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, 1998 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)
1551 North Tustin Avenue, Suite 840, Santa Ana, California 92705
- ---------------------------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (714) 796-1808
--------------
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, 1998.
Common Stock,
$.10 Par Value 4,441,460 Shares
-------------- ----------------
<PAGE>
Index to Form 10-Q
Page No.
Part I. Financial Information
Condensed Consolidated Balance Sheets
October 31, 1998 and January 31, 1998 1
Condensed Consolidated Statements of Income
Quarters Ended and Three Quarters Ended October 31, 1998
and October 31, 1997 2
Condensed Consolidated Statements of Cash Flows
Three Quarters Ended October 31, 1998 and October 31, 1997 3
Notes to Condensed Consolidated Financial Statements 4-6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
October 31, 1998 January 31, 1998
ASSETS (Unaudited) *
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,607,000 $ 5,256,000
Short-term investments 2,486,000 2,348,000
Accounts receivable, net 20,850,000 17,815,000
Inventory 5,102,000 5,247,000
Deferred tax asset 1,890,000 1,383,000
Other current assets 554,000 832,000
----------------- ----------------
Total current assets 32,489,000 32,881,000
Long-term investments 425,000 2,364,000
Property and equipment, net 2,479,000 2,240,000
Software development costs, net 4,164,000 3,131,000
Intangible assets, net 3,678,000 2,660,000
Other assets 579,000 618,000
----------------- ----------------
TOTAL ASSETS $ 43,814,000 $ 43,894,000
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 586,000 $ 493,000
Deferred revenue 2,186,000 1,914,000
Accrued liabilities 10,321,000 9,537,000
----------------- ----------------
Total current liabilities 13,093,000 11,944,000
Deferred income taxes 1,685,000 1,480,000
Stockholders' equity:
Common stock, $.10 par value,
33,750,000 shares authorized,
4,441,460 and 4,719,210 shares
outstanding at October 31, 1998 and
January 31, 1998, respectively 444,000 472,000
Capital contributed in excess
of par value 2,608,000 3,074,000
Retained earnings 25,984,000 26,924,000
----------------- ----------------
Total stockholders' equity 29,036,000 30,470,000
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 43,814,000 $ 43,894,000
================= ================
See accompanying notes to the condensed consolidated financial statements.
*The condensed consolidated balance sheet as of January 31, 1998 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, 1998 October 31, 1997 October 31, 1998 October 31, 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Contract revenues $ 15,766,000 $ 14,003,000 $ 44,807,000 $ 41,641,000
Product sales 8,435,000 7,972,000 23,156,000 21,446,000
--------- --------- ---------- ----------
24,201,000 21,975,000 67,963,000 63,087,000
---------- ---------- ---------- ----------
Direct costs:
Contract costs 10,984,000 9,630,000 30,588,000 28,902,000
Cost of product sales 3,512,000 3,137,000 10,197,000 8,415,000
--------- --------- ---------- ---------
14,496,000 12,767,000 40,785,000 37,317,000
Indirect costs 7,204,000 6,961,000 21,469,000 19,869,000
--------- --------- ---------- ----------
21,700,000 19,728,000 62,254,000 57,186,000
---------- ---------- ---------- ----------
Operating income 2,501,000 2,247,000 5,709,000 5,901,000
Net interest income 40,000 80,000 253,000 336,000
------ ------ ------- -------
Income before income taxes 2,541,000 2,327,000 5,962,000 6,237,000
Income taxes 965,000 884,000 2,265,000 2,370,000
---------- ---------- ---------- ----------
Net income $ 1,576,000 $ 1,443,000 $ 3,697,000 $ 3,867,000
============= ============== ============== ===============
Earnings per share:
Basic $ .35 $ .31 $ .79 $ .81
========= ========= ========= ==========
Diluted $ .32 $ .26 $ .73 $ .71
========= ========= ========= ==========
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, 1998 October 31, 1997
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,697,000 $ 3,867,000
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 2,213,000 1,941,000
Gain on disposal of property and equipment (4,000) -
Deferred income taxes (302,000) (471,000)
Provision for doubtful accounts receivable 66,000 45,000
Net purchases of trading securities (576,000) (607,000)
Increase in accounts receivable (3,101,000) (7,810,000)
Decrease (increase) in inventory 145,000 (1,553,000)
Decrease in other current assets 278,000 265,000
Decrease (increase) in other assets 39,000 (271,000)
Increase in accounts payable 93,000 959,000
Increase (decrease) in deferred revenue 272,000 (625,000)
