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, 1999 Commission File Number 0-5449
COMARCO, Inc.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2088894
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(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
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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 November 30, 1999.
Common Stock,
$.10 Par Value 4,285,060 Shares
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<PAGE>
Index to Form 10-Q
Page No.
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Part I. Financial Information
Condensed Consolidated Balance Sheets
October 31, 1999 and January 31, 1999 1
Condensed Consolidated Statements of Income (Loss)
Quarters Ended and Three Quarters Ended October 31, 1999
and October 31, 1998 2
Condensed Consolidated Statements of Cash Flows
Three Quarters Ended October 31, 1999 and October 31, 1998 3
Condensed Consolidated Statements of Comprehensive Income (Loss)
Three Quarters Ended October 31, 1999 and October 31, 1998 4
Notes to Condensed Consolidated Financial Statements 5-8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
October 31, 1999 January 31, 1999
ASSETS (Unaudited) *
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,701,000 $ 3,220,000
Short-term investments 3,173,000 2,775,000
Accounts receivable, net 9,785,000 11,518,000
Inventory 4,954,000 4,157,000
Deferred tax asset 2,492,000 2,112,000
Net assets available for sale 9,330,000 10,464,000
Other current assets 465,000 337,000
----------------- ----------------
Total current assets 32,900,000 34,583,000
Long-term investments - 526,000
Property and equipment, net 2,456,000 1,948,000
Software development costs, net 5,286,000 4,185,000
Intangible assets, net 1,328,000 1,544,000
Other assets 127,000 94,000
----------------- ----------------
TOTAL ASSETS $ 42,097,000 $ 42,880,000
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 847,000 $ 499,000
Deferred revenue 2,871,000 2,902,000
Accrued liabilities 6,863,000 6,349,000
----------------- ----------------
Total current liabilities 10,581,000 9,750,000
Deferred income taxes 2,197,000 1,928,000
Minority interest 38,000 -
Stockholders' equity:
Common stock, $.10 par value,
33,750,000 shares authorized,
4,301,560 and 4,456,460 shares
outstanding at October 31, 1999 and
January 31, 1999, respectively 430,000 446,000
Capital contributed in excess of par value 3,308,000 2,795,000
Other comprehensive income:
Unrealized investment gains 16,000 16,000
Retained earnings 25,527,000 27,945,000
----------------- ----------------
Total stockholders' equity 29,281,000 31,202,000
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,097,000 $ 42,880,000
================= ================
See accompanying notes to the condensed consolidated financial statements.
*The condensed consolidated balance sheet as of January 31, 1999 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 (Loss)
(Unaudited)
<TABLE>
Quarter Ended Three Quarters Ended
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October 31, 1999 October 31, 1998 October 31, 1999 October 31, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue:
Product sales $ 10,686,000 $ 7,076,000 $ 25,189,000 $ 19,254,000
Services 1,273,000 1,359,000 3,585,000 3,843,000
--------- --------- --------- ---------
11,959,000 8,435,000 28,774,000 23,097,000
---------- --------- ---------- ----------
Cost of sales:
Product sales 5,332,000 2,696,000 12,705,000 7,573,000
Services 926,000 812,000 2,528,000 2,573,000
------- ------- --------- ---------
6,258,000 3,508,000 15,233,000 10,146,000
--------- --------- ---------- ----------
Gross profit 5,701,000 4,927,000 13,541,000 12,951,000
Selling, general & administrative costs 2,538,000 2,539,000 6,721,000 6,916,000
Engineering and support costs 848,000 653,000 2,811,000 2,656,000
------- ------- --------- ---------
Operating income 2,315,000 1,735,000 4,009,000 3,379,000
Net interest income 47,000 40,000 224,000 253,000
Minority interest in earnings
of subsidiary (29,000) - (38,000) -
-------- --------- -------- ---------
Income before income taxes 2,333,000 1,775,000 4,195,000 3,632,000
