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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee required]
For the fiscal year ended January 31, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
------------------ -----------------
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 Identification No.)
incorporation or organization)
22800 Savi Ranch Parkway, Suite 214
Yorba Linda, California 92687
- --------------------------------------- ----------
(Address of principal executive office) (Zip Code)
(714) 282-3832
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
none
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Common stock outstanding at February 29, 1996 - 4,711,209
shares.
Aggregate market value of
Class shares held by non-affiliates
Common Stock............................... $36,901,061
The total number of shares held by non-affiliates on February 29, 1996 was
2,206,701. This number was multiplied by $14.88 per share (the closing sale
price of the Common Stock on February 29, 1996 in the NASDAQ National Market
System, as reported by NASDAQ) to determine the aggregate market value of
non-affiliate shares set forth above. (The assumption is made, solely for
purposes of the above computation, that all Officers, Directors and holders of
more than 5% of the outstanding Common Stock of registrant are affiliates.)
DOCUMENTS INCORPORATED BY REFERENCE
The Company intends to file with the Securities and Exchange Commission a
definitive Proxy Statement (the "1996 Proxy Statement") relating to its 1996
Annual Meeting of Stockholders, which meeting involves the election of directors
and certain related matters. The 1996 Proxy Statement is incorporated by
reference in Part III of this Form 10-K and shall be deemed to be a part hereof.
CROSS REFERENCE SHEET
The following table indicates the headings in the 1996 Proxy Statement
under which the information required in Part III of this Form 10-K may be found.
Form
10-K
Item
No. Item in Form 10-K Item in 1996 Proxy Statement
- ------ ---------------------- ---------------------------------
10. "Directors and Executive Officers of the Registrant"...... "Election of Directors and Officers"
11. "Executive Compensation".................................. "Executive Compensation"
12. "Security Ownership of Certain Beneficial Owners
and Management"......................................... "Ownership of Securities"
13. "Certain Relationships and Related Transactions".......... "Executive Compensation"
Copies of all documents incorporated by reference other than exhibits to
such documents will be provided without charge to each person who receives a
copy of this Annual Report on Form 10-K upon written request.
PART I
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These are in paragraphs 6-8, 12-17, 20 and 34
of Business, and paragraphs 7, 11, 13 and 32 of Management's Discussion and
Analysis of Results of Operations and Financial Condition.
ITEM 1. Business
COMARCO, Inc. and its subsidiaries (the "Company", "COMARCO", or the
"registrant") is a California corporation whose common stock has been publicly
traded since 1971 when it was spun-off from Genge Industries, Inc. Two
subsidiaries, Decisions and Designs, Inc. and International Business Services,
Inc., were acquired in late 1985 and early 1986. A third subsidiary, Comarco
Wireless Technologies, Inc. ("Comarco Wireless"), was formed in January 1994 to
further develop the Company's wireless communications products business. A
fourth subsidiary, LCTI, Inc., was acquired in August 1994. LCTI develops
special purpose software for military and commercial applications. A fifth
subsidiary, Manufacturing Technology Training Center, Inc. (MTTC), was formed in
January 1996 to further develop the Company's technology training business.
BUSINESS AREAS
The business and major customer information provided in the Company's
Consolidated Financial Statements contained in this report are incorporated
herein by reference. In particular, see Note 1 of the Notes to Consolidated
Financial Statements and Item 7, Management's Discussion and Analysis of Results
of Operations and Financial Condition.
The Company has historically engaged in providing support services
(engineering, technical, and airport management) to agencies of the United
States Government, government prime contractors, and local government agencies.
During the past two years, the Company, through its subsidiary, Comarco Wireless
Technologies, Inc., has invested more of its resources in developing products
for the wireless communications industry. This effort has resulted in COMARCO
realizing well over 50% of its operating income from this business area.
Summarized financial information by business segment for the Company's Fiscal
Year 1996, which ended January 31, 1996, is as follows:
Wireless Government
Communications Contracting and Corporate and Other
Products Other Revenue Total
--------------------------------------------------------------------------
(Dollars in Thousands)
Revenues $14,352 $55,489 $ - $69,841
Operating income 3,709 1,885 (49) 5,545
Identifiable assets 4,472 6,510 19,007 29,989
WIRELESS COMMUNICATIONS PRODUCTS
- --------------------------------
The Company's wireless communications products business is presently comprised
of three product families: field measurement products, revenue assurance
products and wireless applications products.
o Field measurement products provide a method for benchmarking and analyzing
the performance of wireless system networks as they are perceived by
customers. The field measurement product line includes the Generation II
cellular survey system, the NES250 real time RF tool, the NRS network
readiness system, and a new line of CDPD data survey products.
o The revenue assurance product line includes system products and services
that test the integrity of cellullar carriers' billing systems.
o Wireless applications products include emergency callbox systems and
wireless data telemetry systems. Emergency callbox systems are distributed
through GTE with more than 18,000 units produced, of which approximately
1,000 were produced in the last year. The Cellular Data Gateway is a new
wireless product that is used to transport data and is optimized for wide
area applications.
Comarco Wireless Technologies' revenues increased to 20% of the Company's total
revenue in Fiscal Year 1996, a 58% increase over the prior fiscal year.
Operating income increased 91% year-to-year and represented 67% of Comarco's
consolidated operating income for Fiscal Year 1996. Continued growth in Comarco
Wireless revenues and income is predicated on a number of factors, including the
continued success of the Company's product development efforts, a geographical
expansion to international markets and continued acceptance of the Company's
products by its customers, none of which can be assured.
PRODUCT DEVELOPMENT
As part of its product development program, the Company is continuing its
software product development program in its wireless communications business.
Because a common thread of technology runs through all Comarco Wireless product
lines, the Company believes that it can leverage its investment and maintain the
focus and concentration of its technical and marketing resources. The Company in
general has been developing and continues to plan to develop products that will
be compatible with all wireless communications air interfaces worldwide. This
program resulted in five new product offerings during Fiscal Year 1995, and six
new product releases in Fiscal Year 1996. The Company's product life cycle is
estimated to be two to five years, depending on the product.
The Company plans to continue to invest substantially in product development
efforts. Its products are characterized by rapidly changing technologies,
evolving standards, and continuous improvements in products and services. The
Company's future 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 that address
new technologies and standards and meet customer needs in the wireless
communications marketplace. 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.
As part of its product development program, the Company is continuing its
software product development program in its wireless communications business.
During Fiscal Year 1996 and Fiscal Year 1995, the Company capitalized
approximately $1.4 million and $1.4 million of software product development
costs, respectively, in accordance with Statement of Financial Accounting
Standards Number 86, Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed. Of the amounts capitalized, $1.1 million and
$900,000, respectively, were amortized in Fiscal Years 1996 and 1995 against
product sales in accordance with Statement 86.
In addition, during Fiscal Years 1996, 1995, and 1994, Comarco Wireless had
expenditures of $1,800,000, $340,000 and $1,400,000, respectively, for research
and development expenses (includes Company-sponsored software development costs
prior to determination of technological feasibility) on current and anticipated
products.
BACKLOG
The value of unfilled orders at Comarco Wireless as of January 31, 1996 is
approximately $4.4 million, compared to $1.7 million as of January 31, 1995. The
current year balance consists of $3.1 million of product orders and $1.3 million
of deferred revenue for basic and extended warranty commitments. Approximately
75% of this value will result in revenue during Fiscal Year 1997. In general,
most of the Company's orders are filled within months from the receipt of the
order.
SEASONALITY
Comarco Wireless has experienced in each of the past three years a seasonal
fluctuation in wireless communications products activity, with greater sales in
the third and fourth quarters of its fiscal year and lesser amounts in the first
and second quarters. 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 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; and other competitive factors. Therefore,
the nature of the wireless communications products business is inherently
unpredictable and sales and profits may fluctuate significantly from quarter to
quarter.
MARKETING, SALES DISTRIBUTION
Comarco Wireless maintains its own internal sales force for the marketing and
sales of the Company's product offerings in the United States. The Company is
establishing a network of agents and distributors for the coordination of sales
activity outside of the United States. This product and geographical expansion
into Europe is well underway and expansion into Asia is expected to begin in
earnest in the later part of Fiscal Year 1997. This expansion overseas faces a
number of inherent barriers, including: the need for export licenses; tariffs
and other potential trade restrictions (including the need to be ISO9000
certified); and changes in laws governing the imposition of duties, quotas,
taxes, or other charges relating to the import or export of its products. The
Company currently has limited experience in penetrating the foreign marketplace
and, therefore, companies having a presence or already doing business overseas
may have an advantage.
CAPITAL REQUIREMENTS
Comarco Wireless' working capital needs primarily consist of the cost of the
upfront product development effort required to expand the Company's product
offerings, inventory requirements including long lead time materials, and the
financing of accounts receivable, which will generally become longer upon the
Company's planned geographical expansion into Europe and Asia. Certain
components used by the Company in its existing products are only available from
single sources, and certain other components are presently available or acquired
only from a limited number of suppliers. In the event that any of its single
source suppliers are unable to fulfill Company requirements or discontinue the
manufacture of a key component, the Company may experience an interruption in
production. The radio interface devices designed into the Company's products are
key purchased components whose lack of availability could have a material
adverse impact on sales and profits. Working capital requirements are expected
to be financed from operations and the financial resources of the Company.
TECHNICAL REQUIREMENTS
Comarco Wireless is selling its products into a market that is growing rapidly
and technological obsolescence and market timing of product introductions is
critical for success. In the development of new or expanded product offerings,
the Company's access to the technical design of air interface devices is
essential for the Company to anticipate and develop compatible wireless
communications products. The inability to obtain the technical designs on a
timely basis will have a direct impact on product design and schedule and could
have a material adverse effect on the Company's business, operating results, and
financial condition.
EMPLOYEES
As of April 1, 1996, Comarco Wireless employed approximately 60 employees. The
Company believes its employee relations to be good. The majority of the
Company's employees are professional or technical personnel having training and
experience in engineering, computer science, and management. The Company's
future success depends in large part on the continued service of its key
technical, marketing, and management personnel, and on its ability to continue
to attract and retain qualified employees, particularly those highly skilled
design, process, and test engineers involved in the development of new products.
