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 October 31, 1996 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 92887
- ------------------------------------------------------------ -----------
(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 November 30, 1996.
Common Stock,
$.10 Par Value 4,800,309 Shares
-------------- ----------------
<PAGE>
Index to Form 10-Q
Page No.
--------
Part I. Financial Information
Condensed Consolidated Balance Sheets
October 31, 1996 and January 31, 1996 1
Condensed Consolidated Statements of Income
Quarters ended and Three Quarters ended October 31, 1996
and October 29, 1995 2
Condensed Consolidated Statements of Cash Flows
Three Quarters ended October 31, 1996 and October 29, 1995 3
Notes to Condensed Consolidated Financial Statements 4-5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
October 31, 1996 January 31, 1996
(Unaudited) *
----------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,851,000 $ 11,801,000
Short-term investments 2,194,000 2,657,000
Accounts receivable, net 13,342,000 7,335,000
Inventory 2,949,000 1,361,000
Other current assets 1,366,000 573,000
----------------- ----------------
Total current assets 26,702,000 23,727,000
Long-term investments 1,962,000 841,000
Property and equipment, net 1,732,000 1,174,000
Software development costs, net 2,181,000 1,401,000
Intangible assets, net 2,700,000 2,578,000
Other assets 298,000 268,000
----------------- ----------------
TOTAL ASSETS $ 35,575,000 $ 29,989,000
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 385,000 $ 547,000
Deferred revenue 1,687,000 1,410,000
Accrued liabilities 7,284,000 5,721,000
----------------- ----------------
Total current liabilities 9,356,000 7,678,000
Deferred income taxes 701,000 573,000
Stockholders' equity:
Common stock, $.10 par value,
33,705,000 shares authorized,
4,800,309 and 4,707,709 shares
outstanding at October 31, 1996 and
January 31, 1996, respectively 480,000 471,000
Capital contributed in excess
of par value 4,375,000 3,883,000
Retained earnings 20,663,000 17,384,000
----------------- ----------------
Total stockholders' equity 25,518,000 21,738,000
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 35,575,000 $ 29,989,000
================= ================
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
*The condensed consolidated balance sheet as of January 31, 1996 has been
summarized from the Company's audited consolidated balance sheet as of that
date.
<PAGE>
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
------------ Quarter Ended -------------- --------- Three Quarters Ended -------
October 31, 1996 October 29, 1995 October 31, 1996 October 29, 1995
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Contract revenues $ 14,181,000 $ 14,187,000 $ 37,650,000 $ 42,376,000
Product sales 4,189,000 4,299,000 13,226,000 10,684,000
--------- --------- ---------- ----------
18,370,000 18,486,000 50,876,000 53,060,000
---------- ---------- ---------- ----------
Direct costs:
Contract costs 10,033,000 9,726,000 25,532,000 28,594,000
Cost of product sales 1,760,000 2,113,000 4,902,000 4,961,000
--------- --------- --------- ---------
11,793,000 11,839,000 30,434,000 33,555,000
Indirect costs 5,056,000 5,230,000 15,745,000 15,572,000
--------- --------- ---------- ----------
16,849,000 17,069,000 46,179,000 49,127,000
---------- ---------- ---------- ----------
Operating income 1,521,000 1,417,000 4,697,000 3,933,000
Net interest income 126,000 114,000 426,000 346,000
------- ------- ------- -------
Income before income taxes 1,647,000 1,531,000 5,123,000 4,279,000
Income taxes 558,000 511,000 1,844,000 1,583,000
------------ ------------ ------------ ------------
Net income $ 1,089,000 $ 1,020,000 $ 3,279,000 $ 2,696,000
============ ============ ============ ============
Earnings per share*
Primary $ .20 $ .20 $ .61 $ .53
========= ========= ========= ==========
</TABLE>
*Fully diluted earnings per share has not been presented as the effect is
immaterial.
