Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended July 31, 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 850, 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 August 31, 1999.
Common Stock,
$.10 Par Value 4,354,910 Shares
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Index to Form 10-Q
Page No.
Part I. Financial Information
Condensed Consolidated Balance Sheets
July 31, 1999 and January 31, 1999 1
Condensed Consolidated Statements of Income
Quarters Ended and Two Quarters Ended July 31, 1999
and July 31, 1998 2
Condensed Consolidated Statements of Cash Flows
Two Quarters Ended July 31, 1999 and July 31, 1998 3
Condensed Consolidated Statements of Comprehensive Income
Two Quarters Ended July 31, 1999 and July 31, 1998 4
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
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
July 31, 1999 January 31, 1999
ASSETS (Unaudited) *
Current assets:
Cash and cash equivalents $ 6,874,000 $ 3,220,000
Short-term investments 3,018,000 2,775,000
Accounts receivable, net 17,004,000 23,151,000
Inventory 4,994,000 4,157,000
Deferred tax asset 2,366,000 2,112,000
Other current assets 668,000 575,000
----------------- ----------------
Total current assets 34,924,000 35,990,000
Long-term investments 295,000 526,000
Property and equipment, net 2,743,000 2,424,000
Software development costs, net 4,865,000 4,185,000
Intangible assets, net 3,384,000 3,587,000
Other assets 566,000 575,000
----------------- ----------------
TOTAL ASSETS $ 46,777,000 $ 47,287,000
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,395,000 $ 1,075,000
Deferred revenue 2,880,000 2,902,000
Accrued liabilities 8,281,000 10,180,000
----------------- ----------------
Total current liabilities 12,556,000 14,157,000
Deferred income taxes 2,107,000 1,928,000
Minority interest 9,000 -
Stockholders' equity:
Common stock, $.10 par value,
33,750,000 shares authorized,
4,422,610 and 4,456,460 shares
outstanding at July 31, 1999 and
January 31, 1999, respectively 442,000 446,000
Capital contributed in excess of par value 1,731,000 2,795,000
Other comprehensive income:
Unrealized investment gains 16,000 16,000
Retained earnings 29,916,000 27,945,000
----------------- ----------------
Total stockholders' equity 32,105,000 31,202,000
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 46,777,000 $ 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.
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
Quarter Ended Two Quarters Ended
------------- ------------------
July 31, 1999 July 31, 1998 July 31, 1999 July 31, 1998
------------- ------------- ------------- -------------
Revenues:
Contract revenues $ 13,829,000 $ 14,647,000 $ 27,161,000 $ 29,041,000
Product sales 8,973,000 7,364,000 16,815,000 14,721,000
--------- --------- ---------- ----------
22,802,000 22,011,000 43,976,000 43,762,000
---------- ---------- ---------- ----------
Direct costs:
Contract costs 9,275,000 9,888,000 17,996,000 19,604,000
Cost of product sales 4,994,000 3,142,000 8,975,000 6,685,000
--------- --------- --------- ---------
14,269,000 13,030,000 26,971,000 26,289,000
Indirect costs 6,988,000 7,010,000 13,994,000 14,265,000
--------- --------- ---------- ----------
21,257,000 20,040,000 40,965,000 40,554,000
---------- ---------- ---------- ----------
Operating income 1,545,000 1,971,000 3,011,000 3,208,000
Minority interest in earnings of
subsidiary 9,000 - 9,000 -
Net interest income 97,000 95,000 177,000 213,000
------ ------ ------- -------
Income before income taxes 1,633,000 2,066,000 3,179,000 3,421,000
Income taxes 621,000 785,000 1,208,000 1,300,000
--------------- --------------- --------------- ---------------
Net income $ 1,012,000 $ 1,281,000 $ 1,971,000 $ 2,121,000
=============== =============== =============== ===============
Earnings per share:
Basi $ .23 $ .27 $ .45 $ .45
========= ========= ========= =========
Diluted $ .21 $ .25 $ .41 $ .42
========= ========= ========= ==========
See accompanying notes to the condensed consolidated financial statements.
