<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
-------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended
OCTOBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-5449
COMARCO, INC.
(Exact name of registrant as specified in its charter)
--------------------
<TABLE>
<S> <C>
California 95-2088894
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
</TABLE>
2 Cromwell, Irvine, California 92618
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (949) 599-7400
--------------------------------------------------------------------------------
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[ ]
As of December 12, 2000, there were 7,041,742 shares of Common Stock
outstanding.
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COMARCO, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
OCTOBER 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION
Page
----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of October 31, 2000 and
January 31, 2000............................................................... 3
Condensed Consolidated Statements of Income for the Three and Nine Months
Ended October 31, 2000 and 1999................................................ 4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended October 31, 2000 and 1999................................................ 5
Notes to Condensed Consolidated Financial Statements............................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................................... 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK........................................................... 16
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................................... 17
ITEM 2. CHANGES IN SECURITIES....................................................... 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................. 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................... 17
ITEM 5. OTHER INFORMATION........................................................... 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................ 17
SIGNATURE............................................................................. 18
</TABLE>
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMARCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
October 31, January 31,
2000 2000
----------- -----------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $18,386,000 $ 5,064,000
Short-term investments 4,375,000 3,721,000
Accounts receivable, net 10,888,000 6,695,000
Inventory 5,508,000 4,852,000
Deferred tax asset 2,787,000 2,908,000
Net assets available for sale 666,000 9,361,000
Other current assets 4,020,000 2,651,000
----------- -----------
Total current assets 46,630,000 35,252,000
Property and equipment, net 3,612,000 2,763,000
Software development costs, net 6,955,000 5,839,000
Intangible assets, net 1,987,000 2,222,000
Other assets 429,000 72,000
----------- -----------
$59,613,000 $46,148,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,131,000 $ 666,000
Deferred revenue 4,510,000 3,077,000
Accrued liabilities 12,588,000 8,052,000
----------- -----------
Total current liabilities 18,229,000 11,795,000
Deferred income taxes 3,135,000 2,599,000
Minority interest 117,000 --
Stockholders' equity 38,132,000 31,754,000
----------- -----------
$59,613,000 $46,148,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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COMARCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 13,153,000 $ 11,959,000 $ 35,202,000 $ 28,774,000
Cost of sales 6,414,000 6,258,000 16,978,000 15,233,000
------------ ------------ ------------ ------------
Gross profit 6,739,000 5,701,000 18,224,000 13,541,000
Selling, general and administrative costs 3,236,000 2,538,000 9,132,000 6,721,000
Engineering and support costs 1,239,000 848,000 3,568,000 2,811,000
------------ ------------ ------------ ------------
Operating income before severance costs 2,264,000 2,315,000 5,524,000 4,009,000
Severance costs -- -- 1,325,000 --
------------ ------------ ------------ ------------
Operating income 2,264,000 2,315,000 4,199,000 4,009,000
Other income 327,000 47,000 501,000 224,000
Minority interest (2,000) (29,000) (4,000) (38,000)
------------ ------------ ------------ ------------
Income before income taxes 2,589,000 2,333,000 4,696,000 4,195,000
Income tax expense 946,000 851,000 1,715,000 1,531,000
------------ ------------ ------------ ------------
Net income from continuing operations 1,643,000 1,482,000 2,981,000 2,664,000
Net income (loss) from discontinued operations (121,000) (1,894,000) 378,000 (1,105,000)
------------ ------------ ------------ ------------
Net income (loss) $ 1,522,000 $ (412,000) $ 3,359,000 $ 1,559,000
============ ============ ============ ============
Earnings per share -- continuing operations:
Basic $ 0.24 $ 0.23 $ 0.45 $ 0.40
============ ============ ============ ============
Diluted $ 0.22 $ 0.21 $ 0.40 $ 0.36
============ ============ ============ ============
Earnings (loss) per share -- discontinued operations:
Basic $ (0.02) $ (0.29) $ 0.05 $ (0.16)
============ ============ ============ ============
Diluted $ (0.02) $ (0.28) $ 0.05 $ (0.16)
============ ============ ============ ============
Earnings (loss) per share:
Basic $ 0.22 $ (0.06) $ 0.50 $ 0.24
============ ============ ============ ============
Diluted $ 0.20 $ (0.07) $ 0.45 $ 0.20
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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COMARCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
October 31,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 2,981,000 $ 2,664,000
Adjustments to reconcile net income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 3,298,000 2,283,000
Loss (gain) on disposal of property and equipment (2,000) 65,000
Deferred income taxes 657,000 (111,000)
Provision for doubtful accounts receivable 18,000 18,000
Minority interest in earnings of subsidiary 4,000 38,000
Changes in operating assets and liabilities:
Increases in trading securities (665,000) (431,000)
Decrease (increase) in accounts receivable (4,211,000) 1,715,000
Increase in inventory (656,000) (797,000)
Decrease (increase) in other current assets 2,392,000 (128,000)
Increase in other assets (7,000) (33,000)
Increase in current liabilities 4,957,000 831,000
------------ ------------
Net cash provided by operating activities 8,766,000 6,114,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of investments 11,000 559,000
Purchases of property and equipment (1,528,000) (1,262,000)
Proceeds from sales of property and equipment 2,000 9,000
Software development costs (3,500,000) (2,488,000)
------------ ------------
Net cash used in investing activities (5,015,000) (3,182,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,632,000 919,000
Purchase of common stock -- (4,399,000)
------------ ------------
Net cash provided by (used in) financing activities 1,632,000 (3,480,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents --
continuing operations 5,383,000 (548,000)
Net increase in cash and cash equivalents --
discontinued operations 7,939,000 29,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 13,322,000 (519,000)
Cash and cash equivalents, beginning of period 5,064,000 3,220,000
------------ ------------
Cash and cash equivalents, end of period $ 18,386,000 $ 2,701,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest -- --
============ ============
Cash paid for income taxes $ 500,000 $ 3,235,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization:
COMARCO, Inc and its wireless technologies subsidiary Comarco Wireless
Technologies, Inc. (collectively, "COMARCO" or the "Company") is a provider of
test and measurement products and engineering services to the wireless
communications industry, fixed wireless communications systems and power
accessories for laptop computers, cellular telephones, handheld devices and
portable printers. COMARCO is a California corporation whose Common Stock has
been publicly traded since 1971 when it was spun-off from Genge Industries, Inc.
Comarco Wireless Technologies, Inc. ("CWT") was incorporated in the state of
Delaware in September 1993. During October 1999, the Company embarked on a plan
to divest its non-wireless businesses and to focus on its wireless
communications products and engineering services business. The divestiture plan
was completed during November 2000. Accordingly, the Company's continuing
operations consist solely of the operations of CWT.
Basis of Presentation:
The interim condensed consolidated financial statements of COMARCO, Inc.
and subsidiaries included herein have been prepared without audit in accordance
with generally accepted accounting principles for interim information and with
the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The Company
believes that the disclosures are adequate to make the information presented not
misleading when read in conjunction with the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended January 31, 2000 and Quarterly Reports on Form 10-Q for prior quarters of
the current fiscal year. The financial information presented herein reflects all
adjustments, consisting only of normal recurring accruals, which are, in the
opinion of management, necessary for a fair presentation of the results for the
interim periods presented. The results for the three and nine months ended
October 31, 2000 are not necessarily indicative of the results to be expected
for the year ended January 31, 2001.
Accounting Pronouncements:
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB No. 101"). SAB No. 101 provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC. SAB No.
101 outlines the basic criteria that must be met to recognize revenue and
provides guidance for disclosures related to revenue recognition policies. The
Company is in the process of determining the impact that adoption will have on
its consolidated financial position or results of operations.
6
<PAGE> 7
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications:
Certain prior period balances have been reclassified to conform to the
current period presentation.