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
--------- Three Quarters Ended --------
October 31, 1996 October 29, 1995
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,279,000 $ 2,696,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,708,000 1,684,000
Loss on disposal of property and equipment 6,000 9,000
Deferred income taxes (359,000) 38,000
Provision for doubtful accounts receivable 28,000 23,000
Net purchases of trading securities (648,000) (52,000)
Increase in accounts receivable (4,536,000) (200,000)
Increase in inventory (961,000) (435,000)
Increase in other current assets (288,000) (34,000)
Increase in other assets (2,000) (11,000)
Increase (decrease) in accounts payable (162,000) 90,000
Increase in deferred revenue 277,000 176,000
Increase (decrease) in accrued liabilities 834,000 (1,037,000)
------------ -------------
Net cash provided (used) by operating activities (824,000) 2,947,000
Cash flows from investing activities:
Purchases of investments (1,572,000) (1,430,000)
Proceeds from sales of investments 1,562,000 984,000
Purchases of property and equipment (632,000) (581,000)
Software development costs (1,725,000) (1,525,000)
Payment for purchase of assets of RAL Consulting and (1,197,000) -
Staffing Services, net of cash acquired
Payment for purchase of callbox assets of GTE Cellular (1,063,000) -
Communications Corp., net of cash acquired
Net cash used in investing activities (4,627,000) (2,552,000)
Cash flows from financing activities:
Proceeds from issuance of common stock 590,000 291,000
Purchase of common stock (89,000) -
Purchase of subordinated debentures - (844,000)
------------- -------------
Net cash provided (used) by financing activities 501,000 (553,000)
------------ -------------
Net decrease in cash and cash equivalents $ (4,950,000) $ (158,000)
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the three quarters for:
Interest $ - $ 41,000
Income taxes 1,677,000 1,702,000
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
COMARCO, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
October 31, 1996 and October 29, 1995
(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 October 31, 1996 and
October 29, 1995 and the results of its operations and cash flows for the
quarter ended and three quarters ended October 31, 1996 and October 29,
1995. 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 and three
quarters ended October 31, 1996 are not necessarily indicative of the
results to be obtained for the full fiscal year.
2. Asset Acquisitions
The Condensed Consolidated Balance Sheet includes the assets of RAL
Consulting and Staffing Services, Inc., acquired by a newly-formed
subsidiary of the Company, CoSource Solutions, Inc., ("CoSource") in
August 1996, and the Condensed Consolidated Statement of Income includes
CoSource's operations since August 1, 1996. CoSource is an engineering,
technical and administrative staffing company serving primarily the
commercial marketplace. CoSource has annual revenues of approximately $10
million. The acquisition has been accounted for using the purchase method
of accounting, and accordingly, the purchase price was allocated to the
acquired share of the tangible and identifiable intangible assets and
assumed liabilities based on their respective fair values. The purchase
price could be increased based upon the achievement by CoSource of
certain performance objectives over the next three years.
In addition, the Condensed Consolidated Balance Sheet includes the
callbox assets of GTE Cellular Communications Corporation, ("GTE-CCC")
acquired by Comarco Wireless Technologies, Inc., a subsidiary of the
Company, in October 1996, and the Condensed Consolidated Statement of
Income includes GTE-CCC operations since October 1, 1996. GTE-CCC is a
wireless communications company which sells and maintains emergency
cellular callboxes for the public and private sectors. GTE-CCC has annual
revenues of approximately $5 million. The acquisition has been accounted
for using the purchase method of accounting, and accordingly, the
purchase price was allocated to the acquired share of the tangible and
identifiable intangible assets and assumed liabilities based on their
respective fair values. The purchase price could be increased based upon
certain sales activities over the next three years.