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Two Quarters Ended
July 31, 1999 July 31, 1998
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Cash flows from operating activities:
Net income $ 1,971,000 $ 2,121,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,686,000 1,348,000
Gain on disposal of property and equipment (8,000) (4,000)
Deferred income taxes (75,000) -
Minority interest 9,000 -
Provision for doubtful accounts receivable 44,000 44,000
Net purchases of trading securities (275,000) (767,000)
Decrease (increase) in accounts receivable 6,103,000 (992,000)
Decrease (increase) in inventory (837,000) 390,000
Decrease (increase) in other current assets (93,000) 99,000
Decrease in other assets 9,000 4,000
Increase in accounts payable 320,000 58,000
Decrease in deferred revenue (22,000) (113,000)
Decrease in accrued liabilities (1,899,000) (1,106,000)
------------------ ------------------
Net cash provided by operating activities 6,933,000 1,082,000
Cash flows from investing activities:
Proceeds from sales and maturities of investments 263,000 455,000
Purchases of property and equipment (895,000) (525,000)
Software development costs (1,579,000) (1,579,000)
Cost of acquisition of Industrial Technology
intellectual property - (1,000,000)
------------------ -----------------
Net cash used in investing activities (2,211,000) (2,649,000)
Cash flows from financing activities:
Proceeds from issuance of common stock 880,000 64,000
Purchase of common stock (1,948,000) (728,000)
------------------ -----------------
Net cash used in financing activities (1,068,000) (664,000)
------------------ -----------------
Net increase (decrease) in cash and cash equivalents $ 3,654,000 $ (2,231,000)
================= =================
Supplemental disclosures of cash flow information:
Cash paid during the two quarters for:
Interest $ - $ -
Income taxes 2,050,000 1,569,000
See accompanying notes to the condensed consolidated financial statements.
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Quarter Ended Two Quarters Ended
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July 31, 1999 July 31, 1998 July 31, 1999 July 31, 1998
------------- ------------- ------------- -------------
Net income $ 1,012,000 $ 1,281,000 $ 1,971,000 $ 2,121,000
Other comprehensive income:
Unrealized holding gains on
investments, net of tax - - - -
------------- ------------- ------------- -------------
Comprehensive income $ 1,012,000 $ 1,281,000 $ 1,971,000 $ 2,121,000
============= ============= ============= =============
See accompanying notes to the condensed consolidated financial statements.
COMARCO, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 31, 1999 and July 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 July 31, 1999 and
January 31, 1999, the results of its operations for the quarters ended
and two quarters ended July 31, 1999 and July 31, 1998, and its cash
flows for the two quarters ended July 31, 1999 and July 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 two quarters ended July
31, 1999 are not necessarily indicative of the results to be obtained for
the full fiscal year.
2. Recent Developments
In July 1999, the Company announced that it was embarking on a plan to
strengthen the Company's focus on the wireless communications products
business area. This plan involves marketing the Company's information
technology and staffing services segment's product lines to potential
buyers. Total revenues and operating income of the information technology
and staffing services segment were $27.2 million and $1.2 million for the
six months ended July 31, 1999, respectively, and $58.0 million and $1.7
million for the fiscal year ended January 31, 1999, respectively. The
Company has retained a financial advisor to explore options to market the
information technology and staffing services segment's product lines. 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.
