-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WpWTKn2hdDgrayP9ZFyBSngMNFPUc6tHlhYJgLOSdOkuLnHYamwZIg1m1xi1Rz2J mwnsBqMFI8bnPKZsG2xnrQ== 0000950130-96-004122.txt : 19961031 0000950130-96-004122.hdr.sgml : 19961031 ACCESSION NUMBER: 0000950130-96-004122 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19961030 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMTECH TELECOMMUNICATIONS CORP /DE/ CENTRAL INDEX KEY: 0000023197 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 112139466 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-07928 FILM NUMBER: 96650622 BUSINESS ADDRESS: STREET 1: 105 BAYLIS RD CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 5167778900 MAIL ADDRESS: STREET 2: 105 BAYLIS ROAD CITY: MELVILLE STATE: NY ZIP: 11747 FORMER COMPANY: FORMER CONFORMED NAME: COMTECH INC DATE OF NAME CHANGE: 19870503 FORMER COMPANY: FORMER CONFORMED NAME: COMTECH TELECOMMUNICATIONS CORP DATE OF NAME CHANGE: 19831215 FORMER COMPANY: FORMER CONFORMED NAME: COMTECH LABORATORIES INC DATE OF NAME CHANGE: 19780425 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 31, 1996 Commission file number 0-7928 COMTECH TELECOMMUNICATIONS CORP. (Exact name of registrant as specified in its charter)
Delaware 3665 11-2139466 (State of Incorporation) (Primary Standard Industrial (IRS Employer Classification Code) Identification No.) 105 Baylis Road, Melville, New York 11747 (Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (516) 777-8900 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share Shares Outstanding Title of each class as of October 18, 1996 2,633,384 The Registrant hereby indicates by check mark whether it (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the Registrant (based upon the closing bid price quoted on NASDAQ) is approximately $ 8,558,000(as of October 18, 1996). DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the document listed below have been incorporated by reference into the indicated Part of this Annual Report on Form 10-K: Proxy Statement for Annual Part III Meeting of Shareholders to be held December 12, 1996 INDEX - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS 1 General 1 Telecommunications Overview 2 Amplifier Technology Overview 3 Narrative Description of Business 3 Comtech Antenna Systems, Inc. ("CASI") 4 Comtech Communications Corp. ("CCC") 4 Comtech Microwave Products Corp. ("CMPC") 4 Comtech Systems, Inc. ("CSI") 4 Sales, Marketing and Customer Support 4 Backlog 5 Manufacturing 6 Research and Development 6 Patents and Licenses 6 Competition 7 Key Personnel/Employees 7 ITEM 2 PROPERTIES 8 ITEM 3 LEGAL PROCEEDINGS 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 9 Dividends 9 Approximate Number of Equity Security Holders 9 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 10 i INDEX - -------------------------------------------------------------------------------- PART II (Continued) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 Comparison of the Fiscal Years 1996 and 1995 11 Comparison of the Fiscal Years 1995 and 1994 12 Liquidity and Capital Resources 13 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 14 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT'S ON ACCOUNTING AND FINANCIAL DISCLOSURE 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT 14 ITEM 11. EXECUTIVE COMPENSATION 14 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 14 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 15 SIGNATURE 17 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1 ii PART I ITEM 1. BUSINESS GENERAL Comtech Telecommunications Corp. (the "Company"), a Delaware corporation, is principally engaged in the design, development, manufacture and installation of high technology electronic products and systems. The Company's communications products are used worldwide for voice, data, facsimile and video transmissions at microwave frequencies in satellite, tropospheric scatter, terrestrial line- of-sight and wireless telecommunications. The Company's solid state high power amplifiers are used in electronic defense, wireless communications, electromagnetic compatibility and susceptibility testing, and high power test instrumentation applications. The Company sells its products directly to end- users, as well as to subcontractors and prime contractors which incorporate such products in full system installations. The Company has been in operation since 1967 and currently offers a broad product line of solid state high power amplifiers and satellite and troposcatter earth station equipments and subsystems. It sells its products to many of the world's providers of telecommunication services and users of high power electronic test systems, including domestic and foreign common carriers and telephone companies, defense systems, medical and automotive equipment producers, electromagnetic compatibility and susceptibility system suppliers, oil and gas companies (for communicating with offshore platforms) private and wireless networks, broadcasters, cable television operators, utilities and municipal, state and national governments. The Company works closely with customers and potential customers to develop product lines in market niches where it believes that it can become a leading supplier. It believes that this strategy is best effected through decentralized subsidiaries and operating units that can respond quickly to changing market and customer requirements. The Company's products are based primarily on microwave and radio frequency technologies, with the same basic technological concepts being applied across the Company's product lines. In the last decade, the Company's products have increasingly incorporated digital microwave technology. The Company believes its expertise in satellite, troposcatter and wireless telecommunications and solid state high power amplification provides a solid base for the development of future products and services, including new instrumentation and communications products and systems. Comtech has four operating units, Comtech Antenna Systems, Inc. ("CASI"), Comtech Communications Corp. ("CCC"), Comtech Microwave Products Corp. ("CMPC") and Comtech Systems, Inc. ("CSI"). CASI is a supplier of fiberglass and metal antenna products used in satellite and troposcatter communication systems. CCC designs and manufactures satellite communications products including frequency converters, solid state power amplifiers, low noise amplifiers and satellite subsystems. CMPC supplies state- of-the-art high power solid state amplifiers for the electronic defense, wireless communication, high power test instrument systems and state-of-the-art automated electromagnetic compatibility and susceptibility instrumentation systems. CSI designs, manufactures and installs troposcatter and terrestrial line-of-sight communications systems and equipment for defense and commercial applications for communicating with offshore oil and gas platforms. TELECOMMUNICATIONS OVERVIEW Telecommunications Market. The demand for telecommunications is increasing worldwide as emerging economies seek to modernize and as increasingly information-intensive countries introduce new telecommunications services. The telecommunications industry has expanded rapidly during the last decade due to both technological advances and regulatory changes. Regulatory initiatives have enhanced competition in telecommunications, thereby opening new markets and providing incentives for the development of new products. Examples of these changes include the development of advanced digital communications, the assignment of radio frequencies to cellular telephone services and the development of private satellite networks. Advances in technology have lowered per-unit communications costs, increased product reliability, and encouraged a proliferation of new and enhanced communications products and services. 1 Transmission Technology Options. Customers for telecommunications equipment must weigh the relative costs and advantages of the six presently available transmission technologies: copper cable, fiber optic cable, high frequency radio systems, wireless microwave systems, tropospheric scatter systems and satellite systems. Rarely is a complete communications network or system based solely on one of these technologies. Transmission is normally routed through a combination of technologies, each employed where most cost- effective. The Company's products are used in satellite, tropospheric scatter and wireless microwave communications. . Copper cable, the traditional transmission medium most familiar to consumers, is being replaced and supplemented by the other media, particularly for high-volume and long distance transmissions where it has substantial capacity, cost and reliability limitations. . Fiber optic cable is best suited to high-volume, point-to-point, short- or long-distance links where its advantages - capacity, quality and security - justify the long lead time and high cost to equip and install a network. . High frequency radio systems ("HF") employ long wavelengths which are propagated beyond line-of-sight distances either by surface waves traveling along the earth's perimeter or by skywave reflection of the transmitted waves off different layers of the ionosphere. Communications using HF surface wave propagation are reliable to distances of 300 miles and skywave propagation can support communication ranges of from 50 to 6,000 miles. Skywave propagation is, however, subject to the variations in height and density of the ionospheric layers. Such variations are diurnal, seasonal, and cyclical, with the occasional added impact of solar flare disturbances and magnetic storms. Improvements in modern technology and the use of adaptive frequency management techniques that enhance propagation prediction have greatly increased HF communication reliability and data throughput. HF radio is used as a prime military and defense communications means for short and medium range applications. . Wireless and microwave communications systems, generally used for point-to-point communications, employ signals with extremely short wave-lengths which travel only in line-of-sight paths over relatively short distances, generally under 30 miles, can be quickly and easily installed, require relatively low initial capital investment, and can be upgraded and expanded over time. There are a wide variety of microwave communication systems offering different frequencies, modulation techniques (analog or digital), and data transmission capacities. . Tropospheric scatter microwave communication systems transmit signals over distances from 30 to 400 miles by reflection of the transmitted signals off the troposphere, an atmospheric layer located approximately seven miles above the earth's surface. These systems, which use microwave technology, are well suited for rapid introduction of service in remote areas or where other communication alternatives are unavailable because of terrain problems, such as large bodies of water, mountains, etc. Such systems offer a high level of reliability and security and are particularly suited to defense and commercial voice and data communication applications. In addition, they have special purpose point-to-point commercial applications, such as communications to offshore gas and oil platforms and along pipelines or railroads. . Satellite communications systems have grown and diversified in response to demand for efficient and accurate long-distance voice and video communication and digital information exchange. In a satellite communication system, information is relayed to and from microwave transmitting and receiving stations on the ground by means of a low earth orbit (LEO) satellite or a geostationary earth orbit (GEO) satellite in an equatorial orbit, generally 22,300 miles, above the earth's equator. Satellite communication systems are particularly useful where long-range, high capacity and high quality point-to-point or point-to-multipoint communication is desirable. As few as three geostationary satellites can provide global communications coverage. These systems, which use microwave technology, are well suited for rapid introduction of service in remote areas or where communication alternatives are unavailable, such as mobile, shipboard or military applications. 