2. STOCKHOLDERS' EQUITY AND STOCK SPLIT
During the third quarter ended October 31, 2000, the Company's Board of
Directors approved a three-for-two split of the Company's Common Stock. All
stockholders of record on October 6, 2000 (the "Record Date") received one-half
additional share for each share owned on the Record Date. Shares resulting from
the split were distributed by the transfer agent on October 27, 2000. All share
and per share amounts contained herein for all periods presented reflect this
stock split.
3. DISCONTINUED OPERATIONS
Prior to the third quarter ended October 31, 2000, the Company completed
five of six planned business disposition transactions. On November 17, 2000, the
Company completed the final disposition transaction with the sale of the
Company's airport services business for approximately $0.5 million in cash.
7
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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4. EARNINGS PER SHARE
The Company calculates net income per share in accordance with Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128").
Under SFAS No. 128, basic net income per share is calculated by dividing net
income by the weighted-average number of common shares outstanding during the
reporting period. Diluted net income per share reflects the effects of
potentially dilutive securities. The following tables present reconciliations of
the numerators and denominators of the basic and diluted earnings per share
computations for net income. In the tables below, "Income" represents the
numerator and "Shares represent the denominator:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
----------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC:
Net income from continuing operations $ 1,643,000 $ 1,482,000 $ 2,981,000 $ 2,664,000
Weighted average shares outstanding 6,831,000 6,540,000 6,677,000 6,606,000
----------- ----------- ----------- -----------
Basic income per share from continuing
operations $ 0.24 $ 0.23 $ 0.45 $ 0.40
=========== =========== =========== ===========
Net income (loss) from discontinued
operations $ (121,000) $(1,894,000) $ 378,000 $(1,105,000)
Weighted average shares outstanding 6,831,000 6,540,000 6,677,000 6,606,000
----------- ----------- ----------- -----------
Basic income (loss) per share from
discontinued operations $ (0.02) $ (0.29) $ 0.05 $ (0.16)
=========== =========== =========== ===========
Net income (loss) $ 1,522,000 $ (412,000) $ 3,359,000 $ 1,559,000
Weighted average shares outstanding 6,831,000 6,540,000 6,677,000 6,606,000
----------- ----------- ----------- -----------
Basic income (loss) per share $ 0.22 $ (0.06) $ 0.50 $ 0.24
=========== =========== =========== ===========
</TABLE>
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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
DILUTED:
Net income from continuing operations $ 1,643,000 $ 1,482,000 $ 2,981,000 $ 2,664,000
Effect of subsidiary options (95,000) (84,000) (211,000) (162,000)
----------- ----------- ----------- -----------
Net income used in calculation of
diluted income per share from
continuing operations $ 1,548,000 $ 1,398,000 $ 2,770,000 $ 2,502,000
=========== =========== =========== ===========
Weighted average shares outstanding 6,831,000 6,540,000 6,677,000 6,606,000
Effect of dilutive securities - stock options 220,000 234,000 293,000 273,000
----------- ----------- ----------- -----------
Weighted average shares used in
calculation of diluted income per
share from continuing operations 7,051,000 6,774,000 6,970,000 6,879,000
=========== =========== =========== ===========
Diluted income per share from
continuing operations $ 0.22 $ 0.21 $ 0.40 $ 0.36
=========== =========== =========== ===========
Net income (loss) from discontinued operations $ (121,000) $(1,894,000) $ 378,000 $(1,105,000)
Effect of subsidiary options -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) used in calculation
of diluted income per share from
discontinued operations $ (121,000) $(1,894,000) $ 378,000 $(1,105,000)
=========== =========== =========== ===========
Weighted average shares outstanding 6,831,000 6,540,000 6,677,000 6,606,000
Effect of dilutive securities - stock options 220,000 234,000 293,000 273,000
----------- ----------- ----------- -----------
Weighted average shares used in
calculation of diluted income
(loss) per share from discontinued
operations 7,051,000 6,774,000 6,970,000 6,879,000
=========== =========== =========== ===========
Diluted income (loss) per share from
discontinued operations $ (0.02) $ (0.28) $ 0.05 $ (0.16)
=========== =========== =========== ===========
</TABLE>
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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 1,522,000 $ (412,000) $ 3,359,000 $ 1,559,000
Effect of subsidiary options (95,000) (84,000) (211,000) (162,000)
----------- ----------- ----------- -----------
Net income used in calculation of
diluted income per share $ 1,427,000 $ (496,000) $ 3,148,000 $ 1,397,000
=========== =========== =========== ===========
Weighted average shares outstanding 6,831,000 6,540,000 6,677,000 6,606,000
Effect of dilutive securities - stock
options 220,000 234,000 293,000 273,000
----------- ----------- ----------- -----------
Weighted average shares used in
calculation of diluted income per
share 7,051,000 6,774,000 6,970,000 6,879,000
=========== =========== =========== ===========
Diluted income per share $ 0.20 $ (0.07) $ 0.45 $ 0.20
=========== =========== =========== ===========
</TABLE>
6. CONTINGENCIES
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. Management does not believe that the impact of such
matters will have a material adverse effect on the Company's financial position
or results of operations when resolved.
