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, 1997 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 92887-1299
- ------------------------------------------------------------- ----------
(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 November 30, 1997.
Common Stock,
$.10 Par Value 4,716,217 Shares
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<PAGE>
Index to Form 10-Q
Page No.
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Part I. Financial Information
Condensed Consolidated Balance Sheets
October 31, 1997 and January 31, 1997 1
Condensed Consolidated Statements of Income
Quarters Ended and Three Quarters Ended October 31, 1997
and October 31, 1996 2
Condensed Consolidated Statements of Cash Flows
Three Quarters Ended October 31, 1997 and October 31, 1996 3
Notes to Condensed Consolidated Financial Statements 4-6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
October 31, 1997 January 31, 1997
ASSETS (Unaudited) *
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,537,000 $ 12,711,000
Short-term investments 2,191,000 1,824,000
Accounts receivable, net 19,291,000 11,526,000
Inventory 5,156,000 3,042,000
Other current assets 2,376,000 2,257,000
----------------- ----------------
Total current assets 31,551,000 31,360,000
Long-term investments 2,651,000 1,859,000
Property and equipment, net 2,169,000 1,408,000
Software development costs, net 3,352,000 2,434,000
Intangible assets, net 3,022,000 1,842,000
Other assets 578,000 307,000
----------------- ----------------
TOTAL ASSETS $ 43,323,000 $ 39,210,000
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,176,000 $ 217,000
Deferred revenue 2,053,000 2,678,000
Accrued liabilities 9,563,000 8,036,000
----------------- ----------------
Total current liabilities 12,792,000 10,931,000
Deferred income taxes 1,215,000 1,302,000
Stockholders' equity:
Common stock, $.10 par value,
33,705,000 shares authorized,
4,716,217 and 4,777,959 shares
outstanding at October 31, 1997 and
January 31, 1997, respectively 472,000 478,000
Capital contributed in excess
of par value 2,928,000 4,450,000
Retained earnings 25,916,000 22,049,000
----------------- ----------------
Total stockholders' equity 29,316,000 26,977,000
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 43,323,000 $ 39,210,000
================= ================
See accompanying notes to the condensed consolidated financial statements.
*The condensed consolidated balance sheet as of January 31, 1997 has been
summarized from the Company's audited consolidated balance sheet as of that
date.
</TABLE>
<PAGE>
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
Quarter Ended Three Quarters Ended
------------- --------------------
October 31, 1997 October 31, 1996 October 31, 1997 October 31, 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Contract revenues $ 14,003,000 $ 14,181,000 $ 41,641,000 $ 37,650,000
Product sales 7,972,000 4,189,000 21,446,000 13,226,000
--------- --------- ---------- ----------
21,975,000 18,370,000 63,087,000 50,876,000
---------- ---------- ---------- ----------
Direct costs:
Contract costs 9,630,000 10,033,000 28,902,000 25,532,000
Cost of product sales 3,974,000 1,760,000 9,850,000 4,902,000
--------- --------- --------- ---------
13,604,000 11,793,000 38,752,000 30,434,000
Indirect costs 6,124,000 5,056,000 18,434,000 15,745,000
--------- --------- ---------- ----------
19,728,000 16,849,000 57,186,000 46,179,000
---------- ---------- ---------- ----------
Operating income 2,247,000 1,521,000 5,901,000 4,697,000
Net interest income 80,000 126,000 336,000 426,000
------ ------- ------- -------
Income before income taxes 2,327,000 1,647,000 6,237,000 5,123,000
Income taxes 884,000 558,000 2,370,000 1,844,000
-------------- -------------- -------------- --------------
Net income $ 1,443,000 $ 1,089,000 $ 3,867,000 $ 3,279,000
============== ============== ============== ==============
Earnings per share*
Primary $ .26 $ .20 $ .71 $ .61
========= ========= ========= ==========
*Fully diluted earnings per share has not been presented as the effect is immaterial.
