-----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, F7dlbYGLvwiZHtitgABQWNmb43jhVK38KPcDJX//n+kCoYaacbS6rPStXW282scZ lr6GjRJ6YjWlW1glHj30kg== 0001005477-98-002977.txt : 19981030 0001005477-98-002977.hdr.sgml : 19981030 ACCESSION NUMBER: 0001005477-98-002977 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19981029 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-K405 SEC ACT: SEC FILE NUMBER: 000-07928 FILM NUMBER: 98732794 BUSINESS ADDRESS: STREET 1: 105 BAYLIS RD CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 5167778900 MAIL ADDRESS: STREET 1: 105 BAYLIS ROAD 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-K405 1 FORM 10-K405 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, 1998 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 26, 1998 2,672,004 ------------------------------------------------------------- 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 $24,048,036 (as of October 26, 1998). ------------------------------------------------------------- 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 15, 1998 PART I ITEM 1. BUSINESS General Comtech Telecommunications Corp. (the "Company"), a Delaware corporation, is principally engaged in the design, development and manufacture 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, over-the-horizon microwave, 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, satellite communication earth station uplink and downlink equipment and systems, and over-the horizon microwave communication systems. It sells its products to many of the world's providers of telecommunication services, of high power electronic test systems and of defense 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 operating units 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 many of 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, over-the horizon microwave 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 PST Corp. ("CPST") and Comtech Systems, Inc. ("CSI"). CASI is a supplier of fiberglass and metal antenna products used in satellite and over-the horizon communication systems. CCC designs and manufactures satellite communications products including frequency converters, modems, VSAT transceivers, solid state power amplifiers and satellite ground station subsystems. CPST supplies state-of-the-art high power solid state amplifiers for the electronic defense, wireless communication and high power test instrument systems. CSI designs, manufactures and installs over-the-horizon 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 markets introduce new telecommunications services. The telecommunications industry has expanded rapidly during the last decade due to both technological advances and regulatory changes. Regulatory initiatives continue to enhance competition in telecommunications, thereby opening new markets and services as well as 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 wireless 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, over-the-horizon microwave 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, over-the-horizon 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 line-of-sight 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, digital, or spread spectrum), and data transmission capacities. Over-the-horizon microwave communication systems ("OTH") 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. The net effect is that the signal is reflected by a large number of scattering particles in the troposphere, which in turn directs a portion of the transmitted signal energy well beyond line-of-sight. Typically, reliable communications OTH links require the use of multiple transmitters (frequency diversity), multiple antennas (space diversity), or other forms of explicit diversity such as polarization or angle diversity. 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), medium earth orbit (MEO), or geostationary earth orbit (GEO) satellite which is generally placed in an equatorial orbit 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 GEO 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 or to outer space. 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 2500 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 and airport radar and electronic jamming systems. In the laboratory, solid-state high power amplifiers are used to test the performance of high power microwave and wireless 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, wireless 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 individual operating units, 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 operating unit, to be more responsive to their particular markets and customers. Brief descriptions of the Company's operating units 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 over-the-horizon microwave 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. The equipment includes modems, frequency up converters and down converters, solid state power amplifiers and satellite VSAT transceivers which incorporate the frequency converters and solid state high power 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 PST Corp. ("CPST") CPST, 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. CPST is an innovative supplier of solid state high power amplifiers and related power processing equipment, which products also replace amplifiers using vacuum tube systems. 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 operating units and third parties. CSI's product line consists primarily of equipment for over-the-horizon microwave 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 over-the-horizon microwave products offered by most of its competitors. Sales, Marketing and Customer Support The Company's sales and marketing efforts are handled independently by each operating unit. The Company's sales and marketing strategies vary with particular markets served, and include direct sales (sales, marketing and engineering personnel), sales through independent representatives, value-added resellers or a combination of the foregoing. Operating units 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. 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. 4 The Company's sales of over-the-horizon microwave communications, satellite communications and solid state high power amplifier products internationally represented approximately 46%, 57% and 56% of total net sales in the fiscal years ended July 31, 1998, 1997 and 1996, respectively. Such international sales are expected to continue to increase due to the global expansion of telecommunications and microwave instrumentation and the Company expects that international sales will remain a substantial proportion of its total sales. Sales to one customer in fiscal 1998 and to a different customer in fiscal 1997, represented 12.2% and 10.2% of consolidated net sales, respectively. There were no customers in fiscal 1996 for which sales amounted to over 10%. 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 ("U.S. government sales") has fluctuated over the past three years, such sales remain significant, accounting for approximately 20%, 17% and 20% of total net sales for the fiscal years ended July 31, 1998, 1997 and 1996, 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 commercial sales ("domestic sales") represented approximately 34%, 26% and 24% of net sales in the fiscal years ended July 31, 1998, 1997 and 1996, respectively. Compliance with Federal, State and Local Environment Protection Laws 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, 1998 and 1997 was approximately $15,452,000 and $14,724,000, respectively. Substantially all of the backlog as of July 31, 1998 is expected to be recognized as sales during the fiscal year ending July 31, 1999. The Company had received progress billings and advance payments aggregating approximately $652,000 as of July 31, 1998 in connection with orders included in the backlog at that date. Approximately 30% of that backlog consisted of United States government contracts, subcontracts and government funded programs, approximately 46% consisted of orders with foreign customers and approximately 24% 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. 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. CASI's business, as well as a significant portion of CPST's and CCC's businesses, operate under a short lead time and usually generate sales out of inventory. 5 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. The Company employs formal quality management programs and other training programs, including International Standards Organization's (ISO 9000) quality procedure registration programs. CPST operating unit has been qualified for ISO 9001 and the Company is in the process of qualifying its other operating units. 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 $1,319,000, $1,023,000 and $741,000 in the fiscal years ended 1998, 1997 and 1996, respectively, representing 4.4%, 4.1% and 3.5% 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, 1998, 1997 and 1996, the Company was reimbursed by customers for such activities in the amounts of $356,000, $436,000 and $516,000, respectively, representing 1.2%, 1.8% and 2.5%, 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 operating units, an organizational structure which the Company believes fosters responsiveness to specific markets and customers. The Company's success is dependent upon the continued contributions of its key management personnel, including the key management at each of its operating units and depends to a significant extent upon its President and Chief Executive Officer. Many of the Company's key personnel, particularly the key engineers, 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, 1998, the Company had 216 employees, 114 of whom were engaged in production and production support, 63 in research and development and other engineering support and 39 in marketing and administrative functions. None of the employees are 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 include 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 U.S. 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 CPST. 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 on 8 acres of land 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 expiring September 30, 2003. 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 20,000 sq. ft. building in Tempe, Arizona for its Comtech Communications Corp. operating unit. The lease provides for the exclusive use of the premises as they now exist for a term of three years through April 2001. 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, 1998. 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 7-31-97 First Quarter $3 5/16 $2 3/4 Second Quarter 4 3/8 2 1/2 Third Quarter 4 1/4 3 Fourth Quarter 4 1/8 3 Fiscal Year Ending 7-31-98 First Quarter 5 1/8 3 1/2 Second Quarter 4 19/32 4 1/4 Third Quarter 9 1/16 6 Fourth Quarter 9 3/4 6 1/4 Fiscal Year Ending 7-31-99 First Quarter 9 1/2 5 (through October 26, 1998) 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 26, 1998, there were approximately 850 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 (in thousands except per share amounts)
