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 July 31, 1998 Commission File Number 0-5449
COMARCO, Inc.
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(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
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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 August 31, 1998.
Common Stock,
$.10 Par Value 4,594,460 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
July 31, 1998 and January 31, 1998 1
Condensed Consolidated Statements of Income
Quarters Ended and Two Quarters Ended July 31, 1998
and July 31, 1997 2
Condensed Consolidated Statements of Cash Flows
Two Quarters Ended July 31, 1998 and July 31, 1997 3
Notes to Condensed Consolidated Financial Statements 4-6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-12
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>
July 31, 1998 January 31, 1998
ASSETS (Unaudited) *
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,025,000 $ 5,256,000
Short-term investments 3,526,000 2,348,000
Accounts receivable, net 18,763,000 17,815,000
Inventory 4,857,000 5,247,000
Deferred tax asset 1,383,000 1,383,000
Other current assets 733,000 832,000
-------------- -------------
Total current assets 32,287,000 32,881,000
Long-term investments 1,498,000 2,364,000
Property and equipment, net 2,216,000 2,240,000
Software development costs, net 3,989,000 3,131,000
Intangible assets, net 3,586,000 2,660,000
Other assets 614,000 618,000
-------------- -------------
TOTAL ASSETS $ 44,190,000 $ 43,894,000
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 551,000 $ 493,000
Deferred revenue 1,801,000 1,914,000
Accrued liabilities 8,431,000 9,537,000
-------------- -------------
Total current liabilities 10,783,000 11,944,000
Deferred income taxes 1,480,000 1,480,000
Stockholders' equity:
Common stock, $.10 par value,
33,750,000 shares authorized, 4,686,460 and
4,719,210 shares outstanding at July 31, 1998 and
January 31, 1998, respectively 469,000 472,000
Capital contributed in excess
of par value 2,413,000 3,074,000
Retained earnings 29,045,000 26,924,000
-------------- -------------
Total stockholders' equity 31,927,000 30,470,000
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,190,000 $ 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 Two Quarters Ended
------------- ------------------
July 31, 1998 July 31, 1997 July 31, 1998 July 31, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Contract revenues $ 14,647,000 $ 13,716,000 $ 29,041,000 $ 27,638,000
Product sales 7,364,000 7,299,000 14,721,000 13,474,000
--------- --------- ---------- ----------
22,011,000 21,015,000 43,762,000 41,112,000
---------- ---------- ---------- ----------
Direct costs:
Contract costs 9,888,000 9,698,000 19,604,000 19,272,000
Cost of product sales 3,142,000 3,013,000 6,685,000 5,278,000
--------- --------- --------- ---------
13,030,000 12,711,000 26,289,000 24,550,000
Indirect costs 7,010,000 6,303,000 14,265,000 12,908,000
--------- --------- ---------- ----------
20,040,000 19,014,000 40,554,000 37,458,000
---------- ---------- ---------- ----------
Operating income 1,971,000 2,001,000 3,208,000 3,654,000
Net interest income 95,000 121,000 213,000 256,000
------ ------- ------- -------
Income before income taxes 2,066,000 2,122,000 3,421,000 3,910,000
Income taxes 785,000 807,000 1,300,000 1,486,000
-------------- ------------- -------------- -------------
Net income $ 1,281,000 $ 1,315,000 $ 2,121,000 $ 2,424,000
============== ============= ============== =============
Earnings per share:
Basic $ .27 $ .28 $ .45 $ .51
============== ============= ============== =============
Diluted $ .25 $ .24 $ .42 $ .45
========= ========= ========= ==========
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
Two Quarters Ended
--------------------------------------
July 31, 1998 July 31, 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,121,000 $ 2,424,000
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 1,348,000 1,275,000
Loss (gain) on disposal of property and equipment (4,000) 9,000
Deferred income taxes - (402,000)
Provision for doubtful accounts receivable 44,000 20,000
Net purchases of trading securities (767,000) (482,000)
Increase in accounts receivable (992,000) (2,597,000)
Decrease (increase) in inventory 390,000 (1,016,000)
Decrease in other current assets 99,000 270,000
Decrease (increase) in other assets 4,000 (191,000)
Increase in accounts payable 58,000 717,000
Decrease in deferred revenue (113,000) (340,000)
Increase (decrease) in accrued liabilities (1,106,000) 286,000
--------------- --------------
Net cash provided (used) by operating activities 1,082,000 (27,000)
Cash flows from investing activities:
Purchases of investments - (1,204,000)
Proceeds from sales and maturities of investments 455,000 583,000
Purchases of property and equipment (525,000) (969,000)
Software development costs (1,579,000) (1,266,000)
Cost of acquisition of Industrial Technology intellectual property (1,000,000) -
Cost of acquisition of Cubic, net of cash acquired - (1,720,000)
--------------- --------------
Net cash used in investing activities (2,649,000) (4,576,000)
Cash flows from financing activities:
Proceeds from issuance of common stock 64,000 219,000
Purchase of common stock (728,000) (1,755,000)
--------------- --------------
Net cash used in financing activities (664,000) (1,536,000)
--------------- ---------------
Net decrease in cash and cash equivalents $ (2,231,000) $ (6,139,000)
=============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the two
quarters for:
Interest $ - $ -
Income taxes 1,569,000 1,268,000
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
COMARCO, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 31, 1998 and July 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 July 31, 1998 and
January 31, 1998, the results of its operations for the quarters ended
and two quarters ended July 31, 1998 and July 31, 1997, and its cash
flows for the two quarters ended July 31, 1998 and July 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 two quarters ended July
31, 1998 are not necessarily indicative of the results to be obtained for
the full fiscal year.
2. Intellectual Property Acquisition
In May 1998, the Company completed the purchase of intellectual property
and related software assets from Industrial Technology, Inc. The acquired
technology includes software suited for automating the comparison of
digital speech quality over diverse cellular, PCS, and other wireless
networks. No tangible assets were acquired. The Company has accounted for
the purchase price as an intangible asset.