7. SUBSEQUENT EVENTS
On December 7, 2000, the Company acquired all the outstanding Common
Stock of EDX Engineering, Inc. ("EDX") for consideration consisting of 257,428
shares of COMARCO Common Stock, valued at $4.2 million on the day the
transaction closed, and $2.1 million in cash. The acquisition of EDX will be
accounted for under the purchase method of accounting. EDX is a leading
developer of system planning tools for the wireless communications industry
based in Eugene, Oregon.
During 1992, the Company's Board of Directors authorized a stock
repurchase program of up to three million shares of Common Stock. From program
inception through October 31, 2000, the Company has repurchased approximately
2,184,000 shares for an average per share price of $7.37 per share. For the nine
months ended October 31, 2000, no shares were repurchased. Subsequent to October
31, 2000, the Company repurchased an additional 58,000 shares in the open
market, bringing the total number of shares repurchased to approximately
2,242,000 shares for an average per share price of $7.62 per share.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
Except for historical information contained herein, the matters
set forth in this quarterly report on Form 10-Q contain forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, the Company's actual results could differ materially and
adversely from those expressed in any forward-looking statements as a result of
various factors. Potential risks and uncertainties include such factors as the
level of sales of our products, timely and cost-effective product development,
market acceptance of new products, foreign marketing, the level of competition
for the Company's products and services, our ability to meet contractual
commitments with our customers, and the ability to meet the technical
requirements of our customers. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," "may," "will" and
variations of these words or similar expressions are intended to identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. Investors are also directed to consider a more detailed description
of risks and uncertainties facing the Company discussed in the Company's Annual
Report on Form 10-K for the year ended January 31, 2000.
OVERVIEW
During October 1999, the Company embarked on a plan to divest its
non-wireless businesses and to focus on its wireless communications products and
engineering services business. The divestiture plan was completed during
November 2000. Accordingly, the Company's continuing operations consist solely
of the operations of Comarco Wireless Technologies, Inc. ("CWT"). The Company is
a provider of test and measurement products and engineering services to the
wireless communications industry. The Company also designs and manufactures
power accessories for laptop computers, cellular telephone, hand held devices
and portable printers, and fixed wireless communication systems (callboxes).
The Company's portfolio of test and measurement products and engineering
services includes products used to monitor, analyze and benchmark the
performance of wireless system networks. Additionally, the Company has developed
a large scale mobile testing service that was deployed nationally during the
fourth quarter ended January 31, 2000. This mobile testing service is currently
being used for the collection and analysis of information related to the quality
of service as experienced by wireless phone users. This information and analysis
is critical to wireless service providers, infrastructure vendors and other
wireless industry participants. Utilizing this mobile testing service as a
foundation, the Company anticipates expanding its offering of engineering
services to include cellular and fixed broadband network design, deployment and
optimization.