The competition for such personnel is intense, and the loss of key employees
could have a material adverse effect on the Company's business, operating
results, and financial condition. Recognizing this reality, the Company has
instituted a long-term incentive stock option plan for key Comarco Wireless
employees, whereby they will directly participate in the success of Comarco
Wireless (see Note 12 of the Notes to Consolidated Financial Statements). The
Company obtains its employees through a variety of means including
advertisements, engineering recruiters, and engineering temporary help firms.
COMPETITION
Comarco Wireless competes in a small niche (field measurement equipment) of the
wireless communications marketplace and believes it may be the domestic market
leader for most of its products. The business is competitive and there are other
companies, many of which are larger and have greater financial resources, who
provide or could provide the same type of products. 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. The Company believes there are
companies that provide or have the ability to provide the products the Company
is planning for overseas users. Also, companies having a presence or already
doing business overseas may have an advantage in knowing how to penetrate those
markets. There can be no assurance that the Company will be able to compete
successfully in the future.
PROPRIETARY INFORMATION
The Company has one patent for its small power adapter for portable computing
devices. However, the Company currently relies primarily on a combination of
trade secrets, copyrights, trademarks, and contractual rights to protect its
intellectual property in the wireless products area. There can be no assurance
that the steps taken by the Company will be adequate to deter misappropriation
or impede third-party development of 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. The failure of the Company to protect its proprietary
information could have a material adverse effect on the Company's business,
operating results, and financial condition.
GOVERNMENT CONTRACTING AND OTHER REVENUE
- ----------------------------------------
These services are primarily in the fields of:
o Information Technologies
o Intelligent Instrumentation and Automated Test Systems
o Ordnance and Weapon Systems Engineering Services
o Airport Management Services
o Manufacturing Training
Approximately $55.5 million or 80% of the Company's revenues for the fiscal
year ended January 31, 1996, were derived from contracts and subcontracts for
such services. In particular, $7.5 million or 11% of the Company's revenues was
from a multi-year contract with the Naval Air Warfare Center, China Lake,
California. The Company provided services to this organization and its
predecessors for 30 years, and the Company's contract expired on November 30,
1995 and will not generate any revenue in Fiscal Year 1997. The loss of this
contract required the Company to reduce its indirect organization supporting
this business area in Fiscal Year 1997.
INFORMATION TECHNOLOGIES
The Company specializes in the application of information technologies to
support agencies of the U.S. Department of Defense. This includes:
o Creating and operating computer-based environments that simulate, emulate,
and stimulate communications and target computer-based systems.
o Designing, building, and employing instrumentation for testing information
systems.
o Designing, engineering, integrating, testing, administering, and
maintaining local- and wide-area network and office automation systems.
o Designing, populating, and maintaining complex databases.
o Specifying, developing, testing, integrating, and supporting communications
protocols, links, and application software.
o Developing and employing data reduction and analysis techniques and records
management systems, including image processing systems.
The Company also designs, specifies, acquires, integrates, tests, installs,
operates, and maintains systems for its customers' uses.
Intelligent Instrumentation and Automated Test Systems
The Company also specializes in the development and application of
computer-based test instruments and automated test systems with particular focus
on:
o Interoperability testing of communications and information systems;
o Developmental and operational testing of C4I, ordnance, tactical weapon and
data systems; and o Automated Test Systems (ATS).
The Company provides engineering and testing support to assure that
communications and computer-based systems interoperate effectively and reliably.
The Company provides design and fabrication of special purpose test support
hardware such as missile launchers, missile guidance and control interface
electronics, and gun system platforms.
Through the Company's software products business and its LEXSYSTM product line,
it offers computer-aided software engineering tools for engineering of
computer-based test program sets (TPSs) and related documentation. We also apply
ATS to develop test program sets (TPSs) and interface devices (IDs) for
operational performance verification and failure diagnosis of mission-critical
electronic assemblies and subassemblies.
ORDNANCE AND WEAPON SYSTEMS ENGINEERING SERVICES
The Company offers U.S. military customers a variety of specialized engineering
services applicable to ordnance and weaponry, including:
o System engineering for complex C4I, ordnance, weapon and weapon-platform
integration concepts.
o Design and test engineering of embedded computers, avionics, software,
lasers, optics, seekers, guidance and control systems, interior and
exterior ballistics, airframes, electronics, energetic materials,
propulsion, warheads, fuses, and insensitive munitions.
o Quality assurance, reliability, maintainability, system safety,
producibility, logistics, and standard engineering.
o Documentation, CAD/CAE (CALS and EDMICS compliant), configuration and data
management, and records archiving and management services.
The Company is providing environmental and safety engineering including:
o Pollution prevention studies
o Evaluation of site developments for environmental compliance
o Air, water, and soil sampling and analysis o Waste system analysis o Permit
renewal preparation o Other environmental support
Current customers for information technologies, intelligent instrumentation and
automated test systems and ordnance and weapons systems engineering services
include agencies of the U.S. Government and government prime contractors.
AIRPORT MANAGEMENT SERVICES
The Company provides airport management services for local government agencies.
In Fiscal Year 1996, the Company had two contracts supporting the Metropolitan
Washington Airports Authority at Washington National Airport. In addition, the
Company has a long-term contract to manage five general aviation airports in Los
Angeles County. Support in this area inludes managing airport operations, ground
transportation services, computerized revenue collection, and general management
support functions. Business in this area also includes a contract to provide
management support to Los Angeles County's Fleet Maintenance Program of
approximately 4,000 County vehicles.
MANUFACTURING TRAINING
Created under a Cooperative Research and Development Agreement (CRADA) with the
Navy, the Company's subsidiary, MTTC, operates a school to provide training in
world-class electronics manufacturing. Specializing in both manual and automated
electronics interconnection methods, the Company offers certification and
operator training in accordance with the commercial standard, IPC A-610. The
Company is currently one of three authorized IPC electronics manufacturing
training centers in the country.
SOFTWARE DEVELOPMENT
The Company, through its software products business, develops software CASE
(Computer-Aided Software Engineering) tools, that increase software engineering
productivity for developers of government test programs. The main customers in
this area are the U.S. Government and government prime contractors. The Company
is currently repositioning its LEXSYSTM product line, and in Fiscal Year 1996
and 1995 the Company capitalized approximately $512,000 and $237,000
respectively, of software product development costs in accordance with Statement
of Financial Accounting Standards Number 86, Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed. Amounts amortized
were $118,000 and $21,000 for Fiscal Year 1996 and 1995 respectively. In
addition, during Fiscal Year 1996 and 1995, the Company had expenditures of
$987,000 and $180,000 respectively, for research and development expenses
(includes company-sponsored software product development costs prior to
determination of technological feasibility) in this business area.
BACKLOG
The Company's backlog from Government contracting and other revenue
believed to be firm as of January 31, 1996 was $31 million, compared to $43
million as of January 31, 1995. The primary reason for the decrease year-to-year
is due to the completion of the contract with the Naval Air Warfare Center,
China Lake, California, as well as the fact that the Company had no other major
contract recompetitions during Fiscal Year 1996. The source of backlog is
primarily contracts with the U.S. and local governments. Government contracts
normally have a base and option periods totalling three to five years in
duration. In many instances, government entities must issue work orders,
delivery orders, or task orders prior to the Company commencing work. These
entities have the discretion to terminate any contract at their convenience, and
are normally obligated only to pay for costs incurred to date under a contract.
In addition, these entities may elect to remove funding previously attached to a
contract. Many of the Company's contracts are multi-year, with options to
provide services for additional periods of time. There can be no assurances that
the government entities will exercise the options, will not withdraw funds
already committed, nor that the entities will fund the unfunded portions of the
Company's contracts. It is estimated that more than 99% of the firm backlog will
be realized in Fiscal Year 1997.
GOVERNMENT CONTRACTS
The majority of the Company's total revenues (approximately 51% in FY96,
58% in FY95, and 62% in FY94) were derived from contracts with the United States
Government, principally agencies of the Department of Defense. A significant
portion of the Company's revenue (29%) is derived from contracts with the U.S.
Navy. Should changes in procurement policies or reductions in government
expenditures occur, revenue and the income of the Company could be adversely
affected (see Management's Discussion and Analysis of Results of Operations and
Financial Condition). The Company's government contracts business is not
seasonal; however variations may occur at the expiration of major contracts
until such contracts are renewed or new contracts obtained. In the course of the
Company's business, its contracts are periodically opened for competition.
Currently, 29% of the Company's Fiscal Year 1996 Government contracting and
other revenues (after exclusion of the China Lake contract) are in recompetition
or are planned for recompetition in Fiscal Year 1997. In addition, the Company's
contract with the Naval Air Warfare Center, China Lake, California, which
represented 11% of the Company's Fiscal Year 1996 revenues, ran through November
1995 and will not generate any revenue in Fiscal Year 1997. The Company plans to
aggressively compete for its existing work and selectively pursue other high
value Government procurements. As of April 1996, the Company has outstanding
proposals valued at approximately $200 million for recompetition or new efforts
with Governmental agencies. There can be no assurance that the Company will be
selected and awarded work under these outstanding proposals.
COMPETITION
In excess of 95% of the Company's Government contracting and other revenue
business is awarded through competitive procurements. Government contracting
services industries consist of thousands of companies, many of which are larger
and have greater financial resources than the Company, who can provide the same
type of services. The business is highly competitive. The Company obtains much
of its business on the basis of submitted proposals to new and existing
customers. Competition generally centers on price, past performance, technical
capability, management plan, and personnel. There is no single company that
competes directly with the Company on all of the Company's services and
products.
PROPRIETARY INFORMATION
The United States Government has certain proprietary rights in software
programs and products developed by the Company in its performance of government
contracts.
EMPLOYEES
As of April 1, 1996, the Company employed approximately 700 employees, of
which 640 were part of the Government contracting business area. The Company
believes its employee relations to be good. The majority of the Company's
employees are professional or technical personnel having training and experience
in engineering, computer science, and management. Approximately 45 of the
Company's employees are represented by the International Brotherhood of
Teamsters and are covered by a collective bargaining agreement. In addition, the
Company has entered negotiations with the International Brotherhood of Teamsters
concerning a collective bargaining agreement for approximately 40 more of the
Company's employees.