3. 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 effects 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 Two Quarters Ended
------------- ------------------
July 31, 1998 July 31, 1997 July 31, 1998 July 31, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic:
Net income $ 1,281,000 $ 1,315,000 $ 2,121,000 $ 2,424,000
Weighted average shares
outstanding 4,714,000 4,761,000 4,716,000 4,773,000
------------- ------------- ------------- ---------
Basic income per common
share $ .27 $ .28 $ .45 $ .51
============= ============= ============= =============
Diluted:
Net income $ 1,281,000 $ 1,315,000 $ 2,121,000 $ 2,424,000
Less - net income allocated
to subsidiary dilutive stock
options outstanding (52,000) (89,000) (74,000) (156,000)
-------------- -------------- -------------- --------------
Net income used in calculation
of diluted income per
common share $ 1,229,000 $ 1,226,000 $ 2,047,000 $ 2,268,000
============= ============= ============= =============
Weighted average shares
outstanding 4,714,000 4,761,000 4,716,000 4,773,000
Plus - common equivalent shares
(determined using the "treasury
stock" method representing
shares issuable upon exercise
of stock options 204,000 319,000 205,000 315,000
---------- ---------- ------------- -------------
Weighted average number
of shares used in calculation
of diluted income per
common share 4,918,000 5,080,000 4,921,000 5,088,000
============= =========== ============== ===========
Diluted income per common
share $ .25 $ .24 $ .42 $ .45
============== ============= ============== ===========
</TABLE>
4. 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 two
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 $14,662 $29,100 - $43,762
Income before income taxes 2,131 1,138 $152 3,421
Identifiable assets 19,482 12,841 11,867 44,190
</TABLE>
Summarized financial information by business segment for the first two
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 $13,076 $28,036 - $41,112
Income before income taxes 2,843 911 $156 3,910
Identifiable assets 15,883 8,913 15,818 40,614
</TABLE>
5. Reclassifications
Certain reclassifications of prior year amounts have been made to conform
to the current year presentation.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSIO 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 second quarter of Fiscal Year 1999 (year ending January
31, 1999), the Company recorded total revenues of $22.0 million,
up 4.8% from the revenues of $21.0 million for the comparable
period of the prior fiscal year. Revenues for the first two
quarters of Fiscal Year 1999 of $43.8 million are up 6.6% from
$41.1 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 15%
year-to-year;
partially offset by:
o reduced activity on the Company's contract at the Los Angeles
County Airports.
Total direct costs of $13.0 million for the second quarter of
Fiscal Year 1999 are up $.3 million, or 2.4%, from $12.7 million
for the second quarter of Fiscal Year 1998. Direct costs for the
first two quarters of Fiscal Year 1999 of $26.3 million are up
$1.7 million, or 6.9%, from $24.6 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 $7.0 million for the second quarter of
Fiscal Year 1999 are up $.7 million, or 11.1%, from $6.3 million
for the second quarter of Fiscal Year 1998. Indirect costs for the
first two quarters of Fiscal Year 1999 of $14.3 million are up
$1.4 million, or 10.9%, from $12.9 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 second quarter of Fiscal Year 1999 amounted to $95,000, as
compared to $121,000 for the comparable period of the prior fiscal
year. Net interest income for the first two quarters of Fiscal
Year 1999 amounted to $213,000, as compared to $256,000 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 $13 million in the first two quarters of Fiscal Year
1998 to an average of $10 million in the first two quarters of
Fiscal Year 1999.
The Company's effective tax rate for the first two quarters of
Fiscal Year 1998 is 38%, the same as the comparable period of the
prior fiscal year.
Net income of $1.3 million for the second quarter of Fiscal Year
1999 is unchanged from the comparable period of the prior year.
Net income of $2.1 million for the first two quarters of Fiscal
Year 1999 is down from $2.4 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.
Wireless Communications Products
Wireless communications products revenues increased 4.2% to $7.4
million for the second quarter of Fiscal Year 1999 from $7.1
million for the comparable period of the prior fiscal year.
Revenues increased 12.2% to $14.7 million for the first two
quarters of Fiscal Year 1999 from $13.1 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>
Two Quarters Ended Two Quarters Ended
July 31, 1998 July 31, 1997
------------- -------------
<S> <C> <C>
Revenues $14,662,000 $13,076,000
Cost of product sales 6,638,000 5,053,000
--------- ---------
Gross margin 8,024,000 8,023,000
Gross margin percentage 54.7% 61.4%
Indirect costs* 5,893,000 5,180,000
--------- ---------
Operating income $ 2,131,000 $ 2,843,000
========= ==========
*Indirect costs include selling, general and administrative
expenses as well as research and development expenses.
</TABLE>
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 product sales other than emergency
callbox systems may not increase over the prior period for the
third quarter of Fiscal Year 1999, while comparisons for the
fourth quarter of Fiscal Year 1999 are expected to be more
favorable due to anticipated upgraded product offerings, although
there can be no assurances in this regard.
The increase in indirect costs of $.7 million for the first two
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. Sustaining
engineering and research and development expenses increased 25%
year-to-year, while selling, general and administrative expenses
increased 8.3% year-to-year.
Operating income as a percentage of revenues is 20.2% for the
second quarter of Fiscal Year 1999, compared to 24.3% for the
comparable period of the prior fiscal year. Operating income as a
percentage of revenues is 14.5% for the first two quarters of
Fiscal Year 1999, compared to 21.7% 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 two
quarters, 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 $1,579,000 and $1,266,000, respectively,
during the first two quarters of Fiscal Years 1999 and 1998,
respectively. Corresponding amounts amortized were $721,000 and
$644,000, respectively.
In May 1998, the Company completed the purchase of intellectual
property and related software assets from Industrial Technology,
Inc. The acquired technology includes software suited for
automating the comparison of digital speech quality over diverse
cellular, PCS, and other wireless networks. The Company intends to
use the acquired technology to enhance its network evaluation
family of products.
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
$7.4 million for the second quarter of Fiscal Year 1999, up from
$6.1 million from the comparable prior period. For the
twelve-month periods ended July 31, 1998 and 1997, orders received
were $28.0 million and $36.5 million, respectively. Included in
the amount for the twelve months ended July 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 July 31, 1998 totalled $15.7 million,
of which $7.4 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 at the end of
Fiscal Year 1999 and into Fiscal Year 2000. An additional $1.6
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 5.0%, from $13.9 million
in the second quarter of Fiscal Year 1998 to $14.6 million in the
second quarter of Fiscal Year 1999. Revenues from this business
area increased 3.9%, from $28.0 million for the first two quarters
of Fiscal Year 1998 to $29.1 million for the first two quarters of
Fiscal Year 1999. Revenues in this business area decreased from
68.1% of the Company's total revenues in the first two quarters of
Fiscal Year 1998 to 66.4% of the Company's total revenues in the
first two 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 two 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 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 ends on September 30, 1998. The Company did not
pursue the recompete of this contract. This contract's annual
revenues approximate $8.8 million, it has been marginally
profitable, and it would be unprofitable if reawarded to the
Company. Two other multi-year government contracts are scheduled
to end in Fiscal Year 1999 with annual revenues of approximately
$3.8 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 $288,000 in the second quarter of
Fiscal Year 1998 to $489,000 in the second quarter of Fiscal Year
1999. Operating income for information technology and staffing
services is up from $811,000 in the first two quarters of Fiscal
Year 1998 to $1,077,000 in the first two quarters of Fiscal Year
1999. The increase is primarily due to higher revenues for
information technology and airport management services, 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 $10 million (includes highly liquid long-term
investments with maturities of 12 to 36 months) during the first
two 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 two 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 2.99 2.75
Working capital $ 21,504,000 $ 20,937,000
Book value per share $6.81 $6.46
</TABLE>
The Company continued to demonstrate solid financial strength in
the above financial factors during the first two quarters of
Fiscal Year 1999 due to continued profitable activity.
The Company has a significant commitment for capital expenditures
at July 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 $1,579,000 and $721,000,
respectively, in the first two 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 July 31,
1998, the Company has re-purchased and retired approximately
966,000 shares. The average price paid per share re-purchased
under the program was $7.06. An additional 92,000 shares were
repurchased during August 1998 for approximately $1.8 million at
an average price of $19.59 per share.