Increase in accrued liabilities 784,000 1,527,000
------------- -------------
Net cash provided (used) by operating activities 3,604,000 (2,733,000)
Cash flows from investing activities:
Purchases of investments - (1,204,000)
Proceeds from sales and maturities of investments 2,377,000 652,000
Purchases of property and equipment (1,087,000) (1,287,000)
Proceeds from sales of property and equipment 4,000 14,000
Software development costs (2,235,000) (1,968,000)
Cost of acquisition of Industrial Technology intellectual property (1,000,000) -
Cost of acquisition of RAL, net of cash acquired (181,000) (406,000)
Cost of acquisition of Cubic, net of cash acquired - (1,714,000)
-------------- --------------
Net cash used in investing activities (2,122,000) (5,913,000)
Cash flows from financing activities:
Proceeds from issuance of common stock 63,000 305,000
Purchase of common stock (5,194,000) (1,833,000)
-------------- --------------
Net cash used in financing activities (5,131,000) (1,528,000)
-------------- ---------------
Net decrease in cash and cash equivalents $ (3,649,000) $ (10,174,000)
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the three
quarters for:
Interest $ - $ 2,000
Income taxes 2,345,000 1,790,000
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
COMARCO, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
October 31, 1998 and October 31,1997
(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, 1998 and
January 31, 1998, the results of its operations for the quarters ended
and three quarters ended October 31, 1998 and October 31, 1997, and its
cash flows for the three quarters ended October 31, 1998 and October 31,
1997. 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, 1998 are not necessarily indicative of the
results to be obtained for the full fiscal year.
2. Significant Accounting Policies - Per Share Information
During the year ended January 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, Earnings per Share, and computed
basic and diluted net income per share based on the weighted average
number of shares of common stock and potential common stock outstanding
during the period. Potential common stock, for purposes of determining
diluted earnings per share, includes the effect of dilutive stock
options. The effect of such potential common stock is computed using the
treasury stock method. Comparative earnings per share data have been
restated for prior periods. Consolidated net income of the Company used
for diluted 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. Basic and diluted net income
per share are calculated as follows:
<PAGE>
<TABLE>
Quarter Ended Three Quarters Ended
------------- --------------------
October 31, 1998 October 31, 1997 October 31, 1998 October 31, 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Basic:
Net income $ 1,576,000 $ 1,443,000 $ 3,697,000 $ 3,867,000
Weighted average shares
outstanding 4,562,000 4,715,000 4,664,000 4,752,000
----------- --------- ---------- -----------
Basic income per common
share $ .35 $ .31 $ .79 $ .81
============ ============ ============= =============
Diluted:
Net income $ 1,576,000 $ 1,443,000 $ 3,697,000 $ 3,867,000
Less - net income allocated
to subsidiary dilutive stock
options outstanding (71,000) (114,000) (145,000) (275,000)
----------- ------------ ----------- -----------
Net income used in calculation
of diluted income per
common share $ 1,505,000 $ 1,329,000 $ 3,552,000 $ 3,592,000
=========== ============ ============= =============
Weighted average shares
outstanding 4,562,000 4,715,000 4,664,000 4,752,000
Plus - common equivalent shares
(determined using the "treasury
stock" method) representing
shares issuable upon exercise
of stock options 188,000 347,000 200,000 324,000
---------- ---------- ----------- ----------
Weighted average number
of shares used in calculation
of diluted income per
common share 4,750,000 5,062,000 4,864,000 5,076,000
========== ========== ============ =========
Diluted income per common
share $ .32 $ .26 $ .73 $ .71
=========== =========== ============= ============
</TABLE>
3. Business Segment Information
The Company's operations have been classified into two business areas:
wireless communications products and information technology and staffing
services. The wireless communications products area develops, produces,
and markets a variety of products and services used in the wireless
communications industry. The information technology and staffing services
area provides services to Federal and local government and commercial
customers pursuant to established contracts. Corporate and other consists
primarily of cash and cash equivalents, fixed assets, and other assets.
