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 April 30, 1999 Commission File Number 0-5449
COMARCO, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2088894
- -------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1551 North Tustin Avenue, Suite 840, Santa Ana, California 92705
- ---------------------------------------------------------- -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (714) 796-1808
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 31, 1999.
Common Stock,
$.10 Par Value 4,401,760 Shares
-------------- ----------------
<PAGE>
Index to Form 10-Q
Page No.
Part I. Financial Information
Condensed Consolidated Balance Sheets
April 30, 1999 and January 31, 1999 1
Condensed Consolidated Statements of Income
Quarters ended April 30, 1999 and April 30, 1998 2
Condensed Consolidated Statements of Cash Flows
Quarters ended April 30, 1999 and April 30, 1998 3
Condensed Consolidated Statements of Comprehensive Income 4
Quarters ended April 30, 1999 and April 30, 1998
Notes to Condensed Consolidated Financial Statements 5-7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-15
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>
April 30, 1999 January 31, 1999
ASSETS (Unaudited) *
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,911,000 $ 3,220,000
Short-term investments 2,645,000 2,775,000
Accounts receivable, net 18,486,000 23,151,000
Inventory 4,631,000 4,157,000
Deferred tax asset 2,112,000 2,112,000
Other current assets 608,000 575,000
----------------- ----------------
Total current assets 36,393,000 35,990,000
Long-term investments 325,000 526,000
Property and equipment, net 2,354,000 2,424,000
Software development costs, net 4,489,000 4,185,000
Intangible assets, net 3,491,000 3,587,000
Other assets 525,000 575,000
----------------- ----------------
TOTAL ASSETS $ 47,577,000 $ 47,287,000
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,133,000 $ 1,075,000
Deferred revenue 2,700,000 2,902,000
Accrued liabilities 10,173,000 10,180,000
----------------- ----------------
Total current liabilities 14,006,000 14,157,000
Deferred income taxes 1,928,000 1,928,000
Stockholders' equity:
Common stock, $.10 par value,
33,750,000 shares authorized,
4,431,360 and 4,456,460 shares
outstanding at April 30, 1999 and
January 31, 1999, respectively 443,000 446,000
Capital contributed in excess of par value 2,280,000 2,795,000
Other comprehensive income:
Unrealized investment gains 16,000 16,000
Retained earnings 28,904,000 27,945,000
----------------- ----------------
Total stockholders' equity 31,643,000 31,202,000
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 47,577,000 $ 47,287,000
================= ================
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>
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
Quarter Ended
--------------------------------------------
April 30, 1999 April 30, 1998
-------------- --------------
<S> <C> <C>
Revenues:
Contract revenues $ 13,332,000 $ 14,394,000
Product sales 7,842,000 7,357,000
--------- ---------
21,174,000 21,751,000
---------- ----------
Direct costs:
Contract costs 8,721,000 9,716,000
Cost of product sales 3,981,000 3,543,000
--------- ---------
12,702,000 13,259,000
Indirect costs 7,006,000 7,255,000
--------- ---------
19,708,000 20,514,000
---------- ----------
Operating income 1,466,000 1,237,000
Net interest income 80,000 118,000
------ -------
Income before income taxes 1,546,000 1,355,000
Income taxes 587,000 515,000
------- -------
Net income $ 959,000 $ 840,000
=============== =============
Earnings per share
Basic $ .22 $ .18
=============== ==============
Diluted $ .20 $ .17
=============== ==============
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
Quarter Ended
April 30, 1999 April 30, 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 959,000 $ 840,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 909,000 597,000
Provision for doubtful accounts receivable 22,000 22,000
Net sales (purchases) of trading securities 98,000 (762,000)
Decrease in accounts receivable 4,643,000 604,000
Decrease (increase) in inventory (474,000) 395,000
Increase in other current assets (33,000) (9,000)
Decrease in other assets 50,000 3,000
Increase in accounts payable 58,000 263,000
Decrease in deferred revenue (202,000) (72,000)
Increase (decrease) in other current liabilities (7,000) 304,000
-------------- -------------
Net cash provided by operating activities 6,023,000 2,185,000
Cash flows from investing activities:
Sales of investments 233,000 87,000
Purchases of property and equipment (229,000) (221,000)
Software development costs (818,000) (571,000)
-------------- -------------
Net cash used in investing activities (814,000) (705,000)
Cash flows from financing activities:
Proceeds from issuance of common stock 31,000 5,000
Purchase of common stock (549,000) -
-------------- -------------
Net cash provided (used) by financing activities (518,000) 5,000
-------------- -------------
Net increase in cash and cash equivalents $ 4,691,000 $ 1,485,000
============== =============
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ - $ -
Income taxes 271,000 39,000
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
<TABLE>
Quarter Ended
---------------------------------------
April 30, 1999 April 30, 1998
-------------- --------------
<S> <C> <C>
Net income $ 959,000 $ 840,000
Other comprehensive income:
Unrealized holding gains on investments,
net of tax - -
--------------- --------------
Comprehensive income $ 959,000 $ 840,000
=============== ==============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
COMARCO, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
April 30, 1999 and April 30,1998
(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 April 30, 1999 and
January 31, 1999 and the results of its operations and cash flows for the
quarters ended April 30, 1999 and April 30, 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 April 30, 1999 are not necessarily
indicative of the results to be obtained for the full fiscal year.