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
sixteen 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 ensure that its
proprietary software and internal computer systems are Year 2000
compliant. The initial phase, which included planning, inventory
and assessment, has been substantially completed. The final phase,
which consists of correction, testing, deployment and acceptance,
is in process and is expected to be completed by mid-1999. The
Company expects that the cost of making its proprietary software
and internal systems compliant will not have a material effect on
its overall financial position or results of operations.
The Company is also beginning the same two-phase program to assess
the risks to the Company of non-IT systems. Non-IT systems include
embedded technology such as micro-controllers. The initial phase
is planned to be completed by the end of 1998 with the final phase
completed during 1999. Based on a preliminary assessment, the cost
of non-IT systems remediation will not have a material impact on
the Company.
The Company has initiated formal communications with its crucial
suppliers to determine whether they are or will be Year 2000
capable. By mid-1999, the Company expects to have identified and
develop contingency plans for any such suppliers who will not be
year 2000 ready.
The Company has also been working with its customers and is
completing an assessment of its obligations to make their systems
Year 2000 ready. The Company currently believes that these
obligations will not have a material effect on the Company.
Even with the effort to address the Year 2000 Issue made by the
Company to date, there can be no assurance that the systems of
other entities on which the Company relies will be timely
remediated, or that a failure to remediate by another entity,
would not have a material adverse effect on the Company.
The Company will utilize both internal and external resources to
reprogram, or replace, and test software for Year 2000
modifications. The total cost of the program is being funded
through operating cash flows. The total cost associated with the
required modifications and conversions is not expected to be
material to the Company's consolidated results of operations and
financial position.
<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:
10.29 Fourth Amendment to Loan Agreement dated August 21, 1998
between the Company and NationsBank of Virginia, N.A.
10.30 Fourth Amended and Restated Master Line of Credit Note
dated August 21, 1998 between the Company and NationsBank
of Virginia, N.A.
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)
September 14, 1998
---------------------------
Thomas P. Baird
Chief Financial Officer
(Authorized Officer and Principal Financial Officer)
FOURTH AMENDEMENT TO LOAN AGREEMENT
-----------------------------------
THIS FOURTH AMENDMENT TO LOAN AGREEMENT (this "Agreement") made this
21st day of August, 1998 by and among (i) COMARCO, INC., a California
corporation (the "Borrower"), (ii) COMARCO WIRELESS TECHNOLOGIES, INC., a
Delaware corporation, INTERNATIONAL BUSINESS SERVICES, INC., a District of
Columbia corporation, DECISIONS AND DESIGNS, INC., a Virginia corporation and
LCTI, INC., a Maryland corporation (collectively, the "Original Guarantors" and
each an "Original Guarantor"), (iii) COMARCO SYSTEMS, INC. ("Comarco Systems"),
a California corporation, COMARCO STAFFING, INC. (formerly known as CoSource
Solutions, Inc.) ("CSI"), a California corporation, MANUFACTURING TRAINING
TECHNOLOGY CENTER, INC. ("MTTCI"), a California corporation and COMARCO WIRELESS
INTERNATIONAL, INC. ("CWI"), a Delaware corporation (Comarco Systems, CSI, MTTCI
and CWI, together with the Original Guarantors, being individually called a
"Guarantor" and collectively, the "Guarantors") and NATIONSBANK, N.A., a
national banking association, its successors and assigns (the "Bank").
RECITALS
--------
A. The Borrower, the Original Guarantors and the Bank have entered into
that certain Loan Agreement dated September 26, 1994 (the "Original Loan
Agreement"), which Original Loan Agreement was amended by that certain First
Amendment to Loan Agreement dated September 26, 1995, by and among the Borrower,
the Original Guarantors and the Bank, and which Original Loan Agreement was
further amended by that certain Second Amendment to Loan Agreement dated August
30, 1996 by and among the Borrower, the Original Guarantors, MTTCI, CSI and the
Bank. Comarco Systems and CWI were added as guarantors to the Original Loan
Agreement pursuant to that certain Third Amendment to Loan Agreement dated as of
August 15, 1997 by and among the Borrower, the Guarantors and the Bank. (The
Original Loan Agreement, as thereafter amended from time to time, is hereafter
called the "Loan Agreement").
B. The Borrower and the Guarantors have requested that the Bank
consolidate the Master Line of Credit and the Guidance Line of Credit into a
single Master Line of Credit in the maximum principal amount of Ten Million
Dollars ($10,000,000) to be used by the Borrower for working capital,
acquisitions and the other purposes described herein, and the Bank has agreed
subject to the terms of this Agreement.
C. All capitalized terms used herein and not otherwise defined shall
have the meanings given to such terms in the Loan Agreement.
NOW, THEREFORE, in consideration of the premises, the mutual agreements
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower, the Guarantors and
the Bank hereby agree as follows:
1. Recitals. The parties hereto acknowledge and agree that the above
Recitals are true and correct in all respect and that the same are incorporated
herein and made a part hereof by reference.
2. Definitions. The definitions of "Loans", "Master Line of Credit",
"Master Line of Credit Expiration Date" and "Notes"in Article I of the Loan
Agreement are amended and restated in their entirety as follows
"Loans" shall mean the Master Line of Credit (including
acquisition loans made pursuant thereto).
"Master Line of Credit" shall mean the line of credit/term
loan facility granted to the Borrower pursuant to this Agreement, in
the maximum principal amount of Ten Million Dollars ($10,000,000) or so
much thereof as shall be advanced or re-advanced and from time to time
remain unpaid, as evidenced by the Master Line of Credit Note and the
Acquisition Term Notes.
"Master Line of Credit Commitment Expiration Date" shall mean
July 30, 2000.
"Notes" shall mean the Master Line of Credit Note and all
Acquisition Term Notes, collectively. From and after the effective date hereof,
the Loan Agreement shall be interpreted and construed to delete all references
to the Guidance Line of Credit and the Guidance Line of Credit Note.
3. Commitment. From and after the effective date hereof, paragraph 1 of
Article II of the Loan Agreement is hereby amended and restated in its entirety
as follows:
1. Commitment. Subject to and upon the terms and conditions of
this Agreement, the Bank agrees that it will extend credit to the
Borrower for the purposes and in the amounts set forth herein as
follows:
(a) Master Line of Credit. The Bank shall extend to
the Borrower the Master Line of Credit, which shall be in the maximum
principal amount of Ten Million Dollars ($10,000,000), or so much
thereof as may be advanced or readvanced and from time to time remain
unpaid, and bear interest and be payable in accordance with the terms
of (i) a Fourth Amended and Restated Master Line of Credit Note in the
maximum principal amount of Ten Million Dollars ($10,000,000) dated as
of July 31, 1998 (together with all renewals, extensions, modifications
and substitutions thereof or therefor, the "Master Line of Credit
Note"); and (ii) any term notes (each, together with all renewals,
extensions, modifications and substitutions thereof or therefor, being
herein referred to as an "Acquisition Term Note") executed and
delivered by the Borrower in connection with advances made by the Ban
for acquisitions as herein provided. It is understood and agreed that
the maximum principal amount of availability under the Master Line of
Credit shall be reduced by the maximum principal amount of availability
of any Acquisition Term Notes issued pursuant to this Agreement,
simultaneously and automatically upon issuance of any Acquisition Term
Note(s). The forms of the Master Line of Credit Note and the
Acquisition Term Note to be utilized are attached hereto as Exhibit B-1
and B-2, respectively.