The Company is also in the late stages of development of a stationary
testing platform. The first offering based on this platform is anticipated to be
RAP(TM) Central, products and engineering services for the wireless revenue
assurance information marketplace. The goal of RAP(TM) Central is to automate
data collection, analysis and delivery of revenue assurance information for
wireless carriers, and improve the revenue capture by assisting carriers in
billing for every minute of use. The Company anticipates
11
<PAGE> 12
delivering RAP(TM) Central products and providing related engineering services
during the first quarter ending April 30, 2001.
During the third quarter ended October 31, 2000, the Company completed
the design and development of the ChargeSource 70-watt universal power adapter,
COMARCO's second-generation mobile power system that powers and charges most
laptop computers, cellular telephones, handheld devices and portable printers.
Also during the third quarter, the Company went into production and began
delivering on a $10 million order from Targus Group International for
ChargeSource 70-watt universal power adapters.
The Company's fixed communications systems include a number of callbox
systems that provide emergency service over wireless and wire-line backbones. In
addition to the design and manufacture of callbox systems, the Company provides
project installation and long-term maintenance services.
RESULTS OF OPERATIONS -- CONTINUING OPERATIONS
The following table and discussion provide information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the condensed consolidated financial
statements and accompanying notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
Percentage of Revenues
----------------------------------------------
Three Months Ended Nine Months Ended
October 31, October 31,
------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 48.8 52.3 48.2 52.9
------ ------ ------ ------
Gross profit 51.2 47.7 51.8 47.1
Selling, general and administrative
costs 24.6 21.2 25.9 23.4
Engineering and support costs 9.4 7.1 10.2 9.8
------ ------ ------ ------
Operating income before severance costs 17.2 19.4 15.7 13.9
Severance costs -- -- 3.8 --
------ ------ ------ ------
Operating income 17.2 19.4 11.9 13.9
Other income 2.5 0.4 1.4 0.8
Minority interest -- (0.3) -- (0.1)
------ ------ ------ ------
Income before income taxes 19.7 19.5 13.3 14.6
Income tax expense 7.2 7.1 4.8 5.3
------ ------ ------ ------
Net income from continuing operations 12.5% 12.4% 8.5% 9.3%
====== ====== ====== ======
</TABLE>
12
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COMPARISON OF THE THREE MONTHS ENDED OCTOBER 31, 2000 TO THE THREE MONTHS ENDED
OCTOBER 31, 1999
Revenue. Revenue for the three months ended October 31, 2000 was $13.2
million compared to $12.0 million for the corresponding quarter of the prior
fiscal year, an increase of $1.2 million. The net increase in third quarter
revenue was primarily due to a $4.8 million increase in sales of test and
measurement products and engineering services which was offset by a $2.8 million
decrease of fixed communication systems sales. With respect to the decrease in
fixed communication systems sales, the Company completed certain contracts to
install and upgrade several callbox systems during the prior fiscal year. These
upgrade contracts were not expected to recur in the current fiscal year.
Cost of Sales. Cost of sales for the three months ended October 31, 2000
was $6.4 million compared to $6.3 million for the corresponding quarter of the
prior fiscal year, an increase of $0.1 million. As a percentage of revenue, cost
of sales was 48.8% and 52.3% for the quarters ended October 31, 2000 and 1999
respectively.
Gross Profit and Margin. For the third quarter ended October 31, 2000,
gross profit increased $1.0 million to $6.7 million from $5.7 million for the
corresponding quarter of the prior fiscal year. Gross margin percentage for the
third quarter was 51.2% as compared to 47.7% for the third quarter ended October
31, 1999. The increase in gross profit was driven by increased revenue, with the
increase in the gross margin percentage attributable to increased sales of the
Company's higher margin test and measurement products and engineering services.