2. Significant Accounting Policies - Per Share Information
During the year ended January 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, Earnings per Share, and computed
basic and diluted net income per share based on the weighted average
number of shares of common stock and potential common stock outstanding
during the period. Potential common stock, for purposes of determining
diluted earnings per share, includes the 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:
<TABLE>
Quarter Ended
April 30, 1999 April 30, 1998
-------------- --------------
<S> <C> <C>
Basic:
Net income $ 959,000 $ 840,000
Weighted average shares outstanding 4,456,000 4,719,000
--------- ---------
Basic income per common share $ .22 $ .18
========== ===========
Diluted:
Net income $ 959,000 $ 840,000
Less - net income allocated to subsidiary
dilutive stock options outstanding (44,000) (22,000)
------------- -------------
Net income used in calculation of diluted
income per share $ 915,000 $ 818,000
============ ==============
Weighted average shares outstanding 4,456,000 4,719,000
Plus - common equivalent shares (determined
using the "treasury stock" method
representing shares issuable upon exercise
of stock options 208,000 206,000
------- -------
Weighted average number of shares used in
calculation of diluted income per common
share 4,664,000 4,925,000
========= =========
Diluted income per common share $ .20 $ .17
========== ==========
</TABLE>
3. Business Segment Information
The Company's operations have been classified into two business areas:
wireless communications products and information technology and staffing
services. The wireless communications products area develops, produces,
and markets a variety of products and services used in the wireless
communications industry. The information technology and staffing services
area provides services to Federal and local government and commercial
customers pursuant to established contracts. Corporate and other consists
primarily of cash and cash equivalents, investments, fixed assets, and
other assets.
Summarized financial information by business segment for the first
quarter of Fiscal Year 2000 is as follows:
<TABLE>
Wireless Information
Communications Technology and Corporate
Products Staffing Services and Other Total
-------------- ----------------- --------- -----
<S> <C> <C> <C> <C>
Revenues 7,842 13,332 - 21,174
Income before income taxes 1,067 483 (4) 1,546
Identifiable assets 19,004 16,226 12,347 47,577
</TABLE>
Summarized financial information by business segment for the first
quarter of Fiscal Year 1999 is as follows:
<TABLE>
Wireless Information
Communications Technology and Corporate
Products Staffing Services and Other Total
-------------- ----------------- --------- -----
<S> <C> <C> <C> <C>
Revenues 7,311 14,440 - 21,751
Income before income taxes 650 655 50 1,355
Identifiable assets 17,146 13,904 14,184 45,234
</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.
The Company has a multi-year fixed price contract for which it is
negotiating a contract modification. The contract is scheduled to end on
September 30, 1999 and the Company cannot complete the statement of work
due to Government delays in providing required equipment. After initial
negotiations, the Company is currently updating a proposal to include all
identified open issues. The Company had previously submitted a proposal
for a 22-month extension and additional funding of $2.7 million, and the
revised proposal is anticipated to be larger. Management currently
expects modification will not occur until late summer. The Company
believes that it has a meritorious position, and if necessary, the
Company intends to seek all remedies available under Federal procurement
laws.
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.
Factors which could cause a material difference in results
include, but are not limited to, the following: regional and
national economic conditions; changes in interest rates; changes
in government spending polices and/or decisions concerning
specific programs; individual business decisions of customers and
business partners; developments in technology; new and expanding
product lines; competition for employee resources; competitive
factors and pricing pressures; the Year 2000 compliance of the
Company's customers and business partners; the Company's ability
to achieve the objectives of its business plans; and changes in
government laws or regulations. 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.
