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, 2000 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)
2 Cromwell, Irvine, California 92618
(Address of principal executive office) (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 _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 31, 2000.
Common Stock,
$.10 Par Value 4,548,874 Shares
-------------- ----------------
Index to Form 10-Q
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
July 31, 2000 and January 31, 2000 1
Condensed Consolidated Statements of Income
Three Months Ended and Six Months Ended July 31, 2000
and July 31, 1999 2
Condensed Consolidated Statements of Cash Flows
Six Months Ended July 31, 2000 and July 31, 1999 3
Condensed Consolidated Statements of Comprehensive Income
Six Months Ended July 31, 2000 and July 31, 1999 4
Notes to Condensed Consolidated Financial Statements 5-8
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 9-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
(i)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
July 31, 2000 January 31, 2000
(Unaudited) (Audited)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $12,671,000 $ 5,064,000
Short-term investments 3,147,000 3,721,000
Accounts receivable, net 10,822,000 6,695,000
Inventory 4,583,000 4,852,000
Deferred tax asset 3,308,000 2,908,000
Net assets available for sale 3,046,000 9,361,000
Other current assets 3,510,000 2,651,000
----------- -----------
Total current assets 41,087,000 35,252,000
Property and equipment, net 3,594,000 2,763,000
Software development costs, net 6,627,000 5,839,000
Intangible assets, net 2,066,000 2,222,000
Other assets 779,000 72,000
----------- -----------
TOTAL ASSETS $54,153,000 $46,148,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 614,000 $ 666,000
Deferred revenue 3,465,000 3,077,000
Accrued liabilities 11,017,000 8,052,000
----------- -----------
Total current liabilities 15,096,000 11,795,000
Deferred income taxes 2,949,000 2,599,000
Minority interest 115,000 --
Stockholders' equity:
Common stock, $.10 par value,
33,750,000 shares authorized,
4,548,874 and 4,340,362 shares
outstanding at July 31, 2000 and
January 31, 2000, respectively 455,000 434,000
Capital contributed in excess of par value 7,146,000 4,692,000
Other comprehensive income:
Unrealized investment gains 3,000 3,000
Retained earnings 28,389,000 26,625,000
----------- -----------
Total stockholders' equity 35,993,000 31,754,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $54,153,000 $46,148,000
=========== ===========
See accompanying notes to the condensed consolidated financial statements.
1
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
July 31, 2000 July 31, 1999 July 31, 2000 July 31, 1999
------------- ------------- ------------- -------------
Revenues:
Product sales $ 8,513,000 $ 7,842,000 $ 15,845,000 $ 14,503,000
Services 3,439,000 1,131,000 6,204,000 2,312,000
------------ ------------ ------------ ------------
11,952,000 8,973,000 22,049,000 16,815,000
------------ ------------ ------------ ------------
Cost of goods sold:
Product sales 3,829,000 4,207,000 6,963,000 7,373,000
Services 1,927,000 787,000 3,601,000 1,602,000
------------ ------------ ------------ ------------
5,756,000 4,994,000 10,564,000 8,975,000
------------ ------------ ------------ ------------
Gross profit 6,196,000 3,979,000 11,485,000 7,840,000
Selling, general & administrative costs 3,015,000 2,080,000 5,896,000 4,183,000
Engineering and support costs 1,220,000 1,084,000 2,329,000 1,963,000
Severance costs 1,325,000 -- 1,325,000 --
------------ ------------ ------------ ------------
Operating income 636,000 815,000 1,935,000 1,694,000
Net interest income 110,000 97,000 174,000 177,000
Minority interest in earnings
of subsidiary (1,000) (6,000) (2,000) (6,000)
------------ ------------ ------------ ------------
Income before income taxes 745,000 906,000 2,107,000 1,865,000
Income taxes 272,000 333,000 769,000 683,000
------------ ------------ ------------ ------------
Net income from continuing operations 473,000 573,000 1,338,000 1,182,000
Net income from discontinued
operations 301,000 439,000 499,000 789,000
------------ ------------ ------------ ------------
Net income $ 774,000 $ 1,012,000 $ 1,837,000 $ 1,971,000
============ ============ ============ ============
Earnings per share - continuing operations:
Basic $ .11 $ .13 $ .31 $ .27
======== ======== ======== ========
Diluted $ .09 $ .12 $ .26 $ .24
======== ======== ======== ========
Earnings per share - discontinued operations:
Basic $ .06 $ .10 $ .11 $ .18
======== ======== ======== ========
Diluted $ .06 $ .09 $ .11 $ .17
======== ======== ======== ========
Earnings per share:
Basic $ .17 $ .23 $ .42 $ .45
======== ======== ======== ========
Diluted $ .15 $ .21 $ .37 $ .41
======== ======== ======== ========
See accompanying notes to the condensed consolidated financial statements.