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
Three Quarters Ended
-------------------------------------------
October 31, 1997 October 31, 1996
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,867,000 $ 3,279,000
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 1,941,000 1,708,000
Loss on disposal of property and equipment - 6,000
Deferred income taxes (471,000) (359,000)
Provision for doubtful accounts receivable 45,000 28,000
Net purchases of trading securities (607,000) (648,000)
Increase in accounts receivable (7,810,000) (4,536,000)
Increase in inventory (1,553,000) (961,000)
Decrease (increase) in other current assets 265,000 (288,000)
Increase in other assets (271,000) (2,000)
Increase (decrease) in accounts payable 959,000 (162,000)
Increase (decrease) in deferred revenue (625,000) 277,000
Increase in accrued liabilities 1,527,000 834,000
---------------- ----------------
Net cash used in operating activities (2,733,000) (824,000)
Cash flows from investing activities:
Purchases of investments (1,204,000) (1,572,000)
Proceeds from sales and maturities of investments 652,000 1,562,000
Purchases of property and equipment (1,287,000) (632,000)
Proceeds from sales of property and equipment 14,000 -
Software development costs (1,968,000) (1,725,000)
Cost of acquisition of RAL, net of cash acquired (406,000) (1,197,000)
Cost of acquisition of GTE callbox, net of cash acquired - (1,063,000)
Cost of acquisition of Cubic callbox, net of cash acquired (1,714,000) -
------------------ ----------------
Net cash used in investing activities (5,913,000) (4,627,000)
Cash flows from financing activities:
Proceeds from issuance of common stock 305,000 590,000
Purchase of common stock (1,833,000) (89,000)
------------------ ----------------
Net cash provided (used) by financing activities (1,528,000) 501,000
------------------ ----------------
Net decrease in cash and cash equivalents $ (10,174,000) $ (4,950,000)
================== ================
Supplemental disclosures of cash flow information:
Cash paid during the three
quarters for:
Interest $ (2,000) $ -
Income taxes 1,790,000 1,677,000
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
COMARCO, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
October 31, 1997 and October 31,1996
(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, 1997 and
January 31, 1997, the results of its operations for the quarter ended and
three quarters ended October 31, 1997 and October 31, 1996, and its cash
flows for the three quarters ended October 31, 1997 and October 31, 1996.
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, 1997 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 callbox assets of
Cubic Communications, Inc., acquired by Comarco Wireless Technologies,
Inc., a subsidiary of the Company, in February 1997, and the Condensed
Consolidated Statement of Income includes Cubic callbox operations since
February 1, 1997. The acquisition has been accounted for using the
purchase method of accounting, and accordingly, the purchase price was
allocated to the acquired tangible and identifiable intangible assets and
assumed liabilities based on their respective fair values.
On August 1, 1996, the Company acquired the assets of RAL Consulting and
Staffing Services, Inc. The purchase agreement provided for contingent
increases in the purchase price over three years based upon the
achievement of certain performance objectives. During the third quarter
of Fiscal Year 1998, the first year's objectives were achieved, therefore
an additional payment to the former owner was made.
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. 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:
<PAGE>
<TABLE>
Quarter Ended Three Quarters Ended
------------- --------------------
October 31, 1997 October 31, 1996 October 31, 1997 October 31, 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income $ 1,443,000 $ 1,089,000 $ 3,867,000 $ 3,279,000
less - net income
allocated to subsidiary
dilutive stock options
outstanding (114,000) (49,000) (275,000) (158,000)
------------ -------- ---------- ---------
Net income used in
calculation of primary
income per share $ 1,329,000 $ 1,040,000 $ 3,592,000 $ 3,121,000
============ ============ ============ ============
Weighted average number
of common shares used in
calculation of primary
income per share 5,062,000 5,132,000 5,076,000 5,121,000
============ ========= ============ ==========
Primary income per
common share $ .26 $ .20 $ .71 $ .61
============ =========== ============ ==========
</TABLE>
4. New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (SFAS No. 128),
"Earnings per Share." SFAS No. 128 provides new methods for the
computation, presentation and disclosure of primary and fully-diluted
earnings per share, simplifying the calculations and making them more
comparable with international accounting standards. Pursuant to SFAS No.