3. Significant Accounting Policies - Per Share Information
The outstanding shares used for earnings per share calculations for all
years presented include the weighted average effect of common shares and
common share equivalents outstanding during the year. Common share
equivalents include dilutive stock options computed using the treasury
stock method. Convertible subordinated debentures, which were retired in
the first quarter of Fiscal Year 1996, are not considered common stock
equivalents and are not considered in the computation of fully diluted
earnings per share since the effect would be antidilutive. Consolidated
net income of the Company used for earnings per share purposes is diluted
as a result of stock options issued by the Company's subsidiaries which
enable their holders to obtain the subsidiaries' common stock. Primary
earnings per share is calculated as follows:
<TABLE>
------------ Quarter Ended ------------- --------- Three Quarters Ended --------
October 31, 1996 October 29, 1995 October 31, 1996 October 29, 1995
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income $ 1,089,000 $ 1,020,000 $ 3,279,000 $ 2,696,000
less - net income
allocated to subsidiary
dilutive stock options
outstanding (49,000) (29,000) (158,000) (58,000)
------------ ------------ ------------ ------------
Net income used in
calculation of primary
income per share $ 1,040,000 $ 991,000 $ 3,121,000 $ 2,638,000
=========== =========== ============ ============
Weighted average number
of common shares used in
calculation of primary
income per share 5,132,000 4,977,000 5,121,000 4,957,000
=========== ========= ============ ============
Primary income per
common share $ .20 $ .20 $ .61 $ .53
=========== =========== ============ ============
</TABLE>
4. 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 RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This quarterly report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities
Exchange Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. These are in paragraphs 9, 10, 11, 15, 17, 18, 20,
24, 25, 30, 31, 33 and 34 of Management's Discussion and Analysis
of Results of Operations and Financial Condition (paragraphs are
numbered beginning with the first paragraph under "Results of
Operations"). A more complete discussion of business risks is
included in the Company's Annual Report on Form 10-K for the year
ended January 31, 1996.
(a) Results of Operations
The Company operates primarily in two business areas: wireless
communications products and outsourced staffing services.
During the third quarter of Fiscal Year 1997 (year ending January
31, 1997), the Company recorded total revenues of $18.4 million,
down .5% from the revenues of $18.5 million for the comparable
period of the prior fiscal year. Revenues for the first three
quarters of Fiscal Year 1997 of $50.9 million are down 4.1% from
$53.1 million for the comparable period of the prior fiscal year.
Decreased year-to-year revenues are primarily due to:
o substantial completion as of September 30, 1995, of the
Company's contract with the Naval Air Warfare Center
("NAWC") at China Lake, California,
partially offset by:
o increased sales of the Company's wireless
communications products, and
o increased other outsourced staffing services revenue
(other than the China Lake contract).
Revenues from the operations acquired from RAL Consulting and
Staffing Services, Inc. and GTE Cellular Communications Corp.
(see footnote 2) were approximately $3 million in the third
quarter of Fiscal Year 1997. These revenues are included in the
accompanying Condensed Consolidated Statements of Income.
Total direct costs of $11.8 million for the third quarter of
Fiscal Year 1997 are unchanged from the comparable period of the
prior year. Direct costs for the first three quarters of Fiscal
Year 1997 of $30.4 million are down $3.2 million, or 9.5%, from
$33.6 million for the comparable period of the prior fiscal year.
The year-to-year decrease is due to the completion of the China
Lake contract, offset by increased sales of wireless
communications products, as discussed above. The year-to-year
decrease in the amount of direct costs is greater than the
decrease in revenues since the Company's wireless communications
products business requires a smaller component of direct costs
than the outsourced staffing services business.
Total indirect costs of $5.1 million for the third quarter of
Fiscal Year 1997 are down $.1 million, or 1.9%, from $5.2 million
for the comparable period of the prior fiscal year. Indirect costs
for the first three quarters of Fiscal Year 1997 of $15.7 million
are up $.1 million, or .6%, from $15.6 million for the comparable
period of the prior fiscal year. The slight increase is due to the
completion of the China Lake contract, offset by increased sales
of wireless communications products, as discussed above.
Net interest income (interest income, less amortization of
offering costs and interest expense) for the third quarter of
Fiscal Year 1997 amounted to $126,000, as compared to $114,000 for
the comparable period of the prior fiscal year. Net interest
income for the first three quarters of Fiscal Year 1997 amounted
to $426,000, as compared to $346,000 for the comparable period of
the prior fiscal year. The increase in the three quarter period
amount is principally due to the repurchase of 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 quarter of Fiscal Year 1996, as well as an
increase in the amount of the Company's invested funds. The
Company recorded accelerated offering cost amortization of $23,000
in the first quarter of Fiscal Year 1996, when the Company retired
the remaining $844,000 of its convertible subordinated debentures
on April 15, 1995.
The Company's effective tax rate for the first three quarters of
Fiscal Year 1997 is 36% versus an effective tax rate of 37% for
the comparable period of the prior fiscal year.
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, as
well as increased net interest income.