2
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
--------------------------------
July 31, 2000 July 31, 1999
------------- -------------
Cash flows from operating activities:
Net income from continuing operations $ 1,338,000 $ 1,182,000
Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 2,303,000 1,488,000
Gain on disposal of property and equipment -- (8,000)
Deferred income taxes (50,000) (75,000)
Provision for doubtful accounts receivable 12,000 12,000
Minority interest in earnings of subsidiary 2,000 6,000
Net sales (purchases) of trading securities 563,000 (275,000)
Decrease (increase) in accounts receivable (4,139,000) 4,620,000
Decrease (increase) in inventory 269,000 (837,000)
Decrease in other current assets 1,402,000 32,000
Increase in other assets (7,000) (50,000)
Decrease in current liabilities (39,000) (1,103,000)
------------ ------------
Net cash provided by operating activities 1,654,000 4,992,000
------------ ------------
Cash flows from investing activities:
Proceeds from sales and maturities of investments 11,000 263,000
Purchases of property and equipment (1,510,000) (741,000)
Proceeds from sales of property and equipment -- 9,000
Software development costs (2,256,000) (1,579,000)
------------ ------------
Net cash used in investing activities (3,755,000) (2,048,000)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,515,000 883,000
Purchase of common stock -- (1,948,000)
------------ ------------
Net cash provided (used) by financing activities 2,515,000 (1,065,000)
------------ ------------
Net increase in cash and cash equivalents -
continuing operations 414,000 1,879,000
Net increase in cash and cash equivalents -
discontinued operations 7,193,000 1,775,000
------------ ------------
Net increase in cash and cash equivalents 7,607,000 3,654,000
Cash and cash equivalents, beginning of period 5,064,000 3,220,000
------------ ------------
Cash and cash equivalents, end of period $ 12,671,000 $ 6,874,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the three quarters for:
Interest $ -- $ --
Income taxes 491,000 2,050,000
See accompanying notes to the condensed consolidated financial statements.
3
COMARCO, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
----------------------------- ------------------------------
July 31, 2000 July 31, 1999 July 31, 2000 July 31, 1999
------------- ------------- ------------- -------------
Net income $ 774,000 $1,012,000 $1,837,000 $1,971,000
Other comprehensive income:
Unrealized holding gains on
investments, net of tax -- -- -- --
---------- ---------- ---------- ----------
Comprehensive income $ 774,000 $1,012,000 $1,837,000 $1,971,000
========== ========== ========== ==========
See accompanying notes to the condensed consolidated financial statements.
4
COMARCO, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 31, 2000, January 31, 2000, and July 31, 1999
(Unaudited)
1. General
The accompanying interim financial statements have been prepared by the
Company's management in accordance with generally accepted accounting
principles and in conjunction with the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and
footnote disclosures required for annual financial statements have been
condensed or excluded pursuant to SEC rules and regulations. Accordingly,
the interim financial statements do not include all of the information and
footnotes required by generally accepted accounting principles in the
United States of America for complete financial statements. In the opinion
of management, the interim financial statements presented herein reflect
all adjustments of a normal and recurring nature which are considered
necessary for a fair presentation of the results for the interim periods
presented. The results of operations for the interim period are not
necessarily indicative of the results that may be expected for the year
ended January 31, 2001. These financial statements should be read in
conjunction with the audited consolidated financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the
year ended January 31, 2000.
2. Discontinued Operations
In July 1999, the Company announced that it was embarking on a plan to
strengthen the Company's focus on the wireless communications products and
services business area. This plan, which was formalized at the end of the
quarter ended October 31, 1999, involves selling the Company's information
technology and staffing services product lines. Therefore, this segment is
presented as discontinued operations and prior periods have been restated.