ITEM 2. Properties
The Company's principal facilities on January 31, 1996, aggregating
approximately 77,000 square feet, are located in the cities of Yorba Linda,
Irvine, Camarillo, and Ridgecrest, California; Vienna and Petersburg, Virginia;
Sierra Vista, Arizona; Warner Robins, Georgia; Bloomfield and Indianapolis,
Indiana; and Gaithersburg, Maryland, and are occupied under leases expiring
prior to Fiscal Year 2002. With the exception of a 6,000 square foot area used
for light manufacturing, all facilities are used for office space. The Company's
aggregate annual rent during Fiscal Year 1996 was approximately $1.2 million.
The aggregate annual rent in the year ending January 31, 1997 is expected to be
approximately $900,000. Management believes that all facilities currently
occupied by the Company provide sufficient space for the Company's present
needs, and that suitable additional space will be available, if needed. Comarco
Wireless operates from a single-site manufacturing operation. Any material
disruption, whether due to fire, natural disaster, or otherwise, could have a
material adverse effect on the Company's business, operating results, and
financial condition.
ITEM 3. Legal Proceedings
The Company is subject to legal proceedings and claims which 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
financial condition of the Company. In particular, see Note 18 of the Notes to
Consolidated Financial Statements.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
ITEM 5. Market for the Company's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded in the over-the-counter market under
the NASDAQ symbol CMRO. The following table sets forth the range of high and low
closing prices in the NASDAQ National Market System for the Common Stock for the
periods indicated, as reported by the National Quotation Bureau Incorporated.
Prices represent actual reported sale prices.
Fiscal Years Ended January 31
Price
------------------------
High Low
--------- ---------
1996
First Quarter................................. $ 11.50 $ 8.13
Second Quarter................................ 11.75 8.88
Third Quarter................................. 11.63 8.88
Fourth Quarter................................ 15.75 9.88
1995
First Quarter................................. $ 5.13 $ 4.56
Second Quarter................................ 5.75 4.88
Third Quarter................................. 6.88 4.63
Fourth Quarter................................ 9.63 6.50
The Company had approximately 722 shareholders of record on February 29,
1996.
The terms of the Company's current bank loan agreement limit the payment of
dividends under certain circumstances. The Company anticipates that dividends
will not be paid for the foreseeable future and that all earnings will be
retained for use in the Company's business and for stock repurchases.
ITEM 6. Selected Financial Data
SELECTED FINANCIAL DATA
(Figures in thousands, except per share amounts)
Years Ended January 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------ ------------- ------------ -------------
Revenues:
Contract revenues...................... $ 54,278 $ 58,796 $ 59,500 $ 79,051 $ 80,333
Product sales.......................... 15,563 9,520 6,808 5,655 --
------------- ------------ ------------- ------------ -------------
69,841 68,316 66,308 84,706 80,333
------------- ------------ ------------- ------------ -------------
Direct costs:
Contract costs......................... 36,540 39,271 39,553 53,188 51,272
Cost of product sales.................. 6,644 5,388 3,764 3,320 --
------------- ------------ ------------- ------------ -------------
43,184 44,659 43,317 56,508 51,272
Indirect costs............................ 21,112 18,652 19,628 23,856 25,096
------------- ------------ ------------- ------------ -------------
64,296 63,311 62,945 80,364 76,368
------------- ------------ ------------- ------------ -------------
Operating income ......................... 5,545 5,005 3,363 4,342 3,965
Interest expense.......................... 44 231 333 436 482
Interest income........................... 541 298 349 284 123
------------- ------------ ------------- ------------ -------------
Income before income taxes and
extraordinary item..................... 6,042 5,072 3,379 4,190 3,606
Income tax expense ....................... 2,157 1,743 980 922 900
------------- ------------ ------------- ------------ -------------
Income before extraordinary item.......... 3,885 3,329 2,399 3,268 2,706
Extraordinary item - gain on extinguishment
of subordinated debentures, net of
income tax expense..................... -- -- -- 4 26
------------- ------------ ------------- ------------ -------------
Net income ............................... $ 3,885 $ 3,329 $ 2,399 $ 3,272 $ 2,732
============= ============ ============= ============ =============
Earnings per share:
Primary:
Before extraordinary item............ $ .75 $ .68 $ .45 $ .60 $ .50
Extraordinary item................... -- -- -- -- .01
------------- ------------ ------------- ------------ -------------
Net income........................... $ .75 $ .68 $ .45 $ .60 $ .51
============= ============ ============= ============ =============
Fully diluted:
Before extraordinary item............ $ .73 $ .66 $ .45 $ .60 $ .49
Extraordinary item................... -- -- -- -- .01
------------- ------------ ------------- ------------ -------------
Net income........................... $ .73 $ .66 $ .45 $ .60 $ .50
============= ============ ============= ============ =============
Dividends declared per share.............. None None None None None
SELECTED FINANCIAL DATA
(In thousands)
January 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------ ------------- ------------ -------------
Working capital .......................... $ 16,049 $ 12,394 $ 14,879 $ 13,829 $ 11,503
Total assets.............................. 29,989 25,810 24,891 25,147 23,598
Borrowings under bank line of credit...... -- -- -- -- ---
Long-term debt, including current
maturities (1)......................... --- 844 2,984 3,384 4,293
Stockholders' equity ..................... 21,738 17,203 15,144 14,406 11,216
==================
(1) Includes Convertible Subordinated Debentures of $844,000 at January 31,
1995, $2,984,000 at January 31, 1994, $3,384,000 at January 31, 1993, and
$4,293,000 at January 31, 1992.
ITEM 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
The following tables set forth, for the periods indicated, the percentage
which certain items in the Consolidated Statements of Income bear to revenues,
and the percentage change from period to period of these items:
Percentage of Revenues
Years Ended January 31,
-------------------------------------------
1996 1995 1994
------------- ------------- ------------
Revenues.......................... 100.0% 100.0% 100.0%
Operating income.................. 7.9 7.3 5.1
Interest expense.................. .1 .3 .5
Interest income................... .8 .4 .5
Income tax expense................ 3.0 2.6 1.5
Net income........................ 5.6 4.9 3.6
Percentage Increase (Decrease)
Years Ended January 31,
-------------------------------------
1996-1995 1995-1994
--------------- ---------------
Revenues.......................... 2.2% 3.0%
Operating income.................. 10.8 48.8
Interest expense.................. (81.0) (30.6)
Interest income................... 81.5 (14.6)
Income tax expense................ 23.8 77.9
Net income........................ 16.7 38.8
FISCAL YEAR ENDED JANUARY 31, 1996 COMPARED TO FISCAL YEAR ENDED
JANUARY 31, 1995
The Company is involved in two distinct business areas: development and
manufacture of wireless communications products; and providing Government
contracting services primarily to government entities.
Fiscal Year 1996 revenues totaled $69.8 million, up 2% from the prior year.
Increased year-to-year revenue is primarily due to:
o sales of the Company's wireless communications products, including various
field measurement and revenue assurance systems to major cellular telephone
companies,
o increased efforts providing testing of C4I systems and field test
instrumentation for the U.S. Armed Forces at various locations, and
o increased efforts in support of the Naval Surface Warfare Center at Crane,
Indiana; partially offset by:
o substantial completion as of September 30, 1995, of the Company's contract
with the Naval Air Warfare Center ("NAWC") at China Lake, California, and
o reduction in activity as a subcontractor in support of the Army's Software
Development Center at Ft. Lee, Virginia.
Wireless Communications Products
Wireless communications products revenues increased 58% to $14.4 million for
Fiscal Year 1996 from $9.1 million for Fiscal Year 1995. Wireless
communications products revenues comprised approximately 20.5% of total Company
revenues during Fiscal Year 1996, up from 13.3% in the prior fiscal year. This
increase is due to increased sales of the Company's network evaluation and
revenue assurance systems to major cellular telephone carriers. During the year
the Company continued to broaden its product line with the introduction of its
second generation of field measurement equipment, including products supporting
the AMPS, TDMA, NAMPS, ETACS and GSM air interfaces. Revenues from sales of
callboxes were minimal during Fiscal Year 1996 as states other than California
have not yet progressed past the field testing stage of these units.
Operating income from wireless communications products increased 91%
year-to-year, comprising 67% of Comarco's total operating income for Fiscal
Year 1996. Summary operating results for Comarco Wireless Technologies, Inc,
the Company's wireless communications products subsidiary, are as follows:
January 31, January 31,
1996 1995
-------------------------------------------
Revenues................. $ 14,352,000 $ 9,089,000
Cost of products sold.... 5,679,000 4,882,000
------------------ -----------------
Gross margin............. 8,673,000 4,207,000
Percentage .............. 60.4% 46.3%
Indirect costs*.......... 4,964,000 2,264,000
------------------ ----------------
Operating income......... $ 3,709,000 $ 1,943,000
================== ================
*Indirect costs include selling, general and administrative expenses, as well
as research and development expenses.
The increased gross margin percentage is due to the incremental benefit of
spreading the fixed costs of operations over a larger activity base and the
ability to obtain economic order buys on component materials.
The increase in indirect costs, excluding research and development expenses,
are in line with the increase in revenues. Research and development expense
totaled $1.8 million during Fiscal Year 1996, compared to $340,000 in the prior
fiscal year. The substantial increase year-to-year is due to a concerted effort
by the Company in Fiscal Year 1996, to accelerate the expansion of both its
product development program and its efforts to upgrade its existing product
line. The Company continues to view the next few years as a window of
opportunity to expand its product line to take advantage of the worldwide
growth in this market. The Company plans to continue to invest heavily in new
product development. There can be no assurance that the Company will be
successful in generating future revenues from such development efforts.
Operating income increased 91% to $3.7 million in Fiscal Year 1996 from $1.9
million in the prior fiscal year. Operating income as a percentage of revenues
is 25.8% for Fiscal Year 1996, compared to 21.4% for the comparable prior
period. The increase is due to the improvement in gross margin percentage noted
above, which was partially offset by an increase in indirect costs, as
discussed above.