4. Use of Loan Proceeds. In addition to the permitted uses described in
paragraph 2(a) of Article II of the Loan Agreement, the proceeds of the Master
Line of Credit may be used in connection with Exchange Contracts (as hereinafter
defined) and the issuance of Letters of Credit in the ordinary course of the
Borrower's business; provided, however, in no event whatsoever shall the
aggregate face amount of all such Letters of Credit outstanding at any time
exceed Two Million Dollars ($2,000,000).
5. Foreign Exchange. Subject to the terms of this Agreement, the
Borrower may enter into foreign exchange contracts (the "Exchange Contracts")
not to exceed an aggregate amount of $750,000 (the "Contract Limit"), pursuant
to which the Bank shall sell to or purchase from the Borrower foreign currency
on a spot or future basis. The Borrower shall not request any Exchange Contracts
at any time it is out of compliance with any of the provisions of this Agreement
or the Loan Agreement. All Exchange Contracts must provide for delivery of
settlement on or before June 30, 2000. The amount available under the Master
Line of Credit at any time shall be reduced by the following amounts (the
"Foreign Exchange Reserve") on any given day (the "Determination Date"): (i) on
all outstanding Exchange Contracts on which delivery is to be effected or
settlement allowed more than two (2) Business Days after the Determination Date,
ten percent (10%) of the gross amount of the Exchange Contracts; plus (ii) on
all outstanding Exchange Contracts on which delivery is to be effected or
settlement allowed within two (2) Business Days after the Determination Date,
one hundred percent (100%) of the gross amount of the Exchange Contracts.
The Bank may, in its discretion, terminate the Exchange Contracts at
any time (a) that an Event of Default occurs or (b) that there is no sufficient
availability under the Master Line of Credit and the Borrower does not have
available funds in its bank account to satisfy the Foreign Exchange Reserve. If
the Bank terminates the Exchange Contracts, and without limitation of any
applicable indemnities, the Borrower agrees to reimburse the Bank for any and
all fees, costs and expenses relating thereto or arising in connection
therewith.
The Borrower shall not permit the total gross amount of all Exchange
Contracts on which delivery is to be effected and settlement allowed in any two
(2) Business Day period to be more than $750,000 (the "Settlement Limit") nor
shall the Borrower permit the total gross amount of all Exchange Contracts to
which the Borrower is a party, outstanding at any one time, to exceed the
Contract Limit. Notwithstanding the above, however, the amount which may be
settled in any two (2) Business Day period may be increased above the Settlement
Limit up to, but in no event to exceed, the amount of the Contract Limit under
either of the following circumstances:
(i) if there is sufficient availability under the Master Line
of Credit in the amount of the Foreign Exchange Reserve as of each Determination
Date, provided that the Bank in advance shall reserve the full amount of the
Foreign Exchange Reserve against the Master Line of Credit; or
(ii) if there is insufficient availability under the Master
Line of Credit, as to settlements within any two (2) Business Day period,
provided that the Bank, in its sole discretion, may: (A) verify good funds
overseas prior to crediting the Borrower's deposit account with the Bank (in the
case of the Borrower's sale of foreign currency); or (B) debit the Borrower's
deposit account with the Bank prior to delivering foreign currency overseas (in
the case of the Borrower's purchase of foreign currency).
In the case of the Borrower's purchase of foreign currency, the
Borrower in advance shall instruct the Bank upon settlement either to treat the
settlement amount as an advance under the Master Line of Credit, or to debit the
Borrower's account for the amount settled.
The Borrower shall execute all standard from applications and
agreements of the Bank in connection with the Exchange Contracts and, without
limiting any of the terms of such applications and agreements, the Borrower will
pay all standard fees and charges of the Bank in connection with the Exchange
Contracts.
Without limiting any of the other terms of this Agreement or any such
standard form applications and agreement of the Bank, the Borrower agrees to
indemnify the Bank and hold it harmless, from and against any and all claims,
debts, liabilities, demands, obligations, actions, costs and expenses
(including, without limitation, attorneys' fees of counsel of the Bank's
choice), of every nature and description which it may sustain or incur, based
upon, arising out of, or in any way relating to any of the Exchange Contracts or
any transactions relating thereto or contemplated thereby.
6. Letters of Credit. Notwithstanding anything set forth in Article II
of the Loan Agreement to the contrary, each Letter of Credit issued under the
Loan Agreement shall be issued under the Master Line of Credit. No Letters of
Credit shall be required to be issued after (or which provide for a maturity
date after) the Master Line of Credit Maturity Date. In the event that the Bank
issues any Letter(s) of Credit, the maximum amount of the credit available in
connection with the Master Line of Credit shall be reduced by the face amount of
each Letter of Credit (so long as such Letter of Credit remains outstanding) and
any amounts drawn under any Letter of Credit shall be deemed advanced under the
Master Line of Credit and shall bear interest and be payable in accordance with
the terms of the Master Line of Credit Note and shall be secured to the same
extent and in the same manner as all other sums advanced under the Master Line
of Credit Note. In addition, the Borrower agrees to pay the fees set forth in
paragraph 5(b) of Article II, of the Loan Agreement for each Letter of Credit
now or hereafter issued by the Bank.
7. Security. As of the effective date hereof, the provisions of
paragraph 2 of Article III, of the Loan Agreement are amended to provide that
the Loans shall be unsecured, unless and until the Borrower's ratio of Total
Liabilities to Net Worth (as calculated in accordance with paragraph 3 of
Article VII thereof) exceeds 2.0 to 1.0.
8. Financial Covenants. From and after the effective date hereof,
paragraph 2 of Article VII of the Loan Agreement is hereby amended and restated
in its entirety as follows:
2. Tangible Net Worth. The Borrower shall at all times
maintain Tangible Net Wroth of not less than Fifteen Million Dollars
($15,000,000). For purposes of this Article VII, "Tangible Net Worth"
shall mean all capital stock, paid in capital and retained earnings
less all treasury stock, amounts due from officers, directors,
stockholders and members of their immediate families, amounts due from
affiliates, investments in non-marketable securities or affiliated
companies, leasehold improvements, goodwill, non-compete agreements,
capitalized organization and development costs, capitalized expenses,
loan costs, patents, trademarks, copyrights, franchises, licenses and
other intangible assets.
From and after the effective date hereof, paragraphs 1 and 4 of Article VI of
the Loan Agreement are deleted in their entirety.