Year Ended July 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Consolidated Statement of Operations Data: Net sales $ 30,114 $ 24,746 $ 20,916 $ 16,455 $ 14,873 Cost of sales 21,330 17,670 14,819 12,096 12,226 -------- -------- -------- -------- -------- Gross profit 8,784 7,076 6,097 4,359 2,647 Expenses: Selling, general and administrative 6,013 5,415 5,015 4,658 4,706 Research and development 1,319 1,023 741 1,036 760 -------- -------- -------- -------- -------- 7,332 6,438 5,756 5,694 5,466 -------- -------- -------- -------- -------- Operating earnings (loss) 1,452 638 341 (1,335) (2,819) Other expenses (income): Interest expense 234 284 302 341 279 Interest income (36) (33) (60) (171) (253) Other income (30) (151) -- (20) -- -------- -------- -------- -------- -------- Earnings (loss) before provision for income taxes 1,284 538 99 (1,485) (2,845) Provision for income taxes 180 54 27 17 25 -------- -------- -------- -------- -------- Net earnings (loss) $ 1,104 $ 484 $ 72 $ (1,502) $ (2,870) ======== ======== ======== ======== ======== Net earnings (loss) per share: Basic $ .42 $ .19 $ .03 $ (.58) $ (1.14) ======== ======== ======== ======== ======== Diluted $ .40 $ .19 $ .03 $ (.58) $ (1.14) ======== ======== ======== ======== ======== Weighted average number common shares outstanding -- Basic computation 2,601 2,582 2,591 2,590 2,519 Potential dilutive common shares 176 22 70 -- -- Weighted average number of common and common equivalent shares outstanding assuming dilution - Diluted computation 2,777 2,604 2,661 2,590 2,519 Consolidated Balance Sheet Data: Total assets $ 19,710 $ 17,960 $ 16,629 $ 16,783 $ 18,289 Working capital 8,918 7,930 7,797 7,681 9,447 Long-term debt, less current installments 1,445 1,310 1,875 2,277 2,535 Stockholders' equity 12,093 10,878 10,301 10,081 11,446
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 ----------------------------- 1998 1997 1996 ---- ---- ---- Net sales 100% 100% 100% Gross Margin 29.2 28.6 29.1 Selling, general and administrative 20 21.9 24.0 expenses Research and development expenses 4.4 4.1 3.5 Operating income 4.8 2.6 1.6 Interest expense, net .8 (1.0) (1.2) Income before income taxes 4.3 2.2 .5 Net income 3.7 2.0 .3 Comparison of the Fiscal Years 1998 and 1997 Results of Operations Net Sales Consolidated net sales were $30,114,000 and $24,746,000 for the fiscal years ended July 31, 1998 and 1997, respectively, representing an increase of $5,368,000 or 21.7%. This increase was due primarily to increased domestic and U.S. government sales of high power amplifiers at CPST and increased international sales of over-the-horizon microwave equipment at CSI, partially offset by decreased international sales of satellite communication products at CCC. International sales decreased by approximately $184,000 or 1%, representing 46% and 57% of total net sales for fiscal 1998 and 1997, respectively. Domestic sales increased by $2,872,000 or 61% representing 34% and 26% of total net sales and U.S. government sales increased by $1,680,000 or 40% representing 20% and 17% of total net sales for fiscal 1998 and 1997, respectively. International and domestic sales are expected to increase in the foreseeable future due to the growing worldwide demand for wireless and satellite telecommunications and the Company's expanded line of product offerings to meet these demands. U.S. government sales are anticipated to remain substantially at the same level for the foreseeable future. Sales to one customer in fiscal 1998 and sales to a different customer in fiscal 1997 represented 12.2% and 10.2% of consolidated net sales for fiscal 1998 and 1997, respectively. The Company has a wide customer base and is usually not dependent on any one customer for revenues. Gross Margins Gross profit was $8,784,000 and $7,076,000 for fiscal 1998 and 1997, respectively, representing an increase of $1,708,000. The primary reason for this increase was a net increase in sales volume in fiscal 1998. Gross profit, as a percentage of net sales, was 29.2% and 28.6%. The Company's gross profit may be affected by a variety of factors, including the mix of products, systems and equipment sold; production, reliability or quality problems; and price competition. Gross margins are expected to remain relatively stable for the foreseeable future. Selling, General and Administrative Selling, general and administrative expenses were $6,013,000 and $5,415,000 in fiscal 1998 and 1997, respectively, representing an increase of $598,000 or 11%. This increase was due primarily to the increased expenses required to support the higher level of sales in the fiscal 1998 period, including higher bid and proposal expenses, sales commissions, marketing personnel expenses and other administrative expenses. As a percentage of sales, however, these expenses decreased to 20% in fiscal 1998, from 21.9% in fiscal 1997. Research and Development Research and development expenses were $1,319,000 and $1,023,000 in fiscal years ended July 31, 1998 and 1997, respectively, representing an increase of $296,000 or 28.9%. Research and development as a percentage of net sales were 4.4% and 4.1%. This increase was primarily due to increased expenses for general product improvements and for the development of a CSAT transceiver and VSAT modem at CCC and a complement of additional product offerings to the "fly-away" and "quick deployment" antenna product lines at CASI. 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, 1998 and 1997, the Company 11 was reimbursed $356,000 and $436,000, respectively, which amounts are not reflected in the reported research and development expenses. Operating Income As a result of the foregoing factors, the Company had operating income of $1,452,000 in fiscal 1998 as compared to operating income of $638,000 in fiscal 1997, representing an increase of $814,000 or 127.6%. Interest Expenses Interest expense was $234,000 and $284,000 in the fiscal years ended July 31, 1998 and 1997, 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, 1998 and 1997 was $36,000 and $33,000, respectively. This increase was due primarily to the increase in the amount of cash available to invest in the fiscal 1998 period. Interest income in fiscal 1997 included approximately $14,000 that was received from a customer for extended payment terms. Other Income The Company had other income of $30,000 and $151,000 in fiscal 1998 and 1997, respectively. Other income in fiscal 1998 was primarily due to the gain on a foreign currency exchange rate and to the sale of scrap materials. In fiscal 1997, the primary components were the result of a gain on the sale of a Company owned storage facility, the sale of fully depreciated equipment, a finders fee the Company earned and the write off of other miscellaneous items. Provision for Income Taxes The provision for income taxes was $180,000 and $54,000 in fiscal 1998 and 1997, respectively. This is composed of $45,000 and $20,000 for federal income tax and $135,000 and $34,000 for state income taxes for fiscal 1998 and 1997, respectively. The Company has NOL carryforwards to offset Corporate federal income tax and is generally only subject to the alternative minimum tax, when applicable. 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 1997 and 1996 Result of Operations Net Sales. Net sales were $24,746,000 and $20,916,000 for the fiscal years ended July 31, 1997 and 1996, respectively, representing an increase of $3,830,000 or 18.3%. This increase was due primarily to increased sales at CPST and CCC subsidiaries both internationally and domestically. International sales represented approximately 57% and 56% and domestic sales represented approximately 26% and 24% of the total net sales for fiscal 1997 and 1996, respectively. International and domestic sales are expected to increase in the foreseeable future due to the growing worldwide demand for wireless and satellite telecommunications. U.S. government sales represented approximately 17% and 20% of the total net sales for fiscal 1997 and 1996, respectively. The Company anticipates that such sales will remain substantially at the same level for the foreseeable future. Gross Margin. Gross profit was $7,076,000 and $6,097,000 for fiscal 1997 and 1996, respectively, representing an increase of $979,000. The primary reason for this increase was an increase in sales volume in fiscal 1997 at CPST and CCC subsidiaries. Gross profit, as a percentage of net sales, was 28.6% and 29.1% for fiscal 1997 and 1996, respectively. This decrease was primarily the result of provisions on two products for slow moving and obsolete inventory of $466,000 which was partially offset by higher gross margin percentages at CPST and CCC subsidiaries. The fiscal 1996 gross profits reflects a gain of $149,000 on the settlement of a claim arising from an earlier acquisition. Selling, General and Administrative. Selling, general and administrative expenses were $5,415,000 and $5,015,000 in fiscal 1997 and 1996, respectively, representing an increase of $400,000. This increase was due primarily to the increase in administrative expenses required to support the higher level of sales in the fiscal 1997 period. As a percentage of sales however, these expenses decreased to 21.9% in fiscal 1997 from 24% in fiscal 1996. Research and Development. Research and development expenses were $1,023,000 and $741,000 in fiscal years ended July 31, 1997 and 1996, respectively, representing an increase of $282,000 or 3.8%. Research and development expenses as a percentage of net sales were 4.1% and 3.5% in fiscal 1997 and 1996, respectively. This increase was 12 primarily due to increased expenses for general product improvement and expanded product development at our CCC subsidiary. 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, 1997 and 1996, the Company was reimbursed $436,000 and $516,000, 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 $638,000 in fiscal 1997 compared to operating income of $341,000 in fiscal 1996. Interest Expense. Interest expense was $284,000 and $302,000 in the fiscal years ended July 31, 1997 and 1996, 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, 1997 and 1996 was $33,000 and $60,000, respectively. This decrease was due primarily to the decrease in the amount of cash available to invest in the fiscal 1997 period. Other Income. The Company had other income of $151,000 in fiscal 1997 and no income classified as other income in fiscal 1996. The primary components for fiscal 1997 were the result of a gain on the sale of a Company owned storage facility, the sale of fully depreciated equipment, a finders fee the Company earned and the write-off of other miscellaneous items. Provision for Income Taxes. The provision for income taxes was $54,000 and $27,000 in fiscal 1997 and 1996, respectively. For fiscal 1997, the Company's tax liability was composed of $20,000 for federal income tax and $34,000 for state income tax. For fiscal 1996, the Company did not incur any federal income tax and the state income tax was $27,000. The Company has NOL carryforwards to offset federal income tax and is generally only subject to the alternative minimum tax, when applicable. 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. Liquidity and Capital Resources The Company's cash and cash equivalents position increased by $1,450,000 from $1,274,000 at July 31, 1997 to $2,724,000 at July 31, 1998. Restricted cash, which is securing standby letters of credit, decreased from $90,000 at July 31, 1997 to $22,000 at July 31, 1998. Operating activities provided net cash of $2,572,000 while investing activities and financing activities used net cash of $312,000 and $810,000, respectively. The increase in accounts receivable, net of the additional amount added to the allowance for doubtful accounts of $68,000, was $381,000. The primary reason for this net increase was the higher volume of sales. The Company reviews its allowance for doubtful accounts periodically and believes that it is sufficient based on past experience and the Company's credit standards. Generally, foreign customers are required to secure their obligations by letter of credit. The decrease in inventory, net of a reduction of reserves of $127,000, was $421,000. 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 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. Inventory reserves are reviewed on an ongoing basis and adjustments are made as needed. Accounts payable decreased by $277,000 primarily due to the timing differences in incurring the expenses. Accrued expenses and other current liabilities increased by $479,000 primarily due to increased customer deposits, higher accrued commissions, an increase in accrued income taxes and higher accrued wages and benefits. 