Wireless Communications Products
Wireless communications products revenues decreased 2.4% to $4.0
million for the third quarter of Fiscal Year 1997 from $4.1
million for the comparable period of the prior fiscal year.
Revenues increased 24.5% to $12.2 million for the three quarters
ended October 31, 1996 from $9.8 million for the comparable period
of the prior fiscal year. The nature of the wireless
communications products business is inherently less predictable
(than the Company's traditional outsourced staffing services
business) as the Company will normally not have a significant
amount of unfilled product orders at the end of a period.
Therefore, the amount of orders, sales levels, and profits are
more difficult to predict and may fluctuate significantly from
quarter to quarter.
Sales from foreign sources were $.4 million and $4.3 million for
the third quarter and the three quarters ended October 31, 1996,
respectively. In comparison, foreign sales for all of Fiscal Year
1996 were $1.4 million. The Company is continuing its expansion
into the international marketplace with planned marketing offices
in the United Kingdom and Singapore by the first quarter of Fiscal
Year 1998.
In addition, the Company is continuing its product development
effort, with the development of products supporting the CDMA,
TDMA, NAMPS, ETACS and GSM air interfaces.
Summary operating results for Comarco Wireless Technologies, Inc.,
the Company's wireless communications products subsidiary, are as
follows:
<TABLE>
Three Quarters Ended Three Quarters Ended
October 31, 1996 October 29, 1995
---------------- ----------------
<S> <C> <C>
Revenues $12,244,000 $9,820,000
Cost of product sales 4,691,000 4,253,000
--------- ---------
Gross income 7,553,000 5,567,000
Gross income percentage 61.7% 56.7%
Indirect costs* 4,370,000 3,161,000
--------- ---------
Operating income $3,183,000 $2,406,000
========== ==========
</TABLE>
*Indirect costs include selling, general, and administrative
expenses as well as research and development expenses.
The Company has made certain reclassifications of expenses to more
accurately reflect the composition of direct and indirect costs
related to product sales.
In the first three quarters of Fiscal Year 1997, the gross income
percentage increased to 61.7% of revenues from 56.7% of revenues
for the comparable period of the prior fiscal year. The increased
gross income percentage is due to the incremental benefit of
spreading the fixed costs of operations over a larger activity
base.
The increase in indirect costs of 38.2% for the first three
quarters of Fiscal Year 1997 over the comparable period of the
prior fiscal year is a result of the increase in revenues, as well
as an increase in infrastructure to support anticipated growth.
Selling, general and administrative expenses increased 64.9% from
the first three quarters of Fiscal Year 1996 to the first three
quarters of Fiscal Year 1997, while expensed research and
development decreased 17.7% to $839,000 from the first three
quarters of Fiscal Year 1996 to the first three quarters of Fiscal
Year 1997. As part of its product development program, the Company
is continuing its software product development program in its
wireless communications products business. 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 $1.7 million and $1.0 million, respectively,
during the first three quarters of Fiscal Years 1997 and 1996,
respectively. Corresponding amounts amortized were $875,000 and
$925,000, respectively. The Company's future product prospects
will depend in part on its ability to enhance the functionality of
its existing products in a timely and cost-effective manner and to
identify, develop, and achieve market acceptance of new products.
There can be no assurance that the Company will be able to respond
to technological advances, changes in customer requirements, or
changes in regulatory requirements or industry standards, and any
significant delays in development, introduction or shipment of
products, or achievement of acceptable product costs, could have a
material adverse effect on the Company's business, operating
results and financial condition.
Operating income as a percentage of revenues is 24.4% for the
third quarter of Fiscal Year 1997, compared to 24.8% for the
comparable period of the prior fiscal year. Operating income as a
percentage of revenues is 26.0% for the first three quarters of
Fiscal Year 1997, compared to 24.5% for the comparable period of
the prior fiscal year.
The Company's orders for wireless communications products totalled
$8.3 million for the third quarter of Fiscal Year 1997, up from
$2.9 million from the comparable prior period. Because of the long
sales cycle involved in selling these products and the high unit
sales price, the Company believes that orders are best analyzed by
looking at a twelve month time period, as orders can fluctuate
significantly from quarter to quarter. For the twelve month
periods ended October 1996 and 1995, orders received were $19.9
million and $13.5 million, respectively. The value of unfilled
product orders at October 31, 1996 totalled $5.1 million. Of this
amount, $4.0 million relates to an order received to modify an
installed base of callboxes over an 18 month period. In addition,
$10.5 million of contract value was received from the acquisition
of the GTE callbox business (see footnote 2). Deferred revenue of
$1.5 million has been recorded for anticipated customer warranty
obligations.