9. Year 2000. The Borrower and each Guarantor hereby represents and
warrants to the Bank that the Borrower and each Guarantor have:
(i) begun analyzing its operations and its subsidiaries and
affiliates that could be adversely affected by failure to become Year 2000
compliant (that is, that computer applications, imbedded microchips and other
systems will be able to perform date-sensitive functions prior to and after
December 31, 1999) and;
(ii) developed a plan for becoming Year 2000 compliant in a
timely manner, the implementation of which is on schedule in all material
respects. The Borrower and each Guarantor reasonably believes that it will
become Year 2000 compliant for its operations and those of its subsidiaries and
affiliates on a timely basis except to the extent that a failure to do so could
not reasonably be expected to have a material adverse effect upon the financial
condition of Borrower or any Guarantor. The Borrower and each Guarantor
reasonably believes any suppliers and vendors that are material to the
operations of Borrower, any Guarantor or any of their subsidiaries and
affiliates will be Year 2000 compliant for their own computer applications
except to the extent that a failure to do so could not reasonably be expected to
have a material adverse effect upon the financial condition of the Borrower or
any of the Guarantors. The Borrower will promptly notify Bank in the event
Borrower or any Guarantor determines that any computer application which is
material to the operations of Borrower any Guarantor, or any of their
subsidiaries or any of their material vendors or suppliers will not be fully
Year 2000 compliant on a timely basis, except to the extent that such failure
could not reasonably be expected to have a material adverse effect upon the
financial condition of the Borrower or any of the Guarantors.
10. Conditions Precedent. This Agreement shall become effective on the
date the Bank receives the following documents, each of which shall be
satisfactory in form and substance to the Bank:
(a) The Fourth Replacement Master Line of Credit Note (as
hereinafter defined) in the form of Exhibit B-1 attached hereto and incorporated
herein by reference, payable to the order of the Bank in the maximum principal
amount of Ten Million Dollars ($10,000,000);
(b) An Amended and Restated Continuing and Unconditional
Guaranty in the form of Exhibit D attached hereto and incorporated herein by
reference, issued and delivered by the Guarantors in favor of the Bank;
(c) Proof that the Borrower has paid all costs and expenses
to the Bank in connection with this Agreement, including but not limited to all
the Bank's attorneys fees; and
(d) Such other information, instruments, opinions, documents,
certificates and reports as the Bank may deem necessary.
11. The Master Line of Credit Note. From and after the date hereto, all
references in the Loan Agreement to the "Master Line of Credit Note" shall mean
that certain Fourth Amended and Restated Master Line of Credit Note of even date
herewith (the "Fourth Replacement Master Line of Credit Note") from the Borrower
in favor of the Bank in the maximum principal amount of Ten Million Dollars
($10,000,000) in the form of Exhibit B-1 attached hereto. The Fourth Replacement
Master Line of Credit Note, consolidates, increases, amends and restates in its
entirety that certain Third Amended and Restated Master Line of Credit Note
dated August 15, 1997 (the "Third Replacement Master Line of Credit Note") from
the Borrower in favor of the Bank in the maximum principal amount of Eight
Million Dollars ($8,000,000) and that certain Third Amended and Restated
Guidance Line of Credit Note ("Restated Guidance Note") dated August 15, 1997
from the Borrower in favor of the Bank in the maximum principal amount of Five
Million Dollars ($5,000,000). The Borrower and the Bank agree that the execution
of this Agreement is not intended and shall not cause or result in a novation
with regard to the Third Replacement Master Line of Credit Note or the Restated
Guidance Note. The Fourth Replacement Master Line of Credit Note shall not
operate as a novation of any of the sums due or owing under the Third Master
Line of Credit Note or the Restated Guidance Note or nullify, discharge, or
release any sums due or owing under the Third Master Line of Credit Note or the
Restated Guidance Note or the continuing contractual relationship of the parties
hereto in accordance with the provisions of this Agreement.
12. Rights and Remedies of the Bank. From and after the effective date
hereof, the following is added to immediately after paragraph 2(e) of Article IX
of the Loan Agreement as paragraph 2 (f):
(f) Liquidate any Exchange Contracts not yet settled and
demand that the Borrower immediately deposit cash with the Bank in an
amount sufficient to cover any losses incurred by the Bank due to
liquidation of the Exchange Contracts at the then prevailing market
price.
13. Replacement Exhibit. Exhibit "B-1" to the Loan Agreement is being
replaced in its entirety with Exhibit "B-1" attached hereto. The Borrower shall
execute and deliver to the Bank on the date hereof the Fourth Replacement Master
Line of Credit Note in substitution for and not satisfaction of, the Third
Replacement Master Line of Credit Note and the Third Replacement Guidance Line
of Credit Note, and the Fourth Replacement Master Note shall be the "Note" or
"Notes" for all purposes of the Loan Documents.
14. Counterparts. This Agreement may be executed in any number of
duplicate originals or counterparts, each of which duplicate original or
counterpart shall be deemed to be an original and all taken together shall
constitute one and the same instrument.
15. Loan Documents; Governing Law; Etc. This Agreement is one of the
Loan Documents defined in the Loan Agreement and shall be governed and construed
in accordance with the laws of the Commonwealth of Virginia. The headings and
captions in this Agreement are for the convenience of the parties only and are
not a part of this Agreement.
16. Acknowledgments. The Borrower and the Guarantors hereby confirm to
the Bank the enforceability and validity of each of the Loan Documents. In
addition, the Borrower and each of the Guarantors hereby agree to the execution
and delivery of this Agreement and the terms and provisions, covenants or
agreements contained in this Agreement shall not in any manner release, impair,
lessen, modify, waive or otherwise limit the liability and obligations of the
Borrower or any of the Guarantors under the terms of any of the Loan Documents,
except as otherwise specifically set forth in this Agreement. The Borrower and
each Guarantor hereby issue, remake, ratify and confirm the representations,
warranties and covenants contained in the Loan Documents.
17. Modifications. This Agreement may not be supplemented, changed,
waived, discharged, terminated, modified or amended, except by written
instrument executed by the parties.
[SIGNATURES ARE ON FOLLOWING PAGES]
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered under seal by their duly authorized representative as of
the date and year first written above.
THE BORROWER:
------------
WITNESS/ATTEST: COMARCO, INC.
__________________________ By:_________________________________(SEAL)
Name:
Title:
THE GUARANTORS:
WITNESS/ATTEST: COMARCO WIRELESS TECHNOLOGIES, INC., a corporation
organized under the laws of the State of Delaware
__________________________ By:_________________________________(SEAL)
Name:
Title:
WITNESS/ATTEST: INTERNATIONAL BUSINESS SERVICES, INC., a corporation
organized under the laws of the District of Columbia
__________________________ By:_________________________________(SEAL)
Name:
Title:
WITNESS/ATTEST: DECISIONS AND DESIGNS, INC., a corporation organized
under the laws of the Commonwealth of Virginia
__________________________ By:_________________________________(SEAL)
Name:
Title:
WITNESS/ATTEST: LCTI, INC., a corporation organized under the laws
of the State of Maryland
__________________________ By:_________________________________(SEAL)
Name:
Title:
WITNESS/ATTEST: MANUFACTURING TRAINING TECHNOLOGY CENTER, INC., a
corporation organized under the laws of the State of
California
__________________________ By:_________________________________(SEAL)
Name:
Title:
WITNESS/ATTEST: COMARCO SYSTEMS, INC., a corporation organized under
the laws of the State of California
__________________________ By:_________________________________(SEAL)
Name:
Title:
WITNESS/ATTEST: COMARCO STAFFING, INC., a corporation organized
under the laws of the State of California
__________________________ By:_________________________________(SEAL)
Name:
Title:
WITNESS/ATTEST: COMARCO WIRELESS INTERNATIONAL, INC., a corporation
organized under the laws of the State of Delaware
__________________________ By:_________________________________(SEAL)
Name:
Title:
THE BANK:
---------
WITNESS: NATIONSBANK, N.A.