The Company has engaged an investment banking firm to market and sell the
discontinued segment. As of September 13, 2000, the Company has closed five
of six currently planned divestiture transactions, including the sale of
the Company's commercial staffing and information technology government
services businesses. The aggregate consideration received to date is $14.4
million, which includes $7.4 million in cash; approximately $1.3 million
due six months after closing, including interest; a $1.4 million two-year
promissory note, payable in four installments; and approximately $4.3
million is due as certain accounts receivables are collected, which is
expected to occur within ninety days of closing. As of September 13, 2000,
approximately $3.6 million of these accounts receivable have been
collected. The Company has signed an agreement for the sale of the airport
management business. The Company cannot determine the amount of gain that
may result from the sale, however it does not expect to realize a loss on
the sale. At the conclusion of the divestiture process, the Company will
consist of the parent company, Comarco Wireless Technologies, Inc., and its
wholly-owned subsidiary, Comarco Wireless International, Inc. The Company
operates in one business segment, wireless communications products and
services. Revenues from the discontinued segment were $19.7 million and
$27.2 million for the six months ended July 31, 2000 and 1999,
respectively. Operating income of the discontinued segment was $855,000 and
$1.3 million for the six months ended July 31, 2000 and 1999, respectively.
3. Significant Accounting Policies - Per Share Information
The Company computes 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:
5
3. Significant Accounting Policies - Per Share Information (continued)
Three Months Ended Six Months Ended
------------------------------- -------------------------------
July 31, 2000 July 31, 1999 July 31, 2000 July 31, 1999
------------- ------------- ------------- -------------
Basic:
Net income from
continuing operations $ 473,000 $ 573,000 $ 1,338,000 $ 1,182,000
Weighted average shares
outstanding 4,446,000 4,396,000 4,400,000 4,425,000
----------- ----------- ----------- -----------
Basic income per share from
continuing operations $ .11 $ .13 $ .31 $ .27
=========== =========== =========== ===========
Net income from
discontinued operations $ 301,000 $ 439,000 $ 499,000 $ 789,000
Weighted average shares
outstanding 4,446,000 4,396,000 4,400,000 4,425,000
----------- ----------- ----------- -----------
Basic income per share from
discontinued operations $ .06 $ .10 $ .11 $ .18
=========== =========== =========== ===========
Net income $ 774,000 $ 1,012,000 $ 1,837,000 $ 1,971,000
Weighted average shares
outstanding 4,446,000 4,396,000 4,400,000 4,425,000
----------- ----------- ----------- -----------
Basic income per share $ .17 $ .23 $ .42 $ .45
=========== =========== =========== ===========
Diluted:
Net income from
continuing operations $ 473,000 $ 573,000 $ 1,338,000 $ 1,182,000
Less - net income allocated
to subsidiary dilutive stock
options outstanding (62,000) (35,000) (126,000) (75,000)
----------- ----------- ----------- -----------
Net income used in calculation
of diluted income per share
from continuing operations $ 411,000 $ 538,000 $ 1,212,000 $ 1,107,000
=========== =========== =========== ===========
Weighted average shares
outstanding 4,446,000 4,396,000 4,400,000 4,425,000
Plus - common equivalent shares
(determined using the "treasury
stock" method) representing
shares issuable upon exercise
of stock options 191,000 184,000 219,000 196,000
----------- ----------- ----------- -----------
Weighted average number
of shares used in calculation
of diluted income per share
from continuing operations 4,637,000 4,580,000 4,619,000 4,621,000
=========== =========== =========== ===========
Diluted income per share
from continuing operations $ .09 $ .12 $ .26 $ .24
=========== =========== =========== ===========
6
3. Significant Accounting Policies - Per Share Information (continued)
Three Months Ended Six Months Ended
------------------------------- -------------------------------
July 31, 2000 July 31, 1999 July 31, 2000 July 31, 1999
------------- ------------- ------------- -------------
Net income from
discontinued operations $ 301,000 $ 439,000 $ 499,000 $ 789,000
Less - net income allocated
to subsidiary dilutive stock
options outstanding -- -- -- --
----------- ----------- ----------- -----------
Net income used in calculation
of diluted income per share
from discontinued operations $ 301,000 $ 439,000 $ 499,000 $ 789,000
=========== =========== =========== ===========
Weighted average shares
outstanding 4,446,000 4,396,000 4,400,000 4,425,000
Plus - common equivalent shares
(determined using the "treasury
stock" method) representing
shares issuable upon exercise
of stock options 191,000 184,000 219,000 196,000
----------- ----------- ----------- -----------
Weighted average number of
shares used in calculation of
diluted income per share from
discontinued operations 4,637,000 4,580,000 4,619,000 4,621,000
=========== =========== ===========
Diluted income per share
from discontinued operations $ .06 $ .09 $ .11 $ .17
=========== =========== =========== ===========