Selling, General and Administrative Costs. Selling, general and
administrative costs for the three months ended October 31, 2000 were $3.2
million compared to $2.5 million for the corresponding quarter of the prior
fiscal year, an increase of $0.7 million. The increase is attributable to
staffing increases in support of the engineering services business that
commenced full operations during the first quarter of the current fiscal year,
as well as, costs related to the marketing of the ChargeSource 70-watt universal
power adapter. As a percentage of revenue, selling, general and administrative
costs were 24.6% and 21.2% for the quarters ended October 31, 2000 and 1999,
respectively.
Engineering and Support Costs. Engineering and support costs for the
three months ended October 31, 2000 were $1.2 million compared to $0.8 million
for the corresponding quarter of the prior fiscal year, an increase of $0.4
million. The increase is primarily attributable to the Company's efforts to
recruit and retain qualified technical personnel to develop and support new
products for the wireless communications industry.
Other Income. For the third quarter ended October 31, 2000, other income
was $0.3 million, as compared to $47,000 for the corresponding quarter of the
prior fiscal year. Other income consists primarily of interest on invested cash
balances, excluding investments in the Company's deferred compensation plan for
executives. The Company has received net cash proceeds from the disposition of
the Company's non-wireless businesses resulting in higher cash balances, $18.4
million as of October 31, 2000 as compared to $2.7 million as of October 31,
1999.
Income Tax Expense. Income tax expense was $0.9 million for the three
months ended October 31, 2000 and 1999. The Company's effective tax rate for
both periods was 36.5%.
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Net Income from Continuing Operations. Net income from continuing
operations was $1.6 million for the three months ended October 31, 2000 compared
to $1.5 million for the corresponding quarter of the prior fiscal year. The
increase in net income from continuing operations was primarily due to increased
interest income on higher cash balances during the quarter.
COMPARISON OF THE NINE MONTHS ENDED OCTOBER 31, 2000 TO THE NINE MONTHS ENDED
OCTOBER 31, 1999
Revenue. Revenue for the nine months ended October 31, 2000 was $35.2
million compared to $28.8 million for the corresponding period of the prior
fiscal year, an increase of $6.4 million or 22.3%. The net increase in revenue
was primarily due to a $12.2 million increase in sales of test and measurement
products and engineering services which was offset by a $4.0 million decrease of
fixed communication systems sales and a $1.3 million decrease in ChargeSource
sales. With respect to the decrease in fixed communication systems sales, the
Company completed certain contracts to install and upgrade several callbox
systems during the prior fiscal year. These upgrade contracts were not expected
to recur in the current fiscal year. Also, during the nine months ended October
31, 2000, the Company completed the design and development of the
second-generation ChargeSource 70-watt universal power adapter and discontinued
production and sales of the 35-watt universal power adapter. Accordingly,
ChargeSource sales for the nine months ended October 31, 2000 were less than
sales for the corresponding period of the prior fiscal year.
Cost of Sales. Cost of sales for the nine months ended October 31, 2000
was $17.0 million compared to $15.2 million for the corresponding quarter of the
prior fiscal year, an increase of $1.8 million. As a percentage of revenue, cost
of sales was 48.2% and 52.9% for the nine months ended October 31, 2000 and 1999
respectively.
Gross Profit and Margin. For the nine months ended October 31, 2000,
gross profit increased $4.7 million or 34.6%, to $18.2 million from $13.5
million for the corresponding quarter of the prior fiscal year. Gross margin
percentage for the nine months was 51.8% as compared to 47.1% for the nine
months ended October 31, 1999. The increase in gross profit was driven by
increased revenue, with the increase in the gross margin percentage attributable
to increased sales of the Company's higher margin test and measurement products
and engineering services.
Selling, General and Administrative Costs. Selling, general and
administrative costs for the nine months ended October 31, 2000 were $9.1
million compared to $6.7 million for the corresponding period of the prior
fiscal year, an increase of $2.4 million or 35.9%. The increase is attributable
to staffing increases in support of the engineering services business that
commenced full operations during the first quarter of the current fiscal year,
as well as, costs related to the marketing of the ChargeSource 70-watt universal
power adapter. As a percentage of revenue, selling, general and administrative
costs were 25.9% and 23.4% for the nine months ended October 31, 2000 and 1999,
respectively.