________________________ By:_________________________________(SEAL)
Elaine T. Eaton
Senior Vice President
FOURTH AMENDED AND RESTATED MASTER LINE OF CREDIT NOTE
THIS FOURTH AMENDED AND RESTATED MASTER LINE OF CREDIT NOTE (this
"Agreement") is entered into as of this 21st day of August 1998, by COMARCO,
INC., a corporation organized under the laws of the State of California (the
"Borrower") in favor of NATIONSBANK, N.A., a national banking association, its
successors and assigns (the "Lender").
RECITALS
--------
A. The Lender made a secured revolving loan (the "Master Line of
Credit") to the Borrower in the original maximum principal amount of Eight
Million Dollars ($8,000,000), which Master Line of Credit is evidenced by that
certain Master Line of Credit Note (the "Original Master Line of Credit Note")
dated September 26, 1994 from the Borrower to the Lender in the maximum
principal amount of Eight Million Dollars ($8,000,000), as amended and restated
in its entirety pursuant to the provisions of that certain Amended and Restated
Master Line of Credit Note dated October 31, 1995 from the Borrower in favor of
the Lender in the maximum principal amount of Eight Million Dollars ($8,000,000)
(the "First Replacement Master Line of Credit Note"), and as further amended and
restated in its entirety pursuant to the provisions of that certain Second
Amended and Restated Master Line of Credit Note dated August 30, 1996 from the
Borrower in favor of the Lender in the maximum principal amount of Eight Million
Dollars ($8,000,000) (the "Second Replacement Master Line of Credit Note"), and
which Second Replacement Master Line of Credit Note was further amended and
restated in its entirety pursuant to the provisions of that certain Third
Amended and Restated Master Line of Credit Note date August 15, 1997 from the
Borrower in favor of the Lender in the maximum principal amount of Eight Million
Dollars ($8,000,000) (the "Third Replacement Master Line of Credit Note").
B. The Master Line of Credit is governed by the provisions of that
certain Loan Agreement of even date with the Original Master Line of Credit Note
by and among the Borrower, the Guarantors named therein and the Lender (the
"Original Loan Agreement"). The Original Loan Agreement was amended by that
certain (i) First Amendment to Loan Agreement dated September 26, 1995 by and
among the Borrower, the Guarantors named therein and the Lender, (ii) Second
Amendment to Loan Agreement dated August 30, 1996, by and among the Borrower,
the guarantors named therein and the Lender, and (iii) Third Amendment to Loan
Agreement dated August 15, 1997 by and among the Borrower, the guarantors named
therein and the Lender (the Original Loan Agreement as amended from time to time
is hereafter called the "Loan Agreement"). All capitalized terms used herein and
not otherwise defined herein shall have the meanings given to such terms in the
Loan Agreement.
C. The Borrower has requested that the Lender increase the maximum
principal amount of the Master Line of Credit and the Lender has agreed to on
the condition, among others, that the Borrower execute and deliver this
Agreement.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Lender and the Borrower covenant and agree as follows:
1. The Recitals. The parties hereto acknowledge and agree that the
above Recitals are true and correct in all respects and that the same are
incorporated herein and made a part hereof by reference.
2. The Master Line of Credit Note. The Third Replacement Master Line of
Credit Note is hereby amended and restated in its entirety as follows:
MASTER LINE OF CREDIT NOTE
--------------------------
$10,000,000 McLean, Virginia
FOR VALUE RECEIVED, COMARCO, INC., a corporation organized under
the laws of the State of California (the "Borrower")promises to pay to
the order of NATIONSBANK, N.A., a national banking association, its
successors and assigns (the "Lender"), the principal sum of TEN MILLION
DOLLARS ($10,000,000) (the "Principal Sum"), or so much thereof as has
been or may be advanced or readvanced to or for the account of the
Borrower, together with interest thereon at the rate or rates
hereinafter provided, in accordance with the following:
1. Interest. Except as otherwise expressly set forth below,
amounts outstanding hereunder shall bear interest at the Prime Rate or
the Floating LIBOR Rate. For purposes hereof, the "Prime Rate" means
the fluctuating prime rate of interest established and declared by the
Lender from time to time. The Prime Rate does not necessarily represent
the lowest rate of interest charged by the Lender to its borrowers. For
purposes hereof, the "Floating LIBOR Rate" shall mean a fluctuating
rate of interest equal to the one month rate of interest (rounded
upwards, if necessary to the nearest 1/100 of 1%) appearing on Telerate
Page 3750 (or any successor page) as the one month London interbank
offered rate for deposits in Dollars at approximately 11:00 a.m.
(London time) on the second preceding business day as adjusted from
time to time in Lender's sole discretion for then applicable reserve
requirements, deposit insurance assessment rates and other regulatory
costs. If for any reason such rate is not available, the term "LIBOR
Rate" shall mean the fluctuating rate of interest equal to the one
month rate of interest (rounded upwards, if necessary to the nearest
1/100 of 1%) appearing on Reuters Screen LIBO Page as the one month
London interbank offered rate for deposits in Dollars at approximately
11:00 a.m. (London time) on the second preceding business day, as
adjusted from time to time in Lender's sole discretion for then
applicable reserve requirements, deposit insurance assessment rates and
other regulatory costs; provided, however, if more than one rate is
specified on Reuters Screen LIBO page, the applicable rate shall be the
arithmetic mean of all such rates. "Telerate Page 3750" means the
British Bankers Association Libor Rates (determined as of 11:00 a.m.
London time) that are published by Dow Jones Telerate, Inc.
So long as no event of default or any act, event or condition
which, with notice or the passage of time or both, would constitute an
event of default under any Loan Document has occurred and is
continuing, the Borrower shall have the right to elect that specified
amounts advanced under this Note, bear interest for specified periods
(each being herein referred to as a "LIBOR Rate Funding Period"), at
the LIBOR Rate, plus one and one half percent (1.50%)(the "Adjusted
LIBOR Rate"). Election by the Borrower of a LIBOR Rate interest rate as
herein provided shall be made in a writing delivered to the Lender not
less than three (3) Banking Days prior to the date of on which the
LIBOR Rate is to begin, and shall specify (1) the Banking Day on which
the LIBOR Rate is to be effective and the period for which the LIBOR
Rate shall be applicable (which shall be only 30, 60, 90 or 180 days
and the expiration of which may not be later than the "Maturity Date");
and (2) the principal amount of this Note which shall bear interest at
the Adjusted LIBOR Rate (each being herein referred to as a "LIBOR Rate
Funding Segment"). The Borrower may not revoke any such election
without the Lender's written consent. Upon the expiration of an
applicable LIBOR Rate Funding Period, unless notice of LIBOR Rate
election from the Borrower, the rate of interest applicable to any
LIBOR Rate Funding Segment (after the expiration thereof) shall
automatically convert at the end of the applicable LIBOR Rate Funding
Period, to the Prime Rate.