Summarized financial information by business segment for the first three
quarters of Fiscal Year 1999 is as follows:
<TABLE>
Wireless Information Technology
Communications and Staffing Services Corporate
Products Revenues and Other Total
-------- -------- --------- -----
<S> <C> <C> <C> <C>
Revenues $23,097 $44,866 - $67,963
Income before income taxes 4,089 1,716 $157 5,962
Identifiable assets 21,475 13,510 8,829 43,814
</TABLE>
Summarized financial information by business segment for the first three
quarters of Fiscal Year 1998 is as follows:
<TABLE>
Wireless Information Technology
Communications and Staffing Services Corporate
Products Revenues and Other Total
-------- -------- --------- -----
<S> <C> <C> <C> <C>
Revenues $20,955 $42,132 - $63,087
Income before income taxes 4,848 1,257 $132 6,237
Identifiable assets 20,512 10,249 12,562 43,323
</TABLE>
4. Reclassifications
Certain reclassifications of prior year amounts have been made to conform
to the current year presentation.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Except for the historical information contained herein, the
matters discussed in this Form 10-Q are forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act
of 1934, as amended, and Section 27A of the Securities Act of
1933, as amended, that involve risks and uncertainties. The actual
results that the Company achieves may differ materially from any
forward-looking projections due to such risks and uncertainties.
Words such as "believes," "anticipates," "expects," "future,"
"intends," and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of
identifying such statements. 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, 1998.
(a) Results of Operations
During the third quarter of Fiscal Year 1999 (year ending January
31, 1999), the Company recorded total revenues of $24.2 million,
up 10.0% from the revenues of $22.0 million for the comparable
period of the prior fiscal year. Revenues for the first three
quarters of Fiscal Year 1999 of $68.0 million are up 7.8% from
$63.1 million for the comparable period of the prior fiscal year.
Increased year-to-year revenues are primarily due to:
o sales of the Company's wireless communications products;
o increase in information technology services activity of 16%
year-to-year;
partially offset by:
o reduced activity on the Company's contract at the Los Angeles
County Airports; an
o termination of the Company's contract at Reagan Washington
National Airport on September 30, 1998.
Total direct costs of $14.5 million for the third quarter of
Fiscal Year 1999 are up $1.7 million, or 13.3%, from $12.8 million
for the third quarter of Fiscal Year 1998. Direct costs for the
first three quarters of Fiscal Year 1999 of $40.8 million are up
$3.5 million, or 9.4%, from $37.3 million for the comparable
period of the prior fiscal year. The increases relate to the
increased revenue activity, particularly from the Company's
wireless communications products business (as discussed below in
the wireless communications products section).
Total indirect costs of $7.2 million for the third quarter of
Fiscal Year 1999 are up $.2 million, or 2.9%, from $7.0 million
for the third quarter of Fiscal Year 1998. Indirect costs for the
first three quarters of Fiscal Year 1999 of $21.5 million are up
$1.6 million, or 8.0%, from $19.9 million for the comparable
period of the prior fiscal year. The increases are principally
from the Company's wireless communications products business, and
results from increased product development costs and increased
selling, general and administrative costs, as further discussed
below.
Net interest income (interest income less interest expense) for
the third quarter of Fiscal Year 1999 amounted to $40,000, as
compared to $80,000 for the comparable period of the prior fiscal
year. Net interest income for the first three quarters of Fiscal
Year 1999 amounted to $253,000, as compared to $336,000 for the
comparable period of the prior fiscal year. The decreases are
principally due to a reduction in cash available to invest from an
average of $12 million in the first three quarters of Fiscal Year
1998 to an average of $9 million in the first three quarters of
Fiscal Year 1999.
The Company's effective tax rate for the first three quarters of
Fiscal Year 1999 is 38%, the same as the comparable period of the
prior fiscal year.