(a) Results of Operations
During the first quarter of Fiscal Year 2000 (year ending January
31, 2000), the Company recorded total revenues of $21.2 million,
down 2.8% from the revenues of $21.8 million for the comparable
period of a year earlier. Decreased year-to-year revenues are
primarily due to:
o completion of the Company's contract at Reagan
Washington National Airport, which expired
September 30, 1998; this contract contributed
$2.0 million of revenue in the prior year's
first quarter;
partially offset by:
o increase in information technology services of approximately
10% period-to-period;
o increase in sales of wireless communications products of
approximately 7% period-to-period;
o increase in commercial staffing services of approximately
7% period-to-period.
Total direct costs of $12.7 million for the first quarter of
Fiscal Year 2000 were down $.6 million, or 4.5%, from $13.3
million for the first quarter of Fiscal Year 1999. The decrease
relates to the reduced revenue activity, as discussed above.
Total indirect costs of $7.0 million for the first quarter of
Fiscal Year 2000 were down $.3 million, or 4.1%, from $7.3 million
for the first quarter of Fiscal Year 1999. The decrease is due to
reduced indirect costs of the wireless communications products
business, as discussed below.
Net interest income (interest income less interest expense) for
the first quarter of Fiscal Year 2000 amounted to $80,000, as
compared to $118,000 for the comparable period of the prior fiscal
year. The decrease is principally due to a reduction in cash
available to invest from an average of $11 million in the first
quarter of Fiscal Year 1999 to an average of $9 million in the
first quarter of Fiscal Year 2000 and lower interest rates.
The Company's effective tax rate for the first quarter of Fiscal
Year 2000 is 38%, the same as the comparable period of the prior
fiscal year.
Net income of $1.0 million for the first quarter of Fiscal Year
2000 is up from $.8 million from the comparable period of the
prior year. Increased net income period-to-period is due to
increased operating results from its wireless communications
products business, partially offset by reduced operating results
from its information technology and staffing services business
segment and lower interest income.
Wireless Communications Products
Wireless communications products revenues increased 6.8% to $7.8
million for the first quarter of Fiscal Year 2000 from $7.3
million for the comparable period of the prior fiscal year. This
increase is due to market trial sales of the Company's universal
power adapter, partially offset by lower quarter-to-quarter sales
of the Company's emergency callbox systems. The Company currently
expects callbox systems revenue to increase significantly in the
second quarter as the Company commenced performance under
contracts to upgrade systems in the Los Angeles and San Francisco
areas late in the first quarter. Summary operating results for
Comarco Wireless Technologies, Inc., the Company's wireless
communications products subsidiary, are as follows:
<TABLE>
Quarter Ended Quarter Ended
April 30, 1999 April 30, 1998
-------------- --------------
<S> <C> <C>
Revenues $7,842,000 $7,311,000
Cost of product sales 3,981,000 3,496,000
--------- ---------
Gross margin 3,861,000 3,815,000
Gross margin percentage 49.2% 52.2%
Indirect costs* 2,794,000 3,165,000
--------- ---------
Operating income $1,067,000 $ 650,000
========== ========
</TABLE>
*Indirect costs include selling, general, and administrative
expenses as well as sustaining engineering and research and
development expenses.
The decreased gross margin percentage is due to market trial sales
of the Company's universal power adapter product, which has a
lower gross margin than the test and measurement and revenue
assurance product families of wireless communications products and
due to higher amortized software development costs
period-to-period.
The decrease in indirect costs of $.4 million for the first
quarter of Fiscal Year 2000 from the comparable period of the
prior fiscal year is principally a result of reduced sustaining
engineering and product support costs as the product lines mature,
as well as slightly decreased selling, general and administrative
costs.
Operating income as a percentage of revenues is 13.6% for the
first quarter of Fiscal Year 2000, compared to 8.9% for the
comparable period of the prior fiscal year. This increase is
primarily due to the reduced indirect costs, 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 $818,000 and $571,000, during the first
quarters of Fiscal Years 2000 and 1999, respectively.
Corresponding amounts amortized in such periods were $568,000 and
$291,000, respectively.