13 During fiscal 1998, the Company made leasehold improvements and purchases of equipment of $1,519,000, of which $1,207,000 was financed by capital leases. All of the Company's long term debt consists of capital leases for its facilities and equipment. The Company has a $6,000,000 secured credit facility from Republic National Bank of New York. The line of credit, which is to be used for working capital requirements, is for a term of one year and bears interest on borrowings of 1/2% over the bank's Reference Rate. A component of this facility is the administration by Republic of $1,000,000 of loans under the Working Capital Guarantee Program of the Export-Import Bank of the United States. This program provides the lender a 90% guarantee on qualifying loans made to the Company for export related contracts. During fiscal 1998, the Company took advances in the aggregate of $1,900,000 which were totally repaid by July 31, 1998. The credit facility expires December 31, 1998. The Company expects to renew the facility. Year 2000 Compliance Management has initiated a company-wide program and has developed a formal plan of implementation to prepare the Company for the Year 2000. This includes taking actions designed to ensure that the Company's information technology ("IT") systems, products and infrastructure are Year 2000 compliance and that its customers, suppliers and service providers have taken similar action. The Company is in the process of evaluating its internal issues - all of its IT systems, products, equipment and other facilities systems. At this time, Management believes that the Company does not have any internal problem other than to upgrade some of its software to available new releases which are Year 2000 compliant. With respect to its external issues - customers, suppliers and service providers, the Company is surveying them primarily through written correspondence. Despite the efforts to survey customers, suppliers and service providers, Management cannot be certain as to the actual Year 2000 readiness of these third parties. To the extent any of its suppliers or service providers are not Year 2000 ready, the Company believes that it will be able to obtain other suppliers or service providers without a significant interruption to its business. To date, the Company has not formulated a Year 2000 contingency plan. Based upon responses to its inquiries, the Company will determine the need for a contingency plan by the end of the first quarter of 1999. The Company anticipates completing its Year 2000 project in early calendar 1999. Management currently believes that the costs related to the Corporation's compliance with the Year 2000 issue should not have a material adverse effect on its consolidated financial position, results of operations or cash flows. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Independent Auditors' Report, Consolidated Financial Statements, Notes to Consolidated Financial Statements and related financial schedule are listed in the index to Consolidated Financial Statements and Schedule annexed hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Certain information concerning the directors and officers of the Company is incorporated by reference to the Proxy Statement of the Company for the Annual Meeting of Stockholders to be held December 15, 1998 (the "Proxy Statement") which will be filed with the Securities and Exchange Commission no more than 120 days after the close of its fiscal year. 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 the close of its fiscal year. 14 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. 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 SCHEDULE 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. (b) No reports on Form 8-K have been filed during the fourth quarter of the fiscal year ended July 31, 1998. (c) Exhibit Index Exhibit Incorporated By Number Description of Exhibit Reference to Exhibit ------ ---------------------- -------------------- 3(a) Certificate of Incorporation of Exhibit 3(a) of the the Registrant Registrant's 1987 Form 10-K 3(b) Amendment of the Certificate of Exhibit 3(b) to the Incorporation affecting the 5 to 1 Registrant's 1991 reverse stock split Form 10-K 3(c) Amended and restated By-Laws of Exhibit 3(c) of the Registrant Registrant's 1998 Form 10-K 3(d) Amendment to the Certificate of Exhibit 3(d) to the Incorporation increasing Registrant's 1994 authorized shares to 12 million Form 10-K 3(e) Amendment to the Certificate of Exhibit 3(e) to Incorporation increasing the Registrant's 1998 amortized shares to 15 million Form 10-K 10(a) Amended and restated Employment Exhibit 10(a) of the Agreement dated January 14, 1998 Registrant's 1998 between the Registrant and Fred Form 10-K Kornberg 10(b) 1982 Incentive Stock Option and Exhibit A to the Appreciation Plan Registrant's Proxy Statement dated October 29, 1982 10(c) Lease and amendment thereto on the Exhibit 10(k) to the Melville Facility Registrant's 1992 Form 10-K 10(d) Amended and restated 1993 Appendix A to the Incentive Stock Option Plan Registrant's Proxy Statement dated November 3, 1997 15 Exhibit Incorporated By Number Description of Exhibit Reference to Exhibit ------ ---------------------- -------------------- 10(e) Time Accelerated Restricted Stock Exhibit 10(j) to the Purchase Agreements between Registrant's 1994 Registrant and Principals of Form 10-K Comtech Communications Corp. operating unit 21 Operating units of the Company Exhibit 21 to the Registrant's 1998 Form 10-K 23 Consent of KPMG Peat Marwick LLP Exhibit 23 to the Registrant's 1998 Form 10-K 27 Financial Data Schedule Exhibit 27 to the Registrant's 1998 Form 10K 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 21, 1998 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 --------- ----- October 21, 1998 /s/ Fred Kornberg Chairman of the Board - ---------------- --------------------------- Chief Executive Officer (Date) Fred Kornberg and President (Principal Executive Officer) October 21, 1998 /s/ J. Preston Windus, Jr. Vice President, - ---------------- --------------------------- Chief Financial Officer (Date) J. Preston Windus, Jr. and Secretary October 21, 1998 /s/ George Bugliarello Director - ---------------- --------------------------- (Date) George Bugliarello October 21, 1998 /s/ Richard L. Goldberg Director - ---------------- --------------------------- (Date) Richard L. Goldberg October 21, 1998 /s/ Gerard R. Nocita Director - ---------------- --------------------------- (Date) Gerard R. Nocita October 21, 1998 /s/ John B. Payne III Director - ---------------- --------------------------- (Date) John B. Payne III October 21, 1998 /s/ Sol S. Weiner Director - ---------------- --------------------------- (Date) Sol S. Weiner 17 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Index to Consolidated Financial Statements and Schedule Page ---- Independent Auditors' Report F-2 Consolidated Financial Statements: Balance Sheets at July 31, 1998 and 1997 F-3 Statements of Operations for each of the years in the three-year period ended July 31, 1998 F-4 Statements of Stockholders' Equity for each of the years in the three-year period ended July 31, 1998 F-5 Statements of Cash Flows for each of the years in the three-year period ended July 31, 1998 F-6, F-7 Notes to Consolidated Financial Statements F-8 - F-18 Additional Financial Information Pursuant to the Requirements of Form 10-K: Schedule II - Valuation and Qualifying Accounts and Reserves S-1 Exhibit 11 - Computation of Earnings Per Share E-1 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 [Letterhead of KPMG Peat Marwick LLP] 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, 1998 and 1997 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, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 1998 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, presents fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP KPMG PEAT MARWICK LLP Melville, New York September 18, 1998 F-2 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Balance Sheets July 31, 1998 and 1997
Assets 1998 1997 ------------ ----------- Current assets: Cash and cash equivalents $ 2,724,000 1,274,000 Restricted cash 22,000 90,000 Accounts receivable, less allowance for doubtful accounts of $170,000 in 1998 and $102,000 in 1997 5,932,000 5,551,000 Inventories, net 6,135,000 6,556,000 Prepaid expenses and other current assets 276,000 231,000 ------------ ----------- Total current assets 15,089,000 13,702,000 Property, plant and equipment, net 4,314,000 3,898,000 Other assets 307,000 360,000 ------------ ----------- $ 19,710,000 17,960,000 ============ =========== Liabilities and Stockholders' Equity Current liabilities: Current installments of long-term debt (including payable to related party of $309,000 in 1998 and $386,000 in 1997) $ 804,000 606,000 Accounts payable 2,588,000 2,865,000 Accrued expenses and other current liabilities 2,780,000 2,301,000 ------------ ----------- Total current liabilities 6,172,000 5,772,000 Long-term debt, less current installments (including payable to related party of $817,260 in 1998 and $1,126,000 in 1997) 1,445,000 1,310,000 ------------ ----------- Total liabilities 7,617,000 7,082,000 ------------ ----------- Stockholders' equity: Preferred stock, par value $.10 per share; shares authorized and unissued 2,000,000 -- -- Common stock, par value $.10 per share; authorized 15,000,000 shares; issued and outstanding, 2,672,004 shares in 1998 and 2,650,404 shares in 1997 267,000 265,000 Additional paid-in capital 22,189,000 22,127,000 Accumulated deficit (10,011,000) (11,115,000) ------------ ----------- 12,445,000 11,277,000 Less: Treasury stock (55,000 shares in 1998 and 1997) (184,000) (184,000) Deferred compensation (168,000) (215,000) ------------ ----------- 12,093,000 10,878,000 ------------ ----------- Commitments and contingencies $ 19,710,000 17,960,000 ============ ===========
See accompanying notes to consolidated financial statements. F-3 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Operations Years ended July 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ Net sales $ 30,114,000 24,746,000 20,916,000 ------------ ------------ ------------ Costs and expenses: Cost of sales 21,330,000 17,670,000 14,819,000 Selling, general and administrative 6,013,000 5,415,000 5,015,000 Research and development 1,319,000 1,023,000 741,000 ------------ ------------ ------------ 28,662,000 24,108,000 20,575,000 ------------ ------------ ------------ Operating income 1,452,000 638,000 341,000 Other expenses (income): Interest expense 234,000 284,000 302,000 Interest income (36,000) (33,000) (60,000) Other (30,000) (151,000) - ------------ ------------ ------------ Income before provision for income taxes 1,284,000 538,000 99,000 Provision for income taxes 180,000 54,000 27,000 ------------ ------------ ------------ Net income $ 1,104,000 484,000 72,000 ============ ============ ============ Earnings per share: Basic $ 0.42 0.19 0.03 Diluted $ 0.40 0.19 0.03 Weighted average number of common shares outstanding - Basic computation 2,601,000 2,582,000 2,591,000 ============ ============ ============ Potential dilutive common shares 176,000 22,000 70,000 ------------ ------------ ------------ Weighted average number of common and common equivalent shares outstanding assuming dilution - Diluted computation 2,777,000 2,604,000 2,661,000 ============ ============ ============
See accompanying notes to consolidated financial statements. F-4 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended July 31, 1998, 1997 and 1996