Net income of $1.6 million for the third quarter of Fiscal Year
1999 is up $.2 million from $1.4 million for the comparable period
of the prior year due to the discontinuation of losses incurred at
a former software subsidiary. Net income of $3.7 million for the
first three quarters of Fiscal Year 1999 is down from $3.9 million
for the comparable period of the prior year due to the increased
product development and selling, general and administrative costs
incurred for the wireless communications products business, as
further discussed below, partially offset by discontinuation of
the losses at a former software subsidiary.
Wireless Communications Products
Wireless communications products revenues increased 6.3% to $8.4
million for the third quarter of Fiscal Year 1999 from $7.9
million for the comparable period of the prior fiscal year.
Revenues increased 10.0% to $23.1 million for the first three
quarters of Fiscal Year 1999 from $21.0 million for the comparable
period of the prior fiscal year. This increase is due to increased
sales of the Company's emergency callbox systems. 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, 1998 October 31, 1997
---------------- ----------------
<S> <C> <C>
Revenues $23,097,000 $20,955,000
Cost of product sales 10,146,000 8,031,000
---------- ---------
Gross margin 12,951,000 12,924,000
Gross margin percentage 56.1% 61.7%
Indirect costs* 8,862,000 8,076,000
--------- ---------
Operating income $4,089,000 $4,848,000
========== ==========
</TABLE>
*Indirect costs include selling, general and administrative
expenses as well as research and development expenses.
The decreased gross income percentage is due to greater sales of
the Company's emergency callbox systems, which have lower gross
margins than the field measurement and revenue assurance product
families, whose revenues were relatively unchanged year-to-year.
The Company believes that in the fourth quarter of Fiscal Year
1999, product sales other than emergency callbox systems are
expected to be more favorable due to recently released upgraded
product offerings, although there can be no assurances in this
regard.
The increase in indirect costs of $.8 million for the first three
quarters of Fiscal Year 1999 over the comparable period of the
prior fiscal year is principally a result of increased costs
incurred in the Company's product development program, as well as
increased selling, general and administrative costs.
Operating income as a percentage of revenues is 23.2% for the
third quarter of Fiscal Year 1999, compared to 25.5% for the
comparable period of the prior fiscal year. Operating income as a
percentage of revenues is 17.7% for the first three quarters of
Fiscal Year 1999, compared to 23.1% for the comparable period of
the prior fiscal year. These decreases are primarily due to the
lower gross income due to a larger mix of the lower margin
emergency callbox systems than in the prior year's first three
quarters, and due to increased sustaining engineering and research
and development expenses as well as increased selling and
administrative expenses, as discussed above.
The Company is continuing its 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 $2,235,000 and $1,968,000, respectively,
during the first three quarters of Fiscal Years 1999 and 1998,
respectively. Corresponding amounts amortized were $1,202,000 and
$719,000, respectively.
The Company's future wireless products 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 totalled
$9.5 million for the third quarter of Fiscal Year 1999, down from
$10.1 million from the comparable prior period. For the
twelve-month periods ended October 31, 1998 and 1997, orders
received were $27.3 million and $36.6 million, respectively.
Included in the amount for the twelve months ended October 31,
1997 was $10 million of long-term maintenance service business
associated with the purchase of the GTE callbox product line.
Because of the long sales cycle involved in selling the Company's
wireless 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,
1998 totalled $16.7 million, of which $6.8 million relates to
long-term maintenance contracts, and $3.7 million relates to the
Company's contract to upgrade the Los Angeles County callbox
system to comply with the Americans with Disabilities Act's
requirements for use by hearing and speech impaired individuals.
The Company currently expects the majority of the Los Angeles
County contract to be performed in Fiscal Year 2000. An additional
$2.2 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, although this trend has been
declining over the same four years. This trend may or may not
continue as the Company broadens its product offerings. The nature
of the wireless communications products business is inherently
unpredictable; sales and profits may fluctuate significantly from
quarter to quarter; and therefore, period-to-period comparisons of
its operating results are not necessarily meaningful and such
comparisons cannot be relied upon as indicators of future
performance.
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; changes
in laws governing the imposition of duties, quotas, taxes, or
other charges relating to the import or export of its products;
and changes in foreign currency exchange rates which can impact
customers' demand for the Company's products and their ability to
pay for the Company's 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 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, 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.