Net income $ 774,000 $ 1,012,000 $ 1,837,000 $ 1,971,000
Less - net income allocated
to subsidiary dilutive stock
options outstanding (62,000) (35,000) (126,000) (75,000)
----------- ----------- ----------- -----------
Net income used in calculation
of diluted income per share $ 712,000 $ 977,000 $ 1,711,000 $ 1,896,000
=========== =========== =========== ===========
Weighted average shares
outstanding 4,446,000 4,396,000 4,400,000 4,425,000
Plus - common equivalent shares
(determined using the "treasury
stock" method) representing
shares issuable upon exercise
of stock options 191,000 184,000 219,000 196,000
----------- ----------- ----------- -----------
Weighted average number of
shares used in calculation of
diluted income per share 4,637,000 4,580,000 4,619,000 4,621,000
=========== =========== =========== ===========
Diluted income per share $ .15 $ .21 $ .37 $ .41
=========== =========== =========== ===========
7
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.
In its information technology government services business, the Company
derived a portion of its revenues from fixed-price and fixed labor rate
contracts, which shift more of the performance risk to the Company. With
the completion of the sale of this business in the second quarter of Fiscal
Year 2001, this risk has been transferred to the buyers of this business.
Management believes that the above contingencies will not prevent the
selling of the discontinued segment.
5. Reclassifications
Certain prior year amounts have been reclassified to conform to the current
period's presentation.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
A. FORWARD-LOOKING STATEMENTS AND RISK FACTORS
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
Company's ability to achieve the objectives of its business plans,
including the disposal of its remaining discontinued business; 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, 2000.
The Company has experienced, in each of the past six years, a seasonal
fluctuation in wireless communications products activity, with greater
sales in the latter half of its fiscal year and lesser amounts in the first
half, although this trend has been declining over the same six years. This
fluctuation may or may not continue due to a number of factors, including:
the timing, cancellation, or delay of customer orders; the timing of new
product introductions by the Company or its competitors; the deployment
schedule of wireless network operators in both North American and
international markets, which can be delayed by both economic and political
issues; the size of customers' capital budgets, which are the traditional
source of customer funding for the purchase of the Company's products;
market acceptance of the Company and its customers' products; variations in
manufacturing capacities, efficiencies and costs; the availability and cost
of parts exacerbated by the very tight market for electrical and
semiconductor components; capacity and production constraints associated
with single source component suppliers; customer acceptance and timing of
outsourced benchmarking and other engineering services; and other
competitive factors. Historically, the Company has often recognized a
substantial portion of its revenues in the last month of any given quarter.
Because the Company's operating expenses are based on anticipated revenue
levels and because a high percentage of the Company's expenses are
relatively fixed, a small variation in the timing of the recognition of
revenues could cause significant variations in operating results from
quarter to quarter. 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'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; to identify, develop, and achieve market acceptance
of new products; the availability and cost of parts exacerbated by the very
tight market for electrical and semiconductor components; and the capacity
and production constraints associated with single source component
suppliers. Future services prospects depend on customer acceptance of
various outsourced engineering services in which the Company continues to
invest human and capital resources. 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, or
recruitment of qualified engineers or technicians, could have a material
adverse effect on the Company's business, operating results and financial
condition.
9
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 patents,
trade secrets, copyrights, and contractual rights to protect its
intellectual property. There can be no assurance that the steps taken by
the Company will be adequate to protect its technology; in addition, the
laws of certain foreign countries in which the Company's products may be
sold do not protect the Company's intellectual property rights to the same
extent as do the laws of the United States.
B. RESULTS OF OPERATIONS
In July 1999, the Company announced that it was embarking on a plan to
strengthen the Company's focus on the wireless communications products and
services business area. This plan, which was formalized at the end of the
quarter ended October 31, 1999, involves selling the Company's information
technology and staffing services product lines. Therefore, this segment is
presented as discontinued operations and prior periods have been restated.