Common stock Additional Treasury stock -------------------- paid-in Accumulated ------------------ Deferred Shares Amount capital deficit Shares Amount compensation ------ ------ ------- ------- ------ ------ ------------ Balance July 31, 1995 2,605,344 $261,000 $22,230,000 $(11,671,000) 15,000 $(180,000) $(553,000) Realized loss on sale of securities -- -- -- -- -- -- -- Amortization of deferred compensation -- -- -- -- -- -- 137,000 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) (416,000) Amortization of deferred compensation -- -- -- -- -- -- 43,000 Termination of unvested restricted shares issued pursuant to employee stock award agreement -- -- (211,000) -- -- -- 158,000 Purchase of Treasury shares -- -- -- -- 40,000 (4,000) -- Stock options exercised 43,060 4,000 103,000 -- -- -- -- Net income -- -- -- 484,000 -- -- -- --------- -------- ----------- ------------ ------ --------- --------- Balance July 31, 1997 2,650,404 265,000 22,127,000 (11,115,000) 55,000 (184,000) (215,000) Amortization of deferred compensation -- -- -- -- -- -- 47,000 Stock options exercised 21,600 2,000 62,000 -- -- -- -- Net income -- -- -- 1,104,000 -- -- -- --------- -------- ----------- ------------ ------ --------- --------- Balance July 31, 1998 2,672,004 $267,000 $22,189,000 $(10,011,000) 55,000 $(184,000) $(168,000) ========= ======== =========== ============ ====== ========= =========
Stockholders' Other equity ----- ------ Balance July 31, 1995 $(6,000) $10,081,000 Realized loss on sale of securities 6,000 6,000 Amortization of deferred compensation -- 137,000 Stock options exercised -- 5,000 Net income -- 72,000 ------- ----------- Balance July 31, 1996 -- 10,301,000 Amortization of deferred compensation -- 43,000 Termination of unvested restricted shares issued pursuant to employee stock award agreement -- (53,000) Purchase of Treasury shares -- (4,000) Stock options exercised -- 107,000 Net income -- 484,000 ------- ----------- Balance July 31, 1997 -- 10,878,000 Amortization of deferred compensation -- 47,000 Stock options exercised -- 64,000 Net income -- 1,104,000 ------- ----------- Balance July 31, 1998 $ -- $12,093,000 ======= =========== See accompanying notes to consolidated financial statements. COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended July 31, 1998, 1997 and 1996
1998 1997 1996 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 1,104,000 484,000 72,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Gain on sale of property -- (72,000) -- Depreciation and amortization 1,159,000 1,065,000 992,000 Provision for bad debts, net 68,000 74,000 -- Provision for (reduction of) inventory reserves (127,000) 466,000 (71,000) Amortization of deferred compensation, net 47,000 (10,000) 137,000 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 68,000 130,000 (195,000) Accounts receivable (449,000) (2,158,000) 1,023,000 Inventories 548,000 (495,000) (1,445,000) Prepaid expenses and other current assets (45,000) (35,000) 90,000 Other assets (3,000) (48,000) 2,000 Notes payable -- -- (85,000) Accounts payable (277,000) 828,000 143,000 Accrued expenses and other current liabilities 479,000 527,000 84,000 ----------- ----------- ----------- Net cash provided by operating activities 2,572,000 756,000 588,000 ----------- ----------- ----------- Cash flows from investing activities: Purchases of property, plant and equipment (312,000) (903,000) (404,000) Net proceeds from sale of marketable investment securities -- -- 275,000 Sale of property, plant and equipment -- 127,000 -- ----------- ----------- ----------- Net cash used in investing activities (312,000) (776,000) (129,000) ----------- ----------- ----------- Cash flows from financing activities: Borrowings under line of credit facility 1,900,000 1,150,000 750,000 Repayments of borrowings under line of credit facility (1,900,000) (1,150,000) (750,000) Principal payments on long-term debt (874,000) (649,000) (643,000) Proceeds from issuance of common stock: Purchase of treasury stock -- (4,000) -- Stock options 64,000 107,000 5,000 ----------- ----------- ----------- Net cash used in financing activities (810,000) (546,000) (638,000) ----------- ----------- -----------
(Continued) F-6 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued
1998 1997 1996 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents $1,450,000 (566,000) (179,000) Cash and cash equivalents at beginning of period 1,274,000 1,840,000 2,019,000 ---------- ---------- ---------- Cash and cash equivalents at end of period $2,724,000 1,274,000 1,840,000 ========== ========== ========== Supplemental cash flow disclosure Cash paid during the period for: Interest $ 234,000 284,000 302,000 ========== ========== ========== Income taxes $ 22,000 38,000 27,000 ========== ========== ==========
Non-Cash Items The Company entered into new capitalized lease agreements in the amount of $1,207,000, $48,000 and $292,000 during the fiscal years ended July 31, 1998, 1997 and 1996, respectively. See accompanying notes to consolidated financial statements. F-7 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements July 31, 1998 and 1997 (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 and microwave 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, among other things, on its ability to keep pace with such changes and developments and to respond to the sophisticated requirements of an increasing variety of electronic equipment users. Many of the Company's competitors are substantially larger, have significantly greater financial, marketing and operating resources and broader product lines than does the Company. A significant technological breakthrough by others, including smaller competitors or new companies, could have a material adverse effect on the Company's business. In addition, certain of the Company's customers have technological capabilities in the Company's product areas and could choose to replace the Company's products with their own. International sales expose the Company to certain risks, including barriers to trade, fluctuations in foreign currency exchange rates (which may make the Company's products less price competitive), political and economic instability, availability of suitable export financing, export license requirements, tariff regulations, and other United States 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 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 $22,000 and $90,000 of restricted cash securing letter of credit obligations with a financial institution at July 31, 1998 and 1997, respectively. (e) Statement of Cash Flows The Company acquired equipment financed by capital leases in the amounts of $1,207,000, $48,000 and $292,000 in 1998 1997 and 1996, respectively. (f) Inventories Workin 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. (g) Long-Lived Assets 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. The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value. (h) Other Assets Included in other assets at July 31, 1998 and 1997 is approximately $350,000 less accumulated amortization which related to an intellectual property rights agreement, which is being amortized over the eight year term of the agreement. At July 31, 1998 and 1997, accumulated amortization related to this purchased technology was approximately $190,000 and $146,000, 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. (i) 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. (Continued) F-9 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (j) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (k) Earnings Per Share The Company calculates earnings per share ("EPS") in accordance with the Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". Basic earnings per share are computed based on the weighted average number of shares outstanding. Diluted EPS reflects the maximum dilution from potential common stock issuable pursuant to the exercise of stock options and warrants, if dilutive, outstanding during each period. (l) 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. (m) 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. (n) Accounting for Stock-Based Compensation The Company records compensation expense for employee stock options only if the current market price of the underlying stock exceeds the exercise price on the date of the grant. The Company has elected not to implement the fair value based accounting method for employee stock options of SFAS No. 123, "Accounting for Stock-Based Compensation", but has elected to disclose the pro forma net earnings per share for employee stock option grants made beginning in fiscal 1996 as if such method had been used to account for stock-based compensation cost as described in SFAS No. 123. (o) Reporting Comprehensive Income The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which requires companies to report all changes in equity during a period, except those resulting from investment by owners and distribution to owners, for the period in which they are recognized. Comprehensive income is the total of net income and all other nonowner changes in equity (or other comprehensive income) such as unrealized gains/losses on securities classified as available-for-sale, foreign currency translation adjustments and minimum (Continued) F-10 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (o) Reporting Comprehensive Income (continued) pension liability adjustments. Comprehensive and other comprehensive income must be reported on the face of annual financial statements or in the case of interim reporting, the footnote approach may be utilized. The Company's operations did not give rise to items includible in comprehensive income which were not already included in net income. Accordingly, the Company's comprehensive income is the same as its net income for all periods presented. (2) Accounts Receivable Accounts receivable consist of the following at July 31, 1998 and 1997: 1998 1997 ---------- ---------- Accounts receivable from commercial customers $4,302,000 4,416,000 Unbilled receivables (including retainages) on contracts-in-progress 1,531,000 384,000 Amounts receivable from the United States government and its agencies 269,000 853,000 ---------- ---------- 6,102,000 5,653,000 Less allowance for doubtful accounts 170,000 102,000 ---------- ---------- Accounts receivable, net $5,932,000 5,551,000 ========== ========== In the opinion of management, substantially all of the unbilled balances will be billed and collected during fiscal 1999. (3) Inventories Inventories consist of the following at July 31, 1998 and 1997: 1998 1997 ---------- ---------- Raw materials and components $3,365,000 2,276,000 Work-in-process 4,932,000 6,025,000 ---------- ---------- 8,297,000 8,301,000 Less: Progress payments 1,333,000 789,000 Reserve for anticipated losses on contracts and inventory reserves 829,000 956,000 ---------- ---------- Inventories, net $6,135,000 6,556,000 ========== ========== (4) Property, Plant and Equipment Property, plant and equipment consists of the following: 1998 1997 ----------- ----------- Equipment $ 8,918,000 8,636,000 Leasehold improvements 352,000 322,000 Facilities financed by capital lease 3,365,000 3,365,000 Equipment financed by capital lease 3,802,000 2,595,000 ----------- ----------- 16,437,000 14,918,000 Less accumulated depreciation and amortization 12,123,000 11,020,000 ----------- ----------- $ 4,314,000 3,898,000 =========== =========== (Continued F-11 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (4) Property, Plant and Equipment (Continued) Depreciation and amortization expense on property, plant and equipment amounted to approximately $1,103,000, $994,000 and $912,000 for the years ended July 31, 1998, 1997 and 1996, respectively. (5) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following at July 31, 1998 and 1997: 1998 1997 ---------- ---------- Customer