3. Significant Accounting Policies - Per Share Information
During the year ended January 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, Earnings per Share, and computed
basic and diluted net income per share based on the weighted average
number of shares of common stock and potential common stock outstanding
during the period. Potential common stock, for purposes of determining
diluted earnings per share, includes the effects of dilutive stock
options. The effect of such potential common stock is computed using the
treasury stock method. Comparative earnings per share data have been
restated for prior periods. Consolidated net income of the Company used
for diluted earnings per share purposes is diluted as a result of stock
options issued by the Company's subsidiaries which enable their holders
to obtain the subsidiaries' common stock. Basic and diluted net income
per share are calculated as follows:
Quarter Ended Two Quarters Ended
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July 31, 1999 July 31, 1998 July 31, 1999 July 31, 1998
------------- ------------- ------------- -------------
Basic:
Net income $ 1,012,000 $ 1,281,000 $ 1,971,000 $ 2,121,000
Weighted average shares
outstanding 4,396,000 4,714,000 4,425,000 4,716,000
------------ ------------- ------------ ------------
Basic income per common
share $ .23 $ .27 $ .45 $ .45
============ ============= ============ ============
Diluted:
Net income $ 1,012,000 $ 1,281,000 $ 1,971,000 $ 2,121,000
Less - net income allocated
to subsidiary dilutive stock
options outstanding (35,000) (52,000) (75,000) (74,000)
------------- ------------- ------------ ------------
Net income used in calculation
of diluted income per
common share $ 977,000 $ 1,229,000 $ 1,896,000 $ 2,047,000
============ ============= ============ ============
Weighted average shares
outstanding 4,396,000 4,714,000 4,425,000 4,716,000
Plus - common equivalent shares
(determined using the "treasury
stock" method representing shares
issuable upon exercise
of stock options 184,000 204,000 196,000 205,000
------------ ------------- ------------ ------------
Weighted average number
of shares used in calculation
of diluted income per
common share 4,580,000 4,918,000 4,621,000 4,921,000
============ ============= ============ ============
Diluted income per common
share $ .21 $ .25 $ .41 $ .42
============ ============= ============== ============
4. Business Segment Information
The Company's operations have been classified into two business areas:
wireless communications products and information technology and staffing
services. The wireless communications products area develops, produces,
and markets a variety of products and services used in the wireless
communications industry. The information technology and staffing services
area provides services to Federal and local government and commercial
customers pursuant to established contracts. Corporate and other consists
primarily of cash and cash equivalents, fixed assets, and other assets.
Summarized financial information by business segment for the first two
quarters of Fiscal Year 2000 is as follows:
Wireless Information
Communications Technology and Corporate
Products Staffing Services and Other Total
-------- ----------------- --------- -----
Revenues $16,815 $27,161 - $43,976
Income before income taxes 2,082 1,178 $(81) 3,179
Identifiable assets 20,254 14,549 11,974 46,777
Summarized financial information by business segment for the first two
quarters of Fiscal Year 1999 is as follows:
Wireless Information
Communications Technology and Corporate
Products Staffing Services and Other Total
-------- ----------------- --------- -----
Revenues $14,662 $29,100 - $43,762
Income before income taxes 2,131 1,233 $57 3,421
Identifiable assets 20,151 14,757 9,282 44,190
5. 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 the U.S. Government delays in providing required equipment. The
Company has submitted a request to the U.S. Government for additional
funding of approximately $5.7 million and a 32-month extension.
Negotiations are ongoing, and if the negotiations are successfully
completed, the actual modification will not occur until the end of
September. The Company believes that it has a meritorious position, and
if necessary, the Company intends to seek all remedies available under
Federal procurement laws.
6. Reclassifications
Certain reclassifications of prior year amounts have been made to conform
to the current year presentation.
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.