128, the Company is required to adopt the provisions of this Statement in
the fourth quarter of Fiscal Year 1998, restating the current year
quarterly information and all prior periods presented. The Company has
not completed its analysis of the impact on the financial statements that
will be caused by the adoption of this Statement.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129 (SFAS No. 129), "Disclosure of Information about
Capital Structure." The Company is required to adopt the provisions of
this Statement for the year ending January 31, 1999. This Statement
continues the previous requirements to disclose certain information about
an entity's capital structure found in APB Opinions No. 10, "Omnibus
Opinion - 1966," No. 15, "Earnings per Share," and FASB Statement No. 47,
"Disclosure of Long-Term Obligations," for entities that were subject to
the requirements of those standards. As the Company has been subject to
the requirements of each of those standards, adoption of SFAS No. 129
will have no impact on the Company's financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 (SFAS No. 130), "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. The Company is
required to adopt the provisions of the Statement for the year ending
January 31, 1999. Earlier application is permitted; however, upon
adoption the Company will be required to reclassify previously reported
annual and interim financial statements. The Company believes that the
disclosure of comprehensive income in accordance with the provisions of
SFAS No. 130 will not impact the manner of presentation of its financial
statements as currently and previously reported.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 (SFAS No. 131), "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 requires the Company to present
certain information about operating segments and related information,
including geographic and major customer data, in its annual financial
statements and in condensed financial statements for interim periods. The
Company is required to adopt the provisions of the Statement for the year
ending January 31, 1999. Earlier application is permitted; however, upon
adoption the Company will be required to restate previously reported
annual segment and related information in accordance with the provisions
of SFAS No. 131. The Company has not completed its analysis of the impact
on the financial statements that will be caused by the adoption of this
Statement.
5. 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 1934. These are in paragraphs 2, 8, 11, 13, 14,
16, 18, 21, 23 and 24 of Management's Discussion and Analysis
of Results of Operations and Financial Condition. 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, 1997.
(a) Results of Operations
During the third quarter of Fiscal Year 1998 (year ending January
31, 1998), the Company recorded total revenues of $22.0 million,
up 19.6% from revenues of $18.4 million for the comparable period
of the prior fiscal year. Revenues for the first three quarters of
Fiscal Year 1998 of $63.1 million are up 24.0% from $50.9 million
for the comparable period of the prior fiscal year. Increased
year-to-year revenues are primarily due to:
o increased sales of the Company's wireless communications
products, including various field measurement and revenue
assurance system to major cellular telephone carriers;
o acquisitions as of October 1, 1996 and February 5, 1997
of callbox product lines from GTE and Cubic Communications,
respectively; and
o acquisition as of August 1, 1996 of a commercial outsourced
staffing company.
Total direct costs of $13.6 million for the third quarter of
Fiscal Year 1998 are up $1.8 million, or 15.3%, from $11.8 million
for the third quarter of Fiscal Year 1997. Direct costs for the
first three quarters of Fiscal Year 1998 of $38.8 million are up
$8.4 million, or 27.6%, from $30.4 million for the comparable
period of the prior fiscal year. The increases are due to the
on-going costs contributed by the acquisitions of the commercial
outsourced staffing company and the cellular callbox product
lines, as well as costs to add additional wireless communications
products business capacity in a new, larger U.S. facility to
support future higher anticipated sales levels.
Total indirect costs of $6.1 million for the third quarter of
Fiscal Year 1998 are up $1.0 million, or 19.6%, from $5.1 million
for the third quarter of Fiscal Year 1997. Indirect costs for the
first three quarters of Fiscal Year 1998 of $18.4 million are up
$2.7 million, or 17.1%, from $15.7 million for the comparable
period of the prior fiscal year. The increases are also related to
the commercial outsourced staffing and callbox product line
acquisitions, as well as increased costs from expansion in the
wireless communications products business, including the
establishment of two international sales offices.
