| COMTECH TELECOMMUNICATIONS CORP /DE/ ITEM 1A RISK FACTORS Forward-Looking Statements This Form 10-K contains “forward-looking statements” including statements concerning the future of our industry, product development, business strategy, continued acceptance of our products, market growth, and dependence on significant customers |
| When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-K The risk factors noted below and other factors noted throughout this Form 10-K could cause our actual financial condition or results to differ significantly from those contained in any forward-looking statement |
| 10 _________________________________________________________________ Due to many factors, including the amount of business represented by large contracts, new orders, net sales and our operating results are difficult to forecast and may be volatile |
| We have experienced, and will experience in the future, significant fluctuations in new orders, net sales and operating results, including our net income and earnings per share, from quarter-to-quarter |
| One reason for this is that a significant portion of our business — primarily the over-the-horizon microwave systems of our telecommunications transmission segment, our RF microwave amplifiers segment and our mobile data communications segment — is derived from a limited number of relatively large customer contracts, the timing of which cannot be predicted |
| Our new orders, net sales and operating results, including our net income and earnings per share, also may vary significantly from period-to-period because of the following factors: product mix sold; fluctuating market demand; price competition; new product introductions by our competitors; fluctuations in foreign currency exchange rates; unexpected changes in delivery of components or subsystems; political instability; regulatory developments; the price and expected volatility of our stock (which will impact, among other items, the amount of stock based compensation expense we may record); and general economic conditions |
| Accordingly, you should not rely on period-to-period comparisons as indications of our future performance because these comparisons may not be meaningful |
| Our business, results of operations, liquidity and financial position depend on our ability to maintain our level of US government business |
| In recent years, we have increased our dependence on US government business |
| Our sales to the US government (including sales to prime contractors to the US government) accounted for approximately 47dtta3prca, 42dtta1prca and 40dtta1prca of our consolidated net sales for the fiscal years ended July 31, 2006, 2005 and 2004, respectively |
| Approximately 60dtta4prca of our backlog at July 31, 2006 consisted of orders from the US government |
| We expect such business to represent a significant portion of our consolidated net sales for the foreseeable future |
| US government business exposes us to various risks, including: • unexpected contract or project terminations or suspensions; • unpredictable order placements, reductions or cancellations; • reductions in government funds available for our projects due to government policy changes, budget cuts and other spending priorities; • penalties arising from post-award contract audits; • cost audits in which the value of our contracts may be reduced; • higher-than-expected final costs, particularly relating to software and hardware development, for work performed under contracts where we commit to specified deliveries for a fixed price; and • unpredictable cash collections of unbilled receivables that may be subject to acceptance of contract deliverables by the customer and contract close out procedures, including government approval of final indirect rates |
| All of our US government contracts can be terminated by the US government for its convenience |
| Termination for convenience provisions provide only for our recovery of costs incurred or committed, settlement expenses and profit on work completed prior to termination |
| In addition to the right of the US government to terminate, US government contracts are conditioned upon the continuing approval by Congress of the necessary spending |
| Congress usually appropriates funds for a given program on a fiscal year basis even though contract performance may take more than one year |
| Consequently, at the beginning of a major program, the contract may not be fully funded, and additional monies are normally committed to the contract only if, as and when appropriations are made by Congress for future fiscal years |
| We obtain US government contracts through a competitive bidding process |
| We cannot assure you that we will continue to win competitively awarded contracts or that awarded contracts will generate sufficient net sales to result in profitability |
| 11 _________________________________________________________________ If we are unable to comply with complex US government regulations governing security and contracting practices, we could be disqualified as a supplier to the US government |
| As a supplier to the US government we must comply with numerous regulations, including those governing security and contracting practices |
| Failure to comply with these procurement regulations and practices could result in fines being imposed against us or our suspension for a period of time from eligibility for bidding on, or for award of, new government contracts |
| If we are disqualified as a supplier to government agencies, we would lose most, if not all, of our US government customers and revenues from sales of our products would decline significantly |
| Among the potential causes for disqualification are violations of various statutes, including those related to procurement integrity, export control, US government security regulations, employment practices, protection of the environment, accuracy of records in the recording of costs, and foreign corruption |