Recent Developments
In July 1999, the Company announced that it was embarking on a
plan to strengthen the Company's focus on the wireless
communications products business area. This plan involves
marketing the Company's information technology and staffing
services segment's product lines to potential buyers. Total
revenues and operating income of the information technology and
staffing services segment were $27.2 million and $1.2 million for
the six months ended July 31, 1999, respectively, and $58.0
million and $1.7 million for the fiscal year ended January 31,
1999, respectively. The Company has retained a financial advisor
to explore options to market the information technology and
staffing services segment's product lines. 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
During the second quarter of Fiscal Year 2000 (year ending January
31, 2000), the Company recorded total revenues of $22.8 million,
up 3.6% from the revenues of $22.0 million for the comparable
period of the prior fiscal year. Revenues for the first two
quarters of Fiscal Year 2000 of $44.0 million are up .5% from
revenues of $43.8 million for the comparable period of the prior
fiscal year. Increased year-to-year revenues are primarily due to:
o sales of the Company's wireless communications products,
specifically sales of callbox and power adapter products,
offset by lower sales of test and measurement equipment;
o increase in information technology services activity of 13%
year-to-year;
partially offset by:
o completion of the Company's contract at Reagan Washington
National Airport, which expired September 30, 1998; this
contract contributed $4.0 million of revenue in the prior
year's first two quarters.
Total direct costs of $14.3 million for the second quarter of
Fiscal Year 2000 were up $1.3 million, or 10%, from $13.0 million
for the second quarter of Fiscal Year 1999. Direct costs for the
first two quarters of Fiscal Year 2000 of $27.0 million were up
$.7 million, or 2.7%, from $26.3 million for the comparable period
of the prior fiscal year. The increases relate to increased
revenue activity in the Company's wireless communications products
business, as discussed below.
Total indirect costs of $7.0 million for the second quarter of
Fiscal Year 2000 were flat from the prior year's second quarter.
Indirect costs for the first two quarters of Fiscal Year 2000 of
$14.0 million were down $.3 million, or 2.1%, from $14.3 million
for the comparable period of the prior fiscal year. The
year-to-date decrease was due to reduced indirect costs of the
wireless communications products business, as discussed below.
Net interest income (interest income less interest expense) for
the second quarter of Fiscal Year 2000 amounted to $97,000, as
compared to $95,000 for the comparable period of the prior fiscal
year. Net interest income for the first two quarters of Fiscal
Year 2000 amounted to $177,000, as compared to $213,000 for the
comparable period of the prior fiscal year. The year-to-year
decrease was principally due to a reduction in cash available to
invest (excludes investments in the Company's deferred
compensation plan for executives) from an average of $8 million in
the first two quarters of Fiscal Year 1999 to an average of $7.6
million in the first two quarters of Fiscal Year 2000.
The Company's effective tax rate for the first two quarters of
Fiscal Year 2000 was 38%, the same as the comparable period of the
prior fiscal year.
Net income of $1.0 million for the second quarter of Fiscal Year
2000 was down from $1.3 million for the comparable period of the
prior year. Net income of $2.0 million for the first two quarters
of Fiscal Year 2000 was down from $2.1 million for the comparable
period of the prior year
Wireless Communications Products
Wireless communications products revenues increased 21.6% to $9.0
million for the second quarter of Fiscal Year 2000 from $7.4
million for the comparable period of the prior fiscal year.
Revenues increased 14.3% to $16.8 million for the first two
quarters of Fiscal Year 2000 from $14.7 million for the comparable
period of the prior fiscal year. This increase was due to
increased sales of the Company's emergency callbox and power
adapter products, offset by reduced revenues from its test and
measurement products. Summary operating results for Comarco
Wireless Technologies, Inc., the Company's wireless communications
products subsidiary, are as follows:
Two Quarters Ended Two Quarters Ended
July 31, 1999 July 31, 1998
------------- -------------
Revenues $16,815,000 $14,662,000
Cost of product sales 8,975,000 6,638,000
--------- ---------
Gross margin 7,840,000 8,024,000
Gross margin percentage 46.6% 54.7%
Indirect costs* 5,749,000 5,893,000
--------- ---------
Operating income $ 2,091,000 $ 2,131,000
========== ==========
*Indirect costs include selling, general and administrative
expenses as well as research and development expenses.