2 AMPLIFIER TECHNOLOGY OVERVIEW Included in the Company's products are solid state high power amplifiers. Amplifiers are a class of electronic apparatus that reproduce signals with greater power, current or voltage amplitude. Indispensable in the world of signal processing, amplifiers can be as tiny as a microchip for a hearing aid or as massive as a multi-story building for transmitting radio signals to submerged submarines. Although the majority of amplifier applications are satisfied by solid-state transistor and integrated circuit technology, vacuum tubes still play an important role in the very high power microwave applications. Amplifiers can be separated into three groups: DC Amplifiers, Audio Frequency Amplifiers, and Radio Frequency Amplifiers. Each group can, in turn be segregated into the general categories of Small Signal Amplifiers and the higher power Large Signal Amplifiers. Small Signal Amplifiers in all three groups employ solid-state technologies to create flexible, easily implemented microelectronic building blocks, and are produced by established semiconductor manufacturers as either catalog products or custom devices for special applications specified by end-item products suppliers. The Company's solid-state high power amplifiers are in the category of Large Signal Amplifiers in the Microwave and Radio Frequency Spectrum. Large Signal Amplifiers are used in wireless telecommunications, defense systems and instrumentation applications, where they are employed to amplify microwave or radio frequency ("RF") energy for the emission of signals. Other applications are as power supply sources of RF energy for lasers and for the cyclotrons used in atomic physics. Solid-state transistor technology dominates the field at output power levels up to 3000 watts for frequencies up to 2000 Mhz. At frequencies higher than 12,000 Mhz, electron tube technology continues to be the most economical means of achieving high power at acceptable instantaneous bandwidths. For applications that require both high power and narrow bandwidths, electron tubes are still used at frequencies extending down to the commercial broadcast bands. Because of their greater instantaneous bandwidths, greater reliability and generally smaller size, however, solid-state amplifiers are constantly being sought as replacements for vacuum tube amplifiers for all applications throughout the useable frequency spectrum. In telecommunications, solid-state high power amplifiers are used to amplify signals for radiation from transmitting antennas in satellite or other wireless telecommunications systems. They are also used to amplify signals in defense radar and electronic jamming systems. In the laboratory, solid-state high power amplifiers are used to test the performance of high power microwave and cellular electronic system components by simulating operating environment conditions. Solid-state high power amplifiers are also used in electromagnetic compatibility and susceptibility testing. The proliferation of electronic systems in products such as automobiles, computers, cellular telephones, radios, televisions, medical equipment, sound amplifiers, aircraft and other products has led to increasingly serious problems with electromagnetic interference. Manufacturers, therefore, test these electronic systems for electromagnetic compatibility and susceptibility. For example, such testing may be used to determine whether the various electronic systems in a commercial aircraft are likely to be affected by the use of laptop computers or video games by passengers in flight. NARRATIVE DESCRIPTION OF BUSINESS The Company's product designs are based on both analog and digital microwave technologies. Digital microwave technology can significantly enhance performance. The Company has invested significant resources in developing its technological expertise, and works closely with customers and potential customers to develop product lines in market niches where it believes its technical expertise in solid-state high power amplification and telecommunication technologies can enable it to become a leading supplier. The Company operates through subsidiaries, each of which maintains its own sales, marketing, product development and manufacturing functions. The Company believes that this organizational structure allows the key personnel of each subsidiary, some of which are the founders of their subsidiaries, to be more responsive to their particular markets and customers. Brief descriptions of the operations of the Company's subsidiaries follow. 3 COMTECH ANTENNA SYSTEMS, INC. ("CASI") CASI, located in St. Cloud, Florida, designs and manufactures a wide variety of fiberglass and aluminum antennas for tropospheric scatter and satellite communication applications, including distributed network programming, cable and broadcast television, radio and other forms of information and entertainment distribution. CASI designs antennas for specific types of telecommunications systems and, typically, sells standardized products to independent distributors, prime contractors and end user customers. CASI's antenna product line includes fixed and mobile antenna systems and specialized multi-beam satellite antenna systems that are capable of receiving signals simultaneously from many independent satellites located up to 60 degrees apart. COMTECH COMMUNICATIONS CORP. ("CCC") CCC, located in Tempe, Arizona, designs and manufactures equipment used in commercial and defense satellite communications applications with satellites operating in the C, X and Ku-bands. The equipments include frequency up converters (which convert the intermediate frequency ("IF") carrier to high frequency transmit carrier, frequency down converters (which convert the higher frequency transmit carrier to an IF carrier at the receive end), solid state power amplifiers (which provide the final amplification of the transmit carriers to a signal sufficient for transmission) low noise amplifiers (which amplify the transmit carrier at the receive end) and satellite transceivers which incorporate the frequency converters, solid state high power and low noise amplifier technologies. These products comprise a broad range of receiving and transmitting equipment offering a variety of state-of-the-art technical capabilities with respect to performance, degree of complexity and value. COMTECH MICROWAVE PRODUCTS CORP. ("CMPC") CMPC, headquartered in Melville, New York, designs, develops and manufactures solid state high power amplifiers for defense, wireless communications, and for instrumentation systems. It sells its products to domestic and foreign commercial users, governmental agencies and prime contractors. The Company believes that CMPC is an innovative supplier of solid state high power amplifiers and related power processing equipment, which products also replace amplifiers using vacuum tube systems. CMPC is also currently developing products for the growing commercial wireless, cellular, PCN/PCS and electromagnetic compatibility and susceptibility amplification markets. COMTECH SYSTEMS, INC. ("CSI") CSI, headquartered in St. Cloud, Florida, designs, manufactures and installs telecommunication systems and equipment for domestic and international applications. CSI supplies telecommunication systems incorporating equipment manufactured by it, other Comtech subsidiaries and third parties. Currently, a significant portion of CSI's sales are for tropospheric scatter communication products and systems sold to oil and gas companies. CSI's product line consists primarily of equipment for tropospheric scatter systems and networks. CSI has a turnkey capability that ranges from system and network planning through equipment and system training and operation and maintenance programs. CSI's products and services are marketed to oil and gas companies and other commercial users, foreign defense commands, and other system prime contractors. The Company believes that CSI's products, which employ adaptive modem digital transmission technology, offer high speed data benefits over the traditional analog tropospheric scatter products offered by most of its competitors. SALES, MARKETING AND CUSTOMER SUPPORT The Company's sales and marketing efforts are handled independently by each subsidiary. The sales and marketing strategy of the Company's subsidiaries vary with particular markets served, and include direct sales by the subsidiary's own sales force (sales, marketing and engineering personnel), sales through independent representatives, value-added resellers or a combination of the foregoing. Subsidiaries have also entered into sales distribution agreements for certain products with distributors. Unlike sales representatives, who merely find customers for the Company on a commission basis, distributors purchase products from the Company for resale. The Company intends to continue to expand its domestic and international marketing efforts through both independent sales representatives and distributors. 4 Relationships with customers are established and maintained by management, technical and marketing personnel. The Company's strategy includes a commitment to provide ongoing customer support for its systems and equipment. This support involves providing direct access to engineering staff or trained technical representatives to resolve technical or operational problems. The Company's sales of tropospheric scatter communications, satellite communications and solid state high power amplifier products internationally represented approximately 56%, 37% and 39% of net sales in the fiscal years ended July 31, 1996, 1995 and 1994, respectively. Such international sales are expected to continue to increase due to the global expansion of telecommunications and microwave instrumentation, particularly in Asia, South America, the Middle East and Europe and the Company expects that international sales will remain a substantial proportion of its total sales. In fiscal 1996 and 1995, there were no sales to any one customer which amounted to over 10% of the consolidated net sales. During fiscal 1994, sales to one foreign customer amounted to $3,410,000, or 23% of consolidated net sales. 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 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 United States dollars, advance payments and irrevocable letters of credit in its favor. Although the percentage of the Company's total net sales to agencies of the United States or to contractors or subcontractors under contracts with United States agencies has fluctuated over the past three years, such sales remain significant, accounting for approximately 20%, 14% and 17% of total net sales for the fiscal years ended July 31, 1996, 1995 and 1994, respectively. These sales are subject to various risks, regulatory provisions applicable to government contracts, including, among other things, unpredictable reductions in funds available for the Company's projects and contract termination at the convenience of the government. Government contracts are generally less profitable than contracts with private industry but typically provide progress payment funding. The Company's domestic sales represented approximately 24%, 49% and 44% of net sales in the fiscal years ended July 31, 1996, 1995 and 1994, respectively. Although the percentage of the Company's total net sales to domestic customers declined this past year, such sales are expected to increase due to the expansion of wireless and satellite telecommunications product sales and the Company expects that domestic sales will remain a substantial proportion of its sales. There is no material effect on the Company's capital expenditures, earnings or competitive position resulting from compliance with Federal, state or local environment protection laws. BACKLOG The Company's backlog as of July 31, 1996 and 1995 was approximately $9,700,000 and $10,242,000, respectively. Included in 1996 backlog is an order for $4,000,000 from an international customer for which preliminary commitment of financing has been received from the Export-Import Bank of The United States. Final commitment is expected during the first quarter of fiscal 1997. Substantially all of the backlog as of July 31, 1996 is expected to be recognized as sales during the fiscal year ending July 31, 1997. The Company had received progress billings and advance payments aggregating approximately $359,000 as of July 31, 1996 in connection with orders included in the backlog at that date. Approximately 29% of that backlog consisted of United States government contracts, subcontracts and government funded programs, approximately 56% consisted of orders with foreign customers and approximately 15 % consisted of orders with domestic commercial customers. All of the contracts in the Company's backlog are subject to cancellation at the convenience of the customer or for default in the event that the Company is unable to complete the contract. 