As part of its product development program, the Company is continuing its
software product development program in it 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 and amortized $1.4 million and $1.1 million,
respectively, during Fiscal Year 1996. The Company capitalized and amortized
$1.4 million and $900,000 in Fiscal Year 1995, respectively. These amounts are
in addition to the research and development expense discussed above.
The Company's orders for wireless communications products totaled $17.1 million
for Fiscal Year 1996, up from $9.6 million during Fiscal Year 1995. The value
of unfilled orders at January 31, 1996 totaled $3.1 million. An additional $1.3
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 three years, with greater sales in the second half
of its fiscal year and lesser amounts in the first half. This trend may or may
not continue as the Company broadens its product offerings. The nature of the
wireless communications products business is inherently less predictable (than
the Company's traditional Government contracting business) as the Company will
normally not have a significant amount of unfilled orders at the end of a
period. Therefore, sales levels and profits are more difficult to predict and
may fluctuate significantly from quarter to quarter.
Government Contracting and Other Revenue
Revenues provided by the Company's traditional Government contracting services
business area decreased from $59.2 million in Fiscal Year 1995 to $55.5 million
in Fiscal Year 1996. Revenues for Government contracting services for Fiscal
Year 1996 comprised 80% of the Company's total revenues compared with 87% in
the prior year. This decrease is primarily due to the reduced activity in the
Company's contracts with the Naval Air Warfare Center at China Lake, California
and the Army's Software Development Center at Ft. Lee, Virginia. The China Lake
contract substantially ended on September 30, 1995 and accounted for
approximately 11% of the Company's total revenues and approximately 14% of
total Government contracting revenues during Fiscal Year 1996 and will not
generate any revenue in Fiscal Year 1997. This contract also accounted for
approximately 11% of the Company's total operating income and approximately 21%
of total Government contracting operating income during Fiscal Year 1996. The
loss of this contract required the Company to reduce the indirect organization
supporting this business in line with the reduced revenue base.
Sales to the U.S. Government as well as to government prime contractors were
43% and 51% of the Company's total revenue during the fourth quarter and the
fiscal year ended January 31, 1996, respectively. In the course of the
Company's business, its government contracts are periodically opened for
competition. Approximately 29% of the Company's current Government contracting
services revenues will either end or will be open for competition during Fiscal
Year 1997. The Company plans to aggressively compete for all work opened for
competition to the extent possible and selectively pursue certain high value
Government procurements. As of April 1996, the Company has outstanding
proposals valued at approximately $200 million for recompetition or new efforts
with Government agencies. There can be no assurance that the Company will be
selected and awarded the work associated with these outstanding proposals. In
addition, government agencies may terminate their contracts in whole or in part
at their convenience. Government agencies may remove funding previously
provided or may not exercise option periods. Therefore, there can be no
assurance that the Government will fund the portions of existing contracts that
are unfunded, or that the Governmental agencies will exercise any options.
Operating income (revenues less direct costs, indirect costs, and depreciation
and amortization) for Government contracting services is down 37% year-to-year
from $3.0 million in Fiscal Year 1995 to $1.9 million in Fiscal Year 1996. The
reduced operating income is primarily due to the operating loss of $1.1 million
incurred by the Company's software products line in Fiscal Year 1996. The
operating loss is due to a concerted effort on the Company's part to complete a
comprehensive repositioning of the CASE tool products. Because the project took
longer and cost more than anticipated, the Company believes sales were delayed
awaiting the release of new product. The upgraded product was released on
February 29, 1996. In addition to completing the project, the Company took
other steps to reorganize this product line during the latter part of Fiscal
Year 1996 including having this software products group report to the
government business organization.
Net interest income (interest income, less amortization of offering costs and
interest expense) for Fiscal Year 1996 totaled $497,000 compared to $67,000 for
the prior fiscal year. The increase is principally due to the retirement of the
Company's remaining convertible subordinated debentures and accelerated
amortization of offering costs related to the Company's purchase of its
convertible subordinated debentures during the first quarters of Fiscal Years
1996 and 1995, as well as higher available investable balances year-to-year.
The Company recorded accelerated offering cost amortization of $23,000 and
$64,000 in Fiscal Years 1996 and 1995, respectively. The Company retired the
remaining $844,000 of its convertible subordinated debentures on April 15,
1995, leaving no outstanding debt as of January 31, 1996.
The Company's effective tax rate is 35.7% for Fiscal Year 1996 versus 34.4% for
the previous fiscal year. The increased effective tax rate is due to a reduced
level of current tax credits available to offset income taxes on current
taxable income.
The overall increase in net income from the prior year is primarily due to the
significant increase in sales of wireless communications products at a higher
operating income margin and increased investment net earnings, partially offset
by the operating loss incurred by the Company's software products business and
a higher effective income tax rate.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of ("Statement
121"). Statement 121 requires that the Company review its long-lived assets for
impairment whenever events or circumstances indicate that the carrying amount
of an asset may not be recoverable. To the extent that the future undiscounted
net cash flows expected to be generated from an asset are less than the
carrying amount of the asset, an impairment loss is recognized based on the
difference between the asset's carrying amount and its fair market value. The
Company is required to adopt Statement 121 as of February 1, 1996. In the
opinion of Company management, the adoption of Statement 121 will not have a
material impact on the Company's financial condition or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-based Compensation
("Statement 123"). Statement 123 recommends, but does not require, the adoption
of a fair value based method of accounting for stock-based compensation of
employees, including common stock options. Statement 123 requires a fair value
based method of accounting for stock-based compensation to individuals other
than employees. The Company currently intends to continue recording stock-based
compensation to employees under the intrinsic value method and does not intend
to adopt the fair value based method of accounting for stock-based compensation
to employees as permitted by Statement 123. Certain pro forma disclosures will
be required in the Company's financial statements for the year ending January
31, 1997 as if the fair value based method had been adopted.
Fiscal Year Ended January 31, 1995 Compared to Fiscal Year Ended January 31,
1994
The Company is involved in two distinct business areas: development and
manufacture of wireless communications products; and providing Government
contracting services primarily to government entities.
Fiscal Year 1995 revenues totaled $68.3 million, up 3% from the prior year.
Increased year-to-year revenue is primarily due to:
o sales of the Company's wireless communications products, including various
field measurement and revenue assurance systems to major cellular carriers,
o increased efforts providing testing of C4I systems and field test
instrumentation as part of joint ventures at the Joint Interoperability
Test Command, Ft. Huachuca, Arizona, and the Test and Experimentation
Command, Ft. Hood and Ft. Bliss, Texas, and
o increased activity providing airport management services to the
Metropolitan Washington Airports Authority at Washington National Airport;
partially offset by:
o reduction in activity in support of the Naval Air Warfare Centers at China
Lake, California and Point Mugu, California, and
o reduction in activity in support of the Army's Software Development Center
at Ft. Lee, Virginia.
In August 1994, the Company was notified that it was not selected in the
contract competition with the Naval Air Warfare Center ("NAWC") at China Lake,
California. The Company and two other companies submitted protests to their
elimination from the recompetition. Based on these protests, the Navy
reinstated all of the protesting companies, including COMARCO, to the
competition. The Navy issued an extension on the Company's contract to continue
work at the Naval Air Warfare Center at China Lake through May 1995, with an
option to extend through September 1995. The Company's current contract in this
location accounted for approximately 18% of the Company's revenues in Fiscal
Year 1995 and 15% of the Company's Fiscal Year 1995 fourth quarter revenues.
Since most of the costs associated with this contract are directly attributable
to the contract, the Company currently anticipates that there will be few
residual costs not reimbursed by the customer. If the Company is not successful
in the recompetition of this contract, it will have a material adverse effect
on operations which will require appropriate organizational changes and cost
reduction efforts.
Wireless Communications Products
Wireless communications products revenues increased to $9.1 million for Fiscal
Year 1995, up 34% from $6.8 million in the prior fiscal year. This increase is
due to increased sales of the Company's network evaluation and revenue
assurance systems to major cellular telephone carriers. Revenues from sales of
callboxes were minimal during Fiscal Year 1995, as states other than California
were only at the field testing stage of these units. If these other states move
forward and select the Company's units, production of units may return in
Fiscal Year 1996, although there can be no assurance that production will
resume.
In accordance with Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, the
Company capitalized and amortized $1.4 million and $.9 million, respectively,
of software product development costs related to wireless communications
products during Fiscal Year 1995. Orders for wireless communications products
increased to $9.6 million during Fiscal Year 1995, as compared to orders of
$5.8 million received during Fiscal Year 1994. The value of unfilled orders at
January 31, 1995 totaled $1.7 million.
Operating income (revenues less direct costs, indirect costs, and depreciation
and amortization) from wireless communications products increased by 155% to
$1.9 million for Fiscal Year 1995 from $.8 million in the prior year. Operating
income as a percentage of revenue for Wireless Communication products improved
to 21.4% of revenue in Fiscal Year 1995 from 11.2% in Fiscal Year 1994. The
increased operating income margin is due to the impact of spreading the fixed
costs of this operation over a larger revenue base.
Government Contracting and Other Revenues
The Company's traditional business of providing engineering services to the
U.S. Government and other government entities declined to 87% of the Company's
revenues in Fiscal Year 1995 from 90% and 93% in Fiscal Years 1994 and 1993,
respectively. The Company experienced a decline in defense-related activity of
approximately 4% during Fiscal Year 1995. The Company anticipates that
continued Government budgetary pressures will result in continued erosion in
Fiscal Year 1996. The Company's contract at the Naval Air Warfare Center in
China Lake, California, which has a current expiration date including options
of September 1995, has experienced a decrease in activity of approximately 17%
from last fiscal year. This decrease in revenue is due to a reduction in
Government funding available for projects at the Naval Air Warfare Center.
Notwithstanding this decline in revenue, the Company's performance grades on
many government contracts, including the contract at the Naval Air Warfare
Center, China Lake, California, which determine the percentage of profit the
Company receives on the contracts, have steadily improved. Except as noted
above, the Company's other defense-related activity has been steady during
Fiscal Year 1995.