Information Technology and Staffing Services Revenue
Revenues provided by the Company's information technology and
staffing services business area increased 12.1%, from $14.1
million in the third quarter of Fiscal Year 1998 to $15.8 million
in the third quarter of Fiscal Year 1999. Revenues from this
business area increased 6.7%, from $42.1 million for the first
three quarters of Fiscal Year 1998 to $44.9 million for the first
three quarters of Fiscal Year 1999. Revenues in this business area
decreased from 66.7% of the Company's total revenues in the first
three quarters of Fiscal Year 1998 to 66.0% of the Company's total
revenues in the first three quarters of Fiscal Year 1999. The
increase in period-to-period revenue is due to an increase in
information technology services activity on contracts with the
U.S. Government partially offset by a decrease in activity on the
Company's management services contract at the Los Angeles County
Airports.
Sales to the U.S. Government as well as to government prime
contractors were 33% and 34% of the Company's total revenue during
the first three quarters of Fiscal Years 1998 and 1999,
respectively. In the course of the Company's business, its
contracts with customers are periodically opened for competition.
In March 1998, the Company announced the award of a contract with
an award value of $75 million over the five year life of the
contract to continue to provide engineering and management
services to the U.S. Navy at Crane, Indiana. The Company's
management services contract at Reagan Washington National Airport
ended on September 30, 1998. The Company did not pursue the
recompete of this contract. This contract's annual revenues
approximated $8.8 million, it was marginally profitable, and it
would have been unprofitable if reawarded to the Company. One
other multi-year government contract is scheduled to end in Fiscal
Year 1999 with annual revenues of approximately $2.2 million. The
Company plans to aggressively compete for work opened for
competition to the extent possible and to selectively pursue
certain high value contract 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 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 information technology and
staffing services is up from $241,000 in the third quarter of
Fiscal Year 1998 to $543,000 in the third quarter of Fiscal Year
1999. Operating income for information technology and staffing
services is up from $1,053,000 in the first three quarters of
Fiscal Year 1998 to $1,620,000 in the first three quarters of
Fiscal Year 1999. The increase is primarily due to the margin
realized on higher revenues for information technology and the
discontinuation of the losses at a former software subsidiary,
partially offset by lower operating income from commercial
staffing due to the cost of opening additional offices.
(b) Financial Condition
The Company signed a loan agreement with a bank effective
September 26, 1994, which was amended effective August 21, 1998.
The loan agreement consists of a $10 million revolving credit
facility, which expires June 30, 2000. The credit facility is
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 $9 million (includes highly liquid long-term
investments with maturities of 12 to 36 months) during the first
three quarters of Fiscal Year 1999. 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, geographic expansion, product development costs, and
stock re-purchases.
During the first three quarters of Fiscal Year 1999, the Company's
average days' sales in accounts receivable have increased
slightly, primarily due to increased sales of wireless
communications products, which have a longer collection cycle than
the Company's information technology and staffing revenues.
Several additional key factors indicating the Company's financial
condition include:
<TABLE>
July 31, 1998 January 31, 1998
------------- ----------------
<S> <C> <C>
Current ratio 2.48 2.75
Working capital $ 19,396,000 $ 20,937,000
Book value per share $6.54 $6.46
</TABLE>
The decreases in the current ratio and in working capital are due
to the stock re-purchases of approximately $5.2 million in the
first three quarters of Fiscal Year 1999. The Company re-purchased
245,000 shares in the third quarter of Fiscal Year 1999 at a cost
of $4.5 million.
The Company has a significant commitment for capital expenditures
at October 31, 1998 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. The amounts capitalized and
amortized in the Company's 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, totaled $2,235,000 and $1,202,000,
respectively, in the first three quarters of Fiscal Year 1999.
The Company's Board of Directors has authorized a stock
re-purchase program of up to 1,500,000 shares. As of October 31,
1998, the Company has re-purchased and retired approximately
1,211,000 shares. The average price paid per share re-purchased
under the program was $9.32.
The Company is subject to legal proceedings and claims that 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.