5 Variations in backlog from time to time are attributable in part to the timing of the Company's preparation and submission of contract proposals, the timing of contract awards and the delivery schedules on specific contracts. As a result, management believes its backlog at any point in the fiscal year is not necessarily indicative of the total sales anticipated for any particular future period. New business orders for some of the Company's products may not be reflected in the revenues of the Company for a year or more. CASI's business, as well as a major portion of CMPC's and CCC's businesses, operate under a short lead time and usually generate sales out of inventory. MANUFACTURING The Company's manufacturing operations consist principally of the assembly and testing of electronic products designed by the Company and built by it from purchased fabricated parts, printed circuits and electronic components and, in the case of CASI, the casting of fiberglass antennas and the shaping of aluminum antennas. The Company employs formal quality management programs and other training programs, and expects to qualify its subsidiaries for the International Standards Organization's (ISO 9000) quality procedure registration programs, which is anticipated to be required in the future for product sales into the European Community. The Company's ability to deliver its 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 are used by the Company in manufacturing its products. Electronic components and raw materials used in the Company's products are generally obtained from independent suppliers. Some components are standard items and are available from a number of suppliers. Others are manufactured to the Company's specifications by subcontractors. The Company obtains certain components and subsystems from a single source or a limited number of sources. The Company believes that most components and equipment are available from existing or alternative suppliers and subcontractors. A significant interruption in the delivery of such items could have a material adverse effect on the Company's business and results of operations. RESEARCH AND DEVELOPMENT The technology used in the Company's products is subject to rapid development and frequent change, and the Company's business position is in large part contingent upon the continuous refinement of its scientific and engineering expertise and the development, either through internal research and development or acquisitions of new or enhanced products and technologies. Research and development expenses were $741,000, $1,036,000 and $760,000 in the fiscal years ended 1996, 1995 and 1994, respectively, representing 3.5%, 6.3% and 5.1% of total net sales, respectively, for such periods. A portion of the Company's research and development efforts is related to specific contracts and is recoverable under such contracts, and such expenditures are not included in research and development expenses for financial reporting purposes. During the fiscal years ended July 31, 1996, 1995 and 1994, the Company was reimbursed by customers for such activities in the amounts of $516,000, $382,000 and $178,000, respectively, representing 2.5%, 2.3% and 1.2%, respectively, of total net sales. The Company obtains customer funding for research and development where possible to adapt the Company's basic technology to specialized customer requirements. PATENTS AND LICENSES Although the Company owns or holds licenses for a number of patents, patents and licenses have been of substantially less significance in the Company's business than have been its scientific and engineering know-how, production techniques, the timely application of its technology and the design development and marketing capabilities of its personnel. The Company relies on the laws of unfair competition, restrictions in licensing agreements and confidentiality agreements to protect such knowledge and techniques. 6 COMPETITION The Company's business is highly competitive and characterized by rapid technological change. In addition, the number of potential customers for the Company's products is limited. The Company's growth and financial position depends, among other things, on its ability to keep pace with such changes and developments and to respond to the sophisticated requirements of an increasing variety of electronic equipment users. Many of the Company's competitors are substantially larger, have significantly greater financial, marketing and operating resources and broader product lines than does the Company. A significant technological breakthrough by others, including smaller competitors or new companies, could have a material adverse effect on the Company's business. In addition, certain of the Company's customers have technological capabilities in the Company's product areas and could choose to replace the Company's products with their own. The Company believes that competition in its markets is based primarily on price, product performance, reputation, delivery times and customer support. The Company believes that, due to its organizational structure and proprietary know-how, it has the ability to develop, produce and to deliver equipment on a cost-effective basis faster than many of its competitors. KEY PERSONNEL/EMPLOYEES The Company operates through a number of subsidiaries, an organizational structure which the Company believes fosters responsiveness to specific markets and customers. This structure, however, leaves the Company with less central control over the operations of its subsidiaries. The Company's success is dependent upon the continued contributions of its key management personnel, including the key management at each of its subsidiaries and depends to a significant extent upon its President and Chief Executive Officer. Many of the Company's key personnel, particularly the key engineers of its subsidiaries, would be difficult to replace, and are not subject to employment or non- competition agreements. The Company's growth and future success will depend in large part upon its 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 the Company has been successful to date in recruiting and retaining key personnel, there can be no assurance that the Company will be successful in attracting and retaining the personnel it requires in order to continue to grow and operate profitably. Also, there can be no assurance that management skills which have been appropriate for the Company in the past will continue to be appropriate if the Company continues to grow and diversify. At July 31, 1996, the Company had 192 employees, 102 of whom were engaged in production and PRODUCTION SUPPORT, 54 IN RESEARCH AND DEVELOPMENT AND OTHER ENGINEERING SUPPORT AND 36 IN MARKETING AND ADMINISTRATIVE FUNCTIONS. NONE OF THE EMPLOYEES IS REPRESENTED BY A LABOR UNION. THE COMPANY BELIEVES THAT ITS EMPLOYEE RELATIONS ARE GOOD. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides for forward looking statements. Certain information in Items 1,2,3,7 and 8 of this Form 10- K included information that is forward looking, such as the Company's anticipated sales levels, its anticipated liquidity and capital requirements and the results of legal proceedings. The matters referred to in forward looking statements could be affected by the risks and uncertainties involved in the Company's business. These risks and uncertainties include, but are not limited to, the effect of economic and market conditions, unpredictable reductions in funding for government defense expenditures, and the risks associated with international sales, including fluctuations in foreign currency exchange rates, political and economic instability, availability of suitable export financing, export license requirements, tariff regulations and other US and foreign regulations that may apply to the export of the Company's products, as well as certain other risks described above in this Item under "Backlog," "Competition" and "Key Personnel/Employees" and below in Item 3 in "Legal Proceedings" and in Item 7 in "Management's Discussion and Analysis of Financial Condition and Results of Operations." Subsequent written and oral forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Form 10-K. 7 ITEM 2. PROPERTIES The Company's corporate offices are located in a portion of the 46,000 square foot facility on 2 acres of land in Melville, New York which also houses CMPC. The Company leases this facility in Melville, New York from a partnership controlled by the Company's Chairman, Chief Executive Officer and President. The lease, as amended, provides for the Company's exclusive use of the premises as they now exist for an initial term of ten years through December 27, 2001. The Company has the option to extend the term of the lease for an additional ten-year period and a right of first refusal in the event of a sale of the facility. The base annual rental under the lease is subject to adjustments. The Company believes that the terms of this lease are not less advantageous to the Company than those that would have been available to the Company from an unrelated party. The Company leases the 32,000 square foot facility used by CASI and CSI in St. Cloud, Florida from a Florida Land Trust, controlled by the Company's Vice President and Chief Financial Officer. The lease provides for the Company's exclusive use of the premises as they now exist for a term of ten years through September 30, 1998. The base annual rental under the lease is subject to adjustments. The Company believes that the terms of this lease are not less advantageous to the Company than those that would have been available to the Company from an unrelated party. The Company leases a 10,000 sq. ft. building in Tempe, Arizona for its Comtech Communications Corp. subsidiary. The lease provides for the exclusive use of the premises as they now exist for a term of three years through February 1997. ITEM 3. LEGAL PROCEEDINGS The Company is subject to certain legal actions which arise out of the normal course of business. It is management's belief that the outcome of these actions will not have a material effect on the Company's consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to stockholders during the fourth quarter of the fiscal year ended July 31, 1996. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the NASDAQ National Market System under the symbol "CMTL". The following table sets forth the range of high and low closing sales prices for the Common Stock, as reported by NASDAQ. Such prices do not include retail markups, markdowns, or commissions.