The decreased gross margin percentage is due to greater sales of
the Company's emergency callbox systems and market trial sales of
the Company's universal power adapter product, which have lower
gross margins than the test and measurement and revenue assurance
product families, which made up a greater percentage of wireless
communications products sales in Fiscal Year 1999. Sales of
callbox systems were up 28% for the first two quarters of Fiscal
Year 2000 over the comparable period of the prior fiscal year,
while sales of test and measurement products were down 19% from
the prior fiscal year. Additionally, there were no power adapter
sales in the first two quarters of Fiscal Year 1999. The Company
believes that sales of emergency callbox systems will continue to
exceed prior year levels for the remainder of Fiscal Year 2000 as
it completes performance on several callbox upgrade contracts in
California. Test and measurement product sales should increase in
the second half of Fiscal Year 2000 compared to first half results
due to anticipated upgraded product offerings, although there can
be no assurances in this regard.
The decrease in indirect costs of $.2 million for the first two
quarters of Fiscal Year 2000 from the comparable period of the
prior fiscal year was partially a result of reduced sustaining
engineering and product support costs as product lines mature, as
well as slightly decreased selling, general and administrative
costs.
Operating income as a percentage of revenues was 11.4% for the
second quarter of Fiscal Year 2000, compared to 20.2% for the
comparable period of the prior fiscal year. Operating income as a
percentage of revenues was 12.4% for the first two quarters of
Fiscal Year 2000, compared to 14.5% 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 the lower margin
emergency callbox systems and universal power adapter products
than in the prior year's first two quarters, as discussed above.
The Company is continuing its product development program in its
wireless communications products business. In accordance with
Financial Accounting Standard No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed, the
Company capitalized $1,579,000 during the first two quarters of
Fiscal Year 1999 and the first two quarters of Fiscal Year 2000.
Corresponding amounts amortized were $899,000 and $721,000, in the
first two 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 totalled
$7.5 million for the second quarter of Fiscal Year 2000, up from
$7.4 million from the comparable prior period. For the
twelve-month periods ended July 31, 1999 and 1998, orders received
were $36.8 million and $28.0 million, respectively. Because of the
long sales cycle involved in selling the Company's wireless
products and the high unit sales price, the Company believes that
orders are best analyzed by looking at a twelve-month time period,
as orders can fluctuate significantly from quarter to quarter. The
value of unfilled orders at July 31, 1999 totalled $13.7 million,
of which $4.8 million relates to long-term maintenance contracts,
and $4.7 million relates to the Company's contracts to upgrade the
callbox systems for Los Angeles County and the San Francisco Bay
areas of California. The Company currently expects to complete
performance on these upgrade contracts in Fiscal Year 2000. An
additional $2.6 million of deferred revenue has been recorded for
anticipated customer warranty obligations.
The Company has experienced fluctuations in wireless
communications products activity in each of the past 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 a single supplier or a
limited number of suppliers, and the inability of any of these
suppliers to fulfill Company requirements may result in an
interruption of 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, 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
In July 1999, the Company announced that it was embarking on a
plan to strengthen the Company's focus on the wireless
communications products business area. This plan involves
marketing the Company's information technology and staffing
services segment's product lines to potential buyers. The Company
has retained a financial advisor to explore options to market the
information technology and staffing services segment. 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.
Revenues provided by the Company's information technology and
staffing services business area decreased 5.5%, from $14.6 million
in the second quarter of Fiscal Year 1999 to $13.8 million in the
second quarter of Fiscal Year 2000. Revenues from this business
area decreased 6.5%, from $29.1 million for the first two quarters
of Fiscal Year 1999 to $27.2 million for the first two quarters of
Fiscal Year 2000. Revenues in this business area decreased from
66.4% of the Company's total revenues in the first two quarters of
Fiscal Year 1999 to 61.8% of the Company's total revenues in the
first two quarters of Fiscal Year 2000. The decrease in
period-to-period revenue was principally due to the completion of
the Company's contract at Reagan Washington National Airport,
which expired on September 30, 1998. This contract contributed
$4.0 million of revenue in the prior year's first two quarters.