Impact of the Year 2000 Issue
Many computer systems and software products currently in use by
businesses and government organizations are coded to accept two
digits, rather than four, to specify the year. Such computer
systems and software products will be unable to properly interpret
dates beyond the year 1999, which could lead to business
disruptions (the "Year 2000 Issue"). As a result, in less than
thirteen months, computer systems and/or software used by many
companies may need to be upgraded to properly interpret dates
beyond 1999. The Company's technical personnel are in the process
of assessing the impact of the Year 2000 Issue on the Company's
products and services.
The Company has established a two-phase program to complete its
year 2000 efforts. The first phase includes planning, inventory,
and assessment; the final phase consists of correction, testing,
deployment, and acceptance. The Company has divided its efforts
into the categories of internal information systems, products,
non-IT systems, business partners, and customers. The status of
each with respect to the Company's two-phase process is addressed
below.
Information Systems
The Company has received letters or has completed remediation
whereby all of its accounting and manufacturing software has been
determined to be year 2000 compliant. The Company is completing
its inventory of computers and computer peripheral equipment. It
has been determined that a few older units are not year 2000
compliant, and these units will be replaced as part of the regular
replacement program next year. Efforts evaluating the readiness of
the Company's internal information systems are expected to be
completed early next year.
Products
The Company is continuing to assess the year 2000 compliance of
its software-based products along with the associated components.
The following detailed actions have been taken to date:
Field measurement/revenue assurance products - Most software
programs have been determined to be year 2000 compliant. For those
requiring remediation, a detailed upgrade program has been sent to
each customer, and the effort is being coordinated through the
Company's normal upgrade program.
Emergency callboxes - The technology acquired from GTE has been
determined to be substantially year 2000 compliant. Changes
required are minimal. The Company is still assessing the year 2000
reliability of the technology acquired from Cubic Communications.
Initial indications are that some problems exist, and remedies are
being designed. Implementation is being coordinated with each
customer as part of its product upgrade program. The financial
impact to the Company, if any, can not be determined until the
product upgrade program is completely coordinated with each member
of the customer base. The Company believes that the Cubic
Communications technology remediation will be completed by June
1999.
Other Software Products - Over the years, the Company has been
associated with a modest number of software products. A review of
commercial products still in the field is being completed for
their year 2000 exposure. This review and any remediation are
expected to be completed by March 1999. The Company expects that
year 2000 issues related to these products will be minimal.
The Company's program to assess and correct any year 2000 issues
with its products is well underway, and upgrade programs are or
will be in place during 1999 to coordinate the efforts involved.
Except for the emergency callbox, efforts are being coordinated
through the Company's normal upgrade channels, and at this time no
additional resources need to be assigned to the effort.
Non-IT Systems
Non-IT systems include embedded technology such as
micro-controllers. The Company's initial assessment indicates that
the equipment utilized in its manufacturing process is not date
dependent. The Company is also assessing the impact of non-IT
issues on its other office equipment (telephone systems, copiers,
facsimile machines, etc.) and facility infrastructure for which it
is responsible. Responses are being received from the respective
vendors, and the Company does not expect any significant issues in
this area. The Company will continue to assess non-IT systems and
expects complete resolution by June 1999.
Business Partners
Business partners include, but are not limited to: suppliers, the
Company's bank, insurance and benefit providers, and property
management firms. The Company's operations are dependent to
varying degrees on the readiness of these and other partners. The
Company has issued questionnaires to or has received
correspondence from most of the currently identified business
partners. To date, the responses received are generally
insufficient for a complete evaluation of the readiness of such
parties. The Company is continuing to pursue responses in order to
complete its evaluation. By mid-1999, the Company expects to have
identified and developed contingency plans for business partners
that cannot give adequate assurances that they will be year 2000
ready.
Customers
The Company has just begun contacting its customers to assess the
state of their readiness and its potential impact on the Company's
operations. The Company's main concern is principally with U.S.
and State and local government entities. The primary concern is
that there will be delays in contract payments to the Company,
which would require a temporary increase in working capital funded
from bank borrowings. The Company has substantial borrowing
capacity available under its current line of credit, which extends
to June 2000. The Company will continue to evaluate the cash flow
impact of year 2000 issues and develop additional contingency
financing plans, if required.
