Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended April 30, 1995 Commission File Number 0-5449
COMARCO, Inc.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2088894
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
22800 Savi Ranch Parkway, Suite 214, Yorba Linda, California 92808-1299
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (714) 282-3832
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of May 31, 1995.
Common Stock,
$.10 Par Value 4,608,959 Shares
<PAGE>
INDEX TO 10-Q
Page No.
Part I. Financial Information
Condensed Consolidated Balance Sheets
April 30, 1995 and January 31, 1995 1
Condensed Consolidated Statements of Income
Quarters ended April 30, 1995 and May 1, 1994 2
Condensed Consolidated Statements of Cash Flows
Quarters ended April 30, 1995 and May 1, 1994 3
Notes to Condensed Consolidated Financial Statements 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations 5-8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
Signature 10
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
April 30, 1995 January 31, 1995
ASSETS (Unaudited) *
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,674,000 $ 7,968,000
Short-term investments 2,452,000 1,939,000
Accounts receivable, net 8,764,000 8,703,000
Other current assets 1,211,000 1,238,000
------------ ------------
Total current assets 19,101,000 19,848,000
Long-term investments 992,000 1,023,000
Property and equipment, net 1,061,000 970,000
Software development costs, net 910,000 676,000
Intangible assets, net 2,903,000 3,011,000
Other assets 265,000 282,000
------------ ------------
TOTAL ASSETS $ 25,232,000 $ 25,810,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 651,000 $ 616,000
Deferred revenue 1,053,000 1,044,000
Accrued liabilities 5,172,000 5,794,000
------------ ------------
Total current liabilities 6,876,000 7,454,000
Convertible subordinated debentures - 844,000
Deferred income taxes 309,000 309,000
Stockholders' equity:
Common stock, $.10 par value,
33,705,000 shares authorized,
4,604,709 and 4,602,009 shares
outstanding at April 30, 1995 and
January 31, 1995, respectively 460,000 460,000
Capital contributed in excess
of par value 3,250,000 3,244,000
Retained earnings 14,337,000 13,499,000
------------ ------------
Total stockholders' equity 18,047,000 17,203,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,232,000 $ 25,810,000
============ ============
See accompanying notes to the condensed consolidated financial statements.
*The condensed consolidated balance sheet as of January 31, 1995 has been
summarized from the Company's audited consolidated balance sheet as of that
date.
</TABLE>
<PAGE>
<TABLE>
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
------------ Quarter Ended ------------
April 30, 1995 May 1, 1994
<S> <C> <C>
Revenues:
Contract revenues $ 13,842,000 $ 14,405,000
Product sales 3,487,000 1,263,000
------------- -------------
17,329,000 15,668,000
------------- -------------
Direct costs:
Contract costs 9,266,000 9,242,000
Cost of product sales 1,718,000 784,000
------------- -------------
10,984,000 10,026,000
Indirect costs 5,039,000 4,626,000
------------- -------------
16,023,000 14,652,000
Operating income 1,306,000 1,016,000
Net interest income (expense) 91,000 (54,000)
------------- -------------
Income before income taxes 1,397,000 962,000
Income taxes 559,000 327,000
------------- -------------
Net income $ 838,000 $ 635,000
============= =============
Earnings per share*
Primary $ .17 $ .13
============= =============
Weighted average shares of
common stock*
Primary 4,929,000 5,019,000
*Fully diluted earnings per share has not been presented as the effect is
not material.