The Company has engaged an investment banking firm to market and sell the
discontinued segment. As of September 13, 2000, the Company has closed five
of six currently planned divestiture transactions, including the sale of
the Company's commercial staffing and information technology government
services businesses. The aggregate consideration received to date is $14.4
million, which includes $7.4 million in cash; approximately $1.3 million
due six months after closing, including interest; a $1.4 million two-year
promissory note, payable in four installments; and approximately $4.3
million is due as certain accounts receivables are collected, which is
expected to occur within ninety days of closing. As of September 13, 2000,
approximately $3.6 million of these accounts receivable have been
collected. The Company has signed an agreement for the sale of the airport
management business. The Company cannot determine the amount of gain that
may result from the sale, however it does not expect to realize a loss on
the sale. At the conclusion of the divestiture process, the Company will
consist of the parent company, Comarco Wireless Technologies, Inc., and its
wholly-owned subsidiary, Comarco Wireless International, Inc. The Company
operates in one business segment, wireless communications products and
services.
10
Results of Continuing Operations
During the second quarter of Fiscal Year 2001 (year ending January 31,
2001), the Company recorded revenues from continuing operations of $12.0
million, up 33% from the revenues of $9.0 million for the comparable period
of the prior fiscal year. Revenues for the six months ended July 31, 2000
of $22.0 million were up 31% from $16.8 million for the comparable period
of the prior fiscal year. Increased period-to-period revenue is primarily
due to wireless test and measurement information services, which began in
the fourth quarter of Fiscal Year 2000; and an increase in the sale of
wireless test and measurement products to major cellular carriers;
partially offset by reduced revenues from wireless callboxes and also from
mobile power products as the Company transitions to its second generation
product, a 70-watt universal power adapter. The Company has also begun a
major product transition to the new X-series test and measurement platform.
The first of the X-series family was released in March 2000. The X-50
platform will support all multiple access technologies: CDMA, IS-136, GSM,
and iDEN. The Company expects the level of sales activity for its wireless
callboxes will be less than prior year levels for the remaining quarters of
Fiscal Year 2001, as prior year revenues included revenue from two large
upgrade contracts, while wireless test and measurement services revenues
are expected to remain steady as the Company continues to expand its
outsourced services offerings. The Company expects that mobile power
product sales activity will increase beginning late in the third quarter of
Fiscal Year 2001 with the Company's recent announcement of a $10 million
order from Targus Group International for the Company's second generation
ChargeSource(TM) 70-watt power adapter.
The Company's orders for wireless communications products totalled $18.0
million for the second quarter of Fiscal Year 2001, up from $7.5 million
from the comparable prior period. Orders for the second quarter of Fiscal
Year 2001 included $7.2 million received on two long-term wireless
application callbox maintenance contracts. For the twelve-month periods
ended July 31, 2000 and 1999, orders received were $53.8 million and $36.8
million, respectively. Because of the long sales cycle involved in selling
the Company's wireless products and services and the high contract value of
each order, the Company believes that orders are best analyzed by looking
at a twelve-month time period, as orders can fluctuate significantly from
quarter to quarter. The value of unfilled orders including deferred revenue
for outstanding post-contract support and extended warranty obligations at
July 31, 2000 totalled $34.1 million. This balance consisted of $6.8
million of product and service revenues, $23.8 million of long-term
wireless application callbox maintenance contracts, and $3.5 million of
deferred revenue for outstanding post-contract support and extended
warranty obligations.
The Company expects a rapid proliferation of portable and stationary
computing and communication systems and appliances that are connected by
wireless communication networks to the public internet, private intranet,
private local area networks, servers, and other terminal devices. The
Company provides products and services for these markets and with its core
technologies consisting of wireless network design, wireless appliance
interfaces and wireless design technologies, plans to provide additional
products and services to end-users and network operators. Based on this
current strategy, the Company forecasts that a growing percentage of its
revenues and profit may come from services in the future.
Gross profit from continuing operations increased to $6.2 million in the
second quarter of Fiscal Year 2001, up 55% from $4.0 million for the
comparable period of the prior fiscal year. Gross profit from continuing
operations increased to $11.5 million for the six months ended July 31,
2000, up 47% from $7.8 million for the comparable period of the prior
fiscal year. Gross profit percentage of revenue was 52% in the second
quarter of Fiscal Year 2001 compared with 44% for the comparable period of
the prior fiscal year. Gross profit percentage of revenue was 52% for the
six months ended July 31, 2000 compared with 46% for the comparable period
of the prior fiscal year. The increases are due to increased sales of
higher margin wireless test and measurement products and services.