The Company faces additional risk factors in developing its
wireless communications products business, including: foreign
marketing, capital requirements, technical requirements,
employees, competition, and proprietary information. A negative
impact to any of these risk factors could have a material adverse
effect on the Company's business, operating results, and financial
condition. Foreign marketing risks include: the need for export
licenses; tariffs and other potential regulatory and trade
restrictions; and changes in laws governing the imposition of
duties, quotas, taxes, or other charges relating to the import or
export of its products. Other companies having a presence or doing
business overseas may have advantages over the Company in these
areas. Certain components used by the Company in its existing
products are only available from single or a limited number of
suppliers, and the inability by any of these suppliers to fulfill
Company requirements may result in an interruption in production.
Access to technical design of air interface devices is essential
for the Company to anticipate and develop compatible wireless
communications products, therefore, the inability to obtain such
technical designs on a timely basis would have a direct impact on
product design and schedule. The Company's future success also
depends in large part on the continued service of its key
personnel, and on its ability to continue to attract and retain
qualified employees, especially highly skilled engineers, for whom
competition in the industry is intense. In addition, the ability
of the Company to compete successfully depends upon a number of
factors, including the rate at which customers accept the
Company's products in overseas markets, product quality and
performance, experienced sales and marketing personnel, rapid
development of new products and features, evolving industry
standards, and the number and nature of the Company's competitors.
There can be no assurance that the Company will be able to compete
successfully in the future. The Company relies on a combination of
trade secrets, copyrights, trademarks, and contractual rights to
protect its intellectual property. There can be no assurance that
the steps taken by the Company will be adequate to protect of its
technology; in addition, the laws of certain foreign countries in
which the Company's products may be sold do not protect the
Company's intellectual property rights to the same extent as do
the laws of the United States.
Outsourced Staffing Services Revenue
Revenues provided by the Company's outsourced staffing services
business area were unchanged from the third quarter of Fiscal Year
1996 to the third quarter of Fiscal Year 1997 at $14.4 million.
Revenues from this business area decreased 10.6%, from $43.3
million for the first three quarters of Fiscal Year 1996 to $38.7
million for the first three quarters of Fiscal Year 1997. Revenues
in this business area decreased from 81.5% of the Company's total
revenues in the first three quarters of Fiscal Year 1996 to 76.0%
of the Company's total revenues in the first three quarters of
Fiscal Year 1997. These decreases are due to the completion of the
Company's contract with the Naval Air Warfare Center at China
Lake, California, on September 30, 1995. The China Lake contract
accounted for approximately 15% of the Company's total operating
income and approximately 14% of the Company's total revenue in the
first three quarters of Fiscal Year 1996. The loss of this
contract required the Company to reduce the indirect organization
supporting this business in line with the reduced revenue base.
Revenues derived from CoSource Solutions, Inc., the Company's new
staffing subsidiary (see footnote 2), in the third quarter of
Fiscal Year 1997 were $2.6 million. The Company's remaining
services revenue increased 3% in the first three quarters of
Fiscal Year 1997 over the comparable period of the prior fiscal
year.
Sales to the U.S. Government as well as to government prime
contractors were 53% and 42% of the Company's total revenue during
the first three quarters of Fiscal Years 1996 and 1997,
respectively. In the course of the Company's business, its
government contracts are periodically opened for competition. In
the current fiscal year, the Company has won two contract
recompetition efforts to continue its support to the U.S.
Government at Fort Hood, Texas and Ft. Huachuca, Arizona. The
Company's next significant contract completion is scheduled to be
in March 1998. The Company plans to aggressively compete for all
work opened for competition to the extent possible and selectively
pursue certain high value Government procurements. There can be no
assurance that the Company will be selected and awarded the work
associated with any outstanding proposals. In addition, government
agencies may terminate their contracts in whole or in part at
their convenience. Government agencies may remove funding
previously provided or may not exercise option periods. Therefore,
there can be no assurance that the Government will fund the
portions of existing contracts that are unfunded, or that the
Governmental agencies will exercise any options.