Income taxes 851,000 648,000 1,531,000 1,326,000
------------ ------------ ------------- -------------
Net income from continuing operations 1,482,000 1,127,000 2,664,000 2,306,000
Net income (loss) from discontinued
operations (1,894,000) 449,000 (1,105,000) 1,391,000
----------- ------- ----------- ---------
Net income (loss) $ (412,000) $ 1,576,000 $ 1,559,000 $ 3,697,000
================= ================ ================= =================
Earnings per share from continuing operations:
Basic $ .34 $ .25 $ .60 $ .49
====== ====== ====== ======
Diluted $ .31 $ .23 $ .54 $ .44
====== ====== ====== ======
Earnings (loss) per share from discontinued operations:
Basic $ (.43) $ .10 $ (.25) $ .30
====== ====== ====== ======
Diluted $ (.42) $ .09 $ (.24) $ .29
====== ====== ====== ======
Earnings (loss) per share:
Basic $ (.09) $ .35 $ .35 $ .79
======= ====== ====== ======
Diluted $ (.11) $ .32 $ .30 $ .73
======= ====== ====== ======
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, 1999 October 31, 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 2,664,000 $ 2,306,000
Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 2,283,000 1,941,000
Loss (gain) on disposal of property and equipment 65,000 (4,000)
Deferred income taxes (111,000) (302,000)
Provision for doubtful accounts receivable 18,000 18,000
Net purchases of trading securities (431,000) (576,000)
Decrease (increase) in accounts receivable 1,715,000 (557,000)
Decrease (increase) in inventory (797,000) 145,000
Decrease (increase) in other current assets (128,000) 94,000
Decrease (increase) in other assets (33,000) 57,000
Increase in accounts payable 348,000 130,000
Increase (decrease) in deferred revenue (31,000) 272,000
Increase in accrued liabilities 514,000 632,000
----------- ----------
Net cash provided by operating activities 6,076,000 4,156,000
Cash flows from investing activities:
Proceeds from sales and maturities of investments 559,000 2,377,000
Purchases of property and equipment (1,262,000) (810,000)
Proceeds from sales of property and equipment 9,000 4,000
Software development costs (2,488,000) (2,235,000)
Cost of acquisition of Industrial Technology intellectual property - (1,000,000)
----------- -----------
Net cash used in investing activities (3,182,000) (1,664,000)
Cash flows from financing activities:
Proceeds from issuance of common stock 919,000 63,000
Purchase of common stock (4,399,000) (5,194,000)
----------- -----------
Net cash used in financing activities (3,480,000) (5,131,000)
----------- ------------
Net decrease in cash and cash equivalents - continuing operations (2,212,000) (2,639,000)
Net increase (decrease) in cash and cash equivalents -
discontinued operations 1,693,000 (1,010,000)
------------ -----------
Net decrease in cash and cash equivalents $ (519,000) $ (3,649,000)
================ ==============
Supplemental disclosures of cash flow information:
Cash paid during the three
quarters for:
Interest $ - $ -
Income taxes 3,235,000 2,345,000
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
<TABLE>
Quarter Ended Three Quarters Ended
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October 31, 1999 October 31, 1998 October 31, 1999 October 31, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss) $ (412,000) $ 1,576,000 $ 1,559,000 $ 3,697,000
Other comprehensive income:
Unrealized holding gains on
investments, net of tax - - - -
---------------- ---------------- ---------------- ----------------
Comprehensive income (loss) $ (412,000) $ 1,576,000 $ 1,559,000 $ 3,697,000
================ ================ ================ ================
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
COMARCO, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
October 31, 1999, January 31, 1999 and October 31,1998
(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, 1999 and
January 31, 1999, the results of its operations for the quarters ended
and three quarters ended October 31, 1999 and October 31, 1998, and its
cash flows for the three quarters ended October 31, 1999 and October 31,
1998. 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, 1999 are not necessarily indicative of the
results to be obtained for the full fiscal year.