The Company's future product prospects will depend in part on its
ability to enhance the functionality of its existing products in a
timely and cost-effective manner and to identify, develop, and
achieve market acceptance of new products. There can be no
assurance that the Company will be able to respond to
technological advances, changes in customer requirements, or
changes in regulatory requirements or industry standards, and any
significant delays in development, introduction or shipment of
products, or achievement of acceptable product costs, could have a
material adverse effect on the Company's business, operating
results and financial condition.
The Company's orders for wireless communications products totalled
$8.5 million for the first quarter of Fiscal Year 2000, up from
$5.2 million from the comparable prior period. For the
twelve-month periods ended April 30, 1999 and 1998, orders
received were $36.8 million and $26.6 million, respectively.
Because of the long sales cycle involved in selling these products
and the high unit sales price, the Company believes that orders
are best analyzed by looking at a twelve-month time period, as
orders can fluctuate significantly from quarter to quarter. The
value of unfilled orders at April 30, 1999 totalled $17.8 million,
of which $5.3 million relates to long-term maintenance contracts,
and $3.7 million relates to the Company's contract to upgrade the
Los Angeles County callbox system to comply with the Americans
with Disabilities Act's requirements for use by hearing and speech
impaired individuals. The Company currently expects the majority
of the Los Angeles County contract to be performed in Fiscal Year
2000. Separately, the Company has recorded $2.7 million of
deferred revenue for anticipated customer warranty obligations.
The Company has experienced fluctuations in wireless
communications products activity in each of the past five 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 five years. This trend may or may not
continue as the Company broadens its wireless communications
products 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 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 the 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, patents 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
Revenues provided by the Company's information technology and
staffing services business area decreased 7.6%, from $14.4 million
in the first quarter of Fiscal Year 1999 to $13.3 million in the
first quarter of Fiscal Year 2000. Revenues in this business area
decreased from 66.4% of the Company's total revenues in the first
quarter of Fiscal Year 1999 to 62.7% of the Company's total
revenues in the first quarter of Fiscal Year 2000. The decrease in
period-to-period revenue is principally due to the completion of
the Company's contract at Reagan Washington National Airport,
which expired on September 30, 1998. This contract contributed
$2.0 million of revenue in the prior year first quarter. The
Company decided not to pursue the recompete of this contract since
it was marginally profitable, and it would have been unprofitable
if reawarded to the Company.
Sales to the U.S. Government as well as to government prime
contractors were 34% of the Company's total revenue during each of
the first quarters of Fiscal Years 1999 and 2000. In the course of
the Company's business, its government contracts are periodically
opened for competition. The Company plans to aggressively compete
for work opened for competition to the extent possible and to
selectively pursue certain high value Government procurements.
There can be no assurance that the Company will be selected and
awarded the work associated with any of its future proposals. In
addition, government agencies may terminate their contracts in
whole or in part at their convenience. Government agencies may
remove funding previously provided or may not exercise option
periods. Therefore, there can be no assurance that the Government
will fund the portions of existing contracts that are unfunded, or
that the governmental agencies will exercise any options. The
Company has a multi-year fixed price contract for which it is
negotiating a contract modification. The contract is scheduled to
end on September 30, 1999 and the Company cannot complete the
statement of work due to Government delays in providing required
equipment. After initial negotiations, the Company is currently
updating a proposal to include all identified open issues. The
Company had previously submitted a proposal for a 22-month
extension and additional funding of $2.7 million, and the revised
proposal is anticipated to be larger. Management currently
expects modification will not occur until late summer. The
Company believes that it has a meritorious position, and if
necessary, the Company intends to seek all remedies available
under Federal procurement laws.
Operating income (revenues less direct costs, indirect costs, and
depreciation and amortization) for the Company's information
technology and staffing services business segment is down from
$607,000 in the first quarter of Fiscal Year 1999 to $399,000 in
the first quarter of Fiscal Year 2000. This decrease is due to
reduced operating income from information technology services
contracts and the completion of the contract at Reagan Washington
National Airport. Reduced operating income from information
technology service contracts is due the Company's expenditures in
pursuing efforts in the commercial and Federal non-defense
marketplaces.