| The government could investigate and make inquiries of our business practices and conduct audits of contract performance and cost accounting |
| Based on the results of such audits, the US government could adjust our contract-related costs and fees |
| Depending on the results of these audits and investigations, the government could make claims against us, and if it were to prevail, certain incurred costs would not be recoverable by us |
| Our dependence on international sales and international sales agents may adversely affect us |
| Sales for use by international customers (including sales to US domestic companies for inclusion in products that will be sold to international customers) represented approximately 35dtta6prca, 44dtta0prca and 45dtta4prca of our consolidated net sales for the fiscal years ended July 31, 2006, 2005 and 2004, respectively |
| Approximately 28dtta4prca of our backlog at July 31, 2006 consisted of orders for use by foreign customers |
| Direct and indirect sales to a North African country during the fiscal year ended July 31, 2006 were 9dtta7prca of consolidated net sales |
| We expect that international sales will continue to be a substantial portion of our consolidated net sales |
| These sales expose us to certain risks, including barriers to trade, fluctuations in foreign currency exchange rates (which may make our products less price-competitive), political and economic instability, exposure to public health epidemics, availability of suitable export financing, tariff regulations, and other US and foreign regulations that may apply to the export of our products and the generally greater difficulties of doing business abroad |
| We attempt to reduce the risk of doing business in foreign countries by seeking subcontracts with large systems suppliers, contracts denominated in US dollars, advance or milestone payments and irrevocable letters of credit in our favor |
| However, we may not be able to reduce the economic risk of doing business in foreign countries, in all instances |
| In such cases, billed and unbilled receivables relating to international sales are subject to increased collectibility risk and may result in significant write-offs, which could have a material adverse impact on our business, results of operations and financial condition |
| In some countries, such as the aforementioned North African country, we rely upon one international sales agent |
| We attempt to reduce our reliance on sales agents by establishing additional foreign sales offices and by engaging, where practicable, more than one independent sales representative in a territory |
| Foreign defense contracts generally contain provisions relating to termination at the convenience of the government |
| In addition, certain of our products and systems may require licenses from US government agencies for export from the US, and some of our products are not permitted to be exported |
| We cannot be sure of our ability to gain any licenses that may be required to export our products, and failure to receive required licenses could materially reduce our ability to sell our products outside the US All of our businesses are subject to rapid technological change; we must keep pace with changes to compete successfully |
| We are engaged in businesses characterized by rapid technological change, evolving industry standards, frequent new product announcements and enhancements, and changing customer demands |
| The introduction of products and services embodying new technologies and the emergence of new industry standards could render any of our products and services obsolete or non-competitive |
| The technology used in our products and services evolves rapidly, and our business position depends, in large part, on the continuous refinement of our scientific and engineering expertise and the development, either through internal research and development or acquisitions, of new or enhanced products and technologies |
| We may not have the economic or technological resources to be successful in such efforts and we may not be able to identify and respond to technological improvements made by our competitors in a timely or cost-effective fashion |
| A significant technological breakthrough by others, including smaller competitors or new firms, could have a material adverse impact on our business, results of operations and financial condition |
| 12 _________________________________________________________________ Reductions in telecommunications equipment and systems spending may negatively affect our revenues, profitability and the recoverability of our assets, including intangible assets |
| From the second half of fiscal 2001 through fiscal 2003, our revenues from commercial customers were negatively affected by the uncertain economic environment both in the overall market, and more specifically in the telecommunications sector |
| Since 2003, the telecommunications sector has stabilized and is growing again; however, if the economy slows, some of our customers may reduce their budgets for spending on telecommunications equipment and systems |
| As a consequence, our current customers and other prospective customers may postpone, reduce or even forego the purchase of our products and systems, which could adversely affect our revenues, profitability and the recoverability of our assets, including intangible assets |
| Our mobile data communications business is subject to unique risks |
| Although sales and earnings have increased significantly in the past few years, our mobile data communications business has a relatively limited operating history compared to our other business segments |
| It is subject to many of the risks inherent in the operation of a new business enterprise |