advances and deposits $ 652,000 406,000 Accrued wages and benefits 1,068,000 937,000 Accrued commissions 452,000 413,000 Other 608,000 545,000 ---------- ---------- $2,780,000 2,301,000 ========== ========== (6) Short-Term Borrowings In December 1997, the Company obtained a new $6,000,000 secured credit facility from Republic National Bank of New York. The line of credit which is to be used for working capital requirements is for a term of one year and bears interest on borrowings of 1-1/2% over the bank's Reference Rate (9% at July 31, 1998). There were no borrowings outstanding at July 31, 1998. A component of this facility is the administration by Republic of $1,000,000 of loans under the Working Capital Guarantee Program of the Export-Import Bank of the United States. This program provides the lender a 90% guarantee on qualifying loans made to the Company for export related contracts. (7) Long-Term Debt Long-term debt consists of the following at July 31, 1998 and 1997: 1998 1997 ---------- ---------- Obligations under capital leases $2,249,000 1,916,000 Less current installments 804,000 606,000 ---------- ---------- $1,445,000 1,310,000 ========== ========== 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 $2,517,000 and $1,958,000 at July 31, 1998 and 1997, respectively. (Continued) F-12 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Future minimum lease payments under capital leases as of July 31, 1998 are: Years ending July 31,: 1999 $1,044,000 2000 737,000 2001 553,000 2002 220,000 2003 43,000 ---------- Total minimum lease payments 2,597,000 Less amounts representing interest (at rates varying from 6.8% to 10.8%) 348,000 ---------- 2,249,000 Less current installments 804,000 ---------- Obligations under capital leases, net of current installments $1,445,000 ========== 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 $205,000 for fiscal 1998, 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, 1998 and 1997 approximated $22,000 and $146,000, respectively. The Company exercised a five year renewal option commencing October 1, 1998. In December 1991, the Company and a partnership controlled by the Company's Chairman, Chief Executive Officer and President entered into an agreement in which the Company leases from the partnership its corporate headquarters and Melville production facility. The lease is for a ten-year period and provides for annual rentals of approximately $439,000 for fiscal 1998, 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, 1998 and 1997 approximated $1,105,000 and $1,366,000, respectively. (8) Income Taxes Theprovision for income taxes included in the accompanying consolidated statements of operations consists of the following: Year ended July 31, ------------------- 1998 1997 1996 -------- ------ ------ Federal $ 45,000 20,000 -- State and local 135,000 34,000 27,000 -------- ------ ------ $180,000 54,000 27,000 ======== ====== ====== (Continued) F-13 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The provision for income taxes was $180,000, $54,000 and $27,000 for fiscal 1998, 1997 and 1996, respectively and differed from the amounts computed by applying the U.S. Federal income tax rate of 34% as a result of the following:
1998 1997 1996 ---- ---- ---- Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- Computed "expected" tax expense (recovery) $ 437,000 34.0% $ 183,000 34.0% $ 34,000 34.0% Increase (reduction) in income taxes resulting from: Change in the beginning of the year valuation allowance for deferred tax assets (93,000) (7.2) 264,000 49.6 (50,000) (50.5) Utilization of tax benefit carryforward (299,000) (23.3) (430,000) (79.9) -- -- State and local income tax, net of Federal benefit 135,000 10.5 34,000 6.3 27,000 27.0 Other 3,000 -- 16,000 16.2 --------- ---- --------- ---- -------- ---- Effective tax rate $ 180,000 14.0% $ 54,000 10.0% $ 27,000 27.0% ========= ==== ========= ==== ======== ====
As of July 31, 1998, the Company has net operating loss carryforwards of approximately $11,900,000 for income tax purposes which expire in various amounts through July 2011. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at July 31, 1998 and 1997 are presented below. There are no temporary differences that give rise to deferred tax liabilities.
1998 1997 ---- ---- Deferred tax assets: Allowance for doubtful accounts receivable $ 60,000 35,000 Inventory reserve 496,000 572,000 Plant and equipment, principally due to capitalized leases and differences in depreciation 27,000 101,000 Compensated absences, principally due to accrual for financial reporting purposes 331,000 312,000 Deferred compensation 154,000 141,000 Net operating loss carryforwards 3,726,000 4,025,000 Investment tax credit carryforwards 440,000 440,000 Alternative minimum tax credit carryforwards 87,000 87,000 ----------- ---------- Total gross deferred tax assets 5,321,000 5,713,000 Less valuation allowance (5,321,000) (5,713,000 ----------- ---------- Net deferred tax assets $ -- -- =========== ==========
(Continued) F-14 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The valuation allowance for deferred tax assets as of August 1, 1997 was $5,713,000. The change in the total valuation allowance for the year ended July 31, 1998 was a $392,000 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 not be 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 $15,650,000. 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. (9) 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. The Plan expired on September 29, 1992. Options granted to purchase an aggregate of 31,120 shares remain outstanding. 1993 Incentive Stock Option Plan - The 1993 Incentive Stock Option Plan, as amended, provides for the granting to key employees and officers of incentive and non-qualified stock options to purchase up to 695,000 shares of the Company's common stock at prices generally not less than the fair market value at the date of grant with the exception of anyone who, prior to the grant, owns more than 10% of the voting power, the exercise price cannot be less than 110% of the fair market value. In addition, it provides formula grants to non-employee members of the Board of Directors. 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 more than 10% of the voting power, the option term may be no more than five years. The Plan expires in 2002, unless terminated earlier by the Board of Directors under conditions specified in the Plan. As of July 31, 1998, the Company had granted incentive stock options representing the right to purchase an aggregate of 592,510 shares at prices ranging between $2.25-$9.13 per share, of which 44,400 options were canceled and 541,010 are outstanding. To date, 7,100 shares have been exercised. 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. The warrant expired unexercised. (Continued) F-15 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 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. The warrants expired unexercised. (b) Option Activity The following table sets forth summarized information concerning the Company's stock options: Number Weighted of average option shares price ------ ----- Outstanding at July 31, 1995 205,180 $3.72 Granted 47,300 3.45 Expired/canceled (7,900) 5.22 Exercised (2,000) 2.35 ------- Outstanding at July 31, 1996 242,580 3.63 Granted 29,000 3.24 Expired/canceled (14,540) 4.28 Exercised (43,060) 2.47 ------- Outstanding at July 31, 1997 213,980 3.82 Granted 388,750 4.49 Expired/canceled (9,000) 3.20 Exercised (21,600) 3.00 ------- Outstanding at July 31, 1998 572,130 3.98 ======= ==== Options exercisable at July 31, 1998 95,816 4.07 ------- ---- Options available for grant at July 31, 1998 146,890 ------- (c) Stock-Based Compensation Plans The Company has two stock option plans, the 1982 Incentive Stock Option Plan and the 1993 Incentive Stock Option Plan. The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts: 1998 1997 ---------- ------- Net income As reported $1,104,000 484,000 Pro forma $ 817,000 475,000 Net income As reported Basic $ .42 .19 per share Diluted $ .40 .19 Pro forma - Basic $ .31 .18 Diluted $ .29 .18 F-16 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Pro forma net earnings reflect only options granted in 1998 and 1997. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented above because compensation cost is reflected over the option's vesting period and compensation cost for options granted prior to August 1, 1995 was not considered. The Company may grant options for up to 695,000 shares under the 1993 Incentive Stock Option Plan. This Plan replaced the 1982 Incentive Stock Option Plan. Options to purchase an aggregate of 572,130 and 213,980 shares of common stock remained outstanding at the end of 1998 and 1997 respectively. Under both plans, the option exercise price equals the stock's closing market price on the date of grant, except in the case of incentive stock options, for optionees who, prior to the grant, owned more than 10% of the voting power, the exercise price cannot be less than 110% of the market value. The term of the options may be no more than ten years, except in the case of incentive stock options, for optionees owning more than 10% of the voting stock, the term may be no more than five years. The options outstanding as of July 31, 1998 are summarized in ranges as follows: Weighted Number of Weighted Range of average options average exercise price exercise price outstanding remaining life -------------- -------------- ----------- -------------- $2.25 - 3.99 3.06 119,680 7 years 4.00 - 6.99 4.47 427,450 9 years 7.00 - 9.99 7.72 25,000 5 years The per share weighted-average fair value of stock options granted during 1998 and 1997 was $3.45 and $2.51, respectively, on the date of grant using the Black Scholes option - pricing model with the following weighted-average assumptions: 1998 - expected dividend yield of 0%, risk free interest rate of 6%, expected volatility of 63.32% and an expected option life of 10 years. 1997 - expected dividend yield of 0%, risk free interest rate of 6%, expected volatility of 64.49% and an expected option life of 10 years. (d) Restricted Common Stock 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 operating unit, 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. During fiscal 1997, 40,000 of such shares were terminated due to the termination of an officer's employment prior to vesting. F-17 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (10) Segment and Principal Customer Information For the purposes of segment reporting, management considers Comtech to operate in one industry, the communications equipment industry. Sales to one customer in fiscal 1998 and a different customer in fiscal 1997 represented 12.2% and 10.2% of the consolidated net sales, respectively. There was no customer in fiscal 1996 for which sales amounted to over 10%. During the fiscal years ended July 31, 1998, 1997 and 1996, approximately 20%, 17% and 20%, respectively, of the Company's net sales resulted from contracts with the United States government and its agencies. Export sales comprised 46%, 57% and 56% of net sales in fiscal 1998, 1997 and 1996, respectively. (11) Commitments and Contingencies (a) Operating Leases The Company is obligated under noncancellable operating lease agreements. At July 31, 1998, the future minimum lease payments under operating leases are as follows: 1999 $196,000 2000 195,000 2001 131,000 2002 7,000 -------- $529,000 ======== Lease expense charged to operations was $140,000, $123,000 and $122,000 in fiscal 1998, 1997 and 1996, 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. (12) Subsequent Events Subsequent to July 31, 1998, the Company established two new wholly-owned subsidiaries, Comtech Wireless, Inc. and Comtech Mobile Datacom Corp. to acquire the assets and assume certain liabilities of two other entities for total consideration of approximately $1,150,000 F-18 Schedule II COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves Years ended July 31, 1998, 1997 and 1996