(b) Financial Condition
The Company signed a loan agreement with a bank effective
September 26, 1994, which was last amended effective August 21,
1998. The loan agreement consists of a $10 million revolving
credit facility, which expires June 30, 2000. The revolving credit
facility is unsecured provided that the Company maintains certain
covenants. Currently, management anticipates that cash flow will
remain at a level which will enable the Company to avoid utilizing
the credit facility except to support letters of credit and
acquisition financing, and that the Company will be able to
purchase investments on a regular basis. The Company's cash and
investment balances averaged $9 million (includes highly liquid
long-term investments with maturities of 12 to 36 months) during
the first quarter of Fiscal Year 2000. 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 quarter of Fiscal Year 2000, the Company's
average days' sales in accounts receivable decreased, primarily
due to collections from several significant wireless
communications products customers during the quarter.
Several additional key factors indicating the Company's financial
condition include:
<TABLE>
April 30, 1999 January 31, 1999
-------------- ----------------
<S> <C> <C>
Current ratio 2.60 2.54
Working capital $ 22,387,000 $ 21,833,000
Book value per share $7.14 $7.00
</TABLE>
The Company continued to demonstrate solid financial strength in
the above financial factors during the first quarter of Fiscal
Year 2000 due to continued profitable activity.
During the first quarter of Fiscal Year 2000, the Company
generated $6.0 million of cash flows from operating activities,
up sharply from $2.2 million in the prior year's first quarter.
This increase is primarily due to strong accounts receivable
collections during the current year's first quarter.
The Company has a significant commitment for capital expenditures
at April 30, 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
business in accordance with Financial Accounting Standard No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed, totaled $818,000 and $568,000,
respectively, in the first quarter of Fiscal Year 2000.
The Company's Board of Directors has authorized a stock
re-purchase program of up to 1,500,000 shares. As of April 30,
1999, the Company has re-purchased and retired approximately
1,237,000 shares of which 27,100 shares with a purchase price of
$549,000 was purchased in the first quarter 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 $9.57.
Subsequent to April 30, 1999 and through June 4, 1999, the Company
has re-purchased another 47,300 shares for an aggregate amount of
$938,000.
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 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"). The Company's technical
personnel has assessed the impact of the Year 2000 Issue on the
Company's products and services.
The Company has established a two-phase program to complete its
year 2000 efforts. The first phase includes planning, inventory,
and assessment; the final phase consists of correction, testing,
deployment, and acceptance. The Company has divided its efforts
into the categories of internal information systems, products,
non-IT systems, business partners, and customers. The status of
each with respect to the Company's two-phase process is addressed
below.
Information Systems
The Company has received letters or has completed remediation
whereby all of its accounting and manufacturing software has been
determined to be year 2000 compliant. The Company is completing
its inventory of computers and computer peripheral equipment and
has determined that a few older units are not year 2000 compliant.
These units will be replaced as part of the regular replacement
program this year. Remediation efforts on the readiness of the
Company's internal information systems are expected to be
completed by late summer 1999.
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/revenue assurance products - Most software
programs have been determined to be year 2000 compliant. For those
requiring remediation, a detailed upgrade program has been sent to
each customer, and the effort is being coordinated through the
Company's normal upgrade program.
Emergency callboxes - The technology acquired from GTE has been
determined to be substantially year 2000 compliant. Changes
required are minimal. The Company has assessed the year 2000
reliability of the technology acquired from Cubic Communications
and determined that some problems may exist. Approximately
two-thirds of the installed base is in the process of being
upgraded, which will eliminate any potential Year 2000 Issue for
these callboxes. The remaining one-third of the installed base has
been offered an upgrade proposal and if accepted, would remove any
remaining year 2000 concerns. To the degree the outstanding
upgrade proposals are not accepted, there would remain some
possible year 2000 exposure. 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. But no assurance can be given at this time as to
the amount, if any, of the liability the Company may ultimately
sustain in this regard.
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 insignificant.
The Company's program to assess and correct any Year 2000 Issues
with its products is well underway, and upgrade programs are or
will be in place during 1999 to coordinate the efforts involved.
Efforts are being coordinated through the Company's normal upgrade
channels, and at this time no additional resources need to be
assigned to the effort.
Non-IT Systems
Non-IT systems include embedded technology such as
micro-controllers. The Company's 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 are being received from the respective
vendors, and the Company does not expect any significant issues in
this area. The Company will continue to assess non-IT systems and
expects substantial resolution by late summer 1999.