The Company will use both internal and external resources to
ensure that it is year 2000 ready. The Company has not deferred
any significant information technology projects as a result of the
year 2000 effort. The total cost of the program is being funded
through operating cash flows. The total cost associated with the
year 2000 effort, except for certain product modifications
discussed above, is not expected to be material to the Company's
consolidated results of operations and financial position.
Although the Company's year 2000 efforts are intended to minimize
the adverse effects of the year 2000 issue on the its business and
operations, the actual effects of the issue and the success or
failure of the Company's efforts described above cannot be known
until the year 2000. Therefore, in the opinion of management, the
most reasonable likely worst case scenario is the possibility that
the Company, its major business partners, other material service
providers, or customers will not adequately address their
respective year 2000 issues in a timely manner, the effect of
which could have a material adverse effect on the Company's
business, results of operations, and financial condition.
The Company will be developing contingency plans with respect to
this most likely worst case scenario as additional information is
obtained from both business partners and customers. Such plans
will not be finalized until at the earliest mid-1999.
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Securities and Exchange Commission has amended Rule 14a-4,
which governs the use of discretionary proxy voting authority with
respect to a shareholder proposal that the shareholder has not
sought to include in the proxy statement pursuant to Rule 14a-8.
Rule 14a-4(c)(1) now sets a 45 day advance notice requirement. If
a shareholder fails to notify the Company of his or her intention
to present a proposal at the meeting at least 45 days prior to the
month and day on which the prior year's proxy statement was first
mailed, then the holders of proxies solicited by the Board of
Directors may use their discretionary voting authority when the
proposal is raised at the Company's Annual Meeting. The proxy
holders will have such discretionary authority even if the proxy
statement contained no discussion of the proposal and the proxy
holders' intentions with respect thereto.
In the case of COMARCO, Inc., April 5, 1999 is the deadline for
shareholders to give such notice with respect to a proposal that
is not sought to be included in the Company's proxy statement with
respect to the 1999 Annual Meeting. As has been the case, any
shareholder who wishes to have a proposal included in the
Company's proxy statement for its 1999 Annual Meeting (which in
all cases will be subject to the rules regarding whether such
proposal may be excluded notwithstanding the request), must notify
COMARCO pursuant to Rule 14-8 not later than January 21, 1999.
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, 1998
----------------------------------------
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, 1998 October 31, 1997
<S> <C> <C>
Basic:
Net income $ 3,697,000 $ 3,867,000
Weighted average shares outstanding 4,664,000 4,752,000
-------------- --------------
Basic income per common share $ .79 $ .81
============== ==============
Diluted:
Net income
$ 3,697,000 $ 3,867,000
Less - net income allocated to subsidiary
dilutive stock options outstanding (145,000) (275,000)
-------------- --------------
Net income used in calculation of diluted income per
common share $ 3,552,000 $ 3,592,000
============== ==============
Weighted average shares outstanding 4,664,000 4,752,000
Plus - common equivalent shares (determined
using the "treasury stock" method)
representing shares issuable upon
exercise of stock options 200,000 324,000
-------------- --------------
Weighted average number of shares used in
calculation of diluted income per common share 4,864,000 5,076,000
============== ==============
Diluted income per common share $ .73 $ .71
============== ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> OCT-31-1998
<CASH> 1,607
<SECURITIES> 425
<RECEIVABLES> 20,850
<ALLOWANCES> 0
<INVENTORY> 5,102
<CURRENT-ASSETS> 32,489
<PP&E> 2,479
<DEPRECIATION> 0
<TOTAL-ASSETS> 43,814
<CURRENT-LIABILITIES> 13,093
<BONDS> 0
0
0
<COMMON> 444
<OTHER-SE> 28,592
<TOTAL-LIABILITY-AND-EQUITY> 43,814
<SALES> 23,156
<TOTAL-REVENUES> 67,963
<CGS> 10,197
<TOTAL-COSTS> 62,254
<OTHER-EXPENSES> 21,469
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (253)
<INCOME-PRETAX> 5,962
<INCOME-TAX> 2,265
<INCOME-CONTINUING> 3,697
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,697
<EPS-PRIMARY> .79
<EPS-DILUTED> .73
<FN>
NOTE: RECEIVABLES AND PP&E VALUES REPORTED REPRESENT NET AMOUNTS.
</FN>
</TABLE>