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
-------- Quarter Ended ---------
April 30, 1995 May 1, 1994
<S> <C> <C>
Cash flows from operating activities:
Net income $ 838,000 $ 635,000
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation and amortization 545,000 147,000
Provision for doubtful accounts receivable 8,000 3,000
Decrease (increase) in accounts receivable (69,000) 275,000
Decrease (increase) in other current assets 27,000 (323,000)
Decrease in other assets 17,000 64,000
Increase (decrease) in accounts payable 35,000 (375,000)
Increase in deferred revenue 9,000 -
Decrease in other current liabilities (622,000) (876,000)
Net cash provided (used) by operating activities 788,000 (450,000)
Cash flows from investing activities:
Purchases of investments (482,000) -
Purchases of property and equipment (200,000) (252,000)
Software development costs (562,000) (358,000)
Net cash used in investing activities (1,244,000) (610,000)
Cash flows from financing activities:
Proceeds from issuance of common stock 6,000 5,000
Purchase of common stock - (149,000)
Purchase of subordinated debentures (844,000) (1,882,000)
Net cash used in financing activities (838,000) (2,026,000)
Net decrease in cash and cash equivalents $ (1,294,000) (3,086,000)
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ 41,000 $ 145,000
Income taxes 31,000 44,000
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
COMARCO, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
April 30, 1995 and May 1, 1994
(Unaudited)
1. General
The financial statements have been prepared without audit. However, they
reflect all adjustments which in the opinion of management are necessary to
fairly state the Company's financial position at April 30, 1995 and May 1, 1994
and the results of its operations and cash flows for the quarters ended April
30, 1995 and May 1, 1994. The information has been prepared in accordance with
Form 10-Q instructions, but does not necessarily include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. The results of the quarter ended April 30, 1995 are not
necessarily indicative of the results to be obtained for the full fiscal year.
2. Subsequent Event - China Lake Competition
On May 26, 1995, the Company was notified that it was not selected in the
contract competition with the Naval Air Warfare Center ("NAWC") at China Lake,
California. The current contract in this location accounted for approximately
15% of the Company's Fiscal Year 1996 first quarter total revenues and 12% of
its operating income. Most costs associated with this effort are directly
attributable to the contract itself, so there will be few direct residual costs
not reimbursed by the customer. The Company's goal is to attempt to maintain its
historical profit margin in this business.
The Navy exercised a contract option to extend the Company's current work
at China Lake through September 30, 1995. The exercise of this option does not
guarantee the Company a certain amount of work. Therefore, the level of revenues
to be generated during this option period is uncertain.
3. Reclassifications
Certain reclassifications of prior year amounts have been made to conform
with the current year presentation.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(a) Results of Operations
During the first quarter of Fiscal Year 1996 (year ending January 31,
1996), the Company recorded total revenues of $17.3 million, up 10% from the
revenues of $15.7 million for the comparable period of a year earlier. Increased
year-to-year revenues are primarily due to:
o increased sales of the Company's wireless communications products,
o revenue contributed by LCTI, Inc., which was acquired by the Company in
the third quarter of Fiscal Year 1995,
o increased activity on the Company's contract to provide airport
management services at Washington National Airport;
partially offset by:
o continued reduction in activity in support of the Naval Air Warfare
Center at China Lake, California, and
o reduction in activity in support of the Army's Software Development
Center at Ft. Lee Virginia.
On May 26, 1995, the Company was notified that it was not selected in the
contract competition with the Naval Air Warfare Center ("NAWC") at China Lake,
California. However, the Navy did exercise an option to extend the Company's
current work through September 30, 1995. The exercise of this option does not
guarantee the Company a certain amount of work. Therefore, the level of revenues
to be generated during this option period is uncertain.
The current contract in this location accounted for approximately 15% of
the Company's Fiscal Year 1996 first quarter total revenues and 12% of its
operating income. Most costs associated with this effort are directly
attributable to the contract itself, so there will be few direct residual costs
not reimbursed by the customer. The loss of this contract will have a material
adverse effect on operations which will require appropriate organizational
changes and cost reduction efforts. The Company has embarked on a process to
review its corporate organization with the goal of attempting to maintain the
historical profit margins on its remaining revenues in this business. This
effort includes a review of personnel and compensation levels, as well as other
administrative costs. There can be no assurance that the Company will be
successful in achieving this objective.