Business Partners
Business partners include, but are not limited to: suppliers, the
Company's bank, insurance and benefit providers, and property
management firms. The Company's operations are dependent to
varying degrees on the readiness of these and other partners. The
Company has issued questionnaires to or has received
correspondence from most of the currently identified business
partners. To date, the responses received indicate that many of
the Company's business partners are actively addressing the Year
2000 Issue. The Company is continuing to pursue responses in order
to complete its evaluation. By late summer 1999, the Company
expects to have identified and developed contingency plans for
business partners that cannot give adequate assurances that they
will be year 2000 ready.
Customers
The Company is contacting its customers to assess the state of
their readiness and the potential impact on the Company's
operations. The Company's main concern is principally with U.S.
and State and local government entities. The primary concern is
that there will be delays in contract payments to the Company,
which would require a temporary increase in working capital funded
from bank borrowings. The Company has substantial borrowing
capacity available under its current line of credit, which extends
to June 2000. The Company will continue to evaluate the cash flow
impact of Year 2000 Issues and develop additional contingency
financing plans, if required.
The Company will use both internal and external resources to
ensure that it is year 2000 ready. The Company has not deferred
any significant information technology projects as a result of the
year 2000 effort. The total cost of the program is being funded
through operating cash flows. The total cost associated with the
year 2000 effort, except for certain product modifications
discussed above, is not expected to be material to the Company's
consolidated results of operations and financial position.
Although the Company's year 2000 efforts are intended to minimize
the adverse effects of the Year 2000 Issue on the its business and
operations, the actual effects of the Issue and the success or
failure of the Company's efforts described above cannot be known
until the year 2000. Therefore, in the opinion of management, the
most reasonable likely worst case scenario is the possibility that
the Company's major business partners, other material service
providers, or customers will not adequately address their
respective Year 2000 Issues in a timely manner, the effect of
which could have a material adverse effect on the Company's
business, results of operations, and financial condition.
The Company will be developing contingency plans with respect to
this most likely worst case scenario as additional information is
obtained from both business partners and customers. Such plans
will not be finalized until late summer 1999 at the earliest.
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 April 30, 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 is limited to approximately
$325,000 of available-for-sale investments as of April 30, 1999.
These investments are high-grade municipal debt securities with
maturities from one to five years which are subject to interest
rate fluctuations.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are included herewith:
ll. Schedule of Computation of Net Income Per Share
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMARCO, Inc.
--------------------------------
(Registrant)
June 14, 1999
----------------------------------
Thomas P. Baird
Chief Financial Officer
(Authorized Officer and Principal Financial Officer)
Exhibit ll
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
<TABLE>
Quarter Ended
-------------------------------------------
April 30, 1999 April 30, 1998
<S> <C> <C>
BASIC
Net income $ 959,000 $ 840,000
Weighted average shares outstanding 4,456,000 4,719,000
----------------- ----------------
Basic income per common share $ .22 $ .18
================ ===============
DILUTED
Net income $ 959,000 $ 840,000
Less - net income allocated to subsidiary
dilutive stock options outstanding (44,000) (22,000)
------------------ -----------------
Net income used in calculation of diluted
income per share $ 915,000 $ 818,000
================ ===============
Weighted average shares outstanding 4,456,000 4,719,000
Plus- common equivalent shares (determined
using the "treasury stock" method)
representing shares issuable upon exercise
of stock options 208,000 206,000
------- -------
Weighted average number of shares used in
calculation of diluted income per common share 4,664,000 4,925,000
================= ================
Diluted income per common share $ .20 $ .17
================ ===============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> APR-30-1999
<CASH> 7,911
<SECURITIES> 2,970
<RECEIVABLES> 18,486
<ALLOWANCES> 0
<INVENTORY> 4,631
<CURRENT-ASSETS> 36,393
<PP&E> 2,354
<DEPRECIATION> 0
<TOTAL-ASSETS> 47,577
<CURRENT-LIABILITIES> 14,006
<BONDS> 0
<COMMON> 443
0
0
<OTHER-SE> 31,200
<TOTAL-LIABILITY-AND-EQUITY> 47,577
<SALES> 7,842
<TOTAL-REVENUES> 21,174
<CGS> 3,981
<TOTAL-COSTS> 19,708
<OTHER-EXPENSES> 7,159
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (80)
<INCOME-PRETAX> 1,546
<INCOME-TAX> 587
<INCOME-CONTINUING> 959
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 959
<EPS-BASIC> .22
<EPS-DILUTED> .20
<FN>
<NOTE-RECEIVABLES AND PP&E VALUES REPORTED REPRESENT NET AMOUNTS>
</FN>
</TABLE>