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,: 1998 $102,000 96,000(C) -- (28,000)(D) 170,000 1997 28,000 85,000(C) -- (11,000)(D) 102,000 1996 137,000 -- -- (109,000)(D) 28,000 Inventory reserves: Year ended July 31,: 1998 $956,000 127,000(B) -- -- 829,000 1997 490,000 466,000(A) -- -- 956,000 1996 567,000 (77,000)(B) -- -- 490,000
(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-3.(C) 2 AMENDED AND RESTATED BY-LAWS AMENDED AND RESTATED BY-LAWS OF COMTECH TELECOMMUNICATIONS CORP. (A Delaware Corporation) ARTICLE I Offices The Corporation shall maintain a registered office in the State of Delaware as required by law. The Corporation may also have offices at other places, within and without the State of Delaware. ARTICLE II Stockholders Section 1. Annual meetings of stockholders shall be held once in each year at such times and such places, within or without the State of Delaware, as may be fixed from time to time by the Board of Directors. Section 2. Except as otherwise required by statute or the Corporation's Certificate of Incorporation, special meetings of stockholders may be called by the Board of Directors, the Chairman of the Board or by any officer instructed by the Board of Directors to call such meetings. Special meetings of stockholders shall be held on such dates and at such times and such places, within or without the State of Delaware, as shall be stated in the notices of such meetings. Notice of any special meeting shall state the purpose or purposes for which the meeting is to be held and no other business shall be transacted except as stated in such notice. Section 3. The holders of a majority of the issued and outstanding shares of the capital stock of the Corporation entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of stockholders. Section 4. Except as otherwise required by statute, the Corporation's Certificate of Incorporation or these By-Laws, all matters coming before any meeting of stockholders shall be decided by the vote of the holders of a majority of the shares of capital stock of the Corporation present in person or represented by proxy at such meeting and voting thereon, a quorum being present. Section 5. The Board of Directors, or, if the Board shall not have made the appointment, the Chairman presiding at any meeting of stockholders, shall have power to appoint two or more persons to act as inspectors, to receive, canvass and report the votes cast by the stockholders at such meeting. Section 6. The Chairman of the Board, or in his absence, the President, shall preside at all meetings of stockholders; and in their absence, the Board of Directors may appoint a person to act as Chairman of the meeting. Section 7. The Secretary or an Assistant Secretary shall act as secretary at all meetings of stockholders; and in their absence, the chairman of the meeting shall appoint a person to act as secretary of the meeting. Section 8. Only persons who are nominated in accordance with the procedures set forth in this section shall be eligible to serve as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at an annual meeting of stockholders (a) by or at the direction of the Board of Directors or (b) by or on behalf of a stockholder of the Corporation, or a duly authorized proxy for such stockholder, who is a stockholder of record at the time of giving notice provided for in this paragraph and who shall be entitled to vote for the election of Directors at the meeting. Any nominations not made by or at the direction of the Board of Directors must be made pursuant to a notice in writing to the Secretary of the Corporation delivered or mailed to, and received at the principal executive offices of the Corporation not fewer than 90 days or more than 120 days prior to the anniversary date of the immediately preceding annual meeting; provided, however, that in the event the annual meeting with respect to which such notice is to be tendered is not held within 30 days 2 before or after such anniversary date, notice by the stockholder to be timely must be received not earlier than 90 days prior to such annual meeting and not later than 60 days prior to such annual meeting; and further provided, however, that, notwithstanding the foregoing, with respect to the first annual meeting of stockholders after June 30, 1998, such notice by the stockholder must be received at the principal executive offices of the Corporation prior to the close of business on the tenth day following the date on which notice of the meeting was first given or made to stockholders generally. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934 (including such person's written consent to being named as a nominee and to serving as a director, if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder, (ii) the class and number of shares of stock of the Corporation beneficially owned by such stockholder and represented by proxy and (iii) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with such nomination and any material interest of such stockholder in such nomination. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination that pertains to the nominee. If the Board of Directors shall determine, based on the facts, that a nomination was not made in accordance with the above procedures, the Chairman of the meeting shall so declare to the meeting and the defective nomination shall be disregarded. ARTICLE III Board of Directors Section 1. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. 3 Section 2. Regular meetings of the Board of Directors shall be held on such dates and at such times and such places, within or without the State of Delaware, as shall be fixed from time to time by the Board. Section 3. Special meetings of the Board of Directors may be called by the Chairman of the Board and shall be called by the Chairman of the Board or the Secretary upon a request in writing by any two directors. Notice shall be given of the date, time and place of each special meeting by mailing the same at least three days before the meeting or by telephoning, telegraphing or delivering personally the same before the meeting to each director. Except as otherwise specified in the notice thereof, or as required by statute, any and all business may be transacted at any special meeting of the Board of Directors. Section 4. The Chairman of the Board shall preside at all meetings of the Board of Directors; and in his absence, the Board of Directors may appoint any other person to act as chairman of the meeting. Less than a quorum of the Board may adjourn any meeting from time to time until a quorum shall be present, whereupon the meeting may be held, as adjourned, without further notice. ARTICLE IV Committees Section 1. The Corporation shall have an Executive Committee, an Audit Committee and a Compensation Committee, each of which shall have such powers of the Board of Directors, not prohibited by statute, as the Board shall from time to time authorize. Each such committee shall consist of two or more directors. Section 2. The Board of Directors may, by resolution passed by a majority of the whole Board, designate from among its own members such other committees as the Board may determine. Each such committee shall have such powers of the Board of Directors, not prohibited by statute, as the Board shall from time to time authorize. 4 Section 3. A majority of a committee shall constitute a quorum for the transaction of business. Each committee shall keep regular minutes of its meetings and shall report the same to the Board of Directors when requested. The Board of Directors may discharge any committee or any member thereof either with or without cause at any time. Section 4. In the case of the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of such absent or disqualified member. ARTICLE V Officers Section 1. The Board of Directors shall elect the following officers: Chairman of the Board of Directors, President, Treasurer and Secretary and such other officers as it may from time to time determine. Section 2. The term of office of the officers shall be for one year and until their respective successors are elected and qualified. The Board of Directors may remove any officer either with or without cause at any time. Section 3. The officers of the Corporation shall each have such powers and duties as generally pertain to their respective offices, as well as such other powers and duties as from time to time may be conferred by the Board of Directors. The Chairman of the Board shall be the chief executive officer of the Corporation, shall possess, except as prohibited by statute, the same power to sign on behalf of and bind the Corporation as is possessed by the President, and shall, during the absence or disability of the President, exercise all the powers and discharge all the duties of the President. The President shall be the chief operating officer of the Corporation and shall have general supervision of the daily operations of the Corporation. 5 Section 4. Unless otherwise ordered by the Board of Directors, the Chairman of the Board, the President or the Secretary shall have full power and authority on behalf of the Corporation to attend and to vote at any meetings of stockholders of any corporation in which this Corporation may hold stock, and may exercise on behalf of this Corporation any and all of the rights and powers incident to the ownership of such stock at any such meeting, and shall have power and authority to execute and deliver proxies, waivers and consents on behalf of the Corporation in connection with the exercise by the Corporation of the rights and powers incident to the ownership of such stock. The Board of Directors may from time to time confer like powers upon any other person or persons. ARTICLE VI Capital Stock Section 1. Certificates for stock of the Corporation shall be in such form as the Board of Directors may from time to time prescribe. Section 2. The Board of Directors shall have power to appoint one or more transfer agents and/or registrars for the transfer and/or registration of certificates for shares of stock of any class or series and may require that stock certificates shall be countersigned and/or registered by one or more of such transfer agents and/or registrars. Section 3. Shares of capital stock of the Corporation shall be transferable on the books of the Corporation only by the holder of record thereof in person or by his duly authorized attorney, upon surrender and cancellation of certificates for a like number of shares, with an assignment or power of transfer endorsed thereon or delivered therewith, duly executed, and with such proof of the authenticity of the signature and of authority to transfer, and of payment of transfer taxes, as the Corporation or its agents may require. Section 4. In case any certificate for the capital stock of the Corporation shall be lost, stolen or destroyed, the Corporation may require such proof of the fact and such indemnity to be given to it and/or to its transfer agent and/or registrar, if any, as it shall deem necessary or advisable. 6 Section 5. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder thereof in fact, and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by law. ARTICLE VII Indemnification Section 1. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer or employee of the Corporation, or is or was serving at the request of the Corporation as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement, actually and reasonably incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Section 2. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer or employee of the Corporation, or is or was serving at the request of the Corporation as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise, 7 against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 3. To the extent that a director, officer or employee of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 and 2 of this Article VII, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 4. Any indemnification under Sections 1 and 2 of this Article VII (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer or employee is proper in the circumstances because he has met the applicable standard of conduct set forth in said Sections 1 and 2. Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. Section 5. Expenses incurred in defending a civil, criminal, administrative or investigative action, suit or proceeding, or threat thereof, may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking by or on behalf of the director, officer or employee to repay such 8 amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Article VII. Section 6. The indemnification provided by this Article VII shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any By-Law agreement, vote of stockholders or disinterested directors, statute, court decision, insurance policy or otherwise, now or hereafter in effect, and shall continue as to a person who has ceased to be a director, officer or employee and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 7. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer or employee of the Corporation, or is or was serving at the request of the Corporation as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article VII or of the General Corporation law of the State of Delaware. Section 8. For purposes of this Article VII, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer or employee of the Corporation which imposes duties on, or involves services by, such director, officer or employee with respect to any employee benefit plan, its participants or beneficiaries; and a person who acting in good faith and in a manner he reasonably believes to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article VII. ARTICLE VIII Miscellaneous 9 Section 1. The seal of the Corporation shall be circular in form and shall contain the name of the Corporation and the year and state of incorporation. Section 2. The Board of Directors shall have power to fix, and from time to time change, the fiscal year of the Corporation. ARTICLE IX Amendment The Board of Directors shall have the power to adopt, alter and repeal the By-Laws of the Corporation at any regular or special meeting of the Board, subject to the power of the stockholders to alter or repeal any By-Law adopted or altered by the Board of Directors. By-Laws may be adopted, altered or repealed by the stockholders by the vote of the holders of a majority of the outstanding shares entitled to vote thereon provided that notice of the proposed adoption, alteration or repeal shall have been given in the notice of such meeting of stockholders. 10 EX-3.(E) 3 AMENDMENT TO THE CERTIFICATE OF INCORPORATION Exhibit 3(e) PAGE 1 State of Delaware Office of the Secretary of State -------------------------------- I EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "COMTECH TELECOMMUNICATIONS CORP.", FILED IN THIS OFFICE ON THE FIFTH DAY OF JANUARY, A.D., 1998, AT 9 O'CLOCK A.M. [SEAL] /s/ Edward J. Freel [SEAL] ----------------------------------------- Edward J. Freel, Secretary of State 2113228 8100 AUTHENTICATION: 8854182 981005583 DATE: 01-08-98 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF COMTECH TELECOMMUNICATIONS CORP. It is hereby certified that: 1. The name of the corporation is Comtech Telecommunications Corp. (the "Corporation"). 2. The certificate of incorporation of the Corporation is hereby amended by deleting paragraph (a) of Article FOURTH thereof and replacing in lieu and instead thereof a new paragraph (a) of Article FOURTH, to read as follows: "FOURTH: (a) the aggregate number of shares which the Corporation shall have authority to issue is Seventeen Million (17,000,000) shares, of which Fifteen Million (15,000,000) shares shall be Common Stock, par value ten cents ($.10) ("Common Stock"), and Two Million (2,000,000) shares shall be Preferred Stock, par value ten cents ($.l0) ("Preferred Stock")." 3. The Board of Directors of the Corporation unanimously adopted a resolution proposing and declaring the advisability of the foregoing amendment to the certificate of incorporation, and recommended the adoption of such amendment by the stockholders of the Corporation. 4. The stockholders of the Corporation, at an annual meeting of stockholders held on December 16, 1997, approved the foregoing amendment to the certificate of incorporation of the Corporation. 5. The amendment of the certificate of incorporation herein certified has been duly adopted in accordance with the provisions of the Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Comtech Telecommunications Corp. has caused this Certificate of Amendment to be executed in its corporate name by its President and attested by its Secretary this 16th day of December, 1997. COMTECH TELECOMMUNICATIONS CORP. By: /s/ Fred Kornberg ------------------------------------- FRED KORNBERG, Chairman, Chief Executive Officer and President Attest: /s/ J. Preston Windus, Jr. - ------------------------------- J. PRESTON WINDUS, JR., Secretary EX-10.(A) 4 AMENDED AND RESTATED EMPLOYMENT AGREEMENT Exhibit 10(a) AGREEMENT dated January 14, 1998 between Comtech Telecommunications Corp. (the "Company") and Fred Kornberg ("Kornberg"). Kornberg is presently Chairman of the Board of Directors, President and Chief Executive Officer of the Company and is employed pursuant to an Agreement dated August 20, 1992 (the "Employment Agreement"). The Company and Kornberg desire to extend the term of Kornberg's employment and effect certain other changes. Accordingly, the Company and Kornberg hereby amend and restate the Employment Agreement to read in its entirety as follows: 1. The Company hereby employs Kornberg as general manager and chief executive officer of its business for the period (hereinafter referred to as the "Employment Period") commencing the date hereof and, except as otherwise provided in Paragraph 6 hereof, terminating on August 31, 2003; provided, however, that the Employment Period shall be automatically extended (subject to Paragraph 6) for successive two-year periods unless either party hereto gives notice of non-extension to the other at least six months in advance of the then scheduled termination date. Kornberg shall have supervision over the business and affairs of the Company and its subsidiaries, shall report and be responsible only to the Board of Directors of the Company, and shall have powers and authority superior to those of any other officer or employee of the Company or any of its subsidiaries. Kornberg accepts such employment and agrees to devote his full time and effort to the business and affairs of the Company and, subject to his election as such, to serve as a director and as Chairman of the Board and President of the Company. He shall not be required to relocate his residence or to perform services which would make the continuance of such residence inconvenient to him. 2. The Company shall pay to Kornberg, for all services rendered by him during the Employment Period, compensation as follows: (a) Salary ("Base Salary") at the annual rate of $240,000, commencing the date hereof, plus such additional amounts, if any, as the Board of Directors may from time to time determine, payable in accordance with the Company's current practice. (b) Incentive compensation ("Incentive Compensation") for each fiscal year in which any part of the Employment Period falls in an amount (not to exceed Kornberg's Base Salary for such fiscal year) equal to 3.5 % of the Company's Pre-Tax Income for each such fiscal year, plus such additional amounts, if any, as the Board of Directors may from time to time determine; provided, however, that if the Employment Period terminates other than at the end of a fiscal year, Incentive Compensation shall be based upon the Company's Pre-Tax Income for the then current fiscal year through the most recent fiscal quarter ended prior to such termination. For purposes of this Paragraph 2(b): (i) The Company's "Pre-Tax Income" for any fiscal year or period shall be the consolidated earnings of the Company and its subsidiaries for such fiscal year or period, as determined by the independent accounting firm employed by the Company as its regular auditors in accordance with generally accepted accounting principles applied on a consistent basis, before (i) any extraordinary item, (ii) provision for federal, state or municipal -2- income taxes thereon and (iii) provision for any Incentive Compensation payable to Kornberg hereunder. (ii) Fifty percent of the Incentive Compensation payable with respect to any fiscal year shall be paid to Kornberg promptly after completion of the Company's audited year-end financial statements for such fiscal year, or promptly after completion of the relevant unaudited quarterly statements, as the case may be. The balance of such Incentive Compensation amount shall be paid on the first anniversary of such initial 50%. If Kornberg voluntarily terminates his employment with the Company other than as permitted by Section 6(b) of this Agreement, or if the Company terminates his employment for cause as defined in paragraph 6(a) hereof, Kornberg shall forfeit his right to receive any Incentive Compensation accrued but unpaid in accordance with this Section 2(b)(ii). 3. During the Employment Period, Kornberg shall be entitled to participate in, and receive benefits in accordance with, the Company's employee benefit plans and programs at the time maintained by the Company for its executives, subject to the provisions of such plans and programs. 4. During the Employment Period, Kornberg shall be entitled to receive reimbursement for all expenses reasonably incurred by him in connection with his duties hereunder in accordance with the usual procedures of the Company. 5. (a) The Company shall obtain (subject to Kornberg's insurability) and keep in full force and effect during the Employment Period, at its own cost and expense, -3- insurance covering Kornberg's life in the amount of $1 million plus such additional amounts, if any, as the Board of Directors may from time to time determine, payable to his estate or such other person or persons as he may from time to time direct. (b) In addition to the insurance provided for in Paragraph 5(a) hereof, the Company, in its discretion, and at its own cost and expense, may also obtain insurance covering Kornberg's life in such amount as it considers advisable, and Kornberg agrees to cooperate fully to enable the Company to obtain such insurance. 6. The Employment Period may be terminated only as follows: (a) By action of the Board of Directors of the Company, upon notice to Kornberg, if during the Employment Period Kornberg shall fail to render the services provided for hereunder for a continuous period of 12 months because of his physical or mental disability, or for cause, which shall mean the commission of acts of willful malfeasance or gross negligence materially and adversely affecting the Company's business. (b) By Kornberg, on ten days notice to the Company, at any time during the Employment Period after a Change in Control of the Company, as defined in Paragraph 7(d) hereof, occurs. 