Net interest income (interest income less interest expense) for
the third quarter of Fiscal Year 1998 amounted to $80,000, as
compared to $126,000 for the comparable period of the prior fiscal
year. Net interest income for the first three quarters of Fiscal
Year 1998 amounted to $336,000, as compared to $426,000 for the
comparable period of the prior fiscal year. The decreases are
principally due to a reduction in cash available to invest over
the current year's first three quarters, as a result of funding
the wireless communications products expansion and the Cubic
callbox product line acquisition, as well as cash used to
re-purchase Company common stock.
The Company's effective tax rate for the first three quarters of
Fiscal Year 1998 is 38% versus an effective tax rate of 36% for
the comparable period of the prior fiscal year.
The overall increase in net income from the prior fiscal year is
due to the significant increase in the sales of wireless
communications products.
Wireless Communications Products
Wireless communications products revenues increased 97.5% to $7.9
million for the third quarter of Fiscal Year 1998 from $4.0
million for the comparable period of the prior fiscal year.
Revenues increased 72.1% to $21.0 million for the three quarters
ended October 31, 1997 from $12.2 million for the comparable
period of the prior fiscal year. These increases are due to
increased sales of the Company's field measurement systems and
revenue assurance systems for major cellular telephone carriers
and the acquisition of the callbox product lines from GTE and
Cubic Communications. The Company has continued to broaden its
product line with the introduction of field measurement equipment,
including products supporting the GSM, CDMA, IS-136 and PCS
1800/1900 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, 1997 October 31, 1996
---------------- ----------------
<S> <C> <C>
Revenues $20,955,000 $12,244,000
Cost of product sales 9,466,000 4,691,000
--------- ---------
Gross margin 11,489,000 7,553,000
Gross margin percentage 54.8% 61.7%
Indirect costs* 6,641,000 4,370,000
--------- ---------
Operating income $ 4,848,000 $ 3,183,000
========== ==========
</TABLE>
*Indirect costs include selling, general, and administrative
expenses as well as research and development expenses.
The decreased gross margin percentage is due to the increased
costs incurred to increase the capacity of the wireless
communications products business, which included additional
staffing, moving to a larger facility in California, and
associated costs to support future anticipated higher sales
levels; along with the addition of the callbox product line.
The increase in indirect costs of 52.0% for the first three
quarters of Fiscal Year 1998 over the comparable period of the
prior fiscal year is a result of costs incurred to establish two
international sales offices and an increase in research and
development. Selling, general and administrative expenses
increased 55.0% from the first three quarters of Fiscal Year 1997
to the first three quarters of Fiscal Year 1998, while research
and development expenses increased 39.3% to $1,169,000 from the
first three quarters of Fiscal Year 1997 to the first three
quarters of Fiscal Year 1998.
Operating income as a percentage of revenues is 25.5% for the
third quarter of Fiscal Year 1998, compared to 24.4% for the
comparable period of the prior fiscal year. Operating income as a
percentage of revenues is 23.1% for the first three quarters of
Fiscal Year 1998, compared to 26.0% for the comparable period of
the prior fiscal year. The year-to-year decrease is primarily due
to the increased costs related to business expansion and the
addition of the callbox product line, as discussed above.
As part of its overall 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 $1,968,000 and $1,725,000, respectively,
during the first three quarters of Fiscal Years 1998 and 1997,
respectively. Corresponding amounts amortized were $719,000 and
$875,000, 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.
The Company's orders for wireless communications products totaled
$10.1 million for the third quarter of Fiscal Year 1998, up from
$8.3 million from the comparable prior period. For the twelve
month periods ended October 1997 and 1996, orders received were
$36.6 million and $19.9 million, respectively. Included in the
amount for the twelve months ended October 31, 1997 is $4 million
of long-term maintenance service business associated with the
purchase of the Cubic callbox product line. 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. The value of unfilled
orders at October 31, 1997 totalled $21.0 million, of which $10.9
million relates to long-term maintenance contracts. An additional
$2.0 million of deferred revenue has been recorded for anticipated
customer warranty obligations.