The Company's contract at the Naval Air Warfare Center in China Lake,
California has experienced a decrease in activity of approximately 20% from the
comparable quarter last year. In addition, the Company's contract in support of
the Army's Software Development Center at Ft. Lee, Virginia has experienced a
decrease in activity of approximately 54% from the comparable quarter last year.
These decreases in revenue are due to reductions in Government funding available
for these projects. The Company expects that defense related activity in the
remainder of Fiscal Year 1996 will continue to show reductions from prior year
periods due to the above-stated contract declines and general Government
budgetary pressures. Notwithstanding this decline in revenue, the Company's
performance grades on many government contracts, which determine the percentage
of profit the Company receives on the contracts, continued at or near record
levels. Except as noted above, the Company's other defense-related activity has
been steady during the first quarter of Fiscal Year 1996.
The Company plans to aggressively compete for all work opened for
competition to the extent possible, selectively pursue certain high value
defense procurements, and build its non-defense work in the areas of airport
management, wireless communications products, and non-defense systems
engineering and integration. If the Company is unable to increase defense
related activity by pursuit of suitable Government awards or replace it with
commercial work, appropriate additional organizational changes and cost
reduction efforts will be pursued.
In addition, government agencies may generally terminate their contracts in
whole or in part at their convenience. Government agencies may remove funding
previously attached or may not exercise option periods. Therefore, there can be
no assurances that the Government will fund those portions of existing contracts
that are unfunded, or that the Government will exercise any options.
Airport management services revenues increased from $4.3 million to $4.5
million, an increase of 5% from the comparable period of the prior fiscal year.
This increase is principally due to increased activity from the Company's
contract in support of Washington National Airport.
Wireless communications products revenues increased 131% to $3.0 million
for the first quarter of Fiscal Year 1996 from $1.3 million for the comparable
period of the prior fiscal year. This increase is due to increased sales of the
Company's network evaluation systems and revenue assurance systems for major
cellular telephone carriers. Revenues from sales of callboxes were minimal
during the first quarter of Fiscal Year 1996, as states other than California
are only at the field testing stage of these units. If these other states move
forward and select the Company's units, the Company believes that production of
units may return in Fiscal Year 1997, although there can be no assurance that
production will resume.
In February 1994, the Company embarked on a multi-year, up to $6 million
software product development program in its wireless communications products
business. The Company views the next few years as a window of opportunity to
expand its product line to take advantage of the worldwide growth in this
market. During this period, the Company intends to generate over two dozen
product line extensions which will support geographical expansion throughout the
wireless communications industry. In accordance with Financial Accounting
Standard No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed, the Company capitalized and amortized $1.4
million and $.9 million, respectively, of software product development costs
related to this program in Fiscal Year 1995. Corresponding amounts for the first
quarter of Fiscal Year 1996 are $300,000 and $300,000, respectively. Success of
this program is evidenced by the Company's increased orders totaling $9.6
million and $3.6 million for Fiscal Year 1995 and the first quarter of Fiscal
Year 1996, respectively, up from $5.8 million and $1.2 million, respectively,
from the comparable prior periods. The value of unfilled orders at April 30,
1995 totaled $2.4 million. The Company has experienced in each of the past two
years a fluctuation in wireless communications product activity, with greater
sales in the third and fourth quarters of its fiscal year and lesser amounts in
the first and second quarters. Profit margins from the Company's wireless
communications products business have been significantly higher than margins
from the services business. The trend toward increased products sales may
continue, although there can be no assurance of this occurring. The nature of
the wireless communications products business is inherently less predictable
than the longer-term services contracts. Therefore, sales levels and profits
will be more difficult to predict and may fluctuate significantly from quarter
to quarter.
In addition, the Company is also investing in development of the next
generation of Computer-Aided Software Engineering (CASE) tools for test program
engineers sold by its newly acquired subsidiary, LCTI, Inc. The amounts
capitalized and amortized in accordance with Financial Accounting Standards No.
86, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed totaled $300,000 and none, respectively in the first quarter
of Fiscal Year 1996. LCTI broke even for the first quarter of Fiscal Year 1996,
and while longer term prospects look favorable for this operation, the near term
could show losses.
Direct costs of $11.0 million for the first quarter of Fiscal Year 1996 are
up $1.0 million (10%) from $10.0 million for the comparable period of the prior
fiscal year. This increase corresponds to the increase in revenues noted above.
Indirect costs for the quarter ended April 30, 1995 are $5.0 million, up
$.4 million (9%) from $4.6 million for the comparable period of the prior fiscal
year. This increase corresponds to the increase in revenues noted above.
Net interest income (interest income, less amortization of offering costs
and interest expense) for the first quarter of Fiscal Year 1996 amounted to
$91,000, as compared to net interest expense of $54,000 for the comparable
period of the prior fiscal year. The change is principally due to the decrease
in the Company's convertible subordinated debentures outstanding and the
accelerated amortization of offering costs related to the Company's purchase of
its convertible subordinated debentures during the first quarters of Fiscal
Years 1996 and 1995, as well as the increase in interest rates available for the
Company's invested funds in the first quarter of Fiscal Year 1996. The Company
recorded accelerated offering cost amortization of $23,000 and $64,000 in the
first quarters of Fiscal Years 1996 and 1995, respectively. The Company retired
the remaining $844,000 of its convertible subordinated debentures on April 15,
1995, leaving no outstanding debt as of April 30, 1995.
The Company's effective tax rate for the first quarter of Fiscal Year 1996
is 40% versus an effective tax rate of 34% for the comparable period of the
prior fiscal year. The increased effective tax rate is due to a reduced level of
current tax credits available to offset income taxes on current taxable income.
The overall increase in net income from the prior fiscal year is primarily
due to the significant increase in the sales of wireless communications products
at higher operating income margins, partially offset by a higher effective
income tax rate.
(b) Financial Condition
The Company signed a loan agreement with a bank effective September 26,
1994. The loan agreement consists of (1) an $8 million revolving credit
facility, which expires September 30, 1996, and (2) a $5 million guidance line
of credit, which expires September 30, 1995. The revolving credit facility and
the guidance line of credit are unsecured provided that the Company maintains
certain covenants. Currently, management anticipates that cash flow will remain
at a level which will enable the Company to avoid utilizing the credit facility
except to support letters of credit and acquisition financing, and that the
Company will be able to purchase investments on a regular basis. The Company's
cash and investment balances averaged $10.5 million during the first quarter of
Fiscal Year 1996. However, maintaining such cash balances is predicated on the
Company maintaining its business base and is subject to the cost of financing
new contracts, acquisitions, and software product development costs for Comarco
Wireless Technologies, Inc. and LCTI, Inc.
During the first quarter of Fiscal Year 1996, the Company's average days'
sales in accounts receivable have remained steady from the prior fiscal year's
levels, at approximately 46 days.
Several additional key factors indicating the Company's financial condition
include:
April 30, 1995 January 31, 1995
Current ratio 2.78 2.66
Working capital $ 12,225,000 $ 12,394,000
Debt to equity 0 .05
Book value per share $3.92 $3.74
The Company continues to demonstrate improvements in the above financial
factors during the first quarter of fiscal year 1996, primarily due to increased
operating margins from increased sales of wireless communications products.
The Company has two significant commitments for capital expenditures at
April 30, 1995 for Comarco Wireless Technologies, Inc. and LCTI, Inc. In
February 1994, the Company embarked on a multi-year, up to $6 million software
product development program in its wireless communications products business.
