870,000 | | | 1,434,000 | | | 8,422,000 | | $ | 17,726,000 | | | Acquisition of Memotec | | | 995,000 | | | — | | | — | | | 995,000 | | | | |
|
| |
|
| |
|
| |
|
| | | Balance at July 31, 2004 | | | 8,865,000 | | | 1,434,000 | | | 8,422,000 | | | 18,721,000 | | | Acquisition of Tolt | | | — | | | 3,571,000 | | | — | | | 3,571,000 | | | Memotec adjustment | | | (48,000 | ) | | — | | | — | | | (48,000 | ) | | | |
|
| |
|
| |
|
| |
|
| | | Balance at July 31, 2005 | | $ | 8,817,000 | | | 5,005,000 | | | 8,422,000 | | $ | 22,244,000 | | | | |
|
| |
|
| |
|
| |
|
| |
| COMTECH TELECOMMUNICATIONS CORP.
| AND SUBSIDIARIES
| | Notes to Consolidated Financial Statements, Continued
|
| | | (16)
| Recent Accounting Pronouncements
| | | | | (a)
| Impact of SFAS No. 123(R), “Share-Based Payments”
| | | | | | In December 2004, the FASB issued SFAS No. 123(R), which requires companies to expense the estimated fair value of employee stock options and similar awards. SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB Opinion No. 25. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) which generally provides the SEC staff’s views regarding SFAS No. 123(R). SAB 107 provides guidance on how to determine the expected volatility and expected term inputs into a valuation model used to determine the fair value of share-based payments. SAB 107 also provides guidance related to numerous aspects of the adoption of SFAS No. 123(R) such as income taxes, capitalization of compensation costs, modification of share-based payments prior to adoption and the classification of expenses. The Company will apply the principles of SAB 107 in conjunction with its adoption of SFAS No. 123(R).
| | | | | | Beginning with the first quarter of fiscal 2006, the Company will adopt the provisions of SFAS No. 123(R) using a modified prospective application. Under the modified prospective application, SFAS No. 123(R), which provides certain changes to the methodology for valuing share-based compensation among other changes, will apply to new awards and to awards outstanding on the effective date that are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under SFAS No. 123.
| | | | | | At July 31, 2005, the total unamortized compensation expense related to the 2,328,690 unvested options that were outstanding, as determined in accordance with SFAS No. 123, was approximately $8,500,000 before income taxes. This amount will be amortized over the remaining vesting periods. In addition, during the first quarter of fiscal 2006 (through September 22, 2005), the Company’s Executive Compensation Committee granted a total of 606,000 nonqualified stock options, all of which had a term of five years and generally had exercise prices equal to the fair market value of the stock on the date of grant. Based on the total number of outstanding options (through September 22, 2005), the Company expects to record amortization of stock compensation expense in fiscal 2006 of approximately $5,300,000 before income taxes, of which $1,300,000 is expected to be recognized during the first quarter of fiscal 2006.
| | | | | | SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under current accounting rules. This requirement will reduce net operating cash flow and increase net financing cash flow in periods after adoption. Total cash flow will remain unchanged.
| | | | | (b)
| Impact of Other Recent Accounting Pronouncements
| | | | | | In October 2004, the FASB ratified , the consensus reached by the EITF with respect to Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings Per Share.” The EITF’s 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. EITF 04-8 was effective for reporting periods ending after December 15, 2004. As further discussed in Note 1, the Company has (i) included the impact of the assumed conversion of its 2.0% convertible senior notes in calculating diluted EPS commencing in the fiscal quarter ended January 31, 2005 and (ii) restated prior periods’ diluted EPS for comparative purposes.
| | | | | | In November 2004, the FASB issued SFAS No. 151, “Inventory Costs - an amendment of Accounting Research Bulletin No. 43, Chapter 4. SFAS No. 151 requires all companies to recognize a current period charge for abnormal amounts of idle facility expense, freight, handling costs and wasted materials. This statement also requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The Company adopted this statement on August 1, 2005 and it has not had a material impact on its consolidated financial statements.
|
| COMTECH TELECOMMUNICATIONS CORP.
| AND SUBSIDIARIES
| | Notes to Consolidated Financial Statements, Continued
|
| | | | | In January 2003, as revised in December 2003, the FASB issued FASB Interpretation No. (“FIN”) 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities (“VIE”) to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties. In March 2005, the FASB issued FASB Staff Position FIN 46 (R)-5, which addresses whether a reporting enterprise should consider whether it holds an implicit variable interest in a VIE or a potential VIE when specific conditions exist. The guidance, which applies to certain leases between related parties, became effective during the fourth quarter of fiscal 2005. As discussed in Note 13(a), the Company leases its corporate headquarters and Melville, NY manufacturing facility from a partnership controlled by the Company’s Chairman, Chief Executive Officer and President. The Company evaluated the relationship between the Company and this partnership and determined that it does not have an implicit variable interest in the partnership. Accordingly, there was no impact on the Company’s consolidated financial statements.