2. Divestiture Plan
In July 1999, the Company announced that it was embarking on a plan to
strengthen the Company's focus on the wireless communications products
and service business area. This plan, which was formalized during the
quarter ended October 31, 1999, involves selling the Company's
information technology and staffing services segment's product lines. The
Company has retained the services of two investment banking firms to
assist in the sale of these product lines. Accordingly, the financial
results of this segment are reported as discontinued operations. Prior
periods' results have been restated to conform to the current
presentation. Total revenues and operating income (loss) of the
information technology and staffing services segment were $39.9 million
and ($1.7) million for the nine months ended October 31, 1999,
respectively, and $44.9 million and $2.4 million for the nine months
ended October 31, 1998, respectively. The Company currently expects the
marketing and selling process to take a minimum of six to nine months,
and there can be no assurance that all of the information technology and
staffing services segment's product lines can be sold to a single or
multiple buyers at acceptable valuations.
Due to the divestiture plan and the resulting classification of
operations into continuing and discontinued components, segment data is
not provided.
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 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:
<TABLE>
Quarter Ended Three Quarters Ended
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October 31, 1999 October 31, 1998 October 31, 1999 October 31, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Basic:
Net income from
continuing operations $ 1,482,000 $ 1,127,000 $ 2,664,000 $ 2,306,000
Weighted average shares
outstanding 4,360,000 4,562,000 4,404,000 4,664,000
------------ --------- ---------- ----------
Basic income per share $ .34 $ .25 $ .60 $ .49
=============== =============== ================ ===============
Net income (loss) from
discontinued operations $ (1,894,000) $ 449,000 $ (1,105,000) $ 1,391,000
Weighted average shares
outstanding 4,360,000 4,562,000 4,404,000 4,664,000
------------ --------- ---------- ----------
Basic income (loss) per share $ (.43) $ .10 $ (.25) $ .30
=============== =============== ================= ===============
Net income (loss) $ (412,000) $ 1,576,000 $ 1,559,000 $ 3,697,000
Weighted average shares
outstanding 4,360,000 4,562,000 4,404,000 4,664,000
--------- --------- --------- ----------
Basic income (loss) per share $ (.09) $ .35 $ .35 $ .79
=============== =============== ================ ===============
Diluted:
Net income from
continuing operations $ 1,482,000 $ 1,127,000 $ 2,664,000 $ 2,306,000
Less - net income allocated
to subsidiary dilutive stock
options outstanding (84,000) (71,000) (162,000) (145,000)
----------- ------------- ---------------- ---------
Net income used in calculation
of diluted income per share
from continuing operations $ 1,398,000 $ 1,056,000 $ 2,502,000 $ 2,161,000
=============== ================ ================ ===============
Weighted average shares
outstanding 4,360,000 4,562,000 4,404,000 4,664,000
Plus - common equivalent shares
(determined using the "treasury
stock" method) representing
shares issuable upon exercise
of stock options 156,000 188,000 182,000 200,000
---------- ---------- ---------- ---------
Weighted average number
of shares used in calculation
of diluted income per share
from continuing operations 4,516,000 4,750,000 4,586,000 4,864,000
============== =========== =========== ===========
Diluted income per share
from continuing operations $ .31 $ .23 $ .54 $ .44
============== =============== =============== ===============
Net income (loss) from
discontinued operations $ (1,894,000) $ 449,000 $ (1,105,000) $ 1,391,000
Less - net income allocated
to subsidiary dilutive stock
options outstanding - - - -
--------------- -------------- ---------------- ---------------
Net income (loss) used in
calculation of diluted income
(loss) per share from
discontinued operations $ (1,894,000) $ 449,000 $ (1,105,000) $ 1,391,000
============== =============== =============== ===============
Weighted average shares
outstanding 4,360,000 4,562,000 4,404,000 4,664,000
Plus - common equivalent shares
(determined using the "treasury
stock" method) representing
shares issuable upon exercise
of stock options 156,000 188,000 182,000 200,000
---------- ---------- ---------- ---------
Weighted average number
of shares used in calculation
of diluted income(loss) per
share from discontinued