| In addition to the other risk factors described in this section, the risk factors applicable to our mobile data communications business include the following: • Our contract for the US Army logistics community’s MTS system currently obligates us to provide hardware, including mobile satellite transceivers, and satellite and other services, through July 2007, at fixed prices and other terms set forth in the contract |
| The US Army is not obligated to purchase any equipment or services under the contract |
| Orders and related sales relating to this contract are subject to unpredictable funding and deployment decisions |
| • The MTS contract is not subject to automatic renewal or extension upon its scheduled expiration in July 2007 |
| As such, the US Army may decide to recompete the contract in which case a new MTS contract for all or a portion of our efforts could be awarded to another party in the future |
| If the MTS contract is not renewed, extended or if we fail to succeed in a recompete process, it would have a material adverse impact on our business and results of operations |
| • In general, as we seek to grow our mobile data communications business, we anticipate that we will need to maintain a substantial inventory in order to provide terminals to our customers on a timely basis |
| Certain components that we need have purchasing lead-times of four months or longer, and the MTS contract requires us to provide mobile terminals within 90 days after we receive an order |
| If forecasted orders are not received, we may be left with large inventories of slow moving or unusable parts or terminals that would result in an adverse impact on our business, results of operations and financial position |
| • We lease the satellite capacity necessary to operate our system from a limited number of third party satellite networks |
| Our ability to grow and remain profitable depends on the ability of our satellite network providers to provide sufficient network capacity, reliability and security to our customers |
| If our satellite network providers were to increase the prices of their services, or to suffer operational or technical failures, our business, results of operation and financial condition could be adversely affected |
| • Our systems occasionally experience downtime |
| All satellite communications are subject to the risk that a satellite or ground station failure or a natural disaster may interrupt service |
| Interruptions in service could have a material adverse impact on our business, results of operations and financial condition |
| Should we be required to restore service on another system in the event of a satellite failure, our costs could increase which would have an adverse effect on our business, results of operations and financial condition |
| Our future success in commercial markets will depend on, among other things, our ability to access the best distribution channels, the development or licensing of applications which create value for the customer and our ability to attract and retain qualified personnel |
| • There are several existing commercial and defense-related competitors, such as Qualcomm, Inc |
| and Northrop Grumman Corporation, that participate in the mobile data communications market and who have much greater financial resources than us |
| Existing competitors, including terrestrial-based service providers, are also aggressively pricing their products and services and may continue to do so in the future |
| Competitors continue to offer new value added products and services, which we may be unable to match on a timely or cost effective basis |
| Increased competition may impact margins throughout the industry |
| We anticipate that new competitors will also enter the mobile data communications market in the future |
| This 13 _________________________________________________________________ could impact our penetration into the commercial market in a significant way and could negatively impact our existing business, results of operation and financial condition |
| Our backlog is subject to customer cancellation or modification and such cancellation could result in decreased sales and increased provisions for excess and obsolete inventory |
| We currently have a backlog of orders, mostly under contracts that the customer may modify or terminate |
| Almost all of the contracts in our backlog are subject to cancellation at the convenience of the customer or for default in the event that we are unable to perform under the contract |
| We cannot assure you that our backlog will result in net sales |
| We record a provision for excess and obsolete inventory based on historical and future usage trends including the consideration of the amount of backlog we have on hand at any particular point in time |
| If our backlog is cancelled or modified, our estimates of future product demand may prove to be inaccurate, in which case we may have understated the provision required for excess and obsolete inventory |
| In the future, if we determine that our inventory was overvalued, we would be required to recognize such costs in our financial statements at the time of such determination |
| Any such charges could be material to our results of operations and financial position |
| Our dependence on component availability, subcontractor availability and performance and key suppliers, including the core manufacturing expertise of our high-volume technology manufacturing center located in Tempe, Arizona, may adversely affect us |
| None of our business segments generally maintain a substantial inventory of components and subsystems |
| Although we obtain certain components and subsystems from a single source or a limited number of sources, we believe that most components and subsystems are available from alternative suppliers and subcontractors |
| A significant interruption in the delivery of such items, however, could have a material adverse impact on our business, results of operations and financial condition |