Common Stock ------------ High Low ------- ------------ FISCAL YEAR ENDING 7-31-95 First Quarter $ 5 $ 3 1/4 Second Quarter 4 2 1/8 Third Quarter 3 5/8 2 1/4 Fourth Quarter 3 3/8 2 FISCAL YEAR ENDING 7-31-96 First Quarter 3 1/2 2 1/4 Second Quarter 2 7/8 2 1/8 Third Quarter 5 2 3/16 Fourth Quarter 6 3/8 3 FISCAL YEAR ENDING 7-31-97 First Quarter 3 5/16 2 3/4 (through October 18, 1996)
DIVIDENDS The Company has never paid a cash dividend on its Common Stock and the Company's Board of Directors intends to continue this policy for the foreseeable future. Earnings, if any, will be used to finance the development and expansion of the Company's business. APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS As of October 18, 1996, there were approximately 1,300 holders of the Company's Common Stock. Such number of record owners was determined from the Company shareholders' records and does not include beneficial owners of the Company's Common Stock held in the names of various security holders, dealers and clearing agencies. 9 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended July 31, -------------------------------------------------- 1996 1995 1994 1993 1992 -------- --------- --------- -------- -------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales $20,916 $16,455 $14,873 $22,265 $19,434 Cost of sales 14,819 12,096 12,226 15,778 13,177 ------- ------- ------- ------- ------- Gross profit 6,097 4,359 2,647 6,487 6,257 Expenses: Selling, general and administrative 5,015 4,658 4,706 4,420 4,262 Research and development 741 1,036 760 314 423 ------- ------- ------- ------- ------- 5,756 5,694 5,466 4,734 4,685 ------- ------- ------- ------- ------- Operating earnings (loss) 341 (1,335) (2,819) 1,753 1,572 Other expenses (income): Interest expense 302 341 279 321 233 Interest income (60) (171) (253) (47) (77) Other income --- (20) --- --- --- ------- ------- ------- ------- ------- Earnings (loss) before provision for income taxes 99 (1,485) (2,845) 1,479 1,416 Provision for income taxes 27 17 25 45 123 ------- ------- ------- ------- ------- Net earnings (loss) $ 72 $(1,502) $(2,870) $ 1,434 $ 1,293 ======= ======= ======= ======= ======= Net earnings (loss) per share $.03 $(.58) $(1.14) $1.07 $1.03 ======= ======= ======= ======= ======= CONSOLIDATED BALANCE SHEET DATA: Total assets $16,629 $16,783 $18,289 $20,397 $16,761 Working capital 7,797 7,681 9,447 11,988 4,935 Long-term debt, less current installments 1,875 2,277 2,535 2,760 2,832 Stockholders' equity 10,301 10,081 11,446 13,214 5,999
10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of the Company's net sales:
Fiscal Year Ended July 31 ------------- 1996 1995 1994 ------ ------ ----------- Net sales 100.0% 100.0% 100.0% Gross Margin 29.1 26.5 17.8 Selling, general and administrative 24.0 28.3 31.6 expenses Research and development expenses 3.5 6.3 5.1 Operating earnings (loss) 1.6 (8.1) (19.0) Interest expense, net (1.2) (1.0) (.2) Earnings (loss) before income taxes .5 (9.0) (19.1) Net earnings (loss) .3 (9.1) (19.3)
COMPARISON OF THE FISCAL YEARS 1996 AND 1995 RESULT OF OPERATIONS NET SALES. net sales were $20,916,000 and $16,455,000 for the fiscal years ended July 31, 1996 and 1995, respectively, representing an increase of $4,461,000 or 27.1%. This increase was primarily due to increased sales for use by international customers. International sales represented approximately 56% and 37% of total net sales for fiscal 1996 and 1995, respectively. The Company expects that international sales will remain a significant proportion of its total sales. Sales to agencies of the United States government or to end users of such agencies represented approximately 20% and 14% of total net sales for fiscal 1996 and 1995, respectively. The company anticipates that such sales will remain substantially at the same level for the foreseeable future. Domestic sales are expected to increase due to the anticipated increase in demand for wireless and satellite telecommunications and microwave electromagnetic compatibility instrumentation. GROSS MARGIN. Gross profit was $6,097,000 or 29.1% of net sales in fiscal 1996 as compared to $4,359,000 or 26.5% of net sales in fiscal 1995. The primary reason for the increase was an increase in in fiscal 1996 in both sales volume and efficiencies in productions at Comtech Communications Corp., resulting in a greater gross margin contribution. To a lesser degree, gross profits were impacted by the gain on the settlement of a claim arising from an earlier acquisition.. The Company paid $85,000 to the seller in settlement of a $250,000 note. The Settlement difference represented reimbursement to the company for costs that it incurred due to the seller's failure to perform in accordance with the agreement. Of this gain, $149,000 was included in cost of sales. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses were $5,015,000 and $4,658,000 in fiscal 1996 and 1995, respectively, representing an increase of $357,000. This increase was due primarily to the increase in marketing and administrative expenses required to support the higher level of sales in the fiscal 1996. As a percentage of sales however, these expenses decreased to 24% in fiscal 1996 from 28.3% in fiscal 1995. RESEARCH AND DEVELOPMENT. Research and development expenses were $741,000 and $1,036,000 in fiscal years ended July 31, 1996 and 1995, respectively, representing a decrease of $295,000 or 28.5%. research and development expenses as a percentage of net sales were 3.5% and 6.3% in fiscal 1996 and 1995, respectively. This decrease was primarily due to the decreased level of R&D expenses at Comtech Communications Corp. as its initial product designs were principally completed in fiscal 1995. 11 Whenever possible, the Company seeks customer-funding for research and development to adapt the Company's products to specialized customer requirements. During the fiscal years ended July 31, 1996 and 1995, the Company was reimbursed $516,000 and $382,000, respectively, which amounts are not reflected in the reported R&D expenses. OPERATING EARNINGS. As a result of the foregoing factors, the Company had operating income of $341,000 in fiscal 1996 compared to an operating loss of $1,335,000 in fiscal 1995. INTEREST EXPENSE. Interest expense was $302,000 and $341,000 in the fiscal years ended July 31, 1996 and 1995, respectively. interest expense in both years was substantially due to interest associated with the Company's capital lease obligations. INTEREST INCOME. Interest income for the fiscal years ended july 31, 1996 and 1995 was $60,000 and $171,000, respectively. this decrease was due primarily to the decrease in the amount of cash available to invest in the fiscal 1996 period. PROVISION FOR INCOME TAXES. The provision for income taxes was $27,000 and $17,000 in fiscal 1996 and 1995, respectively, which principally relates to state income taxes. The Company believes its tax benefits are subject to 100% valuation allowance due to earnings fluctuations inherent in the Company's operations and the potential limitations on utilization of loss and credit carryforwards pursuant to sections 382 and 383 of the internal revenue code of 1986. COMPARISON OF THE FISCAL YEARS 1995 AND 1994 RESULT OF OPERATIONS NET SALES. Net sales were $16,455,000 and $14,873,000 for the fiscal years ended July 31, 1995 and 1994, respectively, representing an increase of $1,582,000 or 11%. this increase was primarily due to an increase in domestic commercial sales, principally sales at the Comtech Communications Corp. subsidiary which was formed in February 1994 and commenced significant levels of shipments of products in the latter part of fiscal 1995. International sales represented approximately 37% and 39% of total net sales for fiscal 1995 and 1994, respectively. Although the Company has been experiencing delays and deferrals of orders in the international marketplace, it expects that international sales will remain a significant proportion of its total sales. Sales to agencies of the United States Government or to end users of such agencies ("Government Sales") represented approximately 14% and 17% of total net sales for fiscal 1995 and 1994, respectively. The Company anticipates that Government Sales will remain at reduced levels for the foreseeable future due to the reduction in United States defense spending. Domestic sales are anticipated to increase due to the expansion of wireless and satellite telecommunications and microwave electromagnetic compatibility instrumentation. GROSS MARGIN. Gross Profit was $4,359,000 or 26.5% of net sales in fiscal 1995 as compared to $2,647,000 or 17.8% of net sales in fiscal 1994. The lower gross margins in the fiscal 1994 period were attributable to technical difficulties experienced with respect to certain projects. Additionally, improved margins were experienced in fiscal 1995 in system sales and a product mix of equipment sales. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses were $4,658,000 or 28.3% of net sales and $4,706,000 or 31.6% of net sales in fiscal 1995 and 1994, respectively, representing a modest decline of approximately 1%. Increased amounts of expenses in these areas at the Comtech Communications Corp. subsidiary, due to its growth and development, partially offset the decrease which was realized at the other subsidiaries as a result of the cost reduction measures we instituted. RESEARCH AND DEVELOPMENT. Research and development expense were $1,036,000 and $760,000 in fiscal years ended July 31, 1995 and 1994, respectively, representing an increase of $276,000 or 36%. Research and development expenses as a percentage of net sales were 6.3% and 5.1% in fiscal 1995 and 1994, respectively. The increase was due to increased research and development and product development costs at Comtech Communications Corp. subsidiary. 12 Whenever possible, the Company seeks customer-funding for research and development to adapt the Company's products to specialized customer requirements. During the fiscal years ended July 31, 1995 and 1994, the Company was reimbursed $382,000, and $178,000, respectively. OPERATING EARNINGS. As a result of the foregoing factors, the Company had an operating loss of $1,335,000 in fiscal 1995 as compared to a loss of $2,819,000 in fiscal 1994. INTEREST EXPENSE. Interest expense was $341,000 and $279,000 in the fiscal years ended July 31, 1995 and 1994, respectively. Interest expense in both years was substantially due to interest associated with the Company's capital lease obligations. There was no borrowing against the Company's bank line of credit in either year. INTEREST INCOME. Interest income for the fiscal years ended July 31, 1995 and 1994 was $171,000 and $253,000, respectively. This decrease was due primarily to the decrease in the amount of cash available to invest in the fiscal 1995 period. PROVISION FOR INCOME TAXES. The provision for income taxes was $17,000 and $25,000 in fiscal 1995 and 1994, respectively, which principally relates to state income taxes. The Company believes its tax benefits are subject to 100% valuation allowance due to earnings fluctuations inherent in the Company's operations and the potential limitations on utilization of loss and credit carry forwards pursuant to sections 382 and 383 of the Internal Revenue code of 1986. Liquidity and Capital Resources - ------------------------------- The Company's cash and cash equivalents position decreased by $179,000, from $2,019,000 at July 31, 1995 to $1,840,000 at July 31, 1996. Of this decrease, $195,000 was added to restricted cash to secure additional standby letters of credit that were outstanding at July 31, 1996. The balance was the net result of cash provided by other operating activities and cash used in investing activities and financing activities. Accounts receivable were $3,467,000 at July 31, 1996 as compared to $4,490,000 at July 31, 1995, net of an allowance for doubtful accounts of $28,000 in fiscal 1996 and $137,000 in fiscal 1995. The decreased accounts receivable balance is a result of the Company's efforts to shorten the collection cycle of accounts receivables and also due to the timing of shipments. Included in the accounts receivable balances for sales recorded on a percentage-of-completion basis were $689,000 and $920,000 of unbilled accounts receivable at July 31, 1996 and 1995, respectively. The portion of accounts receivable represented by unbilled accounts receivable will vary at any time as a function of the volume of contracts being performed by the Company that are accounted for on a percentage- of-completion basis. The Company believes that its allowance for doubtful accounts is sufficient based on past experience and the Company's credit standards. The Company generally requires international customers to secure their obligations by letter of credit. Inventory levels of materials and work-in process, net of progress payments and reserves were $6,527,000 and $5,011,000, respectively for fiscal years ended July 31, 1996 and 1995. The primary increase was at our solid state amplifier subsidiary which was necessary to support a 27% higher contract backlog at July 31, 1996 over the previous year. The Company generally operates on a job-order cost basis, that is, costs are incurred as work-in-process inventory for specific contracts or "jobs" and, accordingly inventory levels will vary as a function of the state of the Company's order backlog. The Company does have some product lines which require a more competitive delivery response to customers requirements and require the company to provide for a level of "off- the-shelf" equipment. The only other general inventory that the Company maintains is for basic components which are common for most of its products. Investing activities used $129,000 of cash as a result of the net proceeds from the sale of marketable securities offset by purchases of capital equipment. This equipment was primarily needed by the Comtech Communications Corp. subsidiary to complete their production stage development and at the Comtech Microwave Products Corp. subsidiary to respond to increased operating levels. Financing activities used $638,000 of cash for principal payments of long-term debt. 13 In April 1996, the Company settled a claim in connection with a note payable arising from an earlier acquisition. The Company paid $85,000 to the seller in settlement of a $250,000 note. The settlement difference represented reimbursement to the Company for costs that it incurred due to the seller's failure to perform in accordance with the agreement. Of this gain, $149,000 was included in cost of sales and $16,000 has been included in selling, general and administrative expenses. From time to time the Company utilizes short-term bank financing to fund its working capital requirements. At present, the Company has a $4.5 million credit facility with a financial institution. The line, which bears interest at 1% over the prime rate, is to be secured at the time of borrowing by collateral satisfactory to the financial institution. During fiscal 1996, the Company took advances totaling $750,000 which were paid back in full by July 31, 1996. This credit facility expires on January 31, 1997. The Company is presently negotiating with the financial institution for a continued facility. Additionally the Company has obtained a preliminary commitment from the Export- Import Bank of the United States, for a guarantee of up to $1 million under the Working Capital Guarantee Program. This program provides to the lender, a 90% guarantee on qualifying loans made to the Company for export related contracts. This line is presently in negotiation with the lender. The Company has in the past and continues to place a high emphasis on cash collections as well as seeking progress and advance payments on contracts when appropriate. The Company's cash balances may fluctuate from time to time due to the timing of contract deliveries and collection cycles. The Company believes that its current cash position, funds generated from operations and funds available from its current credit facility, collectively, will be adequate to meet the Company's cash requirements. The Company's cash investments consist of highly liquid interest bearing commercial grade securities and certificates of deposit. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Independent Auditors' Report, Consolidated Financial Statements, Notes to Consolidated Financial Statements and related financial schedules are listed in the index to Consolidated Financial Statements and Schedules annexed hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Certain information concerning the directors of the Company is incorporated by reference to the Proxy Statement of the Company for the Annual Meeting of Stockholders to be held December 12, 1996 (the "Proxy Statement") which will be filed with the Securities and Exchange Commission. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated by reference to the Company's Proxy Statement which will be filed with the Securities and Exchange Commission no more than 120 days after close of its fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the Company's Proxy Statement which will be filed with the Securities and Exchange Commission no later than 120 days after the close of its fiscal year. 14 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is incorporated by reference to the Company's Proxy Statement which will be filed with the Securities and Exchange Commission no more than 120 days after the close of its fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: 1. and 2. Financial Statements and Financial Statement Schedule The Financial Statements filed as part of this report are listed in the accompanying Index to Consolidated Financial Statements and Schedule.