operations 4,516,000 4,750,000 4,586,000 4,864,000
=============== =========== =========== ===========
Diluted income (loss) per share
from discontinued operations $ (.42) $ .09 $ (.24) $ .29
=============== =============== ================ ===============
Net income (loss) $ (412,000) $ 1,576,000 $ 1,559,000 $ 3,697,000
Less - net income allocated
to subsidiary dilutive stock
options outstanding (84,000) (71,000) (162,000) (145,000)
----------- ------------- ---------------- ---------
Net income (loss) used in
calculation of diluted income
(loss) per share $ (496,000) $ 1,505,000 $ 1,397,000 $ 3,552,000
=============== =============== ================ ===============
Weighted average shares
outstanding 4,360,000 4,562,000 4,404,000 4,664,000
Plus - common equivalent shares
(determined using the "treasury
stock" method) representing
shares issuable upon exercise
of stock options 156,000 188,000 182,000 200,000
---------- ---------- ---------- ---------
Weighted average number of
shares used in calculation of
diluted income (loss) per share 4,516,000 4,750,000 4,586,000 4,864,000
=============== =============== ================ ===============
Diluted income (loss) per share $ (.11) $ .32 $ .30 $ .73
=============== =============== ================ ===============
</TABLE>
4. Commitments and Contingencies
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. In the opinion of management and the
Company's legal counsel, the amount of ultimate liability with respect to
these actions will not materially affect the financial condition of the
Company.
As part of its discontinued operations, the Company has a multi-year
fixed price contract for which it has been negotiating contract
modifications. The Company submitted a request to the U.S. Government for
additional funding of approximately $5.7 million and a 30-month
extension. The Company received a modification in late September in
partial settlement of the Company's request, providing funding of $1.9
million and a 16-month extension. An additional $2.0 million and a
nine-month extension have been negotiated but have not yet been reduced
to a formal contract modification and funding appropriation. Negotiations
are continuing for up to an additional $1.5 million and a five-month
extension. The Company's request for additional funding and performance
period was due to U.S. Government delays in providing required equipment.
The Company believes that it continues to have a meritorious position on
remaining open items. If necessary, the Company intends to seek all
remedies available under Federal procurement laws. No reserves have been
recorded on this contract at this time since management believes the
Company will be successful in resolving the remaining open issues.
Additionally, as part of its discontinued operations, the Company has an
unresolved dispute on two fixed price contracts with one customer. During
the quarter ended October 31, 1999, the Company recorded a reserve of
approximately $2.9 million related to these contracts. Management is
working with the customer to have the contracts terminated. Management
believes that the reserves established are sufficient to cover the
outstanding issues on these contracts. The reserve includes costs
estimated to be incurred to terminate the contracts, including severance
and facility costs.
Management believes that the above contingencies will not prevent the
selling of the discontinued segment.
5. 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, 1999.
Divestiture Plan
In July 1999, the Company announced that it was embarking on a
plan to strengthen the Company's focus on the wireless
communications products and service business area. This plan,
which was formalized during the quarter ended October 31, 1999,
involves selling the Company's information technology and staffing
services segment's product lines. The Company has retained the
services of two investment banking firms to assist in the sale of
these product lines. Accordingly, the financial results of this
segment are reported as discontinued operations. Total revenues
and operating income (loss) of the information technology and
staffing services segment were $39.9 million and ($1.7) million
for the nine months ended October 31, 1999, respectively, and
$44.9 million and $2.4 million for the nine months ended October
31, 1998, respectively. The Company currently expects the
marketing and selling process to take a minimum of six to nine
months, and there can be no assurance that all of the information
technology and staffing services segment's product lines can be
sold to a single or multiple buyers at acceptable valuations.