In the course of the Company's business, its government contracts are
periodically opened for competition. The Company's contracts with the Naval Air
Warfare Centers in China Lake and Point Mugu, California are currently under a
combined recompetition that includes these two contracts plus a number of other
companies' contracts. These two contracts accounted for approximately 22% of
the Company's revenues in Fiscal Year 1995. An award decision is expected
during the summer of 1995. There can be no assurance that the Company will be
selected in this recompetition. If the Company is not successful, it will have
a material adverse effect on operations that will require appropriate
organizational changes and cost reduction efforts.
Operating income (revenues less direct cost, indirect costs and depreciation
and amortization) remained level at $3 million or 5% operating income as a
percentage or revenue, on the same amount of revenues year-to-year. Operations
income for defense-related activity declined in line with the reduction in
revenue, while, airport management operating income increased due to increased
operating efficiences from its contract to manage the five general aviation
airports in Los Angeles County, California.
The Company recorded net interest income for Fiscal Year 1995 of $67,000,
versus net interest income of $16,000 from the prior fiscal year. The increase
is due to a continued reduction in debt and the Company's ability to make
short-term investments on a regular basis in the current year, resulting in
interest income. The Company's only indebtedness at January 31, 1995 is its
convertible subordinated debentures, which totaled $844,000, down from $3.0
million at January 31, 1994. The Company has elected to redeem the remaining
outstanding balance of $844,000 of the debentures at par on April 15, 1995, in
accordance with the provisions of the debenture agreement.
The Company's effective tax rate is 34.4% for Fiscal Year 1995 versus 29% for
the previous fiscal year. The increased effective tax rate is due to a reduced
level of current tax credits available to offset income taxes on current
taxable income.
The overall increase in net income from the prior fiscal year is primarily due
to the significant increase in the sales of wireless communications products at
higher operating income margins partially offset by a higher effective income
tax rate.
Liability and Capital Resources
The Company signed a loan agreement with a bank effective September 26, 1994,
which was amended effective September 26, 1995. The loan agreement consists of
(1) an $8 million revolving credit facility, which expires June 30, 1997, and
(2) a $5 million guidance line of credit, which expires June 30, 1996. The
revolving credit facility and the guidance line of credit are 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 $13.3 million (includes highly liquid long-term investments with
maturities of 12 to 36 months) during the fourth quarter of Fiscal Year 1996.
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, and software product development costs.
During the fourth quarter of Fiscal Year 1996, the Company's average days'
sales in accounts receivable have remained steady from the prior fiscal year's
levels, at approximately 42 days.
Several additional key factors indicating the Company's financial condition
include:
January 31, January 31,
1996 1995
--------------- ----------------
Current Ratio........................... 3.09 2.66
Working Capital......................... $ 16,049,000 $ 12,394,000
Debt to equity ratio.................... 0 .05
Book value per share.................... $ 4.62 $ 3.74
The Company continues to demonstrate improvements in the above financial
factors during Fiscal Year 1996, primarily due to increased operating margins
from increased sales of wireless communications products.
The Company has a significant commitment for capital expenditures at January
31, 1996 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. The amounts
capitalized and amortized in accordance with Financial Accounting Standard No
86, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed, totaled $1.9 million and $1.2 million, respectively, in
Fiscal Year 1996.
The Company's Board of Directors has authorized a stock re-purchase program of
up to 1,000,000 shares. As of January 31, 1996, the Company has repurchased and
retired approximately 796,000 shares. The average price paid per share
re-purchased under the program was $4.75.
The Company redeemed the remaining $844,000 of outstanding convertible
subordinated debentures in accordance with the provisions of the debenture
agreement on April 15, 1995.
The Company is subject to legal proceedings and claims which 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. In particular, see Note 18 of the Notes to
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.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
--------
Independent Auditors' Report.......................................... 18
Financial Statements:
Consolidated Balance Sheets, January 31, 1996
and 1995....................................................... 19
Consolidated Statements of Income, Years Ended
January 31, 1996, 1995, and 1994............................... 20
Consolidated Statements of Cash Flows, Years
Ended January 31, 1996, 1995, and 1994......................... 21
Notes to Consolidated Financial Statements....................... 22
Financial Statement Schedule:
VIII Reserves, Years Ended January 31, 1996,
1995, and 1994................................................. 40
All other schedules are omitted because the required information is not present
in amounts sufficient to require submission of the schedule or because the
information required is included in the consolidated financial statements or the
notes thereto.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
COMARCO, Inc.:
We have audited the consolidated financial statements of COMARCO, Inc. and
Subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and the financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of COMARCO,
Inc. and Subsidiaries as of January 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended January 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
McLean, Virginia
March 29, 1996
COMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
January 31,
---------------------------------
1996 1995
------------- --------------
Current assets:
Cash and cash equivalents................................... $ 11,801 $ 7,968
Short-term investments...................................... 2,657 1,939
Accounts receivable, net.................................... 7,335 8,703
Inventory................................................... 1,361 535
Other current assets........................................ 573 703
------------- --------------
Total current assets...................................... 23,727 19,848
Long-term investments.......................................... 841 1,023
Property and equipment, net.................................... 1,174 970
Software development costs, net................................ 1,401 676
Intangible assets, net......................................... 2,578 3,011
Other assets................................................... 268 282
------------- --------------
$ 29,989 $ 25,810
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 547 $ 616
Deferred revenue............................................ 1,410 1,044
Accrued liabilities......................................... 5,721 5,794
------------- --------------
Total current liabilities................................. 7,678 7,454
Convertible subordinated debentures............................ - 844
Deferred income taxes.......................................... 573 309
Stockholders' equity:
Common stock, $.10 par value, 33,705,000 shares
authorized; shares outstanding of 4,707,709
in 1996 and 4,602,009 in 1995............................. 471 460
Paid-in capital............................................. 3,883 3,244
Retained earnings........................................... 17,384 13,499
------------- --------------
Total stockholders' equity................................ 21,738 17,203
Commitments and contingencies (Notes 13 and 18)
============= ==============
$ 29,989 $ 25,810
============= ==============
See accompanying notes to consolidated financial statements
COMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Years Ended January 31,
-----------------------------------------------------
1996 1995 1994
------------- ------------- --------------
Revenues:
Contract revenues.................. $ 54,278 $ 58,796 $ 59,500
Product sales...................... 15,563 9,520 6,808
------------- ------------- --------------
69,841 68,316 66,308
------------- ------------- --------------
Direct costs:
Contract costs..................... 36,540 39,271 39,553
Cost of product sales.............. 6,644 5,388 3,764
------------- ------------- --------------
43,184 44,659 43,317
Indirect costs........................ 21,112 18,652 19,628
------------- ------------- --------------
64,296 63,311 62,945
------------- ------------- --------------
Operating income...................... 5,545 5,005 3,363
Interest expense...................... 44 231 333
Interest income....................... 541 298 349
------------- ------------- --------------
Income before income taxes............ 6,042 5,072 3,379
Income tax expense.................... 2,157 1,743 980
------------- ------------- --------------
Net income............................ $ 3,885 $ 3,329 $ 2,399
============= ============= ==============
Earnings per common share:
Primary:
Net income....................... $ .75 $ .68 $ .45
============= ============= ==============
Fully diluted:
Net income....................... $ .73 $ .66 $ .45
============= ============= ==============
See accompanying notes to consolidated financial statements
COMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended January 31,
-----------------------------------------------------
1996 1995 1994
------------- ------------- --------------
Cash flows from operating activities:
Net income............................................... $ 3,885 $ 3,329 $ 2,399
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on disposal of property and equipment........... (26) --- (7)
Depreciation and amortization........................ 2,117 1,728 716
Provision for doubtful accounts receivable........... 30 12 18
Deferred income taxes................................ 247 83 65
Changes in operating assets and liabilities, net
of effects from the purchase of LCTI:
Increases in investments........................... (357) --- ---
Decrease (increase) in accounts receivable......... 1,338 513 (190)
Increase in inventory.............................. (826) (71) (213)
Decrease (increase) in other current assets........ 147 130 (246)
Decrease in other assets........................... 14 86 108
Decrease in accounts payable....................... (69) (215) (297)
Increase in deferred revenue....................... 366 442 602
Increase (decrease) in accrued liabilities......... (73) 47 (700)
------------- ------------- --------------
Net cash provided by operating activities................ 6,793 6,084 2,255
Cash flows from investing activities:
Purchases of investments................................. (1,903) (3,038) ---
Proceeds from sales of investments....................... 1,724 76 ---
Purchases of property and equipment...................... (740) (558) (461)
Proceeds from sale of property and equipment............. 53 1 27
Software development costs............................... (1,900) (1,597) ---
Cost of acquisition of LCTI, net of cash acquired........ -- (65) ---
------------- ------------- --------------
Net cash used in investing activities.................... (2,766) (5,181) (434)
Cash flows from financing activities:
Principal payments on long-term debt..................... -- (821) ---
Purchase of convertible subordinated debentures.......... (844) (2,140) (400)
Proceeds from issuance of common stock,
including tax benefit.................................. 650 122 221
Purchase of common stock................................. -- (1,392) (1,882)
------------- ------------- --------------
Net cash used in financing activities.................... (194) (4,231) (2,061)
------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents........ 3,833 (3,328) (240)
Cash and cash equivalents, beginning of year................ 7,968 11,296 11,536
------------- ------------- --------------
Cash and cash equivalents, end of year...................... $ 11,801 $ 7,968 $ 11,296
============= ============= ==============
See accompanying notes to consolidated financial statements
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996 AND 1995 AND 1994
1. Significant Accounting Policies
a. The Company--COMARCO, Inc. and its subsidiaries' (the "Company")
traditional business area consists of providing a broad range of support
services to agencies of the United States Government, government prime
contractors, and local governments, primarily in the fields of information
technologies; intelligent instrumentation and automated test systems; ordnance
and weapon system engineering services; airport management services; and
manufacturing training. The Company, operating in a newer business area through
one of its subsidiaries, Comarco Wireless Technologies, Inc., designs and
develops products for the wireless communications industry. Sales to the United
States Government and government prime contractors were 51%, 58%, and 62% of
revenues for the years ended January 31, 1996, 1995, and 1994, respectively. In
August 1994, the Company acquired all of the outstanding stock of LCTI, Inc. As
negotiated under the purchase agreement, the Company was not required to pay any
consideration to the former owners of LCTI at the acquisition date, but may be
required to make payments to these former owners based upon the results of
LCTI's operations over a five-year period from the date of acquisition. The
acquisition was accounted for using the purchase method. There was no difference
between the estimated fair values of the acquired net tangible and identifiable
intangible assets and the assumed liabilities. LCTI's results of operations have
been included in the Company's consolidated results of operations since the
acquisition date. The acquisition did not have a material pro-forma impact on
operations.
b. Principles of Consolidation--The accompanying financial statements
include the accounts of the Company and its subsidiaries. All material
intercompany balances, transactions and profits have been eliminated in
consolidation.
c. Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
d. Revenues--Substantially all of the Company's contract revenues are
earned under long-term agreements and are recorded using the
percentage-of-completion method. Contract revenue is recorded as costs are
incurred, and profit is recognized on each contract based on the percentage that
the incurred costs bear to estimated total costs. The fees under certain
government contracts may be increased or decreased in accordance with cost or
performance incentive provisions which measure actual performance against
established targets or other criteria. Such incentive fee awards or penalties
are included in contract revenues at the time the amounts can be reasonably
determined. Costs to complete are reviewed periodically and revised as required.