Incorporated By Exhibit Page --------------- - ------- ---- Reference to Number Description of Exhibit Number Exhibit - ------ ---------------------- ------ --------------- 3(a) Certificate of Exhibit 3(a) of Incorporation of the the Registrant's Registrant 1987 Form 10-K 3(b) Amendment of the Exhibit 3(b) to Certificate of the Registrant's Incorporation 1991 Form 10-K affecting the 5 to 1 reverse stock split 3(c) By-Laws of the Exhibit 3(c) of Registrant the Registrant's 1987 Form 10-K 3(d) Amendment to the Exhibit 3(d) to Certificate of the Registrant's Incorporation 1994 Form 10-K increasing authorized shares to 12 million 10(a) Employment Agreetment Exhibit 10(b) of dated August 20, 1992 the Registrant's between the 1992 Form 10-K Registrant and Fred Kornberg 10(b) Non-employee Exhibit 10(t) to Directors' Stock the Registrant's Option Plan 1987 Form 10-K 10(c) 1982 Incentive Stock Exhibit A to the Option and Registrant's Proxy Appreciation Plan Statement dated October 29, 1982 10(d) Lease and amendment Exhibit 10(k) to thereto on the the Registrant's Melville Facility 1992 Form 10-K 10(e) 1993 Incentive Stock Appendix A to the Option Plan Registrant's Proxy Statement dated December 3, 1992 10(f) Warrant Agreement Exhibit 4 to dated July 21, 1993 Registration between the Statement No. Registrant and 33-63784 Barington Capital Group, L.P. 10(g) Warrant Agreement Exhibit 4(b) to dated July 9, 1993 the Registrant's between Registrant Form 8-K dated and PMCC Acquisition July 9, 1993 Corp.
15 10(h) Amendment to the Form S-8 filed Registrant's 1993 August 31, 1994 Incentive Stock Registration No. Option Plan 33-83584 10(i) Time Accelerated Exhibit 10(j) to Restricted Stock the Registrant's Purchase Agreements 1994 Form 10-K between Registrant and Principals of Comtech Communications Corp. subsidiary 21 Subsidiaries of the Exhibit 21 to the Company Registrant's 1996 Form 10-K 23 Consent of KPMG Peat Exhibit 23 to the Marwick LLP Registrant's 1996 Form 10-K Exhibits to this Annual Report on Form 10-K are available upon request for a fee to the Company of $25. 16 SIGNATURE --------- Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMTECH TELECOMMUNICATIONS CORP. October 29, 1996 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 --------- ----- 10/29/96 s/Fred Kornberg Chairman of the Board - ----------- ------------------------ ----------------------------- (Date) Fred Kornberg Chief Executive Officer and Director (Principal Executive Officer) 10/29/96 s/J. Preston Windus, Jr. Vice President, - ----------- ------------------------ ----------------------------- (Date) J. Preston Windus, Jr. Chief Financial Officer and Secretary 10/29/96 s/George Bugliarello Director - ----------- ------------------------ ----------------------------- (Date) George Bugliarello 10/29/96 s/Richard L. Goldberg Director - ----------- ------------------------ ----------------------------- (Date) Richard L. Goldberg 10/29/96 s/Gerard R. Nocita Director - ----------- ------------------------ ----------------------------- (Date) Gerard R. Nocita 10/29/96 s/John B. Payne III Director - ----------- ------------------------ ----------------------------- (Date) John B. Payne III 10/29/96 s/Sol S. Weiner Director - ----------- ------------------------ ----------------------------- (Date) Sol S. Weiner
17 SUBSIDIARIES ------------ The following is a list of the active subsidiaries of the Company as of October 29, 1996: Subsidiary State of Incorporation ---------- ---------------------- Comtech Microwave Products Corp. New York Comtech Systems, Inc. Delaware Comtech Antenna Systems, Inc. Delaware Comtech Communications Corp. Delaware 18 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE (FORM 10-K) JULY 31, 1996 AND 1995 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Index to Consolidated Financial Statements Independent Auditors' Reports Consolidated Financial Statements: Balance Sheets at July 31, 1996 and 1995 Statements of Operations for each of the years in the three-year period ended July 31, 1996 Statements of Stockholders' Equity for each of the years in the three-year period ended July 31, 1996 Statements of Cash Flows for each of the years in the three-year period ended July 31, 1996 Notes to Consolidated Financial Statements Additional Financial Information Pursuant to the Requirements of Form 10-K: Schedule II - Valuation and Qualifying Accounts and Reserves Exhibit 11 - Computation of Earnings (Loss) Per Share Schedules not listed above have been omitted because they are either not applicable or the required information has been given elsewhere in the consolidated financial statements or notes thereto. F-1 Independent Auditors' Report ---------------------------- The Board of Directors and Stockholders Comtech Telecommunications Corp.: We have audited the consolidated balance sheets of Comtech Telecommunications Corp. and subsidiaries as of July 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended July 31, 1996. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule II as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 1996 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule II, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in notes to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No.115, "Accounting for Certain Investments in Debt and Equity Securities" in fiscal 1995. KPMG PEAT MARWICK LLP Jericho, New York October 21, 1996 F-2 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Balance Sheets July 31, 1996 and 1995
Assets 1996 1995 ------ ---- ---- Current assets: Cash and cash equivalents $ 1,840,000 2,019,000 Restricted cash 220,000 25,000 Marketable investment securities -- 275,000 Accounts receivable, less allowance for doubtful accounts of $28,000 in 1996 and $137,000 in 1995 3,467,000 4,490,000 Inventories, net 6,527,000 5,011,000 Prepaid expenses and other current assets 196,000 286,000 ----------- ----------- Total current assets 12,250,000 12,106,000 Property, plant and equipment, net 3,996,000 4,212,000 Other assets 383,000 465,000 ----------- ----------- $ 16,629,000 16,783,000 =========== =========== Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Current installments of long-term debt (including payable to related party of $351,000 in 1996 and $319,000 in 1995) 642,000 591,000 Notes payable -- 250,000 Accounts payable 2,037,000 1,894,000 Accrued expenses and other current liabilities 1,774,000 1,690,000 ----------- ----------- Total current liabilities 4,453,000 4,425,000 Long-term debt, less current installments (including payable to related party of $1,512,000 in 1996 and $1,862,000 in 1995) 1,875,000 2,277,000 ----------- ----------- Total liabilities 6,328,000 6,702,000 ----------- ----------- Stockholders' equity: Preferred stock, par value $.10 per share; shares authorized and unissued 2,000,000 -- -- Common stock, par value $.10 per share; authorized 10,000,000 shares; issued and outstanding, 2,607,344 shares in 1996 and 2,605,344 shares in 1995 261,000 261,000 Additional paid-in capital 22,235,000 22,230,000 Accumulated deficit (11,599,000) (11,671,000) ----------- ----------- 10,897,000 10,820,000 Less: Treasury stock (15,000 shares in 1996 and 1995) (180,000) (180,000) Deferred compensation (416,000) (553,000) Unrealized loss on securities -- (6,000) ----------- ----------- 10,301,000 10,081,000 ----------- ----------- Commitments and contingencies $ 16,629,000 16,783,000 =========== =========== See accompanying notes to consolidated financial statements.