Operating income (revenues less direct costs, indirect costs, and
depreciation and amortization) for outsourced staffing services is
up 42.3% from $390,000 in the third quarter of Fiscal Year 1996 to
$555,000 in the third quarter of Fiscal Year 1997. Operating
income for outsourced staffing services is down .9% from
$1,527,000 in the first three quarters of Fiscal Year 1996 to
$1,514,000 in the first three quarters of Fiscal Year 1997. The
increased operating income for the third quarter of Fiscal Year
1996 to the third quarter of Fiscal Year 1997 is due to a
reduction in the operating loss for the Company's software
products line, combined with the operating income generated by
CoSource Solutions, Inc., offset by the impact of the completion
of the China Lake contract.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of ("Statement 121"). Statement 121 requires that
the Company review its long-lived assets for impairment whenever
events or circumstances indicate that the carrying amount of an
asset may not be recoverable. To the extent that the future
undiscounted net cash flows expected to be generated from an asset
are less than the carrying amount of the asset, an impairment loss
is recognized based on the difference between the asset's carrying
amount and its fair market value. The Company adopted Statement
121 as of February 1, 1996. The adoption of Statement 121 did not
have a material impact on the Company's financial condition or
results of operations. The Company continually reviews its
long-lived assets for purposes of compliance with Statement 121.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting
for Stock-based Compensation ("Statement 123"). Statement 123
recommends, but does not require, the adoption of a fair value
based method of accounting for stock-based compensation of
employees, including common stock options. Statement 123 requires
a fair value based method of accounting for stock-based
compensation to individuals other than employees. The Company
currently intends to continue recording stock-based compensation
to employees under the intrinsic value method and does not intend
to adopt the fair value based method of accounting for stock-based
compensation to employees as permitted by Statement 123. Certain
pro forma disclosures will be required in the Company's financial
statements for the year ending January 31, 1997 as if the fair
value based method had been adopted.
(b) Financial Condition
The Company signed a loan agreement with a bank effective
September 26, 1994, which was amended effective August 1, 1996.
The loan agreement consists of (1) an $8 million revolving credit
facility, which expires June 30, 1998, and (2) a $5 million
guidance line of credit, which expires June 30, 1997. 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 $15 million (includes highly liquid long-term
investments with maturities of 12 to 36 months) during the first
two quarters of Fiscal Year 1997 and $13 million during the third
quarter of Fiscal Year 1997. The decrease during the third quarter
was due to the cost of financing the acquisitions which occurred
during the quarter (see footnote 2). 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.
During the third quarter of Fiscal Year 1997, the Company's
average days' sales in accounts receivable have increased to
approximately 59 days. This increase is due to accounts receivable
recorded as a result of the acquisitions in the quarter, and in
addition, due to the international sales of the Company's wireless
communications products. The Company's experience has shown that
international sales require a longer collections cycle than
domestic sales. The Company anticipates that average days' sales
will decrease during the fourth quarter, however, a return to
historical levels of 45 to 50 days will be dependent upon the
Company's international sales activity.
Several additional key factors indicating the Company's financial
condition include:
October 31, 1996 January 31, 1996
---------------- ----------------
Current ratio 2.85 3.09
Working capital $17,346,000 $16,049,000
Book value per share $5.32 $4.62
The Company continues to demonstrate overall improvements in the
above financial factors during the first three quarters of Fiscal
Year 1997, primarily due to increased operating margins from
increased sales of wireless communications products.
The Company completed the asset acquisition of RAL Consulting and
Staffing Services, Inc. ("RAL"), an engineering, technical and
administrative staffing company serving primarily the commercial
marketplace, on August 1, 1996. The terms of the purchase
agreement required the Company to make an initial payment of $1.2
million to RAL at closing, and provide for additional payments
subject to the business attaining certain profitability objectives
over the next three years. The activity for CoSource Solutions,
Inc., the newly-formed, wholly-owned subsidiary of COMARCO, Inc.
which purchased RAL's assets, is consolidated with the rest of the
Company's operations as of August 1, 1996.