For purposes hereof, the "LIBOR Rate" shall mean the per annum rate of
interest, as determined by the Lender in its sole discretion, at which
deposits in United States Dollars in an amount approximately equal to
the amount for which the rate is to be fixed and with maturities
comparable to the interest period selected by the Borrower, to be the
averages of rates per annum for 11:00 a.m. (London, time), two (2)
Banking Days prior to the first day of such LIBOR Rate Funding Period
for delivery on the first such day of such LIBOR Rate Funding Period,
in amounts comparable to the applicable LIBOR Rate Funding Segment, as
adjusted for Federal Reserve Board reserve requirements and similar
assessments, if any, imposed upon the Lender.
All interest payable under the terms of this Note shall be
calculated on the basis of a 360-day year and the actual number of days
elapsed.
2. Payments and Maturity. The unpaid Principal Sum, together
with interest thereon at the rate or rates provided above, shall be
payable as follows:
(a) Except as otherwise provided in this Note, this
Note shall be payable in successive monthly installments of accrued and
unpaid interest only, on the last day of each month commencing July 31,
1998, and on the last day of each month thereafter to maturity;
(b) Unless sooner paid, the unpaid Principal Sum,
together with all accrued and unpaid interest thereon shall be due and
payable in full on June 30, 2000.
The fact that the balance hereunder may be reduced to
zero from time to time pursuant to the Loan Agreement will not affect
the continuing validity of this Note or the Loan Agreement, and the
balance may be increased to the Principal Sum after any such reduction
to zero.
3. Default Interest. Upon the occurrence of an Event of
Default (as hereinafter defined), the unpaid Principal Sum shall bear
interest thereafter at a rate two percent (2%) per annum in excess of
the then highest current rate or rates of interest hereunder until such
Event of Default is cured.
4. Late Charges. If the Borrower shall fail to make any
payment under the terms of this Note within five (5) days after the
date such payment is due, the Borrower shall pay to the Lender on
demand a late charge equal to five percent (5%) of such payment.
5. Application and Place of Payments. All payments hereunder
shall be applied first to the payment of any late charges and costs of
collections then due hereunder, second to the payment of accrued and
unpaid interest then due hereunder, and the remainder, if any, shall be
applied to the unpaid Principal Sum. Notwithstanding the foregoing,
accrued and unpaid interest on amounts outstanding hereunder bearing
interest on a LIBOR Rate basis shall be due and payable on the last day
of the applicable LIBOR Rate Funding Period (as herein defined) and if
such LIBOR Rate Funding Period is longer than ninety (90) days, on the
ninetieth (90th) day of each LIBOR Rate Funding Period. All payments on
account of this Note shall be paid in lawful money of the United States
of America in immediately available funds on or before 11:00 a.m.
(Washington, D.C. time) at its principal office in McLean, Virginia or
at such other times and places as the Lender may at any time and from
time to time designate in writing to the Borrower.
6. Prepayment. The Borrower may prepay amounts accruing
interest based on the Prime Rate, in whole or in part, at any time
without notice to the Lender without premium or penalty. No prepayment
of any other amounts outstanding hereunder shall be permitted without
the prior written consent of the Lender.
7. Loan Agreement and Other Loan Documents. This Note is the
"Master Line of Credit Note" described in a Loan Agreement dated as of
September 26, 1994 by and among the Borrower and Comarco Wireless
Technologies, Inc., International Business Services, Inc., Decisions
and Designs, Inc., LCTI, Inc. (the "Original Guarantors") and the
Lender, as amended by (i) that certain First Amendment to Loan
Agreement dated September 26, 1995, by and among the Borrower, the
Original Guarantors and the Lender, (ii) that certain Second Amendment
to Loan Agreement dated August 30, 1996, by and among the Borrower, the
Original Guarantors, Manufacturing Training Technology, Center, Inc.
("MTTCI"), Comarco Staffing, Inc. (formerly known as CoSource
Solutions, Inc.) ("CSI") and the Lender, (iii) that certain Third
Amendment to Loan Agreement dated as of August 15, 1997 by and among
the Borrower, the Original Guarantors, MTTCI, CSI, Comarco Systems,
Inc., Comarco Wireless International, Inc. and the Lender, and (iv)
that certain Fourth Amendment to Loan Agreement of even date herewith
by and among the Borrower, the Original Guarantors, MTTCI, CSI, Comarco
Systems, Inc., Comarco Wireless International, Inc. and the Lender (as
amended, modified, restated, substituted, extended and renewed at any
time and from time to time, the "Loan Agreement"). The indebtedness
evidenced by this Note is included within the meaning of the term
"Obligations" as defined in the Security Agreement. This Note
increases, amends and restates in its entirety that certain Third
Amended and Restated Master Line of Credit Note dated August 15, 1997
in the maximum principal amount of Eight Million Dollars ($8,000,000)
from the Borrower in favor of the Lender. The term "Loan Documents" as
used in this Note shall mean collectively this Note, any Acquisition
Term Note, the Loan Agreement and any other instrument, agreement, or
document previously, simultaneously, or hereafter executed and
delivered by the Borrower, the Guarantors and/or any other person,
singularly or jointly with any other person, evidencing, securing,
guaranteeing, or in connection with the Principal Sum, this Note and/or
the Loan Agreement. All capitalized terms used herein and not otherwise
defined shall have the meanings given to such terms in the Loan
Agreement.
8. Events of Default. The occurrence of any one or more of the
following events shall constitute an event of default (individually, an
"Event of Default" and collectively, the "Events of Default") under the
terms of this Note:
(a) The failure of the Borrower to pay to the Lender
within five (5) days of when due any and all amounts payable by the
Borrower to the Lender under the terms of this Note; or
(b) The occurrence of an event of default (as defined
therein) under the terms and conditions of any of the other Loan
Documents, including, but not limited to the Loan Agreement.
9. Remedies. Upon the occurrence of an Event of Default, at
the option of the Lender, all amounts payable by the Borrower to the
Lender under the terms of this Note shall immediately become due and
payable by the Borrower to the Lender without notice to the Borrower,
or any other person, and the Lender shall have all of the rights,
powers, and remedies available under the terms of this Note, any of the
other Loan Documents and all applicable laws. The Borrower, the
Guarantors and all endorsers, guarantors, and other parties who may now
or in the future be primarily or secondarily liable for the payment of
the indebtedness evidenced by this Note hereby severally waive
presentment, protest and demand, notice of protest, notice of demand
and of dishonor and non-payment of this Note and expressly agree that
this Note or any payment hereunder may be extended from time to time
without in any way affecting the liability of the Borrower, and any
guarantors and endorsers.
10. Expenses. The Borrower promises to pay to the Lender on
demand by the Lender all costs and expenses incurred by the Lender in
connection with the collection and enforcement of this Note, including,
without limitation, reasonable attorneys' fees and expenses and all
court costs.
11. Notices. Any notice, request, or demand to or upon the
Borrower or the Lender shall be deemed to have been properly given or
made when delivered in accordance with the Loan Agreement.
