Musical Chairs for Comarco Top Job Is Over, CEO Says : Turnabout: Latest chief executive says he is there for the duration. He says the company is debt free, has a backlog of orders and is hiring for expansion.


In the last five years, Comarco Inc. has had five chief executives. The latest CEO, Don M. Bailey, thinks he will end the game of executive musical chairs at the defense engineering and management services firm.

“I was fortunate enough to work for a variety of talented people, some aggressive and some conservative,” said Bailey, 45, an 11-year company veteran who has held nearly every top management job at Comarco.

“I’ve come out with a balanced viewpoint of the way to manage the company. I’m here for the duration.”

Bailey, who became CEO in January, has seen the worst at Comarco. As recently as January, 1988, the company was perched on the precipice of financial disaster. It had lost $14 million over the two previous years, the result of some acquisitions.


Now Bailey says the company has engineered a turnaround. While its earnings results have so far been modest, the company is now something of an oddity in the shrinking defense industry: It is debt free; it has a big backlog, and it is hiring for an expansion.

“We’re looking for companies that aren’t impacted by the economy or defense cuts,” said Michael Murphy, editor of the California Technology Stock Letter in San Francisco. “Comarco has control of its own destiny.”

Here are some of the reasons that Comarco stands out among local defense contractors:

* Under a heavy burden of more than $30 million in debt from acquisitions four years ago, Comarco has eliminated its debt and is well positioned to live with leaner defense budgets.

* Contract backlog is at more than $600 million, a record level. That is in part due to the award last month of a $8-million-per-year contract to manage general aviation airports in Los Angeles County over the next 20 years. And last week, the company won a five-year engineering services contract from the Navy’s Pacific Missile Test Center valued at up to $121 million.

* The company has 1,400 employees, and it is planning to hire 100 to 200 more people despite the recession and shrinking defense budget.

A rare bird, Bailey is a confident defense contractor these days because Comarco’s business isn’t dependent on the volume of big-ticket weapons contracts.

Under most of its engineering contracts, the company’s engineers evaluate weapons under development and build test equipment. Bailey said it is a necessary business whether a production contract calls for only one system or hundreds of systems.


As a result, he said the company doesn’t have to worry about its core business melting away as it searches for new commercial markets. In August, 1988, the company won a renewed $134-million, five-year contract to manage the U.S. Navy’s weapons testing base in Ridgecrest near China Lake.

Military base closings could affect the company, but Bailey said the firm’s base service contracts aren’t considered high risk for elimination. He said the company’s diversification plan, aimed at increasing non-defense business from 25% to 50%, will also shield the firm.

“It (diversification) is an insurance policy against military cuts,” Bailey said. “But it’s also a way to grow a business. It takes time, but, fortunately, we started it a few years ago.”

About 75% of the company’s current revenues are military related, while 25% come from non-defense work. Bailey wants to increase non-defense business to 50% of sales, but only recently did Comarco make a big advance toward that goal.


Steve DeLuca, analyst for Cruttenden & Co. in Newport Beach, said the company’s diversification seems to be paying off. As state and local governments feel greater budget pressure, they are cutting costs by using more private contractors to manage their work instead of doing it themselves.

“We’ll tend to benefit from a recession as it puts more pressure on the state and local governments,” Bailey said.

Comarco’s first thrust into this area is airport management. Last month, the company won a 20-year contract worth $8 million a year to manage five general aviation airports for Los Angeles County. General aviation airports serve small planes.

Managing everything from janitors to runway emergency crews may seem like a low-tech market that any services company could break into, but Bailey said the company has an edge since it has been managing National Airport in Washington for a decade.


Comarco will use its management savvy to expand into other areas, Bailey said, such as the management of convention centers or stadiums. So far, facilities management accounts for 20% of company revenues. Five years ago it was not in the business.

Another diversification effort is development of the company’s roadside cellular emergency call box manufacturing business, which accounts for 5% of revenue.

The solar-powered boxes, which help stranded drivers on freeways get help, are slowly spreading across the nation as local governments begin to approve fees to build the emergency cellular networks. “Smart” computers in the call boxes automatically tell emergency dispatchers where the emergency caller is located and also notify the company when maintenance is necessary.

Bailey said Comarco, allied with a unit of GTE Corp., has installed 6,000 call boxes, or 80% of the market. Its main competitors in the field are Cubic Communications of San Diego and, more recently, Motorola Inc. in Schaumburg, Ill.


The market has developed slowly since the company introduced the call boxes in Orange County in 1986. But Thomas Franza, vice president of Comarco’s digital products division, said the market potential in the United States could be as much as 200,000 phones as more cellular phone markets develop. The firm is also marketing the phones in Europe and Asia.

The cellular market also offers another opportunity for Comarco to exploit its engineering talent. Using the firm’s field engineers and cellular phone savvy, Comarco has developed a system for testing the quality of a cellular phone network during peak traffic hours.

The system makes automatic calls from a moving van and measures the quality of phone service in different parts of a cellular network, a useful tool for technicians who must maintain the quality of the rapidly expanding phone service.

The system could also prove a popular service among cellular phone service providers as these companies launch a nationwide effort to convert their systems from analog transmission to digital transmission. Such a change allows the providers to expand the volume of calls that the networks can handle at a given time.


During 1991, some cellular carriers that are pushing the limits of network capacity--such as PacTel Cellular and Los Angeles Cellular--plan to convert their networks to digital. Ultimately, Comarco’s system could be used to evaluate quality as the different industry players test digital transmission equipment based on differing technological standards, Franza said.

“It’s a bigger opportunity for us than call boxes,” he said. “There are two cellular companies each in hundreds of cities that could use it. It’s also a niche opportunity that won’t attract a lot of players.”

While the near areas of growth sound promising, they will mean nothing if Comarco cannot execute the contracts profitably. And so far, the company has yet to impress Wall Street with blockbuster earnings.

One investor who doesn’t mind waiting for earnings is Alan Parsow, an Elkhorn, Neb., investment manager who has acquired over 10% of Comarco’s stock in the past four years. Parsow said that he isn’t interested in acquiring the company but that he does expect consolidation in the defense engineering services industry.


“I didn’t buy it as a takeover candidate but because the stock was cheap,” he said. The company’s stock closed on Monday at $3.875, up 12.5 cents, in trading on the over-the-counter market.

Although final results aren’t available, the company said that preliminary results show that earnings rose 25% for the fiscal year ended Jan. 31. For the nine months ended Oct. 21, the company reported a profit of $1.2 million on revenue of $53.5 million, compared to a profit of $1 million on revenue of $60.5 million.

“The piece that needs to fall into place is to produce decent earnings,” Murphy said. “I think they’re getting there.”

Comarco’s Turnaround Address: 106 S. Old Springs Road, Anaheim. Business: Defense engineering and managment; airport services management, manufacturing of freeway emergency call boxes. Top executive: Don M. Baily, president and chief executive officer. Employees: 1,400 Backlog: More than $600 million. Recent major contracts: $121-million award to provide engineering services at the Navy Pacific Missle Test Center for up to five years; in January, an $8-million-a-year contract to manage . general aviation airports in Los Angeles County for the next 20 years. Nine-month revenues, 1991: $53.5 million for period ended Oct. 21. Nine-month net income, 1991: $1.2 million for period ended Oct. 21. Performance Revenue In millions of dollars ’90: $81.4 Net income In millions of dollars ’90: $1.4 Fiscal years ended Jan. 31. Source: Comarco Inc.