F-3 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Operations Years ended July 31, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Net sales $ 20,916,000 16,455,000 14,873,000 ---------- ---------- ---------- Costs and expenses: Cost of sales 14,819,000 12,096,000 12,226,000 Selling, general and administrative 5,015,000 4,658,000 4,706,000 Research and development 741,000 1,036,000 760,000 20,575,000 17,790,000 17,692,000 ---------- ---------- ---------- Operating income (loss) 341,000 (1,335,000) (2,819,000) Other expenses (income): Interest expense 302,000 341,000 279,000 Interest income (60,000) (171,000) (253,000) Other -- (20,000) -- ---------- ---------- ---------- Income (loss) before provision for income taxes 99,000 (1,485,000) (2,845,000) Provision for income taxes 27,000 17,000 25,000 ---------- ---------- ---------- Net income (loss) $ 72,000 (1,502,000) (2,870,000) ========== ========== ========== Net income (loss) per share $0.03 (.58) (1.14) =========== ========== ========== Weighted average number of common and common equivalent shares outstanding 2,661,000 2,590,000 2,519,000 =========== ========== ==========
See accompanying notes to consolidated financial statements. F-4 COMTECH TELECOMMUNICATION CORP. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended July 31, 1996, 1995 and 1994
Common stock Additional Treasury stock ---------------- paid in Accumulated --------------- Shares Amount capital deficit Shares Amount ------ ------ ------- ------- ------ ------ Balance July 31, 1993 2,292,144 $ 229,000 $ 20,617,000 $(7,299,000) 15,000 $(180,000) Shared issued in connection with stock option agreement 43,200 5,000 112,000 - - - Shares issued in connection with public offering of common stock 150,000 15,000 868,000 - - - Restricted shares issued pursuant to employee stock award agreements 120,000 12,000 633,000 - - - Amortization of deferred compensation - - - - - - Net loss - - - (2,870,000) - - --------- --------- ---------- ------------ ------ ------ Balance July 31, 1994 2,605,344 261,000 22,230,000 (10,169,000) 15,000 (180,000) Amortization of deferred compensation - - - - - - Unrealized loss on securities - - - - - - Net loss - - - (1,502,000) - - --------- --------- ---------- ------------ ------ ------ Balance July 31, 1995 2,605,344 261,000 22,230,000 (11,671,000) 15,000 (180,000) Realized loss on sale of securities - - - - - - Amortization of deferred compensation - - - - - - Stock options exercised 2,000 - 5,000 - - - Net income - - - 72,000 - - --------- --------- ---------- ------------ ------ ------ Balance July 31, 1996 2,607,344 $ 261,000 22,235,000 $ (11,599,000) 15,000 (180,000) ========= ========= ========== ============= ====== =======
Deferred Stock- compen- holders' sation Other equity --------- ----- ------ Balance July 31, 1993 $(153,000) $ - $13,214,000 Shared issued in connection with stock option agreement - - 117,000 Shares issued in connection with public offering of common stock - - 883,000 Restricted shares issued pursuant to employee stock award agreements (633,000) - 12,000 Amortization of deferred compensation 90,000 - 90,000 Net loss - - (2,870,000) ----------- --------- ----------- Balance July 31, 1994 (696,000) - 11,446,000 Amortization of deferred compensation 143,000 - 143,000 Unrealized loss on securities - (6,000) (6,000) Net loss - - (1,502,000) ----------- --------- ----------- Balance July 31, 1995 (553,000) (6,000) 10,081,000 Realized loss on sale of securities - 6,000 6,000 Amortization of deferred compensation 137,000 - 137,000 Stock options exercised - - 5,000 Net income - - 72,000 ----------- --------- ----------- Balance July 31, 1996 $ (416,000) $ - $10,301,000 =========== ========= ===========
See accompanying notes to consolidated financial statements. F-5 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended July 31, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 72,000 (1,502,000) (2,870,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 992,000 798,000 686,000 Provision for bad debts, net -- 25,000 -- Provision for (reduction of) inventory reserves and anticipated losses on contracts (71,000) (6,000) 468,000 Amortization of deferred compensation 137,000 143,000 90,000 Gain on settlement of claim (165,000) -- -- Loss on sale of securities 6,000 -- -- Changes in assets and liabilities: Restricted cash securing letter of credit obligations (195,000) (25,000) -- Accounts receivable 1,023,000 (737,000) 916,000 Inventories (1,445,000) (1,126,000) (1,148,000) Prepaid expenses and other current assets 90,000 (70,000) (51,000) Notes Payable (85,000) -- -- Other assets 2,000 -- (489,000) Accounts payable 143,000 531,000 (974,000) Accrued expenses and other current liabilities 84,000 (495,000) 564,000 ---------- ---------- ---------- Net cash provided by (used in) operating activities 588,000 (2,464,000) (2,808,000) ---------- ---------- ---------- Cash flows from investing activities: Purchases of property, plant and equipment (404,000) (546,000) (291,000) Net proceeds of sale (purchases) of marketable investment securities 275,000 5,084,000 (5,365,000) -------- ---------- ---------- Net cash (used in) provided by investing activities (129,000) 4,538,000 (5,656,000) ---------- ---------- ---------- Cash flows from financing activities: Borrowings under line of credit facility 750,000 -- -- Repayments of borrowings under line of credit facility (750,000) -- -- Principal payments on long-term debt (643,000) (560,000) (334,000) Proceeds from issuance of common stock: Exercise of underwriters allotment -- -- 883,000 Stock options 5,000 -- 117,000 Restricted stock -- -- 12,000 ---------- ---------- ---------- Net cash (used in) provided by financing activities (638,000) (560,000) 678,000 ---------- ---------- ----------
(Continued) F-6 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued
1996 1995 1994 ---------- --------- ----------- Net (decrease) increase in cash and cash equivalents $ (179,000) 1,514,000 (7,786,000) Cash and cash equivalents at beginning of period 2,019,000 505,000 8,291,000 --------- --------- ---------- Cash and cash equivalents at end of period $ 1,840,000 2,019,000 505,000 ========= ========= ========== Supplemental cash flow disclosure - --------------------------------- Cash paid during the period for: Interest $ 302,000 341,000 279,000 ========= ========= ========== Income taxes $ 27,000 17,000 13,000 ========= ========= ==========
See accompanying notes to consolidated financial statements. F-7 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements July 31, 1996 and 1995 (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 is engaged in the design, development, manufacture and installation, for commercial and government applications, of high technology communications and radio frequency amplifier equipment. The Company's business is highly competitive and characterized by rapid technological change. In addition the number of potential customers for the Company's products is limited. The Company's growth and financial position depends, amount other things, on its ability to keep pace with such changes and developments and to respond to the sophisticated requirements of an increasing variety of electronic equipment users. Many of the Company's competitors are substantially larger, have significantly greater financial, marketing and operating resources and broader product lines than does the Company. A significant technological breakthrough by others, including smaller competitors or new companies, could have a material adverse effect on the Company's business. In addition, certain of the Company's customers have technological capabilities in the Company's product areas and could choose to replace the Company's products with their own . International sales expose the Company to certain risks, including barriers to trade, fluctuations in foreign currency exchange rates (which may make the Company's products less price competitive), political and economic instability, availability of suitable export financing, export license requirements, tariff regulations, and other United States 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 United States dollars, advance payments and irrevocable letters of credit in its favor. (c) Revenue Recognition ------------------- Sales on long-term, fixed price contracts, including pro-rata profits, are generally recorded based on the relationship of total costs incurred to date to total projected final costs or, alternatively, as progress billings or deliveries are made. Sales under cost reimbursement contracts are recorded as costs are incurred. Sales on other contract orders are recognized under the units of delivery method. Under this method, sales are recorded as units are delivered with the related cost of sales recognized on each shipment based upon a percentage of estimated final contract costs. Contract costs include material, direct labor, manufacturing overhead and other direct costs. Retainages and estimated earnings in excess of amounts billed on certain multi-year programs are reported as unbilled receivables. (Continued) F-8 2 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes To Consolidated Financial Statements, Continued Sales not associated with long-term contracts are generally recognized when the earnings process is complete, generally upon shipment or customer acceptance Provision for anticipated losses on uncompleted contracts are made in the period in which such losses are determined. (d) Cash and Cash Equivalents ------------------------- Cash equivalents consist of highly liquid direct obligations of the United States government with a maturity at acquisition of three months or less. These investments are carried at cost plus accrued interest, which approximates market. The Company had $220,000 and $25,000 of restricted cash securing letter of credit obligations with a financial institution at July 31, 1996 and 1995, respectively. (e) Statement of Cash Flows ----------------------- The Company acquired equipment financed by capital leases in the amounts of $292,000, $383,000 and $204,000 in 1996, 1995 and 1994, respectively. In January 1994, the Company issued a $250,000 note payable in connection with the purchase of equipment and an intellectual property rights agreement. The note was subsequently settled in April 1996 for a cash payment of $85,000 (see note 7). (f) Marketable Investment Securities -------------------------------- The Company adopted the provisions of Statement of Financial Accounting Standards No.115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No.115) effective August 1, 1994 and the cumulative effect of this change was immaterial. Under SFAS No.115, the Company classifies its investments in debt and equity securities as available-for-sale. Accordingly, these investments are reported at fair value with unrealized holding gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of tax. Classification of investments is determined at acquisition and reassessed at each reporting date. Realized gains