11
Indirect costs, excluding a one-time charge for severance costs, were $4.2
million in the second quarter of Fiscal Year 2001, up from $3.2 million for
the comparable period of the prior fiscal year. Indirect costs, excluding
the one-time charge, were $8.2 million for the six months ended July 31,
2000, up from $6.1 million for the comparable period of the prior fiscal
year. The Company has experienced increases in selling, general and
administrative costs as well as in sustaining engineering, research and
development and support costs as a result of executing its current plan to
develop additional products and services for the wireless marketplace.
These efforts included continuing development of the Company's second
generation portable power adapter; its RAP(TM) Central wireless revenue
assurance system and services, which is an emerging market for the Company;
and expenses to launch and grow its wireless test and measurement
information services business.
The Company recorded a one-time charge for severance costs of $1.3 million
in the second quarter of Fiscal Year 2001. This charge is in conjunction
with the disposition of the Company's non-wireless businesses and relates
to severance agreements for the Company's outgoing corporate staff.
The Company is continuing its software product development program in its
continuing operations' wireless communications products business. In
accordance with Financial Accounting Standard No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, the
Company capitalized $2.3 million and $1.6 million, during the first two
quarters of Fiscal Years 2001 and 2000, respectively. The increase in the
amount capitalized is due to the product development efforts discussed
above. Corresponding amounts amortized in such periods were $1.5 million
and $899,000, respectively. These amounts are in addition to the
engineering, research and development and support expenses discussed above.
Excluding the one-time charge of $1.3 million for severance costs,
operating income increased to $2.0 million in the second quarter of Fiscal
Year 2001 from $815,000 from the comparable period of the prior year, an
increase of 145%. Excluding the one-time charge, operating income increased
to $3.3 million for the six months ended July 31, 2000 from $1.7 million
from the comparable period of the prior year, an increase of 94%. These
year-to-year increases in operating income are primarily due to higher
gross profit contribution from the increased sales of wireless test and
measurement products and services, offset by increased indirect costs, as
discussed above.
Including the one-time charge of $1.3 million for severance costs,
operating income from continuing operations was $636,000 in the second
quarter of Fiscal Year 2001, down from $815,000 for the comparable period
of the prior fiscal year. Operating income from continuing operations was
$1.9 million for the six months ended July 31, 2000, up from $1.7 million
for the comparable period of the prior fiscal year.
Net interest income (interest income less interest expense) for the second
quarter of Fiscal Year 2001 amounted to $110,000, as compared to $97,000
for the comparable period of the prior fiscal year. Net interest income for
the six months ended July 31, 2000 amounted to $174,000, as compared to
$177,000 for the comparable period of the prior fiscal year. The increase
is principally due to an increase in cash available to invest from an
average of $7.6 million in the second quarter of Fiscal Year 2000 to an
average of $11.1 million in the second quarter of Fiscal Year 2001
(excluding investments in the Company's deferred compensation plan for
executives).
The Company's effective tax rate for the six months ended July 31, 2000 is
36.5%, the same as the comparable period of the prior fiscal year.
Net income from continuing operations was $473,000 for the second quarter
of Fiscal Year 2001, down from $573,000 for the comparable period of the
prior fiscal year. Net income from continuing operations was $1.3 million
for the six months ended July 31, 2000, up from $1.2 million for the
comparable period of the prior fiscal year. The decrease in net income from
continuing operations for the second quarter of Fiscal Year 2001 from the
comparable period of the prior year is due to the
12
one-time charge for severance costs offset by higher gross profit
contribution dollars, as discussed above.
Results of Discontinued Operations
As previously discussed, in July 1999, the Company announced that it was
embarking on a plan to strengthen the Company's focus on the wireless
communications products and services business area. This plan, which was
formalized at the end of the quarter ended October 31, 1999, involves
selling the Company's information technology and staffing services product
lines. As of September 13, 2000, the Company has closed five of six
currently planned divestiture transactions, including the sale of the
Company's commercial staffing and information technology government
services businesses. The Company has signed an agreement for the sale of
the airport management business. The Company cannot determine the amount of
gain that may result from the sale, however it does not expect to realize a
loss on the sale.