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% and 39% of the Company's total revenue during
the first two quarters of Fiscal Years 1999 and 2000,
respectively. 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 contract procurements. There can be no
assurance that the Company will be selected and awarded the work
associated with any of its future proposals. The Company has no
recompetitions of major contracts for the next two years. 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 U.S. Government delays in providing
required equipment. The Company has submitted a request to the
U.S. Government for additional funding of approximately $5.7
million and a 32-month extension. Negotiations are ongoing, and if
the negotiations are successfully completed, the actual
modification will not occur until the end of September. 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 information technology and
staffing services is up from $578,000 in the second quarter of
Fiscal Year 1999 to $695,000 in the second quarter of Fiscal Year
2000. Operating income for information technology and staffing
services is down from $1,233,000 in the first two quarters of
Fiscal Year 1999 to $1,178,000 in the first two quarters of Fiscal
Year 2000. The decrease in the year-to-year comparison was
primarily due to lower operating income for information technology
services, partially offset by higher operating income from
commercial staffing services.
(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 $7.6 million (includes highly liquid
long-term investments with maturities of 12 to 36 months, excludes
investments in the Company's deferred compensation plan for
executives) during the first two quarters 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 two 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 as well as improved collections
from information technology services customers.
Several additional key factors indicating the Company's financial
condition include:
July 31, 1999 January 31, 1999
------------- ----------------
Current ratio 2.78 2.54
Working capital $ 22,368,000 $ 21,833,000
Book value per share $7.26 $7.00
The Company continued to demonstrate solid financial strength in
the above financial factors during the first two quarters of
Fiscal Year 2000 due to continued profitable activity.
During the first two quarters of Fiscal Year 2000, the Company
generated $6.9 million of cash flows from operating activities, up
sharply from the $1.1 million from the prior year's first two
quarters. This increase is primarily due to strong accounts
receivable collections during the current fiscal year.
The Company has a significant commitment for capital expenditures
at July 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
business in accordance with Financial Accounting Standard No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed, totaled $1,579,000 and $899,000,
respectively, in the first two quarters 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 July 31,
1999, the Company has re-purchased and retired approximately
1,308,000 shares of which 97,600 shares with a purchase price of
$1,948,000 was purchased in the first two 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
$10.12. Subsequent to July 31, 1999 and through September 14,
1999, the Company has re-purchased another 75,200 shares for an
aggregate amount of $1,494,000.
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 5 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 are in the process of assessing the impact of the Year
2000 Issue on the Company's products and services.
The Company has established a two-phase program to complete its
year 2000 efforts. The first phase includes planning, inventory
and assessment; the final phase consists of correction, testing,
deployment, and acceptance. The Company has divided its efforts
into the categories of internal information systems, products,
non-IT systems, business partners, and customers. The status of
each with respect to the Company's two-phase process is addressed
below.
Information Systems
The Company has received letters or has completed remediation
whereby all of its accounting and manufacturing software has been
determined to be year 2000 compliant. The Company is completing
its inventory of computers and computer peripheral equipment 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 October 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. Substantially all of
the installed base is in the process of being upgraded, 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 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 October 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 October 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 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 the latter part of calendar year 1999.
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 July 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 is limited to approximately
$295,000 of available-for-sale investments as of July 31, 1999.
These investments are high-grade municipal debt securities with
maturities from one to five years which are subject to interest
rate fluctuations.
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
On July 22, 1999, the Company filed a Current Report on Form 8-K
reporting the announcement of a strategic plan to enhance
shareholder value by marketing the Company's information
technology and staffing services segment's product lines and
enclosing its press release of July 7, 1999 to that effect.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMARCO, Inc.
---------------------------------
(Registrant)
September 14, 1999
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Thomas P. Baird
Chief Financial Officer
(Authorized Officer and Principal Financial Officer)