The Company has experienced fluctuations in wireless
communications products activity in each of the past four years,
with greater sales in the second half of its fiscal year and
lesser amounts in the first half. This trend may or may not
continue as the Company attempts to broaden its product offerings.
The nature of the wireless communications products business is
inherently unpredictable as the Company has not historically had a
significant amount of unfilled orders at the end of a period.
Therefore, the amount of orders, sales levels, and profits are
difficult to predict and may fluctuate significantly from quarter
to quarter.
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 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 a single or 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 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 decreased 2.1%, from $14.4 million in the third
quarter of Fiscal Year 1997 to $14.1 million in the third quarter
of Fiscal Year 1998. Revenues from this business area increased
9.1%, from $38.6 million for the first three quarters of Fiscal
Year 1997 to $42.1 million for the first three quarters of Fiscal
Year 1998. Revenues in this business area decreased from 75.8% of
the Company's total revenues in the first three quarters of Fiscal
Year 1997 to 66.7% of the Company's total revenues in the first
three quarters of Fiscal Year 1998. The increase in year-to-year
revenue is due to the acquisition of the commercial outsourced
staffing company on August 1, 1996, which contributed $7.8 million
of revenue in the first three quarters of Fiscal Year 1998, versus
$2.6 million in the third quarter of Fiscal Year 1998. This
increase was partially offset by a decrease in other outsourced
staffing revenue at some of the Company's locations providing
services to government agencies.
Sales to the U.S. Government as well as to government prime
contractors were 42% and 33% of the Company's total revenue
during the first three quarters of Fiscal Years 1997 and 1998,
respectively. In the course of the Company's business, its
government contracts are periodically opened for competition.
None of the Company's government contracts are scheduled to end
in Fiscal Year 1998, however the Company's contract with the
Naval Surface Warfare Center at Crane, Indiana is currently
scheduled to end in the first quarter of Fiscal Year 1999. This
contract has generated approximately 10% of the Company's total
revenues for the first three quarters of Fiscal Year 1998. The
Company has submitted a proposal to the Navy in the competition
for this work. In addition, the Company's contract with the
Metropolitan Washington Airports Authority at Washington National
Airport is scheduled to end in the third quarter of Fiscal Year
1999. This contract has generated approximately 11% of the
Company's total revenues for the first three quarters of Fiscal
Year 1998. Due to competitive circumstances in the parking
management business, the Company may not elect to pursue this
work after the contract ends. The Company plans to aggressively
compete for any other 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 of its future
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 government agencies will fund the portions of existing
contracts that are unfunded, or that the agencies will exercise
any options.
Operating income (revenues less direct costs and indirect costs)
for outsourced staffing services is down 56.6% from $555,000 in
the third quarter of Fiscal Year 1997 to $241,000 in the third
quarter of Fiscal Year 1998. Operating income for outsourced
staffing services is down 30.4% from $1,514,000 in the first three
quarters of Fiscal Year 1997 to $1,053,000 in the first three
quarters of Fiscal Year 1998. Decreased operating income from
several government airport services and Federal Government
services contracts was partially offset by increased operating
income provided by the acquisition of the commercial outsourced
staffing company.
(b) Financial Condition
The Company signed a loan agreement with a bank effective
September 26, 1994, which was amended effective August 15, 1997.
The loan agreement consists of (1) an $8 million revolving credit
facility, which expires May 31, 1999, and (2) a $5 million
guidance line of credit, which expires May 31, 1998. 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 $12
million (includes highly liquid long-term investments with
maturities of 12 to 36 months) during the first three quarters of
Fiscal Year 1998. 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,
software product development costs, and the Company's stock
re-purchase program.