(a) Results of Operations
The Company expects a rapid proliferation of portable and
stationary computing and communication systems and appliances that
are connected by wireless communication networks to the public
internet, private intranets, private local area networks, servers
and other terminal devices. The Company provides products and
services for these markets and the Company is developing
strategies and plans to provide additional products and services
to end-users and network operators. Based on its current strategy,
the Company forecasts that a growing fraction of its revenue and
profit will come from services in the future.
Continuing Operations
During the third quarter of Fiscal Year 2000 (year ending January
31, 2000), the Company recorded product sales revenues of $10.7
million, up 51% from the product sales revenues of $7.1 million
for the comparable period of the prior fiscal year. Increased
third quarter to third quarter product sales revenues is primarily
due to the Company's performance under upgrade programs for
various California customers' wireless motorist aid systems, and
continued market trial sales of the Company's universal power
adapters for wireless communication devices. Product sales
revenues for the first three quarters of Fiscal Year 2000 of $25.2
million were up 31% from $19.3 million for the comparable period
of the prior fiscal year. Increased year-to-year product sales
revenues were primarily due to the upgrade contracts and the sales
of the universal power adapter for wireless communication devices
mentioned above, along with a slight reduction in sales of its
test and measurement systems to major cellular carriers. The
Company currently expects that sales of wireless motorist aid
systems will return to historical levels in Fiscal Year 2001.
Service sales revenues totalled $1.3 million for the quarter ended
October 31, 1999, down marginally from the same period last year.
Service sales revenues were $3.6 million for the three quarters of
Fiscal Year 2000, compared with $3.8 million for the comparable
period of the prior fiscal year. Services revenues' slight
reductions were due to good weather conditions in California which
lower the need for replacement parts. The Company expects services
revenues to resume growth in the fourth quarter and beyond as it
offers its wireless information service to additional segments of
the wireless communications industry.
Cost of product sales was 50% of product revenues in the third
quarter of Fiscal Year 2000 compared with 38% of product revenues
for the comparable period of the prior fiscal year. Cost of
product sales for the first three quarters of this Fiscal Year
2000 was 50% of product revenues compared with 39% for the
comparable period of the prior fiscal year. The increase in cost
of product sales percentage of revenue period over period is due
to the shift in product mix caused by the upgrade contracts and
market trial sales of universal power adapters mentioned above.
Cost of service sales are $.9 million for the third quarter of
Fiscal Year 2000 compared with $.8 million for the comparable
period of the prior fiscal year. Year to date cost of service
sales is $2.5 million compared with $2.6 million for the
comparable period of the prior fiscal year. Third quarter results
included the startup costs of initial contracts in the information
analysis services business for major cellular carriers.
Gross profit totalled $5.7 million for the third quarter of Fiscal
Year 2000, up 16% from $4.9 million for the third quarter of
Fiscal Year 1999. Gross profit for the first three quarters of
Fiscal Year 2000 is $13.5 million, up 4% from $13.0 million for
the comparable period of the prior fiscal year. The gross profit
percentage growth is lower than the overall revenue percentage
growth because of lower contributions from the upgrade contracts
for wireless motorist aid systems and universal power adapter for
wireless communication devices mentioned above. The Company
expects to complete the current contracts for wireless motorist
aid systems during the current fiscal year.
Selling, general and administrative costs were unchanged for the
third quarter of Fiscal Year 2000 from the third quarter of Fiscal
Year 1999. Selling, general and administrative costs for the first
three quarters of Fiscal Year 2000 of $6.7 million were down $.2
million, or 2.9%, from $6.9 million for the comparable period of
the prior fiscal year. The slight change in selling, general and
administrative costs is due to reductions in international selling
expenses as a result of restructuring that was completed during
Fiscal Year 1999.
Engineering and support costs of $848,000 for the third quarter of
Fiscal Year 2000 were up $195,000, or 29.9% from $653,000 for the
third quarter of Fiscal Year 1999. Engineering and support costs
for the first three quarters of Fiscal Year 2000 of $2.8 million
were up $.1 million, or 3.7% from $2.7 million for the comparable
period of the prior fiscal year. The increase period to period are
due to the Company's continued investment in engineering talent to
support its new product releases.