| In recent years, we have increased the company-wide dependency on our high-volume technology manufacturing center located in Tempe, Arizona, which is part of our telecommunications transmission segment |
| In fiscal 2006, 2005 and 2004, intersegment sales by the telecommunications transmission segment to the mobile data communications segment were dlra55dtta7 million, dlra19dtta5 million, and dlra12dtta8 million, respectively |
| Intersegment sales in fiscal 2006, 2005 and 2004 by the telecommunications transmission segment to the RF microwave amplifiers segment were dlra7dtta5 million, dlra8dtta6 million and dlra3dtta6 million, respectively |
| If a natural disaster or other business interruption occurred, we do not have immediate access to other manufacturing facilities, and as a result, our business would suffer |
| In addition, if our high-volume technology manufacturing center is unable to produce sufficient product or maintain quality, it could have a material adverse impact on all three of our business segments, our results of operations and our financial condition |
| Contract cost growth on our fixed price contracts and other contracts that cannot be justified as an increase in contract value due from customers exposes us to reduced profitability and the potential loss of future business and other risks |
| This means that we bear the risk of unanticipated technological, manufacturing, supply or other problems, price increases or other increases in the cost of performance |
| Operating margin is adversely affected when contract costs that cannot be billed to the customer are incurred |
| This cost growth can occur if initial estimates used for calculating the contract price were incorrect, or if estimates to complete increase |
| The cost estimation process requires significant judgment and expertise |
| Reasons for cost growth may include unavailability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of any delays in performance, availability and timing of funding from the customer, natural disasters, and the inability to recover any claims included in the estimates to complete |
| A significant change in an estimate on one or more programs could have a material impact on our business, results of operations and financial position |
| Adverse regulatory changes could impair our ability to sell products |
| Our products are incorporated into wireless communications systems that must comply with various US government regulations, including those of the FCC, as well as international laws and regulations |
| Regulatory changes, including changes in the allocation and availability of frequency spectrum, and in the military standards and specifications that define the current satellite networking environment, could materially harm our business by (i) restricting development efforts by us and our customers, (ii) making our current products less attractive or obsolete, or (iii) increasing the opportunity for additional competition |
| 14 _________________________________________________________________ Changes in, or our failure to comply with, applicable laws and regulations could materially harm our business |
| In addition, the increasing demand for wireless communications has exerted pressure on regulatory bodies worldwide to adopt new standards and reassign bandwidth for these products and services |
| The reduced number of available frequencies for other products and services and the time delays inherent in the government approval process of new products and services have caused and may continue to cause our customers to cancel, postpone or reschedule their installation of communications systems including their satellite, over-the-horizon microwave, or terrestrial line-of-sight microwave communication systems |
| The EU has recently adopted two directives to facilitate the recycling of electrical and electronic equipment sold in the EU The first of these is the Waste from Electrical and Electronic Equipment directive, which directs EU member states to enact laws, regulations, and administrative provisions to ensure that producers of electrical and electronic equipment are financially responsible for the collection, recycling, treatment, and environmentally sound disposal of certain products placed on the market after August 13, 2005, and from products in use prior to that date that are being replaced |
| The EU has also adopted the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) directive |
| The RoHS directive restricts the use of lead, mercury, and certain other substances in electrical and electronic products placed on the market in the EU after July 1, 2006 |
| Similar laws and regulations have been or may be enacted in other regions, including in the US, China and Japan |
| Other environmental regulations may require us to reengineer our products to utilize components that are more environmentally compatible, and such reengineering and component substitution may result in additional costs to us |
| There can be no assurance that such existing or future laws will not have a material adverse effect on our business |
| Acquisitions and strategic investments may divert our resources and management attention; results may fall short of expectations |
| We intend to continue pursuing selected acquisitions of and investments in businesses, technologies and product lines as a key component of our growth strategy |
| Any future acquisition or investment may result in the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of debt and amortization expenses or in process research and development charges related to intangible assets |
| Acquisitions involve numerous risks, including: • difficulties in the integration and assimilation of the operations, technologies, products and personnel of an acquired business; • diversion of management’s attention from other business concerns; • increased expenses associated with the acquisition; and • potential loss of key employees or customers of any acquired business |