During the first three quarters of Fiscal Year 1998, the Company's
average days' sales in accounts receivable have increased,
primarily due to increased sales of wireless communications
products, which have a longer collection cycle than the Company's
outsourced staffing revenues.
Several additional key factors indicating the Company's financial
condition include:
<TABLE>
October 31, 1997 January 31, 1997
---------------- ----------------
<S> <C> <C>
Current ratio 2.47 2.87
Working capital $ 18,759,000 $ 20,429,000
Book value per share $6.22 $5.65
</TABLE>
The decrease in the current ratio and amount of working capital
during the first three quarters of Fiscal Year 1998 is due to the
funding of the wireless communications products business
expansion, as well as funds used to re-purchase Company common
stock during the first three quarters of Fiscal Year 1998.
The Company has a significant commitment for capital expenditures
at October 31, 1997 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, $1,968,000 and $938,000,
respectively, in the first three quarters of Fiscal Year 1998.
The Company's Board of Directors has authorized a stock
re-purchase program of up to 1,500,000 shares. As of October 31,
1997, the Company has re-purchased and retired approximately
929,000 shares. The average price paid per share re-purchased
under the program was $6.55.
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 15, 1997
-------------------------------------------------
Thomas P. Baird
Chief Financial Officer
(Authorized Officer and Principal Financial Officer)
Exhibit 11
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
<TABLE>
Three Quarters Ended
-------------------------------------------
October 31, 1997 October 31, 1996
<S> <C> <C>
PRIMARY
Net income $ 3,867,000 $ 3,279,000
Less - net income allocated to subsidiary
dilutive stock options outstanding (275,000) (158,000)
------------------ ----------------
Net income used in calculation of primary
income per share $ 3,592,000 $ 3,121,000
================== ================
Weighted average number of common shares
outstanding during the period 4,752,000 4,760,000
Add - common equivalent shares (determined
using the "treasury stock" method)
representing shares issuable upon
exercise of stock options 324,000 361,000
------------------ ----------------
Weighted average number of shares used in
calculation of primary income per share 5,076,000 5,121,000
================== ================
Primary income per common share $ .71 $ .61
================== ================
<PAGE>
Three Quarters Ended
-------------------------------------------
October 31, 1997 October 31, 1996
FULLY DILUTED
Net income $ 3,867,000 $ 3,279,000
Less - net income allocated to subsidiary
dilutive stock options outstanding (286,000) (158,000)
------------------ ----------------
Net income used in calculation of primary
income per share $ 3,581,000 $ 3,121,000
================= ================
Weighted average number of common shares
outstanding during the period 4,752,000 4,760,000
Add - common equivalent shares (determined
using the "treasury stock" method)
representing shares issuable upon
exercise of stock options 369,000 361,000
------- -------
Weighted average number of shares used in
calculation of fully diluted income per share 5,121,000 5,121,000
================= ================
Fully diluted income per common share $ .70 $ .61
================= ================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> OCT-31-1997
<CASH> 2,537
<SECURITIES> 4,842
<RECEIVABLES> 19,291
<ALLOWANCES> 0
<INVENTORY> 5,156
<CURRENT-ASSETS> 31,551
<PP&E> 2,651
<DEPRECIATION> 0
<TOTAL-ASSETS> 43,323
<CURRENT-LIABILITIES> 12,792
<BONDS> 0
0
0
<COMMON> 472
<OTHER-SE> 28,844
<TOTAL-LIABILITY-AND-EQUITY> 43,323
<SALES> 21,446
<TOTAL-REVENUES> 63,087
<CGS> 9,850
<TOTAL-COSTS> 57,186
<OTHER-EXPENSES> 18,434
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (336)
<INCOME-PRETAX> 6,237
<INCOME-TAX> 2,370
<INCOME-CONTINUING> 3,867
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,867
<EPS-PRIMARY> .71
<EPS-DILUTED> .70
<FN>
NOTE: RECEIVABLES AND PP&E VALUES REPORTED REPRESENT NET AMOUNTS.
</FN>
</TABLE>