and losses are included in the determination of net earnings at the time of sale and are derived using the specific identification method for determining cost of securities sold. (g) Inventories ----------- Work in process inventory reflects all accumulated production costs, which are comprised of direct production costs and overhead, reduced by amounts attributable to units delivered. These inventories are reduced to their estimated net realizable value by a charge to cost of sales in the period such excess costs are determined. Raw materials and components and work-in-process inventory associated with short-term contracts and purchase orders are stated at the lower of cost or market, computed on the first-in, first-out (FIFO) method. (Continued) F-9 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (h) Depreciation and Amortization ----------------------------- The Company's plant and equipment, recorded at cost, are depreciated or amortized over their estimated useful lives (building and improvements - 40 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. (i) Other Assets ------------ Included in other assets at July 31, 1996 and 1995 is approximately $335,000 relating to an intellectual property rights agreement, which is being amortized over the eight year term of the agreement. At July 31, 1996 and 1995, accumulated amortization related to this purchased technology were approximately $102,000 and $58,000, respectively. The Company assesses the recoverability of the intangible asset by determining whether the amortization of purchased technology over its remaining life can be recovered through undiscounted future operating cash flows from product sales utilizing the technology. (j) 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. (k) 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. (l) Net Income (loss) Per Share --------------------------- Net income (loss) per share are based on the weighted average number of common and common equivalent shares (if dilutive) outstanding during each year. Fully diluted per share information has been omitted because it does not differ materially from primary income (loss) per share. (m) Financial Instruments --------------------- Management of the Company believes that the book value of its monetary assets and liabilities, approximates fair value as a result of the short-term nature of such assets and liabilities. Management further believes that the fair market value of long-term debt relating to capital leases does not differ materially from carrying value. (Continued) F-10 (n) Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect 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. (2) Marketable Investment Securities -------------------------------- As discussed in note 1, the Company adopted the provisions of SFAS No.115 effective August 1, 1994 and the cumulative effect of this change in the method of accounting for certain investments in debt and equity securities, net of income taxes was immaterial. The following table presents the amortized cost, gross unrealized losses and fair value of the investments available-for-sale as of July 31, 1995:
Gross Amortized Unrealized Fair Cost Losses Value ---- ------ ----- Commercial debt obligation $ 281,000 6,000 275,000 ======= ===== ======= The Company did not hold any marketable securities at July 1, 1996. (3) Accounts Receivable ------------------- Accounts receivable consist of the following at July 31, 1996 and 1995: 1996 1995 ---- ---- Accounts receivable from commercial customers $ 2,079,000 3,368,000 Unbilled receivables (including retainages) on contracts-in-progress 689,000 920,000 Amounts receivable from the United States Government and its agencies 727,000 339,000 --------- --------- 3,495,000 4,627,000 Less allowance for doubtful accounts 28,000 137,000 --------- --------- Accounts receivable, net $ 3,467,000 4,490,000 ========= =========
In the opinion of management, substantially all of the unbilled balances will be billed and collected during fiscal 1997. (Continued) F-11 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (4) Inventories ----------- Inventories consist of the following at July 31, 1996 and 1995: 1996 1995 ---- ---- Raw materials and components $ 1,754,000 1,437,000 Work-in-process 5,414,000 4,234,000 ---------- ---------- 7,168,000 5,671,000 Less: Progress payments 151,000 93,000 Provision for anticipated losses on contracts and inventory reserves 490,000 567,000 ---------- ---------- Inventories, net $ 6,527,000 5,011,000 ========== ========== (5) Property, Plant and Equipment ----------------------------- Property, plant and equipment consists of the following: 1996 1995 ---- ---- Land $ 40,000 40,000 Buildings and improvements 320,000 320,000 Equipment 7,765,000 7,383,000 Leasehold improvements 299,000 285,000 Facilities financed by capital lease 3,365,000 3,365,000 Equipment financed by capital lease 2,546,000 2,246,000 ----------- ---------- 14,335,000 13,639,000 Less accumulated depreciation and amortization 10,339,000 9,427,000 ---------- ---------- $ 3,996,000 4,212,000 ========== ========== Depreciation and amortization expense on property, plant and equipment amounted to approximately $912,000, $709,000 and $665,000 for the years ended July 31, 1996, 1995 and 1994, respectively. (6) Accrued Expenses and Other Current Liabilities ---------------------------------------------- Accrued expenses and other current liabilities consist of the following at July 31, 1996 and 1995: F-12 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 1996 1995 ---- ---- Customer advances and deposits $ 208,000 321,000 Accrued wages and benefits 680,000 461,000 Accrued commissions 355,000 401,000 Other 531,000 507,000 -------- -------- $ 1,774,000 1,690,000 ========= ========= (7) Note Payable ------------ During fiscal 1996, the Company received a favorable judgment and settled its dispute concerning the $250,000 note payable related to an asset acquisition agreement. The settlement resulted in the Company paying $85,000 to the seller. The settlement difference between the disputed final contractual payment amount of $250,000 and the negotiated settlement of $85,000, represented reimbursement to the Company for costs that it incurred due to the seller's failure to perform in accordance with the agreement. Accordingly, $149,000 has been included in cost of sales and $16,000 has been included in selling, general and administrative expenses. (8) Short-Term Borrowings --------------------- The Company has a $4,500,000 secured line of credit facility with a financial institution which expires on January 31, 1997. Borrowings under the facility will be secured by collateral satisfactory to the financial institution and will bear interest at 1% above the prime rate, as defined. At July 31, 1996, the interest rate for the facility was 9.75% and there were no direct borrowings outstanding. (9) Long-Term Debt -------------- Long-term debt consists of the following at July 31, 1996 and 1995: 1996 1995 ---- ---- Obligations under capital leases $2,517,000 2,868,000 Less current installments 642,000 591,000 ---------- --------- $1,875,000 2,277,000 ========== ========= The obligations under capital leases relate to the St. Cloud, Florida and Melville, New York facilities, as well as certain equipment, the net carrying value of which was $2,475,000 at July 31, 1996. (Continued) F-13 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Future minimum lease payments under capital leases as of July 31, 1996 are: Years ending July 31,: 1997 $ 866,000 1998 748,000 1999 542,000 2000 412,000 2001 380,000 Thereafter 158,000 --------- Total minimum lease payments 3,106,000 Less amounts representing interest (at rates varying from 6.8% to 10.8%) 589,000 --------- 2,517,000 Less current installments 642,000 --------- Obligations under capital leases, net of current installments $1,875,000 ========== In September 1988, the Company sold and simultaneously leased back its St. Cloud, Florida facility. The buyer/ lessor is a partnership in which one of the Company's officers is a general partner. The lease is for a ten-year period and provides for annual rentals of approximately $178,000 for fiscal 1996, subject to annual adjustment. For financial reporting purposes, the Company has capitalized this lease at inception in the amount of $840,000, net of deferred interest of $492,000. The outstanding balance at July 31, 1996 and 1995 approximated $258,000 and $360,000, respectively. In December 1991, the Company and a partnership controlled by the Company's Chairman and Chief Executive Officer entered into an agreement in which the Company leases from the partnership its corporate headquarters and Melville production facility. The lease is for a ten-year period and provides for annual rentals of approximately $411,000 for fiscal 1996 subject to annual adjustments equal to the lesser of 5% or the change in the Consumer Price Index. For financial reporting purposes, the Company has capitalized this lease at inception in the amount of $2,450,000, net of deferred interest of $1,345,000. The outstanding balance at July 31, 1996 and 1995 approximated $1,604,000 and $1,821,000, respectively. (10) Income Taxes ------------ The provision for income taxes included in the accompanying consolidated statements of operations consists of the following: Year ended July 31, ------------------- 1996 1995 1994 ---- ---- ---- Federal $ -- -- -- State and local 27,000 17,000 25,000 ------ ------ ------ $ 27,000 17,000 25,000 ====== ====== ====== (Continued) F-14 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The provision for income taxes was $27,000, $17,000 and $25,000 for fiscal 1996, 1995 and 1994, respectively and differed from the amounts computed by applying the U.S. Federal income tax rate of 34% as a result of the following:
1996 1995 1994 ---- ---- ---- Amount Rate Amount Rate Amount Rate --------- ------ ---------- ------- ----------- ------- Computed "expected" tax expense (recovery)............. $ 34,000 34.0% $(505,000) (34.0)% $ (976,000) (34.0)% Increase (reduction) in income taxes resulting from: Change in the beginning of the year valuation allowance for deferred tax assets allocated for income tax expense......... (50,000) (50.5) 507,000 34.0 1,018,000 35.5 Utilization of tax benefit carryforward............... -- -- -- -- -- -- State and local income tax, net of Federal benefit..... 27,000 27.0 17,000 .1 25,000 .1 Other........................ 16,000 16.2 (2,000) -- (42,000) (1.5) -------- ----- --------- ------ ---------- ------ Effective tax rate................ $ 27,000 27.0% $ 17,000 .1% $ 25,000 .1% ======== ===== ========= ====== ========== ======
As of July 31, 1996, the Company has net operating loss carryforwards of approximately $12,634,860 for income tax purposes which expire in various amounts through July 2010. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at July 31, 1996 and 1995 are presented below. There are no temporary differences that give rise to deferred tax liabilities.