Engineering and Support Costs. Engineering and support costs for the
nine months ended October 31, 2000 were $3.6 million compared to $2.8 million
for the corresponding quarter of the prior fiscal year, and increase of $0.8
million or 26.9%. The increase is primarily attributable to the Company's
efforts to recruit and retain qualified technical personnel to develop and
support new products for the wireless communications industry.
Severance Costs. During the second quarter ended July 31, 2000 and in
conjunction with the disposition of the Company's non-wireless businesses,
COMARCO was required to record a $1.3 million charge to continuing operations
for costs related to severance agreements for the Company's outgoing corporate
staff. Accordingly, for the nine months ended October 31, 2000, severance costs
were $1.3 million. No comparable costs were incurred during the corresponding
period of the prior fiscal year.
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Other Income. For the nine months ended October 31, 2000, other income
was $0.5 million, as compared to $0.2 for the corresponding period of the prior
fiscal year. Other income consists primarily of interest on invested cash
balances, excluding investments in the Company's deferred compensation plan for
executives. The Company has received net cash proceeds from the disposition of
the Company's non-wireless businesses resulting in higher cash balances.
Income Tax Expense. Income tax expense was $1.7 million for the nine
months ended October 31, 2000 compared to $1.5 million for the corresponding
period of the prior fiscal year. The Company's effective tax rate for both
periods was 36.5%.
Net Income from Continuing Operations. Net income from continuing
operations was $3.0 million for the nine months ended October 31, 2000 compared
to $2.7 million for the corresponding period of the prior fiscal year, an
increase of $0.3 million or 11.9%. The net increase in net income from
continuing operations was driven by both increased revenue and a favorable
increase in the Company's gross margin percentage and offset by increased
support costs and the one-time charge for severance costs that totaled $0.8
million, net of tax.
RESULTS OF OPERATIONS -- DISCONTINUED OPERATIONS
As discussed above, COMARCO embarked on a plan to divest its
non-wireless businesses during October 1999. Prior to the third quarter ended
October 31, 2000, the Company completed five of six planned business disposition
transactions. On November 17, 2000, COMARCO completed the final disposition
transaction with the sale of the Company's airport services business.
Net Income (Loss) from Discontinued Operations. Net loss from
discontinued operations was $0.1 million for the three months ended October 31,
2000 compared to $1.9 million for the corresponding quarter of the prior fiscal
year. For the nine months ended October net income was $0.4 million compared to
a net loss of $1.1 million for the corresponding period of the prior fiscal
year. The decrease in the level of discontinued operations was due to the sales
of the various discontinued operations throughout the trailing twelve-month
period.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $18.4 million at October 31, 2000
compared to $5.1 million at January 31, 2000, an increase of $13.3 million.
Approximately $7.5 million of the increase is attributable to net proceeds
received from the sales of the discontinued operations, with approximately $0.4
million provided by the related operations for the nine months ended October 31,
2000.
Cash Flows from Operating Activities. Cash provided by operating
activities is primarily derived from the sale of Company's products and from
providing engineering services. Cash provided by operating activities was $8.8
million and $6.1 million for the nine months ended October 31, 2000 and 1999,
respectively.
Cash provided by operating activities during the nine months ended
October 31, 2000 was primarily a result of the Company's net income from
continuing operations before non-cash charges, a tax benefit on stock options
exercised of $1.5 million and an increase in current liabilities primarily
attributable to accrued costs related to the disposition of discontinued
operations, offset by an increase in accounts receivable. Cash provided by
operating activities during the nine months ended October 31, 1999 was primarily
a result of the Company's net income from continuing operations before non-cash
charges and a decrease in accounts receivable.