Operating income as a percentage of revenues was 19.4% for the
third quarter of Fiscal Year 2000, compared to 20.6% for the
comparable period of the prior fiscal year. Operating income as a
percentage of revenues was 13.9% for the first three quarters of
Fiscal Year 2000, compared to 14.6% for the comparable period of
the prior fiscal year. These decreases were primarily due to the
lower gross income due to a larger mix of upgrade contracts for
wireless motorist aid systems and the universal power adapter for
wireless communication devices than in the prior year's first
three quarters, as discussed above.
Net interest income (interest income less interest expense) for
the third quarter of Fiscal Year 2000 amounted to $47,000, as
compared to $40,000 for the comparable period of the prior fiscal
year. Net interest income for the first three quarters of Fiscal
Year 2000 amounted to $224,000, as compared to $253,000 for the
comparable period of the prior fiscal year.
The Company's effective tax rate for the first three quarters of
Fiscal Year 2000 is 36.5%, the same as the comparable period of
the prior fiscal year.
Net income from continuing operations of $1.5 million for the
third quarter of Fiscal Year 2000 is up $.4 million from $1.1
million for the comparable period of the prior year. Net income
from continuing operations of $2.7 million for the first three
quarters of Fiscal Year 2000 is up $.4 million from $2.3 million
for the comparable period of the prior year.
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 $2,488,000 and $2,235,000, respectively,
during the first three quarters of Fiscal Years 2000 and 1999,
respectively. Corresponding amounts amortized were $1,387,000 and
$1,202,000, in the first three quarters of Fiscal Year 2000 and
1999, 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 and
services totalled $9.9 million for the third quarter of Fiscal
Year 2000, up from $9.5 million from the comparable prior period.
For the twelve-month periods ended October 31, 1999 and 1998,
orders received were $37.7 million and $27.3 million,
respectively. Because of the long sales cycle involved in selling
the Company's wireless products and services and the high contract
value of each order, 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, including deferred revenue for outstanding post
contract support and extended warranty obligations at October 31,
1999 totalled $14.8 million.
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 conducting its
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 of 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
patents, 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.
Discontinued Operations
The loss from discontinued operations resulted from the
establishment of a $2.9 million reserve in the third quarter of
Fiscal Year 2000 on two fixed price contracts that the Company has
with one customer. Management is working with the customer to have
the contracts terminated. Management believes that the reserves
established are sufficient to cover the outstanding issues on
these contracts. The reserve includes costs estimated to be
incurred to terminate the contracts, including severance and
facility costs. Management believes that this contingency will not
prevent the selling of the discontinued segment.
(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 $6.6 million (includes highly liquid long-term
investments with maturities of 12 to 36 months, and excludes
investments in the Company's deferred compensation plan for
executives) during the first three quarters of Fiscal Year 2000,
but have declined to $2.8 million as of October 31, 1999,
principally due to the Company's stock re-purchase program.
Therefore, 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 2000, the Company's
average days' sales in accounts receivable have decreased,
primarily due to collections from several significant wireless
communications products customers.
Several additional key factors indicating the Company's financial
condition include:
<TABLE>
October 31, 1999 January 31, 1999
---------------- ----------------
<S> <C> <C>
Current ratio 3.11 3.55
Working capital $ 22,319,000 $ 24,833,000
Book value per share $6.81 $7.00
</TABLE>
The decreases in the above factors are due to the stock
re-purchases of approximately $4.4 million in the first three
quarters of Fiscal Year 2000, as well as the fixed price contracts
reserve established in discontinued operations during the third
quarter of Fiscal Year 2000.
The Company has a significant commitment for capital expenditures
at October 31, 1999 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 and
services business in accordance with Financial Accounting Standard
No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed, totaled $2,488,000 and $1,387,000,
respectively, in the first three quarters of Fiscal Year 2000.