1996 1995 ---- ---- Deferred tax assets: Allowance for doubtful accounts receivable 10,000 47,000 Inventories, principally due to additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986 374,000 452,000 Plant and equipment, principally due to capitalized interest and differences in depreciation 156,000 186,000 Compensated absences, principally due to accrual for financial reporting purposes 213,000 195,000 Deferred compensation 144,000 94,000 Net operating loss carryforwards 4,294,000 4,294,000 Investment tax credit carryforwards 440,000 440,000 Alternative minimum tax credit carryforwards 87,000 87,000 ----------- ---------- Total gross deferred tax assets 5,718,000 5,795,000 Less valuation allowance (5,718,000) (5,795,000) ----------- ---------- Net deferred tax assets $ -- -- =========== ==========
(Continued) F-15 The valuation allowance for deferred tax assets as of August 1, 1995 was $5,795,000. The change in the total valuation allowance for the year ended July 31, 1996 was a $77,000 decrease. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be not realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income of approximately $16,500,000. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will not realize the benefits of these deferred tax assets and has fully reserved the deferred asset. In accordance with Section 382 of the Internal Revenue Code of 1986, as amended and Section 383 of the Code, a change in more than 50% in the beneficial ownership of the Company within a three-year period (an Ownership Change) will place an annual limitation on the Company's ability to utilize its existing NOL and general business tax credit carryforwards (together, the Carryforwards) to offset United States Federal taxable income in the current and future years. The Company does not believe that an Ownership Change has occurred due to changes in the beneficial ownership of the Company's common stock in the current three-year testing period immediately prior to the completion in July 1993 of the Company's common stock offering (the Offering). The Company has not calculated the potential impact of the limitations provided under Section 382 and 383. (11) Stockholders' Equity -------------------- (a) Option and Warrant Plans and Agreements --------------------------------------- The Company has several option and warrant plans and agreements. 1982 Incentive Stock Option Plan - The 1982 Incentive Stock Option and -------------------------------- Appreciation Plan provided for the granting to key employees and officers of incentive stock options to purchase up to 160,000 shares of the Company's common stock through September 29, 1992 at prices not less than the fair market value of such shares on the date the option is granted. 1993 Incentive Stock Option Plan - On January 20, 1993, the stockholders of -------------------------------- the Company ratified the adoption of the 1993 Incentive Stock Option Plan ("the Plan"). The Plan is intended to replace the 1982 Incentive Stock Option Plan which expired on September 29, 1992, but options granted under the 1982 Plan to purchase an aggregate of approximately 92,520 shares of common stock remain outstanding. 125,000 shares of common stock were originally reserved for issuance under the 1993 Plan. Pursuant to a January 1994 Plan amendment, the number of shares that may be granted was increased to 245,000 shares. In addition, the Plan was amended to provide formula grants to non-employee members of the Board of Directors. Both incentive and non-qualified stock options may be granted under the Plan. The term of the options may be no more than ten years except for incentive stock options granted to any employee who, prior to the granting of the option, owns stock representing (Continued) F-16 more than 10% of the voting power, for whom the option term may be no more than five years. The exercise price for incentive stock options can generally be no less than the fair market value at the date of grant, with the exception of any employee who, prior to the granting of the option, owns stock representing more than 10% of the voting power, as to whom the exercise price cannot be less than 110% of the fair market value of the Company's common stock at the date of grant. The Plan expires in 2002, unless terminated earlier by the Board of Directors under conditions specified in the Plan. As of July 31, 1996, the Company had granted incentive stock options representing the right to purchase an aggregate of 174,760 shares at prices ranging between $2.25-$9.13 per share, of which 29,900 options were canceled and 144,060 are outstanding. The options are exercisable ratably over a five-year period commencing one year from the dates of grant. To date, 800 shares have been exercised. Directors' Option Plan - The 1987 Directors' Stock Option Plan provides for ---------------------- the granting of options to purchase up to 2,000 shares to each of the Company's four outside directors at an option price of not less than the fair market price per share at the date of grant. Options become exercisable at the rate of 20 percent per year commencing one year from the date of grant. At July 31, 1996, options to purchase 6,000 shares of the Company's common stock are outstanding. Warrant Held by Storage Technology Corp. (STC) - STC held a warrant, pursuant ---------------------------------------------- to a debt agreement, to purchase 90,000 shares of the Company's common stock at an exercise price of $10.00 per share through March 8, 1990. No portion of this warrant was exercised. In September 1990, STC agreed to accept a cash payment of $708,000, including accrued interest of $22,000, in full satisfaction of the outstanding principal balance of approximately $1,372,000. As part of the settlement, the Company agreed to reissue a warrant which provides for the purchase of up to 90,000 shares of the Company's common stock for $7.50 per share. The warrant was not exercised and expired on September 26, 1995. Warrant Issued to PMCC Acquisition Corp. - Pursuant to a settlement of the ---------------------------------------- litigation arising from the sale of the Company's former Premier Microwave Division, the Company issued to PMCC Acquisition Corporation a warrant to purchase 100,000 shares of the Company's common stock at an exercise price of $8.40. For financial reporting purposes, this warrant was valued at $50,000. The warrants are exercisable for a period of five years, commencing August 1, 1993 and shares purchased through the exercise of this warrant contain both voting and transferability restrictions. Underwriter Warrants - Pursuant to the Company's common stock offering -------------------- completed in July 1993, the Underwriter received warrants to purchase 100,000 shares of common stock at a price of 140% of the offering price, or $9.80, for a term of four years beginning on July 14, 1994. (b) Option and Warrant Activity --------------------------- The following table sets forth summarized information concerning the Company's stock options and warrants: F-17 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Number Option price of shares range per share --------- --------------- Outstanding at July 31, 1993 457,540 $2.20-9.80 Granted 54,500 4.25-9.13 Expired/canceled (11,080) 2.20-7.95 Exercised (43,200) 2.20-6.13 ------- Outstanding at July 31, 1994 457,760 2.35-9.80 Granted 43,460 2.25-2.63 Expired/canceled (6,040) 4.13-7.95 Exercised -- -- ------- Outstanding at July 31, 1995 495,180 2.25-9.80 Granted 47,300 2.25-3.75 Expired/canceled (97,900) 4.25-7.50 Exercised (2,000) 2.50 ------- Outstanding at July 31, 1996 442,580 2.25-9.80 ======= Options/warrants exercisable at July 31, 1996 330,552 2.50-9.80 ======= Options/warrants available for grant at July 31, 1996 100,140 ======= (c) Restricted Common Stock ----------------------- As part of an amended and restated employment agreement dated August 20, 1992, the Company sold 50,000 shares of its common stock, par value $.10 per share, to its president and chief executive officer at a purchase price of $.50 per share, which was ratified by the stockholders. The market value of the Company's common stock at the date of grant was $4.25 per share. The employment agreement requires the forfeiture of these shares, if the recipient leaves the employ of the Company, as defined in the agreement, prior to August 31, 1997. In February 1994, a total of 120,000 restricted shares of the Company's common stock were granted by the Board of Directors to the principal officers of the Company's subsidiary, CCC, at a cost of $.10 per share. The award relates to services to be provided over future years and, as a result, the stock awards are subject to certain restrictions which may be removed earlier upon CCC attaining certain business plan milestones, as provided in the agreement, but no later than ten years from the date of the award. The excess of market value over cost of the shares awarded of $633,000 was recorded as deferred compensation and is being amortized to expense over a ten year period subject to the aforementioned accelerated provisions, if appropriate, as evaluated on an annual basis. The deferred compensation is reflected as a reduction of stockholder's equity in the accompanying balance sheets. (Continued) F-18 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (12) Segment and Principal Customer Information ------------------------------------------ For the purposes of segment reporting, management considers Comtech to operate in one industry, the communications equipment industry. In fiscal 1996 and 1995, there were no sales to any one foreign or domestic customer which amounted to over 10% of the consolidated net sales. During fiscal 1994, sales to one foreign customer amounted to $3,410,000 or 23% of consolidated net sales. During the fiscal years ended July 31, 1996, 1995 and 1994, approximately 20%, 14% and 17%, respectively, of the Company's net sales resulted from contracts with the United States government and its agencies. Export sales comprised 56%, 37% and 39% of net sales in fiscal 1996, 1995 and 1994, respectively. (13) Commitments and Contingencies ----------------------------- (a) Operating Leases ---------------- The Company is obligated under noncancellable operating lease agreements. At July 31, 1996, the future minimum lease payments under operating leases are as follows: 1997 $ 87,000 1998 33,000 1999 16,000 2000 7,000 2001 -- Thereafter -- -------- $143,000 ======== Lease expense charged to operations was $122,000, $126,000 and $90,000 in fiscal 1996, 1995 and 1994, respectively. (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 condition. (c) Litigation ---------- The Company is subject to certain legal actions which arise out of the normal course of business. It is management's belief that outcome of these actions will not have a material adverse effect on the Company's consolidated financial position. F-19 Schedule II ----------- COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves Years ended July 31, 1996, 1995 and 1994
Column A Column B Column C Column D Column E ---------- -------------- ----------- --------------- ---------- Additions -------------------------------------------------------------------- (1) (2) Charged to Balance at Charged to other Transfers Balance at beginning cost and accounts - (deductions) end of Description of period expenses describe describe period - ----------------------------------- ---------- ---------- ---------- ----------- ---------- Allowance for doubtful accounts - accounts receivable: Year ended July 31,: 1996 $137,000 (109,000)(D) 28,000 1995 136,000 25,000 (C) -- (24,000)(D) 137,000 1994 136,000 -- -- -- 136,000 Inventory reserves: Year ended July 31,: 1996 567,000 (77,000)(B) 490,000 1995 578,000 (11,000)(B) -- -- 567,000 1994 110,000 468,000 (A) -- -- 578,000
(A) Increase in reserves for contract and other adjustments. (B) Reduction of excess reserves for contract and other adjustments. (C) Increase of allowance for doubtful accounts. (D) Write-off of uncollectible receivables. S-1 EX-11 2 COMPUTATION OF NET INCOME EXHIBIT 11 ---------- COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Computation of Net Income (Loss) Per Share Years ended July 31, 1996, 1995 and 1994 Year Ended July 31, ------------------- 1996 1995 1994 ---- ---- ---- Net income (loss) $ 72,000 (1,502,000) (2,870,000) ----------- ---------- ---------- Computation of weighted average number of common and common equivalent shares outstanding during the period: Weighted average number of common shares 2,606,000 2,605,000 2,534,000 Weighted average shares assumed to be issued upon exercise of common stock options 70,000 --- --- Less treasury stock (15,000) (15,000) (15,000) ----------- ---------- ---------- Weighted average number of common and common equiv- alent shares outstanding during the period 2,661,000 2,590,000 2,519,000 ----------- ---------- ---------- Net income (loss) per share $ .03 (.58) (1.14) ----------- ---------- ---------- EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED FINANCIAL STATEMENTS FORM 10-K JULY 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JUL-31-1996 AUG-01-1995 JUL-31-1996 2060 0 3495 28 6527 12250 14335 10339 16629 4453 0 261 0 0 10040 16629 20916 20916 14819 20575 0 0 302 99 27 72 0 0 0 72 .03 .03
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