12. Miscellaneous. Each right, power, and remedy of the Lender
as provided for in this Note or any of the other Loan Documents, or now
or hereafter existing under any applicable law or otherwise shall be
cumulative and concurrent and shall be in addition to every other
right, power, or remedy provided for in this Note or any of the other
Loan Documents or now or hereafter existing under any applicable law,
and the exercise or beginning of the exercise by the Lender of any one
or more of such rights, powers, or remedies shall not preclude the
simultaneous or later exercise by the Lender of any or all such other
rights, powers, or remedies. No failure or delay by the Lender to
insist upon the strict performance of any term, condition, covenant, or
agreement of this Note or any of the other Loan Documents, or to
exercise any right, power, or remedy consequent upon a breach thereof,
shall constitute a waiver of any such term, condition, covenant, or
agreement or of any such breach, or preclude the Lender from exercising
any such right, power, or remedy at a later time or times. By accepting
payment after the due date of any amount payable under the terms of
this Note, the Lender shall not be deemed to waive the right either to
require prompt payment when due of all other amounts payable under the
terms of this Note or to declare an Event of Default for the failure to
effect such prompt payment of any such other amount. No course of
dealing or conduct shall be effective to amend, modify, waive, release,
or change any provisions of this Note.
13. Partial Invalidity. In the event any provision of this
Note (or any part of any provision) is held by a court of competent
jurisdiction to be invalid, illegal, or unenforceable in any respect,
such invalidity, illegality, or unenforceability shall not affect any
other provision (or remaining part of the affected provision) of this
Note; but this Note shall be construed as if such invalid, illegal, or
unenforceable provision (or part thereof) had not been contained in
this Note, but only to the extent it is invalid, illegal, or
unenforceable.
14. Captions. The captions herein set forth are for
convenience only and shall not be deemed to define, limit, or describe
the scope or intent of this Note.
15. Applicable Law. The Borrower acknowledges and agrees that
this Note shall be governed by the laws of the Commonwealth of
Virginia, even though for the convenience and at the request of the
Borrower, this Note may be executed elsewhere.
16. Arbitration. Any controversy or claim between or among the
parties hereto including but not limited to those arising out of or
relating to this Agreement or any of the other Loan Documents ,
including any claim based on or arising from any alleged tort, shall be
determined by binding arbitration in accordance with the Federal
Arbitration Act (or if not applicable, the applicable state law), the
rules of practice and procedure for the arbitration of commercial
disputes of Judicial Arbitration and Mediation Services, Inc.
(J.A.M.S.) and the "special rules" set forth below. In the event of any
inconsistency, the special rules shall control. Judgment upon any
arbitration award may be entered in any court having jurisdiction. Any
party to this agreement may bring an action, including a summary or
expedited proceeding, to compel arbitration of any controversy or claim
to which this Agreement applies in any court having jurisdiction over
such action.
(a) Special Rules. The arbitration shall be conducted
in the city of the Borrower's domicile at time of this Agreement's
execution and administered by J.A.M.S. who will appoint an arbitrator;
if J.A.M.S. is unable or legally precluded from administering the
arbitration, then the American Arbitration Association will serve. All
arbitration hearings will be commenced within 90 days of the demand for
arbitration; further, the arbitrator shall only, upon a showing of
cause, be permitted to extend the commencement of such hearing for up
to an additional 60 days.
(b) Reservation of Rights. Nothing in this Agreement
shall be deemed to (i) limit the applicability of any otherwise
applicable statutes of limitation or repose and any waivers contained
in this Note or (ii) be a waiver by the Lender of the protection
afforded to it by 12 U.S.C. Section 91 or any substantially equivalent
state law; or (iii) limit the right of the Lender (a) to exercise self
help remedies such as (but not limited to) setoff, or (b) to foreclose
against any real or personal property collateral, or (c) to obtain from
a court provisional or ancillary remedies such as (but not limited to)
injunctive relief, writ of possession or the appointment of a receiver.
Lender may exercise such self help rights, foreclosure upon such
property, or obtain such provisional or ancillary remedies before,
during or after the pendency of any arbitration proceeding brought
pursuant to this Agreement. Neither the exercise of self help remedies
nor the institution or maintenance of an action for foreclosure or
provisional or ancillary remedies shall constitute a waiver of the
right of any party, including the claimant in any such action, to
arbitrate the merits of the controversy or claim occasioning resort to
such remedies.
3. Governing Law, Etc. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Virginia and shall
be deemed to be an instrument under seal pursuant to said law. The headings used
in this Agreement are for the convenience of the parties and shall not be used
to interpret or construe the provisions hereof.
4. Not A Novation. It is expressly understood and agreed that the
indebtedness evidenced by the Third Replacement Master Line of Credit Note has
not been extinguished or discharged hereby. The Borrower and the Lender agree
that the execution of this Agreement is not intended and shall not cause or
result in a novation with regard to the Third Replacement Master Line of Credit
Note.
WITNESS the signature and seal of the Borrower by its duly authorized
officer as of the day and year first above written.
WITNESS/ATTEST: COMARCO, INC.
______________________________ By:_____________________________(SEAL)
Name:
Title:
<TABLE>
Exhibit ll
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
Two Quarters Ended
--------------------------------
July 31, 1998 July 31, 1997
------------- -------------
<S> <C> <C>
Basic:
Net income $ 2,121,000 $ 2,424,000
Weighted average shares outstanding 4,716,000 4,773,000
------------- -------------
Basic income per common share $ .45 $ .51
============= =============
Diluted:
Net income
$ 2,121,000 $ 2,424,000
Less - net income allocated to subsidiary
dilutive options
outstanding (74,000) (156,000)
------------- -----------
Net income used in calculation of diluted
income per common share $ 2,047,000 $ 2,268,000
============== ============
Weighted average shares outstanding 4,716,000 4,773,000
Plus- common equivalent shares (determined
using the "treasury stock" method
representing shares issuable upon exercise
of stock options 205,000 315,000
------------- ------------
Weighted average number of shares used in
calculation of diluted income per common share 4,921,000 5,088,000
============= ============
Primary income per common share $ .42 $ .45
============= ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> JUL-31-1998
<CASH> 3,025
<SECURITIES> 5,024
<RECEIVABLES> 18,763
<ALLOWANCES> 0
<INVENTORY> 4,857
<CURRENT-ASSETS> 32,287
<PP&E> 2,216
<DEPRECIATION> 0
<TOTAL-ASSETS> 44,190
<CURRENT-LIABILITIES> 10,783
<BONDS> 0
0
0
<COMMON> 469
<OTHER-SE> 31,458
<TOTAL-LIABILITY-AND-EQUITY> 44,190
<SALES> 14,721
<TOTAL-REVENUES> 43,762
<CGS> 6,685
<TOTAL-COSTS> 40,554
<OTHER-EXPENSES> 14,265
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (213)
<INCOME-PRETAX> 3,421
<INCOME-TAX> 1,300
<INCOME-CONTINUING> 2,121
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,121
<EPS-PRIMARY> .45
<EPS-DILUTED> .42
<FN>
NOTE: RECEIVABLES AND PP&E VALUES REPORTED REPRESENT NET AMOUNTS.
</FN>
</TABLE>