| | | | | | In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which changes the requirements for the accounting and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principles, as well as to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS No. 154 eliminates the requirement to include the cumulative effect of changes in accounting principle in the income statement and instead requires that changes in accounting principle be retroactively applied. A change in accounting estimate continues to be accounted for in the period of change and future periods if necessary. A correction of an error continues to be reported by restating prior period financial statements. SFAS No. 154 applies to accounting changes and corrections of errors made on or after January 1, 2006.
| | | | | | In June 2005, the FASB issued FASB Staff Position No. 143-1, “Accounting for Electronic Equipment Waste Obligations,” to address the accounting for obligations associated with Directive 2002/96/EC on Waste Electrical and Electronic Equipment adopted by the European Union (“EU”). This guidance is effective beginning on the later of the first reporting period ending after June 8, 2005 or the date of adoption of the law by the applicable EU member country. As of July 31, 2005, the EU member countries where the majority of the Company’s sales within the EU are made have not yet implemented the Directive. The impact of this guidance for the fiscal year ended July 31, 2005 for the Company’s “historical waste” (as defined by the EU) was not material and the Company continues to evaluate these new laws and the related financial impact in the countries in which its products are sold.
| | | | 17)
| Unaudited Quarterly Financial Data
| | | | | | The following is a summary of unaudited quarterly operating results (amounts in thousands, except per share data):
|
| | | | | | | | | | | | | | | | | | | Fiscal 2005 | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total | | |
| |
| |
| |
| |
| |
| | | Net sales | | $ | 56,122 | | | 78,087 | | | 75,388 | | | 98,293 | | | 307,890 | | | Gross profit | | | 27,121 | | | 32,290 | | | 29,478 | | | 38,477 | | | 127,366 | | | Net income | | | 7,076 | | | 10,182 | | | 8,372 | | | 11,025 | | | 36,655 | | | Diluted income per share | | $ | 0.28 | | | 0.39 | | | 0.32 | | | 0.42 | | | 1.42 | * |
| | | | | | | | | | | | | | | | | | | Fiscal 2004 | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total | | |
| |
| |
| |
| |
| |
| | | Net sales | | $ | 56,296 | | | 56,794 | | | 51,244 | | | 59,056 | | | 223,390 | | | Gross profit | | | 20,980 | | | 20,613 | | | 20,609 | | | 25,330 | | | 87,532 | | | Net income | | | 5,743 | | | 5,243 | | | 4,753 | | | 6,088 | | | 21,827 | | | Diluted income per share | | $ | 0.25 | | | 0.22 | | | 0.20 | | | 0.25 | | | 0.92 | |
| | | | *
| Income per share information for the full fiscal year may not equal the total of the quarters within the year as a result of rounding.
|
Schedule II
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Fiscal Years Ended July 31, 2005, 2004 and 2003
| | | | | | | | | | | | | | | | | | | | | | | | | Column A | | Column B | | Column C Additions | | Column D | | Column E | |
| |
| |
| |
| |
| | Description | | Balance at
beginning
of period | | Charged to
cost and
expenses | | Charged to
other accounts
- describe | | Transfers
(deductions)
- describe | | Balance
at end of
period | |
| |
| |
| |
| |
| |
| | Allowance for doubtful accounts - accounts receivable: | | | | | | | | | | | | | | | | | | | | | Year ended July 31, | | | | | | | | | | | | | | | | | | | | | 2005 | | | $ | 732,000 | | | 287,000 (C | ) | | | — | | (383,000) (D | ) | | | $ | 636,000 | | | 2004 | | | | 912,000 | | | 147,000 (C | ) | | | — | | (327,000) (D | ) | | | | 732,000 | | | 2003 | | | | 795,000 | | | 246,000 (C | ) | | | — | | (129,000) (D | ) | | | | 912,000 | | | | | | | | | | | | | | | | | | | | | | | | Inventory reserves: | | | | | | | | | | | | | | | | | | | | | Year ended July 31, | | | | | | | | | | | | | | | | | | | | | 2005 | | | $ | 5,622,000 | | | 2,098,000 (A | ) | | | — | | (1,211,000) (B | ) | | | $ | 6,509,000 | | | 2004 | | | | 5,099,000 | | | 1,193,000 (A | ) | | | — | | (670,000) (B | ) | | | | 5,622,000 | | | 2003 | | | | 3,289,000 | | | 2,521,000 (A | ) | | | — | | (711,000) (B | ) | | | | 5,099,000 | | |
| | (A)
| Provision for excess and obsolete inventory.
| (B)
| Write-off of inventory.
| (C)
| Provision for doubtful accounts.
| (D)
| Write-off of uncollectible receivables.
|
S-1
|
|
|