Revenues provided by the Company's discontinued operations decreased 37%,
from $13.9 million in the second quarter of Fiscal Year 2000 to $8.7
million in the second quarter of Fiscal Year 2001. Revenues provided by the
Company's discontinued operations decreased 28%, from $27.2 million in the
six months ended July 31, 1999 to $19.7 million in the six months ended
July 31, 2000. The decreases in period-to-period revenue are principally
due to the sale of the Company's commercial staffing business in March 2000
and the sale of the Company's information technology government services
business in July 2000.
Operating income (revenues less direct costs, indirect costs, and
depreciation and amortization) for the discontinued segment is down from
$730,000 in the second quarter of Fiscal Year 2000 to $502,000 in the
second quarter of Fiscal Year 2001. Operating income for the discontinued
segment is down from $1.3 million for the six months ended July 31, 1999 to
$855,000 for the six months ended July 31, 2000. These decreases are
principally due to the sale of the Company's commercial staffing business
in March 2000 and the sale of the Company's information technology
government services business in July 2000.
In its information technology government services business, the Company
derived a portion of its revenues from fixed-price and fixed labor rate
contracts, which shift more of the performance risk to the Company. With
the completion of the sale of this business in the second quarter of Fiscal
Year 2001, this risk has been transferred to the buyers of this business.
C. FINANCIAL CONDITION
The Company signed a loan agreement with a bank effective September 26,
1994, which was last amended effective June 30, 2000. The loan agreement
consists of a $10 million revolving credit facility, which expires June 30,
2001. 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 $11.1 million (excluding investments in the Company's deferred
compensation plan for executives) during the second quarter of Fiscal Year
2001. 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 second quarter of Fiscal Year 2001, the Company's average days'
sales in accounts receivable decreased slightly.
13
Several additional key factors indicating the Company's financial condition
include:
July 31, 2000 January 31, 2000
------------- ----------------
Current ratio 2.72 2.99
Working capital $25,991,000 $23,457,000
Book value per share $7.91 $7.32
The Company continued to demonstrate solid financial strength in the above
financial factors during the six months ended July 31, 2000 due to
continued profitable activity.
During the six months ended July 31, 2000, the Company had $1.7 million of
cash flows from operating activities, as compared to $5.0 million in the
corresponding period of the prior year. This decrease is primarily due to
the increase in accounts receivable from the timing of significant sales at
the end of the second quarter.
The Company has a significant commitment for capital expenditures at July
31, 2000 for Comarco Wireless Technologies, Inc. The Company has developed
and intends to continue to develop numerous new product line extensions for
the wireless communications industry. This software product development
program is expected to be funded from the Company's current working capital
and future cash flows. The amounts capitalized 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 $2.3 million and $1.6 million,
respectively, in the first two quarters of Fiscal Year 2001 and 2000.
Corresponding amounts amortized in such periods were $1.5 million and
$899,000, respectively.
The Company's Board of Directors has authorized a stock re-purchase program
of up to 2,000,000 shares. As of July 31, 2000, the Company has
re-purchased and retired approximately 1,456,000 shares. Over the term of
the program, which began in 1992, the average price paid per share
re-purchased under the program was $11.06.
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
working capital and capital expenditure requirements.
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 July 31, 2000, the Company had
approximately $355,000 of 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in
the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect the Company's operating results and financial
condition. In particular, see Note 4 of the Notes to Condensed
Consolidated Financial Statements.
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
The following exhibits are included herewith:
10.28 Sixth Amendment to Loan Agreement dated June 30, 2000
between the Company and Bank of America, N.A. (formerly
NationsBank of Virginia, N.A.).
10.29 Fifth Amended and Restated Master Line of Credit Note dated
June 30, 2000 between the Company and Bank of America, N.A.
(formerly NationsBank of Virginia, N.A.).
11 Schedule of Computation of Net Income Per Share
(b) Reports on Form 8-K
On July 21, 2000 the Company filed a Report on Form 8-K reporting the
sale of substantially all of its information technology government
services business.
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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, 2000
------------------------------------------
Daniel R. Lutz
Vice President and Chief Financial Officer
(Authorized Officer and Principal Financial Officer)
16