The Company's Board of Directors has authorized a stock
re-purchase program of up to 2,000,000 shares. As of October 31,
1999, the Company has re-purchased and retired approximately
1,433,000 shares, of which 223,000 shares with a purchase price of
$4,399,000 were purchased in the first three quarters of Fiscal
Year 2000. Over the term of the program, which began in 1992, the
average price paid per share re-purchased under the program was
$10.94.
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
(see Note 4 of the Notes to Condensed Consolidated Financial
Statements).
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.
Year 2000
Many computer systems and software products in use by businesses
and government organizations were 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"). The Company's technical personnel have
assessed the impact of the Year 2000 Issue on the Company's
products and services.
The Company established a two-phase program to complete its year
2000 efforts. The first phase included planning, inventory, and
assessment; the final phase consisted of correction, testing,
deployment, and acceptance. The Company 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 completed its
inventory of computers and computer peripheral equipment. It was
determined that a few older units were not year 2000 compliant,
and these units were replaced as part of the regular replacement
program this year. Remediation efforts on the readiness of the
Company's internal information systems have been completed.
Products
The Company has assessed the year 2000 compliance of its
software-based products along with the associated components. The
following detailed actions have been taken to date:
Test and measurement systems - Most software programs have been
determined to be year 2000 compliant. For those requiring
remediation, a detailed upgrade program was submitted to customers
over a year ago, and the effort has been coordinated through the
Company's normal upgrade program. The Company believes that this
process is substantially completed.
Wireless motorist aid callbox systems - The technology acquired
from GTE has been determined to be substantially year 2000
compliant. Changes required were minimal. The Company has assessed
the year 2000 reliability of the technology acquired from Cubic
Communications and determined that some problems existed. The
entire installed base that the Company acquired from Cubic
Communications is in the process of being upgraded. The upgrades
will be substantially completed by December 31, 1999, which will
eliminate any potential Year 2000 Issue for these callboxes. At
this time, the Company does not believe that it will incur a
material liability in regard to possible year 2000 problems from
systems previously sold by Cubic Communications.
Other Software Products - Over the years, the Company has been
associated with a modest number of software products. A review of
commercial products has been completed for their year 2000
exposure. The Company concluded that Year 2000 Issues related to
these products are minimal and that required remediation efforts
are completed.
Non-IT Systems
Non-IT systems include embedded technology such as
micro-controllers. The Company's assessment indicated that the
equipment utilized in its manufacturing process is not date
dependent. The Company has assessed 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 have been received from the respective
vendors, and the Company believes that all significant issues have
been resolved.
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. The responses received indicate that many of the
Company's business partners are actively addressing the Year 2000
Issue and are or will be Year 2000 compliant. The Company has
identified and developed contingency plans for business partners
that cannot give adequate assurances that they will be year 2000
ready.
Customers
The Company has contacted 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 has used 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 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's major business partners, other material service
providers, or customers did not adequately address their
respective Year 2000 Issues in a timely manner, even though the
Company has received general or specific assurances, the effect of
which could have a material adverse effect on the Company's
business, results of operations, and financial condition. The
Company has developed overall contingency plans with respect to
this most likely worst case scenario.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including changes in
interest rates and currency exchange rates. As of October 31,
1999, the Company had no accounts receivable denominated in
foreign currencies. The Company's standard terms require foreign
customers to pay for the Company's products with U.S. dollars. For
those orders denominated in foreign currencies, the Company may
limit its exposure to losses from foreign currency transactions by
the purchase of forward foreign exchange contracts. Such activity
to date has been insignificant.
The Company's interest rate risk in the past was limited to a
minor amount of available-for-sale investments; these investments
were sold during the quarter ended October 31, 1999, and
therefore, the interest rate risk was eliminated.
<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, 2000 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 2000 Annual Meeting. As has been the case, any
shareholder who wishes to have a proposal included in the
Company's proxy statement for its 2000 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, 2000.