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Cash Flows from Investing Activities. Cash used in investing activities
was $5.0 million and $3.2 million for the nine months ended October 31, 2000 and
1999, respectively. Investing activities for the nine months ended October 31,
2000 and 1999 consisted primarily of cash paid for property and equipment in
support of the Company's growth and for the development of software to be used
in products currently under development. The Company intends to continue to
invest aggressively in a software development program designed to bring new
products and services for the wireless communications industry to market in a
timely manner. This software development program is expected to be funded with
current cash balances and cash provided by operating activities.
On December 7, 2000, the Company acquired all the outstanding Common
Stock of EDX Engineering, Inc. ("EDX") for consideration consisting of 257,428
shares of COMARCO Common Stock, valued at $4.2 million on the day the
transaction closed, and $2.1 million in cash. EDX is a leading developer of
system planning tools for the wireless communications industry based in Eugene,
Oregon.
Cash Flows from Financing Activities. Cash provided by financing
activities for the nine months ended October 31, 2000 consisted of $1.6 million
from sales of Common Stock issued through the Company's employee and director
stock option plans. For the nine months ended October 31, 1999 investing
activities consisted of $0.9 million from the sales of Common Stock issued
through the Company's employee and director stock option plans and the
repurchase of approximately 335,000 shares in the open market for approximately
$4.4 million.
During 1992, the Company's Board of Directors authorized a stock
repurchase program of up to three million shares of Common Stock. From program
inception through October 31, 2000, the Company has repurchased approximately
2,184,000 shares for an average per share price of $7.37 per share. For the nine
months ended October 31, 2000, no shares were repurchased. Subsequent to October
31, 2000, the Company repurchased an additional 58,000 shares in the open
market, bringing the total number of shares repurchased to approximately
2,242,000 shares for an average per share price of $7.62 per share.
The Company maintains a $10.0 million unsecured revolving credit
facility (the "Credit Facility") which expires June 30, 2001. Borrowings under
the Credit Facility bear interest at the bank's prime rate or the London
Interbank Offered Rate plus 150 basis points, at the option of the Company. At
October 31, 2000 and as of the date of this quarterly report on Form 10-Q, there
are no amounts outstanding on the Credit Facility and the entire $10.0 million
commitment is available to the Company.
The Company believes that current cash balances, cash provided by
operating activities and borrowings under the Credit Facility will be sufficient
to satisfy the Company's working capital and capital expenditure requirements
for the next twelve months. Future acquisitions, if any, may be funded through
the use of current cash balances, the Credit Facility or other borrowings and
the issuance of additional equity or debt securities.
ITEM 3. 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, 2000, the Company had
approximately $0.4 million of accounts receivable denominated in foreign
currencies. The Company's standard terms require foreign customers to pay for
the Company's products and services with U.S. dollars. For those orders
denominated in foreign currencies, the Company may limit its exposure to losses
from foreign currency transactions through the purchase of forward foreign
exchange contract.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Amended and Restated Articles of Incorporation,
including Certificate of Amendment of Restated Articles
of Incorporation, effective October 27, 2000.
10.30 Letter Agreement dated December 6, 2000 Amending Loan
Agreement between the Company and Bank of America, N.A.
(formerly NationsBank of Virginia, N.A.).
11 Schedule of Computation of Net Income (Loss) Per Share
27 Financial Data Schedule
(b) Report on Form 8-K:
(1) Current Report on Form 8-K dated September 14, 2000 with
disclosure under Item 5 regarding the Company's
announcement of its 3-for-2 stock split with a record
date of October 6, 2000 and a distribution date of
October 27, 2000.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Irvine,
State of California, on December 12, 2000.
COMARCO, INC.
By:/s/ Daniel R. Lutz
----------------------------
Daniel R. Lutz
Vice President and
Chief Financial Officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation, including Certificate of
Amendment of Restated Articles of Incorporation, effective October 27,
2000.
10.30 Letter Agreement dated December 6, 2000 Amending Loan Agreement between
the Company and Bank of America, N.A. (formerly NationsBank of Virginia,
N.A.).
11 Schedule of Computation of Net Income (Loss) Per Share
27 Financial Data Schedule
</TABLE>