| We cannot assure you that our acquisitions will be successful and will not adversely affect our business, results of operations or financial condition |
| We have investments in recorded goodwill as a result of prior acquisitions, and changes in future business conditions could cause these investments to become impaired, requiring substantial write-downs that would reduce our operating income |
| Goodwill recorded on our balance sheet as of July 31, 2006 was dlra22dtta2 million |
| We evaluate the recoverability of recorded goodwill amounts annually, or when evidence of potential impairment exists |
| The annual impairment test is based on several factors requiring judgment |
| Changes in our operating performance or business conditions, in general, could result in an impairment of goodwill which could be material to our results of operations |
| The loss of key technical or management personnel could adversely affect our business |
| Our success depends on the continued contributions of key technical management personnel, including the key corporate and operating unit management at each of our subsidiaries |
| Many of our key personnel, particularly the key engineers of our subsidiaries, would be difficult to replace, and are not subject to employment or noncompetition agreements |
| Our growth and future success will depend in large part upon our ability to attract and retain highly qualified engineering, sales and marketing personnel |
| Competition for such personnel from other companies, academic institutions, government entities and other organizations is intense |
| Although we believe that we have been successful to date in recruiting and keeping key personnel, we may not be successful in attracting and 15 _________________________________________________________________ retaining the personnel we will need to continue to grow and operate profitably |
| Also, the management skills that have been appropriate for us in the past may not continue to be appropriate if we continue to grow and diversify |
| Our business and operating results may be negatively impacted if we are unable to continue to manage growth of our businesses |
| Certain of our businesses have experienced periods of rapid growth that have placed, and may continue to place, significant demands on our managerial, operational and financial resources |
| In order to manage this growth, we must continue to improve and expand our management, operational and financial systems and controls |
| We also need to continue to recruit and retain personnel and train and manage our employee base |
| We must carefully manage research and development capabilities and production and inventory levels to meet product demand, new product introductions and product and technology transitions |
| If we are not able to timely and effectively manage our growth and maintain the quality standards required by our existing and potential customers, we could experience a material adverse impact on our business, results of operations and financial condition |
| Our markets are highly competitive |
| The markets for our products are highly competitive |
| We cannot assure you that we will be able to successfully compete or that our competitors will not develop new technologies and products that are more effective than our own |
| We expect the DoD’s increased use of commercial off-the-shelf products and components in military equipment will encourage new competitors to enter the market |
| Also, although the implementation of advanced telecommunications services is in its early stages in many developing countries, we believe competition may intensify as businesses and foreign governments realize the market potential of telecommunications services |
| Many of our competitors have financial, technical, marketing, sales and distribution resources greater than ours |
| Protection of our intellectual property is limited; we are subject to the risk of third party claims of infringement |
| Our businesses rely in large part upon our proprietary scientific and engineering “know-how” and production techniques |
| Historically, patents have not been an important part of our protection of our intellectual property rights |
| We rely upon the laws of unfair competition, restrictions in licensing agreements and confidentiality agreements to protect our intellectual property |
| We limit access to and distribution of our proprietary information |
| These efforts allow us to rely upon the knowledge and experience of our management and technical personnel to market our existing products and to develop new products |
| The departure of any of our key management and technical personnel, the breach of their confidentiality and non-disclosure obligations to us or the failure to achieve our intellectual property objectives may have a material adverse impact on our business, results of operations and financial condition |
| Our ability to compete successfully and achieve future revenue growth will depend, in part, on our ability to protect our proprietary technology and operate without infringing upon the rights of others |
| In addition, the laws of certain countries in which our products are or may be sold may not protect our products and intellectual property rights to the same extent as the laws of the US We believe that we own or have licensed all intellectual property rights necessary for the operation of our businesses as currently contemplated |
| If the technology we use is found to infringe on protected technology, we could be required to change our business practices, license the protected technology, and/or pay damages or other compensation to the infringed party |
| If we are unable to license protected technology that we use in our business or if we are required to change our business practices, we could be prohibited from making and selling our products or providing certain telecommunications services |