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, 1999
--------------------------------------
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, 1999 October 31, 1998
---------------- ----------------
<S> <C> <C>
Basic:
Net income from continuing operations $ 2,664,000 $ 2,306,000
Weighted average shares outstanding 4,404,000 4,664,000
----------------- ----------------
Basic income per share $ .60 $ .49
================ ===============
Net income (loss) from discontinued operations $ (1,105,000) $ 1,391,000
Weighted average shares outstanding 4,404,000 4,664,000
----------------- ----------------
Basic income (loss) per share $ (.25) $ .30
================ ===============
Net income $ 1,559,000 $ 3,697,000
Weighted average shares outstanding 4,404,000 4,664,000
----------------- ----------------
Basic income per share $ .35 $ .79
================ ===============
Diluted:
Net income from continuing operations $ 2,664,000 $ 2,306,000
Less - net income allocated to subsidiary dilutive stock options
outstanding (162,000) (145,000)
------------------ ------------------
Net income used in calculation of diluted income per
share from continuing operations $ 2,502,000 $ 2,161,000
================ ===============
Weighted average shares outstanding 4,404,000 4,664,000
Plus- common equivalent shares (determined using the "treasury
stock" method) representing shares issuable upon exercise of
stock options 182,000 200,000
----------------- ----------------
Weighted average number of shares used in calculation of
diluted income per share from continuing operations 4,586,000 4,864,000
================= ================
Diluted income per share from continuing operations $ .54 $ .44
================ ===============
Net income (loss) from discontinued operations $ (1,105,000) $ 1,391,000
Less - net income allocated to subsidiary dilutive stock options
outstanding - -
------------------ ------------------
Net income (loss) used in calculation of diluted income (loss)
per share from discontinued operations $ (1,105,000) $ 1,391,000
================= ===============
Weighted average shares outstanding 4,404,000 4,664,000
Plus- common equivalent shares (determined using the "treasury
stock" method)representing shares issuable upon exercise of
stock options 182,000 200,000
----------------- ----------------
Weighted average number of shares used in calculation of
diluted income (loss) per share from discontinued operations 4,586,000 4,864,000
================= ================
Diluted income (loss) per share from discontinued operations $ (.24) $ .29
================ ===============
Net income
$ 1,559,000 $ 3,697,000
Less - net income allocated to subsidiary dilutive stock options
outstanding (162,000) (145,000)
------------------ ----------------
Net income used in calculation of diluted income per share $ 1,397,000 $ 3,592,000
================ ===============
Weighted average shares outstanding 4,404,000 4,664,000
Plus- common equivalent shares (determined using the "treasury
stock" method) representing shares issuable upon exercise of
stock options 182,000 200,000
----------------- ----------------
Weighted average number of shares used in calculation of
diluted income per share 4,586,000 4,864,000
================= ================
Diluted income per share $ .30 $ .73
================= ================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> OCT-31-1999
<CASH> 2,701
<SECURITIES> 3,173
<RECEIVABLES> 9,785
<ALLOWANCES> 0
<INVENTORY> 4,954
<CURRENT-ASSETS> 32,900
<PP&E> 2,456
<DEPRECIATION> 0
<TOTAL-ASSETS> 42,097
<CURRENT-LIABILITIES> 10,581
<BONDS> 0
0
0
<COMMON> 430
<OTHER-SE> 28,851
<TOTAL-LIABILITY-AND-EQUITY> 42,097
<SALES> 25,189
<TOTAL-REVENUES> 28,774
<CGS> 12,705
<TOTAL-COSTS> 24,765
<OTHER-EXPENSES> 9,532
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (224)
<INCOME-PRETAX> 4,195
<INCOME-TAX> 1,531
<INCOME-CONTINUING> 2,664
<DISCONTINUED> (1,105)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,559
<EPS-BASIC> .35
<EPS-DILUTED> .30
<FN>
NOTE: RECEIVABLES AND PP&E VALUES REPORTED REPRESENT NET AMOUNTS.
</FN>
</TABLE>