During this time, the Company intends to develop over two dozen new product line
extensions for the wireless communications industry. This software product
development program is expected to be funded from the Company's current working
capital. In addition, the Company is also investing in development of the next
generation of Computer-Aided Software Engineering (CASE) tools for test program
engineers sold by its newly acquired subsidiary, LCTI, Inc. The amounts
capitalized and amortized in accordance with Financial Accounting Standard No.
86, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed, totaled $600,000 and $300,000, respectively in the first
quarter of Fiscal Year 1996.
The Company's Board of Directors has authorized a stock re-purchase program
of up to 1,000,000 shares. As of April 30, 1995, the Company has re-purchased
and retired approximately 796,000 shares. The average price paid per share
re-purchased under the program was $4.75.
The Company redeemed the remaining $844,000 of outstanding convertible
subordinated debentures in accordance with the provisions of the debenture
agreement on April 15, 1995.
On May 26, 1995, the Company was notified by the Navy that it was not
successful in the Naval Air Warfare Center, China Lake contract competition.
While the Company does anticipate lower revenues and profits due to this
decision, the Company does not anticipate a proportional negative impact to its
liquidity or capital resources.
The Company believes that its cash flow from operations and available bank
borrowings will be sufficient to satisfy the current and anticipated capital
requirements for operations.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are included herewith:
ll. Schedule of Computation of Net Income Per Share
(b) Reports on Form 8-K
On June 2, 1995, the Company filed a current Report on Form 8-K
reporting that the Company had not been selected for award
of the engineering services contract to support the Naval Air
Warfare Center at China Lake, California, and enclosing a
press release of May 26, 1995 to that effect.
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
COMARCO, Inc.
(Registrant)
June 13, 1995
THOMAS P. BAIRD
Thomas P. Baird
Chief Financial Officer
(Authorized Officer and Principal Financial Officer)
<TABLE>
Exhibit ll
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
-------- Quarter Ended ---------
April 30, 1995 May 1, 1994
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PRIMARY
Net income $ 838,000 $ 635,000
Less - net income allocated to subsidiary
dilutive stock options outstanding (13,000) -
------------- -----------
Net income used in calculation of primary
income per share $ 825,000 $ 635,000
============ ===========
Weighted average number of common shares
outstanding during the period 4,603,000 4,836,000
Add - common equivalent shares (determined
using the "treasury stock" method)
representing shares issuable upon
exercise of stock options 326,000 183,000
Weighted average number of shares used in
calculation of primary income per share 4,929,000 5,019,000
============ ===========
Primary income per common share $ .17 $ .13
<PAGE>
Exhibit ll (cont'd)
-------- Quarter Ended ---------
April 30, 1995 May 1, 1994
FULLY DILUTED
Net income used in calculation of primary
income per share $ 825,000 $ 635,000
=========== ===========
Weighted average number of common shares
outstanding during the period 4,603,000 4,836,000
Add - common equivalent shares (determined
using the "treasury stock" method)
representing shares issuable upon
exercise of stock options 368,000 192,000
----------- -----------
Weighted average number of shares used in
calculation of fully diluted
income per share 4,971,000 5,028,000
=========== ===========
Fully diluted income per common share $ .17 $ .13
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> APR-30-1995
<CASH> 6,674
<SECURITIES> 3,444
<RECEIVABLES> 8,764
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,101
<PP&E> 1,061
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,232
<CURRENT-LIABILITIES> 6,876
<BONDS> 0
<COMMON> 460
0
0
<OTHER-SE> 17,587
<TOTAL-LIABILITY-AND-EQUITY> 25,232
<SALES> 3,487
<TOTAL-REVENUES> 17,329
<CGS> 1,718
<TOTAL-COSTS> 16,023
<OTHER-EXPENSES> 5,039
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (91)
<INCOME-PRETAX> 1,397
<INCOME-TAX> 559
<INCOME-CONTINUING> 838
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 838
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
<FN>
NOTE: RECEIVABLES AND PP&E VALUES REPORTED REPRESENT NET AMOUNTS.
</FN>
</TABLE>