The Company also completed the asset acquisition of GTE Cellular
Communications Corporation ("GTE-CCC"), the callbox operation of
GTE, during the third quarter of Fiscal Year 1997, effective as of
October 1, 1996. The terms of the GTE-CCC agreement required the
Company to make an initial payment of $1.1 million to GTE at
closing, and provide for additional payments based on certain
sales activities over the ensuing two years. The activity for this
acquisition is consolidated with the rest of the Company's
operations as of October 1, 1996.
The two above stated acquisitions were funded from the Company's
internal working capital and did not have a significant impact on
the Company's financial condition. Any contingent payments
provided in the acquisition agreements are also anticipated to be
funded from the Company's working capital, with no significant
impact on the Company's financial condition.
The Company has a significant commitment for capital expenditures
at October 31, 1996 for Comarco Wireless Technologies, Inc. The
Company has developed and intends to continue to develop new
product line extensions for the wireless communications industry.
This product development program is expected to be funded from the
Company's current working capital. Under the software development
portion of the Company's product development program, the Company
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, $1.7 million and $875,000,
respectively, in the first three quarters of Fiscal Year 1997.
The Company's Board of Directors has authorized a stock
re-purchase program of up to 1,000,000 shares. As of October 31,
1996, the Company has re-purchased and retired approximately
803,000 shares, which includes 6,000 shares re-purchased in the
first three quarters of Fiscal Year 1997. The average price paid
per share re-purchased under the program was $4.82.
The Company is subject to legal proceedings and claims which arise
in the ordinary course of business. In the opinion of management,
the amount of ultimate liability with respect to these actions
will not materially affect the financial condition of the Company.
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
None.
<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)
December 12, 1996
THOMAS P. BAIRD
------------------------------------------------
Thomas P. Baird
Chief Financial Officer
(Authorized Officer and Principal Financial Officer)
Exhibit ll
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
<TABLE>
------ Three Quarters Ended ----------------
October 31, 1996 October 29, 1995
<S> <C> <C>
PRIMARY
Net income $ 3,279,000 $ 2,696,000
Less - net income allocated to subsidiary
dilutive stock options outstanding (158,000) (58,000)
------------- -------------
Net income used in calculation of primary
income per share $ 3,121,000 $ 2,638,000
============ ============
Weighted average number of common shares
outstanding during the period 4,760,000 4,615,000
Add - common equivalent shares (determined
using the "treasury stock" method)
representing shares issuable upon
exercise of stock options 361,000 342,000
------------ ------------
Weighted average number of shares used in
calculation of primary income per share 5,121,000 4,957,000
============ ============
Primary income per common share $ .61 $ .53
============ ============
FULLY DILUTED
Net income used in calculation of primary
income per share $ 3,121,000 $ 2,638,000
============ ============
Weighted average number of common shares
outstanding during the period 4,760,000 4,615,000
Add - common equivalent shares (determined
using the "treasury stock" method)
representing shares issuable upon
exercise of stock options 361,000 345,000
------------ ------------
Weighted average number of shares used in
calculation of fully diluted income per share 5,121,000 4,960,000
============ ============
Fully diluted income per common share $ .61 $ .53
============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> OCT-31-1996
<CASH> 6,851
<SECURITIES> 4,156
<RECEIVABLES> 13,342
<ALLOWANCES> 0
<INVENTORY> 2,949
<CURRENT-ASSETS> 26,702
<PP&E> 1,732
<DEPRECIATION> 0
<TOTAL-ASSETS> 35,575
<CURRENT-LIABILITIES> 9,356
<BONDS> 0
0
0
<COMMON> 480
<OTHER-SE> 25,038
<TOTAL-LIABILITY-AND-EQUITY> 35,575
<SALES> 13,226
<TOTAL-REVENUES> 50,876
<CGS> 4,902
<TOTAL-COSTS> 46,179
<OTHER-EXPENSES> 15,745
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (426)
<INCOME-PRETAX> 5,123
<INCOME-TAX> 1,844
<INCOME-CONTINUING> 3,279
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,279
<EPS-PRIMARY> .61
<EPS-DILUTED> .61
<FN>
NOTE: RECEIVABLES AND PP&E VALUES REPORTED REPRESENT NET AMOUNTS.
</FN>
</TABLE>