Provisions are made for the full amount of anticipated losses, if any, on all
contracts in the period in which they are first determinable.
Revenues from product sales are primarily recorded as products are shipped
or when customers have accepted the products, depending on the contract terms.
The estimated sales value of post contract customer support which is included as
part of an initial warranty period is deferred and amortized over the warranty
period. Revenues from extended warranty agreements are recognized ratably over
the term of the agreement.
e. Cash and Cash Equivalents--For purposes of the consolidated statements
of cash flows, the Company considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents. Cash
equivalents of $10.9 million and $7.3 million at January 31, 1996 and 1995,
respectively, consist primarily of variable rate securities, money market funds,
and commercial paper.
f. Inventory--Inventory is stated at the lower of cost or market. Cost is
determined using standard cost, which approximates actual costs on a first-in,
first-out (FIFO) method.
g. Property and Equipment--Property and equipment are stated at cost and
are depreciated using the straight-line method, over useful lives of three to
seven years.
h. Software Development Costs--Capitalization of internally developed
software begins upon the determination by the Company of a product's
technological feasibility. Capitalized software development costs are amortized
over related sales on a per-unit basis based upon estimated total sales, with a
minimum amortization based on a straight-line method over a two to five year
useful life. Capitalized software development costs and associated amortization
expense were approximately $1.9 million and $1.2 million respectively, in the
year ended January 31, 1996. Capitalized software development costs and
associated amortization expense were approximately $1.6 million and $921,000,
respectively, in the year ended January 1995. There were no capitalized software
development costs or amortization in the year ended January 31, 1994.
i. Intangible Assets--Intangible assets are being amortized over periods of
five to thirty years. Costs in excess of net assets acquired are being amortized
over a forty-year period. All such amortization is computed on the straight-line
basis.
j. Taxes on Income--Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Future tax benefits
recognized as deferred tax assets must be reduced by a valuation allowance where
it is more likely than not that the benefits may not be realized.
The Company adopted, as of February 1, 1993, Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. The Company
previously used the asset and liability method under Statement 96. There was no
cumulative effect of this change in accounting for income taxes on the
consolidated financial statements.
k. Per Share Information--The outstanding shares used for earnings per
share calculations for all years presented include the weighted average effect
of common shares and common share equivalents outstanding during the year.
Common share equivalents include dilutive stock options and warrants computed
using the treasury stock method. Convertible subordinated debentures are not
considered common stock equivalents and are not considered in the computation of
fully diluted earnings per share since the effect would be antidilutive.
Consolidated net income of the Company used for 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.
l. Reclassifications-Certain reclassifications of 1994 and 1995 amounts
have been made to conform with the 1996 presentation.
2. Investments
Effective February 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Statement 115 prescribes how companies are to account for and
report investments in equity securities that have readily determinable fair
values and for all investments in debt securities. The adoption of Statement 115
had no material impact on the Company's consolidated statement of income for the
years ended January 31, 1995 and 1996.
Securities classified as available for sale are as follows at January 31, 1996
and 1995:
Gross Gross
Unrealized Unrealized Aggregate
Security Holding Holding Fair
Year Type Cost Gains Losses Value
- ---- -------- ---- ---------- ---------- -----
(Dollars in thousands)
1996 Equity $286 -- -- $286
1995 Equity $649 -- -- $649
Securities classified as held-to-maturity are as follows at January 31, 1996 and
1995:
Gross Gross
Unrealized Unrealized Aggregate
Security Amortized Holding Holding Fair
Year Type Cost Gains Losses Value
- ---- -------- --------- ---------- ---------- ----------
(Dollars in thousands)
1996 Debt $2,855 $17 $ 5 $2,867
1995 Debt $2,313 -- $29 $2,284
Maturities of debt securities classified as held-to maturity are as follows at
January 31, 1996:
Aggregate
Security Fair
Type Cost Value
-------- ---- ---------
(Dollars in thousands)
Tax-exempt obligations:
Within one year $2,014 $2,013
One through five years 841 854
Proceeds from the sales of available-for-sale securities in the years ended
January 31, 1996 and 1995 were $363,000 and none, respectively. No gross
realized gains or losses were recorded on sales of available-for-sale securities
in the years ended January 31, 1996 and 1995.
Short-term investments at January 31, 1996 and 1995 included restricted amounts
of $357,000 and none, respectively, related to balances maintained in a
non-qualified deferred compensation plan for Company executives.
The amount of net unrealized holding gains on trading securities recorded in the
years ended January 31, 1996 and 1995 were $25,000 and none, respectively.
3. Accounts Receivable
Accounts receivable consist of the following:
January 31,
----------------------------
1996 1995
----------- -----------
(Dollars in thousands)
U.S. Government
Billed................................... $ 3,096 $ 4,283
Unbilled................................. 1,566 2,549
Commercial.................................. 2,490 1,812
Other ...................................... 439 395
----------- -----------
7,591 9,039
Less: Allowances for doubtful accounts...... (256) (336)
----------- -----------
$ 7,335 $ 8,703
=========== ===========
Included in unbilled accounts receivable are retainages due upon completion of
contracts of approximately $154,000 and $282,000 as of January 31, 1996 and
1995, respectively. Of total accounts receivable at January 31, 1996, there are
approximately $758,000 of unbilled receivables which, based upon the Company's
experience, may not be collected within the next fiscal year.
4. Inventory
Inventory consists of the following:
January 31,
----------------------------
1996 1995
----------- -----------
(Dollars in thousands)
Raw materials......................... $ 830 $ 233
Work-in-process....................... 278 107
Finished goods........................ 253 195
----------- -----------
$ 1,361 $ 535
=========== ===========
5. Property and Equipment
Property and equipment consist of the following:
January 31,
----------------------------
1996 1995
----------- -----------
(Dollars in thousands)
Office furnishings and fixtures.................. $ 1,056 $ 1,134
Equipment........................................ 2,281 2,829
Software......................................... 225 196
----------- -----------
3,562 4,159
Less: Accumulated depreciation and amortization.. (2,388) (3,189)
=========== ===========
$ 1,174 $ 970
=========== ===========
6. Intangible Assets
Intangible assets consist of the following:
January 31,
----------------------------
1996 1995
----------- -----------
(Dollars in thousands)
Costs in excess of net assets acquired....... $ 1,697 $ 1,697
Other intangible assets, based on
allocated purchase price.................... 1,845 3,730
----------- -----------
3,542 5,427
Less: Accumulated amortization............... (964) (2,416)
=========== ===========
$ 2,578 $ 3,011
=========== ===========
Amortization of intangible assets for the years ended January 31, 1996, 1995,
and 1994 amounted to $433,000, $341,000, and $253,000, respectively.
7. Bank Line of Credit
As a part of a loan agreement with a bank, the Company has an $8 million
revolving credit facility, which expires June 30, 1997, and a $5 million
guidance line of credit, which expires June 30, 1996. The revolving credit
facility and the guidance line of credit are unsecured provided that the Company
maintains certain covenants. Outstanding loans under this agreement bear
interest at no less than the bank's prime rate or the London Interbank Offered
Rate (LIBOR) plus 150 basis points, at the Company's option. The interest rates
can be increased by the bank dependent upon the Company maintaining certain
financial ratios. The bank's prime rate was 8.50% at January 31, 1996. There
were no borrowings under the line of credit at January 31, 1996 or 1995. The
loan agreement also includes certain restrictive covenants.
8. Accrued Liabilities
Accrued liabilities consist of the following:
January 31,
----------------------------
1996 1995
----------- -----------
(Dollars in thousands)
Accrued payroll and related expense.......... $ 4,247 $ 3,983
Other.......................................... 1,474 1,811
----------- -----------
$ 5,721 $ 5,794
=========== ===========
9. Stockholders' Equity
Changes in the components of stockholders' equity for the years ended January
31, 1994, 1995, and 1996 were as follows:
Common Paid-in Retained
Stock Capital Earnings Total
------------- ------------ ------------- -------------
(Dollars in thousands)
Balance at January 31, 1993.............. $ 519 $ 6,116 $ 7,771 $ 14,406
Net income............................ -- -- 2,399 2,399
Exercise of stock options, 70,000
shares.............................. 7 129 -- 136
Tax benefit from exercise of stock
options............................. -- 85 -- 85
Purchase and retirement of common stock,
407,850 shares...................... (41) (1,841) -- (1,882)
------------- ------------ ------------- -------------
Balance at January 31, 1994.............. 485 4,489 10,170 15,144
Net income............................ -- -- 3,329 3,329
Exercise of stock options and debenture
conversions, 35,271 shares.......... 3 72 -- 75
Tax benefit from exercise of stock
options............................. -- 47 -- 47
Purchase and retirement of common stock,
282,364 shares...................... (28) (1,364) -- (1,392)
------------- ------------ ------------- -------------
Balance at January 31, 1995.............. 460 3,244 13,499 17,203
Net income............................ -- -- 3,885 3,885
Exercise of stock options, 105,700
shares.............................. 11 476 -- 487
Tax benefit from exercise of stock
options............................. -- 163 -- 163
============= ============ ============= =============
Balance at January 31, 1996.............. $ 471 $ 3,883 $ 17,384 $ 21,738
============= ============ ============= =============
10. Income Taxes
Income taxes consist of the following amounts:
Years Ended January 31,
-----------------------------------------------------
1996 1995 1994
------------- ------------- --------------
(Dollars in thousands)
Federal income tax:
Current............................ $ 1,415 $ 1,160 $ 644
Deferred........................... 206 80 40
State income taxes:
Current............................ 495 500 271
Deferred........................... 41 3 25
------------- ------------- --------------
$ 2,157 $ 1,743 $ 980
============= ============= ==============
Deferred income taxes reflect the impact of temporary differences between the
amount of assets and liabilities recognized for financial statement reporting
purposes and such amounts recognized for tax filing purposes. The principal
items making up the deferred tax provision in the years ended January 31, 1996
and 1995 were differing depreciation methods, the amortization of intangibles,
accrued vacation, and prepaid expenses.