| Our operations are subject to environmental laws and regulations and we may be subject to environmental liabilities |
| We engage in manufacturing and are subject to a variety of local, state and federal governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture our products, particularly in the fabrication of fiberglass antennas by our Comtech Antenna Systems, Inc |
| We are also subject to the RoHS directive which restricts the use of lead, mercury and other substances in electrical and electronic products |
| The failure to comply with current or future environmental requirements could result in the imposition of substantial fines, suspension of production, alteration of our manufacturing processes or cessation of operations that could have a material adverse impact on our business, results of operations and financial condition |
| 16 _________________________________________________________________ In addition, the handling, treatment or disposal of hazardous substances by us or our predecessors may have resulted or could in the future result in contamination requiring investigation or remediation, or leading to other liabilities, any of which could have a material adverse impact on our business, results of operations and financial condition |
| Our fiscal 2004 Federal income tax return is being audited by the Internal Revenue Service, other returns may be selected for audit and a resulting tax assessment or settlement could have a material adverse impact on our results of operations and financial position |
| We are subject to income taxes in both the US and certain foreign jurisdictions, including Canada |
| Significant judgment is required in determining the provision for income taxes |
| Although we believe our tax estimates are reasonable, the final determination of tax examinations and any related litigation could be materially different than what is reflected in historical income tax provisions and accruals |
| In fiscal 2006, we were informed by the Internal Revenue Service that our Federal income tax return for the fiscal year ended July 31, 2004 was selected for a general tax audit |
| The audit is in the early stages and additional income tax returns for other fiscal years may be examined |
| If the outcome of the audit differs materially from our original income tax provisions, it could have a material impact on our results of operations and financial position |
| Recently enacted securities laws and regulations are increasing our costs |
| The Sarbanes-Oxley Act of 2002 required changes in some of our corporate governance, public disclosure and compliance practices |
| For example, the SEC has promulgated new rules on a variety of subjects |
| In addition, the NASDAQ Stock Market LLC (“NASDAQ”) has revised its requirements for companies, such as us, that are listed on the NASDAQ These changes are increasing our legal and financial compliance costs including making it more difficult and more expensive for us to obtain director and officer liability insurance or maintain our current liability coverage |
| We believe that these new laws and regulations could make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serve on our audit committee, and qualified executive officers |
| We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 |
| Identification of material weaknesses in internal controls, if identified, could indicate a lack of proper controls to generate accurate financial statements |
| Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and related SEC rules, we are required to furnish a report of management’s assessment of the effectiveness of our internal controls as part of our Annual Report on Form 10-K Our auditors are required to attest to and report on management’s assessment, as well as provide a separate opinion |
| To issue our report, we document our internal control design and the testing processes that support our evaluation and conclusion, and then we test and evaluate the results |
| There can be no assurance, however, that we will be able to remediate material weaknesses, if any, that may be identified in future periods, or maintain all of the controls necessary for continued compliance |
| There likewise can be no assurance that we will be able to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly traded companies |
| Changes in financial accounting standards related to stock option expenses are expected to continue to have a significant effect on our reported results |
| In fiscal 2006, we adopted Statement of Financial Accounting Standards Nodtta 123(R), “Share-Based Payment,” a revised standard that requires that we record compensation expense in the statement of operations for employee stock options using a fair value method |
| The adoption of the new standard had a significant effect on our reported earnings, and could adversely impact our ability to provide accurate guidance on our future reported financial results due to the variability of the factors used to estimate the value of stock options |
| As a result, the ongoing application of the new standard could impact the future value of our common stock and may result in greater stock price volatility |
| In addition, since our inception, we have used stock options and other long-term equity incentives as a fundamental component of our employee compensation packages |
| We believe that stock options and other long-term equity incentives directly motivate our employees to maximize long-term stockholder value and, through the use of long-term vesting, encourage employees to remain with us |
| To the extent that this accounting standard makes it less attractive to grant options to employees, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could have a material adverse impact on our business, results of operations and financial condition |