7. If Kornberg terminates the Employment period in accordance with -4- Paragraph 6(b) hereof, the following provisions shall apply: (a) Subject to Paragraph 7(c) hereof, the Company shall pay to Kornberg, within 30 days after the effective date of the termination (the "Effective Date"), a lump sum equal to: (i) the greater of (x) Kornberg's Base Salary, at the rate in effect at the time such notice is given, for the full unexpired term of the Employment Period, or (y) three times Kornberg's Base Salary then in effect; plus (ii) the amount of any Incentive Compensation accrued with respect to any fiscal year ended prior to the Effective Date but unpaid; plus (iii) if and to the extent Kornberg so elects, an amount equal to (x) the number of shares of Common Stock of the Company subject to unexercised options held by Kornberg at the Effective Date, multiplied by (y) the difference between the weighted average exercise price of such options and the per share fair market value of the Common Stock at the Effective Date, against surrender to the Company of all options (and any related stock appreciation rights) relating to the Common Stock held by Kornberg at the Effective Date and elected by him to be treated in accordance with this Section. The per share fair market value of the Common Stock as of a date, for purposes of this provision, shall be the mean of the high and low bid and asked prices of the Common Stock, if then traded in the over-the-counter market, or the mean of the high and low closing prices of the Common Stock, if then traded on the National Market System of the National Association of Securities Dealers -5- Automated Quotations System or on a national securities exchange, for the 30 days immediately preceding the relevant date. (b) For the full unexpired term of the Employment Period, the Company shall continue Kornberg's participation in each employee benefit plan (including, without limitation, life insurance and medical plans and including, to the extent allowed, amending such plans) in which Kornberg was entitled to participate immediately prior to the Effective Date as if he continued to be employed by the Company hereunder. If the terms of any benefit plan of the Company may not under Section 401(a) or other similar provisions of the Internal Revenue Code of 1986, as amended (the "Code"), permit continued participation by Kornberg, the Company will arrange to provide to Kornberg benefits substantially equivalent to, as to time and amount, and no less favorable than, on an after-tax basis, the benefits he would have been entitled to receive under such plan if he had been continuously employed by the Company for the full unexpired term of the Employment Period. Kornberg shall have the option to have assigned to him, at no cost and with no apportionment of prepaid premiums, any assignable insurance policies owned by the Company and relating specifically to Kornberg. (c) Notwithstanding any other provision of this Agreement, the amounts payable to Kornberg under Paragraph 7(a) shall be equal to whichever of the following amounts shall result in the greater after-tax payment to Kornberg, after application of -6- all federal, state and local taxes applicable to such payments: (i) the amount otherwise payable under Paragraph 7(a) without regard to this Paragraph 7(c); and (ii) the amount payable in (i) above, reduced by the total amounts payable under Paragraph 7(a) and (b) to the extent included as parachute payments under Section 280G(b)(2) of the Code, but only to the extent such amounts included as parachute payments exceed 299% of Kornberg's "Base Amount," as defined in Section 280G(b)(3)(A) and (d)(1) and (2) of the Code. The calculation of after-tax payments under this paragraph 7(c) shall be made by independent public accountants selected by Kornberg and consented to by the Company, which consent shall not be unreasonably withheld. The fees and expenses of such accountants shall be borne by the Company. (d) Except as provided below, for purposes of this Employment Agreement a Change in Control shall be deemed to have occurred if: (i) an event that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14a promulgated under the 1934 Act, as in effect on the date hereof, occurs; or -7- (ii) any person or group of persons acting in concert becomes the beneficial owner of 30% or more of the Company's outstanding voting securities or securities convertible into such amount of voting securities; or (iii) within two years after a tender offer or exchange offer, or as the result of a merger, consolidation, sale of substantially all of the Company's assets or a contested election of the Board of Directors, or any combination of such transactions, the persons who were directors of the Company prior to the transaction do not constitute a majority of the Board of Directors of the Company or its successor; provided, however, that no such event shall be deemed to constitute a Change in Control if such event is approved by two-thirds of the Prior Directors of the Company and the Successor Directors (each as hereafter defined), if any, voting together. For purposes of this Agreement, Prior Directors are those directors of the Company in office immediately prior to such event, and Successor Directors are successors to Prior Directors who were recommended to succeed Prior Directors by a majority of the Prior Directors then in office. 8. Kornberg agrees that during the Employment Period and for a period of two years thereafter, he will not, in any manner, directly or indirectly, engage in any business which competes with the business in which the Company is presently engaged or may be engaged at any time during the Employment Period, and he will not directly or indirectly own, manage, operate, join, control or participate in the ownership, management, operation or control of, or be employed by, or connected in any manner with, any corporation, firm or business that is so engaged; provided, however, that nothing herein contained shall prohibit -8- Kornberg from owning not more than five per cent of the outstanding stock of any publicly held corporation. 9. (a) In order to induce Kornberg to enter into this Agreement, the Company agrees that if it breaches this Agreement, Kornberg shall have no further obligations hereunder and shall be under no duty to seek other employment or otherwise mitigate his damages, and the Company shall pay Kornberg the following amounts as liquidated damages in lieu of any further obligations hereunder: (i) An amount equal to 85% of his total Base Salary, at the rate in effect at the time of such breach, for the full unexpired term of the Employment Period, such amount to be made payable within 10 days after such breach; plus (ii) An amount equal to his Incentive Compensation for the full fiscal year in which the breach occurs; (iii) If and to the extent Kornberg elects to receive such amount, an amount equal to that which would be payable under Paragraph 7(a)(iii) hereof if Kornberg had terminated this Agreement pursuant to Paragraph 6(b) as of the date of such breach, provided however, that if a Change in Control of the Company has occurred at any time prior to the date of such breach, Kornberg shall be entitled to receive as liquidated damages amounts and benefits equal to the amounts and benefits he would have been entitled to receive pursuant to Paragraph 7 hereof (including Paragraph 7(c)) if he had terminated the Employment Period effective on the date of breach. -9- (b) Kornberg shall be entitled to reasonable attorney's fees and disbursements in any action to recover any amounts due him or obtain other relief under this Agreement or in any action relating to a breach by the Company of this Employment Agreement. 10. Any offer, notice, request or other communication hereunder shall be in writing and shall be deemed to have been duly given if hand delivered or mailed by registered or certified mail, return receipt requested, addressed to the respective address of each party hereinafter set forth, or to such other address as each party may designate by a notice pursuant hereto, which change of address notice shall be effective upon receipt thereof: If to the Company: Comtech Telecommunications Corp. 105 Baylis Road Melville, New York 11747 Attention: Secretary If to Kornberg: Mr. Fred Kornberg 17 Palatine Court Syosset, New York 11788 11. If any provision of this Agreement shall be held for any reason to be unenforceable, the remainder of this Agreement shall nevertheless remain in full force and effect. 12. This Agreement, including, without limitation, the provisions of this Paragraph 12, shall be binding upon and inure to the benefit of, and shall be deemed to refer with equal force and effect to, any corporate or other successor to the Company which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or -10- substantially all of the assets or business of the Company. This Agreement shall not be assignable by the Company or any such successor, except to the corporate or other successor referred to in the preceding sentence. Kornberg may not assign, pledge or encumber his interest in this Agreement without the written consent of the Company. This Agreement shall be binding upon and inure to the benefit of Kornberg, his heirs and personal representatives. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first written above. COMTECH TELECOMMUNICATIONS CORP. By: /s/ J. Preston Windus, Jr. ------------------------------------- Authorized Signatory Approval of Chairman of the Compensation Committee of the Board of Directors /s/ George Bug[ILLEGIBLE] /s/ Fred Kornberg - ------------------------- ------------------------------------- Fred Kornberg -11- EX-11 5 COMPUTATION OF EARNINGS PER SHARE Exhibit 11 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Computation of Earnings Per Share Years ended July 31, 1998, 1997 and 1996
Year ended July 31, ------------------- 1998 1997 1996 ---------- --------- --------- Net income $1,104,000 484,000 72,000 ========== ========= ========= Computation of weighted average number of common and common equivalent shares outstanding during the period: Weighted average number of common shares 2,656,000 2,637,000 2,606,000 Weighted average shares assumed to be issued upon exercise of common stock options 176,000 22,000 70,000 Less treasury stock (55,000) (55,000) (15,000) ---------- --------- --------- Weighted average number of common and common equivalent shares outstanding during the period 2,777,000 2,604,000 2,661,000 ========== ========= ========= Net income per share: Basic $ .42 .19 .03 Diluted $ .40 .19 .03
E-1 EX-21 6 SUBSIDIARIES OF THE COMPANY SUBSIDIARIES The following is a list of the active subsidiaries of the Company as of October 26, 1998: Subsidiary State of Incorporation ---------- ---------------------- Comtech PST Corp. New York Comtech Systems, Inc. Delaware Comtech Antenna Systems, Inc. Delaware Comtech Communications Corp. Delaware Comtech Wireless, Inc. New York Comtech Mobile Datacom Corp. Delaware EX-23 7 CONSENT OF INDEPENDENT AUDITOR [LOGO] KPMG Peat Marwick LLP Independent Auditors' Consent The Board of Directors Comtech Telecommunications Corp.: We consent to incorporation by reference in the Registration Statement (No. 2-89857) on Form S-8 of Comtech Telecommunications Corp. of our report dated September 18, 1998, relating to the consolidated balance sheets of Comtech Telecommunications Corp. and subsidiaries as of July 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows and related schedule II for each of the years in the three-year period ended July 31, 1998, which report appears in the July 31, 1998 annual report on Form 10-K of Comtech Telecommunications Corp. and subsidiaries. /s/ KPMG Peat Marwick LLP KPMG PEAT MARWICK LLP Melville, New York September 18, 1998 EX-27 8 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Consolidated Financial Statements Form 10K July 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR JUL-31-1998 AUG-01-1997 JUL-31-1998 2,746 0 6,034 102 6,135 15,089 16,438 12,124 19,710 6,172 0 267 0 0 11,826 19,710 30,114 30,114 21,330 28,662 0 0 234 1,284 180 1,140 0 0 0 1,104 .42 .40
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