The differences between the effective income tax rate and the statutory federal
income tax rates for the years ended January 31, 1996, 1995, and 1994 are as
follows:
Years Ended January 31,
--------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- ---------------------
Percent Percent Percent
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
-------- -------- -------- --------- --------- ---------
(Dollars in thousands)
Computed "expected" tax on income before
extraordinary items and income taxes... $ 2,115 35.0% $ 1,775 35.0% $ 1,149 34.0%
Surtax exemption.......................... (60) (1.0) (1.0) -- --
(51)
State tax, net of federal benefit......... 354 5.9 332 6.5 195 5.8
Change in valuation allowance............. (170) (2.8) (300) (400) (11.8)
(5.9)
Other, net................................ (82) (1.4) (13) (.2) 36 1.0
-------- -------- -------- --------- --------- ---------
Taxes on income........................... $ 2,157 35.7% $ 1,743 34.4% $ 980 29.0%
======== ======== ======== ========= ========= =========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at January 31, 1996 and
1995 are presented below:
January 31,
----------------------------
1996 1995
---------------------------
(Dollars in thousands)
Deferred tax assets:
Accounts receivable.................................... $ 328 $ 505
Property and equipment, principally due to differing
depreciation methods.................................. 70 8
Employee benefits, principally due to accrual for
financial reporting purposes.......................... 409 446
Other.................................................. 35 28
------ ------
Total gross deferred tax assets........................ 842 987
Less valuation allowance............................... 530 700
------ ------
Net deferred tax assets................................ $ 312 $ 287
------ ------
Deferred tax liabilities:
Prepaid expenses....................................... $ 110 $ 156
Property and equipment, principally due to differing
depreciation methods.................................. 73 --
Software development costs............................. 530 277
Intangible assets, principally due to differing
amortization methods.................................. -- 26
------ ------
Total gross deferred tax liabilities................... $ 713 $ 459
------ ------
Net deferred tax liability............................ $ 401 $ 172
====== ======
The valuation allowance for deferred tax assets as of February 1, 1995 was
$700,000. The net change in the valuation allowance for the year ended January
31, 1996 was a decrease of $170,000.
11. Convertible Subordinated Debentures
At January 31, 1996 and 1995, the Company had outstanding convertible
subordinated debentures of none and $844,000, respectively. The debentures bore
interest at a rate of 9.75%, were due April 15, 2000, and were convertible to
shares of the Company's common stock at $11.50 per share.
For the years ended January 31, 1996 and 1995, the Company redeemed and
purchased $844,000 and $2,140,000, respectively, of the debentures at par.
12. Stock Options
The Company has two stock option plans under which officers and key employees
may be granted options to purchase shares of common stock of the Company at not
less than 100% of the fair market value at the date of grant, unless the
optionee is a 10% shareholder of the Company, in which case the price must not
be less than 110% of the fair market value. The options are exercisable in
installments determined by the compensation committee of the Company's Board of
Directors, however no option may be exercised prior to one year following the
grant of the option. The options expire as determined by the committee, but no
later than ten years and one week after the date of grant (five years for 10%
shareholders). Transactions and other information relating to this plan for the
three years ended January 31, 1996 are summarized below:
Outstanding Options
----------------------------------------------
Number of Exercise Price
Shares Per Share
------------- ----------------------------
Balance, January 31, 1993.............. 463,325 $ 1.88 to $ 6.25
Options granted..................... 91,000 $ 4.56
Options canceled or expired......... (81,000) $ 1.88 to $ 6.25
Options exercised................... (37,500) $ 1.88 to $ 2.13
---------
Balance, January 31, 1994.............. 435,825 $ 1.88 to $ 6.25
Options canceled or expired......... (5,375) $ 1.88 to $ 6.25
Options exercised................... (34,750) $ 1.88 to $ 2.13
---------
Balance, January 31, 1995.............. 395,700 $ 1.88 to $ 6.25
Options granted..................... 109,000 $ 8.63
Options canceled or expired......... (20,250) $ 4.56 to $ 6.25
Options exercised................... (105,700) $ 1.88 to $ 6.25
---------
Balance, January 31, 1996.............. 378,750 $ 1.88 to $ 8.63
=========
Stock options exercisable at January 31, 1996, 1995, and 1994 were 214,625,
264,825, and 227,075, respectively. Shares available under the plan for future
grants at January 31, 1996, 1995, and 1994 were 403,230, 142,105, and 137,105,
respectively.
The Company also has a Director Stock Option Plan under which members of the
Board of Directors may be granted options to purchase up to 425,000 shares of
common stock of the Company. These options become exercisable ratably over four
years from the date of issuance.
Transactions and other information relating to the Director Stock Option Plan
for the three years ended January 31, 1996 are summarized below:
Outstanding Options
--------------------------------------------
Number of Exercise Price
Shares Per Share
----------- ---------------------------
Balance, January 31, 1993.............. 152,500 $ 1.88
Options granted..................... 15,000 $ 5.25
Options exercised................... (32,500) $ 1.88
Options canceled or expired......... --
--------
Balance, January 31, 1994.............. 135,000 $ 5.25
Options granted..................... 25,000 $ 5.13
Options canceled or expired......... (8,000) $ 5.13 to $ 5.25
--------
Balance, January 31, 1995.............. 152,000 $ 1.88 to $ 5.25
Options granted..................... 20,000 $ 11.50
Options canceled or expired......... --
--------
Balance, January 31, 1996.............. 172,000 $ 1.88 to $ 11.50
========
Stock options exercisable at January 31, 1996, 1995, and 1994 were 131,000,
123,000, and 120,000, respectively. Shares available under the plan for future
grants at January 31, 1996, 1995, and 1994 were 135,500, 155,500, and 47,500,
respectively.
One of the Company's subsidiaries, Comarco Wireless Technologies, Inc. (CWT),
also has a stock option plan under which officers and key employees of CWT may
be granted options to purchase up to 60,000 shares of common stock of CWT at not
less than 100% of the fair market value at the date of grant. As of January 31,
1996, all 300,000 outstanding shares of CWT common stock are owned by the
Company. The fair market value of the shares and the exercise dates of the
options are determined by the compensation committee of the Company's Board of
Directors, however no option may be exercised prior to one year following the
grant of the option. The options expire as determined by the committee, but not
later than ten years and one week after the date of grant. In the fiscal year
ended January 31, 1995, 24,000 options were granted at an exercise price of
$25.33. In the fiscal year ended January 31, 1996, 14,000 options were granted
at exercise prices ranging from $43.00 to $119.73. Stock options exercisable at
January 31, 1996 and 1995 were 6,000 and none, respectively. Shares available
under the plan for future grants at January 31, 1996 and 1995 were 22,000 and
36,000, respectively.
13. Lease Commitments
Rental commitments under noncancelable operating leases, principally on the
Company's office space, equipment and automobiles were $1,677,000 at January 31,
1996, payable as follows: $615,000, $490,000, $415,000, $146,000 and $11,000 in
the years ended January 31, 1997, 1998, 1999, 2000, and 2001 respectively.
Certain of the rental commitments are subject to increases based on the change
in the Consumer Price Index. Rental expense for the years ended January 31,
1996, 1995, and 1994 was $1,361,000, $1,456,000, and $1,982,000, respectively.
14. Employee Benefit Plans
The Company has a Savings and Retirement Plan which provides benefits to
eligible employees. Under the Plan, as amended effective January 1, 1993,
employees who have been with the Company in excess of three months and are at
least 20 1/2 years of age may participate by contributing between 1% and 15% of
earnings. Company contributions match employee contributions at levels as
specified in the Plan document. In addition, the Company may contribute a
portion of its net profits as determined by the Board of Directors. Company
contributions, which consist of matching contributions, with respect to the Plan
for the years ended January 31, 1996, 1995, and 1994 were approximately
$560,000, $553,000, and $565,000, respectively.
15. Supplemental Disclosures of Cash Flow Information
Years Ended January 31,
-----------------------------------------------------
1996 1995 1994
------------- ------------- --------------
(Dollars in thousands)
Cash paid during the year for:
Interest.......................... $ 44 $ 212 $ 313
Income taxes...................... $2,209 $1,468 $ 735
In August 1994, the Company acquired all of the common stock of LCTI, Inc. No
cash was paid for the acquisition of the stock. In connection with this
acquisition, the Company acquired tangible assets with a fair value of $615,000
and assumed liabilities of $1,059,000. The difference between the fair value of
the tangible assets acquired and the liabilities assumed was assigned to certain
intangible assets.
16. Research and Development Costs
The Company incurred research and development costs (includes Company-sponsored
software development costs prior to determination of technological feasibility)
of approximately $2,800,000, $520,000, and $1,400,000, in the years ended
January 31, 1996, 1995, and 1994, respectively, related to wireless
communications products and development of software tools. These costs were
expensed as incurred.