| 17 _________________________________________________________________ We face risks from the uncertainty of prevailing economic and political conditions |
| Current global political and economic conditions are uncertain |
| As a result, it is difficult to estimate the level of expansion, if any, for the global or US economies generally or the markets in which we participate |
| Because our budgeting and forecasting process relies on estimates of growth in the markets we serve, the current economic environment renders estimates of future income and expenses even more difficult than usual to formulate |
| The future direction of the domestic and global economies and political environment could have a material adverse impact on our business, results of operations and financial condition |
| Terrorist attacks and threats, and government responses thereto, and threats of war elsewhere may negatively impact all aspects of our operations, revenues, costs and stock price |
| Terrorist attacks, the US government’s and other governments’ responses thereto, and threats of war could adversely impact our business, results of operations and financial condition |
| Any escalation in these events or similar or future events may disrupt our operations or those of our customers and may affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers |
| In addition, these could have an adverse impact on the US and world economy in general |
| Provisions in our corporate documents, stockholder rights plan, and Delaware law could delay or prevent a change in control of Comtech |
| We have taken a number of actions that could have the effect of discouraging, delaying or preventing a merger or acquisition involving Comtech that our stockholders may consider favorable |
| For example, we have a classified board and the employment contract of our chief executive officer provides for a substantial payment in the event of a change of control of Comtech |
| We also adopted a stockholder rights plan that could cause substantial dilution to a stockholder, and substantially increase the cost paid by a stockholder, who attempts to acquire us on terms not approved by our Board of Directors |
| These provisions could prevent us from being acquired |
| In addition, our certificate of incorporation grants our Board of Directors the authority to fix the rights, preferences and privileges of and issue up to 2cmam000cmam000 shares of preferred stock without stockholder action |
| Although we have no present intention to issue shares of preferred stock, such an issuance of any class or series of our preferred stock could have rights which would adversely affect the voting power of the common stock or which could delay, defer, or prevent a change in control of Comtech |
| In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law |
| In general, this statute provides that except in certain limited circumstances a corporation shall not engage in any “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner |
| A “business combination” includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder |
| Subject to certain exceptions, for purposes of Section 203 of the Delaware General Corporation Law, an “interested stockholder” is a person who, together with affiliates, owns, or within three years did own, 15prca or more of the corporation’s voting stock |
| This provision could have the effect of delaying or preventing a change in control of Comtech |
| Our debt service obligations may adversely affect our cash flow |
| The higher level of indebtedness resulting from the issuance of our 2dtta0prca convertible senior notes increases the risk that we may default on our debt obligations |
| We cannot assure you that we will be able to generate sufficient cash flow to pay the interest on our debt or that future working capital, borrowings or equity financing will be available to pay or refinance such debt |
| The level of our indebtedness, among other things, could: • make it difficult for us to make payments on our debt; • make it difficult for us to obtain any necessary financing in the future for working capital, acquisitions, capital expenditures, debt service requirements or other purposes; • limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and • make us more vulnerable in the event of a downturn in our business |
| The stock market in general, and the stock prices of technology-based companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of any specific public company |
| The market price of our common stock has fluctuated significantly in the past and is likely to fluctuate significantly in the future as well |
| Factors that could have a significant impact on the market price of our stock are described throughout the Risk Factors section and include: • strategic transactions, such as acquisitions and divestures; • future announcements concerning us or our competitors; • receipt or non-receipt of substantial orders for products and services; • quality deficiencies in services or products; • results of technological innovations; • new commercial products; • changes in recommendations of securities analysts; • government regulations; • proprietary rights or product or patent litigation; • changes in economic conditions generally, particularly in the telecommunications sector; • changes in securities market conditions, generally; • energy blackouts; • acts of terrorism or war; • inflation or deflation; and • rumors or allegations regarding our financial disclosures or practices |
| Shortfalls in our sales or earnings in any given period relative to the levels expected by securities analysts could immediately, significantly and adversely affect the trading price of our common stock |
| We have never declared or paid cash dividends |
| We have never declared or paid a cash dividend and do not intend to declare any cash dividends on our common stock in the foreseeable future |