17. Business Segment Information
The Company's operations have been classified into two business areas: Wireless
communications products and Government contracting services. The wireless
communications products area develops, produces, and markets a variety of
products and services used in the wireless communications industry. The
Government contracting 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 Fiscal Year 1996 is as
follows:
Wireless Government
Communications Contracting and Corporate and
Products Other Revenues Other Total
----------------------------------------------------------------------------
(Dollars in thousands)
Revenues $14,352 $55,489 --- $69,841
Operating income 3,709 1,885 $ (49) 5,545
Identifiable assets 4,472 6,510 19,007 29,989
Depreciation and
amortization 1,258 512 347 2,117
Capital expenditures 470 221 49 740
Summarized financial information by business segment for Fiscal Year 1995 is as
follows:
Wireless Government
Communications Contracting and Corporate and
Products Other Revenues Other Total
----------------------------------------------------------------------------
(Dollars in thousands)
Revenues $9,089 $59,227 --- $68,316
Operating income 1,943 3,001 $ 61 5,005
Identifiable assets 2,788 7,791 15,231 25,810
Depreciation and
amortization 1,108 185 435 1,728
Capital expenditures 284 200 74 558
18. Commitments and Contingencies
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its 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.
Costs under cost-reimbursable contracts are subject to audit by the customer
upon contract completion. Therefore, all contract costs, including direct and
indirect costs, are potentially subject to adjustment prior to final
reimbursement. Based on the results of audits conducted, the Company currently
has open issues regarding certain costs charged to cost-reimbursable contracts
on which the Company is awaiting final decisions from contracting officers. The
amounts which are subject to this review by the Government total approximately
$1.7 million. The Company believes that it has meritorious defenses, and if
necessary, the Company intends to vigorously defend its positions through the
appeals and claims process. Management believes that sufficient reserves are
available to offset any potential adjustments.
19. Quarterly Financial Data (Unaudited)
Unaudited summarized financial data by quarter for Fiscal Years 1996 and 1995 is
as follows (in thousands, except per share data):
Fiscal Year 1996 Quarter Ended
------------------------------------------------------------
April 30 July 30 October 29 January 31
-------------- ------------- ------------- --------------
Revenues................................. $ 17,329 $ 17,245 $ 18,486 $ 16,781
Operating income......................... 1,306 1,210 1,417 1,612
Net income............................... 838 838 1,020 1,189
-------------- ------------- ------------- --------------
Primary earnings per common share........ $ .17 $ .16 $ .20 $ .22
============== ============= ============= ==============
-------------- ------------- ------------- --------------
Fully diluted earnings per common share.. $ .17 $ .16 $ .20 $ .20
============== ============= ============= ==============
Fiscal Year 1995 Quarter Ended
------------------------------------------------------------
May 2 August 1 October 31 January 31
-------------- ------------- ------------- --------------
Revenues................................. $ 15,668 $ 16,014 $ 18,278 $ 18,356
Operating income......................... 1,016 1,043 1,417 1,529
Net income............................... 635 699 952 1,043
-------------- ------------- ------------- --------------
Primary earnings per common share........ $ .13 $ .14 $ .20 $ .21
============== ============= ============= ==============
-------------- ------------- ------------- --------------
Fully diluted earnings per common share.. $ .13 $ .14 $ .19 $ .20
============== ============= ============= ==============
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information concerning Directors and Executive Officers of the Company is
incorporated herein by reference from the Company's definitive proxy statement
for the 1996 annual meeting of shareholders, which the Company expects to file
with the SEC.
ITEM 11. Executive Compensation
Information regarding executive compensation is incorporated by reference
from the Company's definitive proxy statement for the 1996 annual meeting of
shareholders, which the Company expects to file with the SEC.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information regarding Security Ownership is incorporated by reference
from the section entitled "Ownership of Securities" in the Company's definitive
proxy statement for the 1996 annual meeting of shareholders, which the Company
expects to file with the SEC.
ITEM 13. Certain Relationships and Related Transactions
The information concerning certain relationships and related transactions
of the Registrant is incorporated by reference from the section entitled
"Executive Compensation" in the Company's definitive proxy statement for the
1995 annual meeting of shareholders, which the Company expects to file with the
SEC.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements (See Item 8)
2. Financial Statement Schedule:
The following additional information for the fiscal years ended
January 31, 1996, 1995, and 1994 is submitted herewith:
VIII Reserves
All other schedules are omitted because the required information is not
present in amounts sufficient to require submission of the schedule or
because the information required is included in the consolidated
financial statements or the notes thereto.
3. Exhibits
3.1 Articles of Incorporation. The Articles of Incorporation are
incorporated herein by reference from the Company's report on
Form 8 filed with the Securities and Exchange Commission on
November 16, 1988.
3.2 By-Laws. The By-Laws are incorporated by reference from the
Company's report on Form 10-Q for the quarter ended July 31,
1986.
10. Material Contracts
10.1 1982 Stock Option Plan. The restated 1982 Stock Option Plan is
incorporated herein by reference from Exhibit C to the
Company's definitive Proxy Materials filed with the Securities
and Exchange Commission on June 25, 1986.
10.2 Lease relating to Bloomfield, Indiana facility dated February
1, 1988 between the Company and Laverne Rollison is
incorporated by reference from the Company's report on Form
10-K for the year ended January 31, 1988.
10.3 Director Stock Option Plan dated July 1, 1987 is incorporated
by reference from the Company's report on Form 10-K for the
year ended January 31, 1988.
10.4 United States Navy Contract dated October 1, 1988 between the
Company and the Naval Weapons Center at China Lake, California
is incorporated by reference from the Company's report on Form
10-K for the year ended January 31, 1989.
10.5 Contract dated January 22, 1991 between the Company and the
County of Los Angeles for the operation and maintenance of
County-owned general aviation airports is incorporated by
reference from the Company's report on Form 10-K for the year
ended January 31, 1991.
10.6 United States Navy Contract dated February 21, 1991 between
the Company and the Pacific Missile Test Center, Point Mugu,
California is incorporated by reference from the Company's
report on Form 10-Q for the quarter ended May 5, 1991.
10.7 Agreement dated April 16, 1991 between the Company and Don M.
Bailey, President and Chief Executive Officer, regarding
employment termination in the event of a change in control of
the Company is incorporated by reference from the Company's
report on Form 10-K for the year ended January 31, 1992.
10.8 Agreement dated December 14, 1989 between the Company and
ManTech Engineering Corporation to establish the Interop Joint
Venture is incorporated by reference from the Company's report
on Form 10-K for the year ended January 31, 1992.
10.9 Agreement dated January 4, 1993 between the Company, DynCorp,
and Electronic Warfare Associates to establish the Tesco Joint
Venture is incorporated by reference from the Company's report
on Form 10-K for the year ended January 31, 1993.
10.10 Business Loan Agreement dated September 26, 1994 between the
Company and NationsBank of Virginia, N.A. to establish a
$5,000,000 Guidance Line of Credit and an $8,000,000 Master
Line of Credit is incorporated by reference from the Company's
report on Form 10-Q for the quarter ended October 30, 1994.
10.11 Guidance Line of Credit Note for $5,000,000 dated September
26, 1994 between the Company and NationsBank of Virginia, N.A.
is incorporated by reference from the Company's report on Form
10-Q for the quarter ended October 30, 1994.
10.12 Master Line of Credit for $8,000,000 dated September 26, 1994
between the Company and NationsBank of Virginia, N.A. is
incorporated by reference from the Company's report on Form
10-Q for the quarter ended October 30, 1994.
10.13 Nonqualified Employee Stock Option Plan for Comarco Wireless
Technologies, Inc. dated August 1994 is incorporated by
reference from the Company's report on Form 10-Q for the
quarter ended October 30, 1994.
10.14 Primary Stock Purchase Agreement among COMARCO, Inc. and the
prior shareholders of LCTI, Inc., dated August 9, 1994 is
incorporated by reference from the Company's report on Form
10-Q for the quarter ended October 30, 1994.
10.15 Second Stock Purchase Agreement among COMARCO, Inc. and the
prior shareholders of LCTI, Inc., dated August 9, 1994 is
incorporated by reference from the Company's report on Form
10-Q for the quarter ended October 30, 1994.
10.16 First Amendment to Loan Agreement dated September 26, 1995
between the Company and NationsBank of Virginia, N.A. is
incorporated by reference from the Company's report on Form
10-Q for the quarter ended October 29, 1995.
10.17 Amended and Restated Master Line of Credit Note dated October
31, 1995 between the Company and NationsBank of Virginia, N.A.
is incorporated by reference from the Company's report on Form
10-Q for the quarter ended October 29, 1995.
10.18 Amended and Restated Guidance Line of Credit Note dated
October 31, 1995 between the Company and NationsBank of
Virginia, N.A. is incorporated by reference from the Company's
report on Form 10-Q for the quarter ended October 29, 1995.
11. Computation of Number of Shares of Common Stock used in the
Computation of Earnings Per Share.
21.1 Subsidiaries of the Company. The following are the
significant subsidiaries of the Company:
Decisions and Designs, Inc. (DDI) incorporated in the
Commonwealth of Virginia.
International Business Services, Inc. (IBS) incorporated in
the District of Columbia.
Comarco Wireless Technologies, Inc. (CWT) incorporated in the
State of Delaware.
LCTI, Inc. incorporated in the State of Maryland.
Manufacturing Technology Training Center, Inc. (MTTC)
incorporated in the State of Delaware.
Comarco Wireless Europe, Inc. incorporated in the State of
Delaware.
23.1 Consent of Accountants.
99.2 Undertakings of Registrant.
(b) Reports on Form 8-K
Form 8-K dated June 2, 1995 reporting under Items 5 and 14 and
attaching a press release dated May 26, 1995.
COMARCO, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on April 24, 1996.
COMARCO, INC.
/s/ DON M. BAILEY
-------------------------------------
Don M. Bailey
President,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf by the
Registrant and in the capacities and on the dates so indicated.
Signature Title Date
Chairman of the Board
/s/ GERALD D. GRIFFIN and Director April 24, 1996
- -------------------------
Gerald D. Griffin
President, Chief Executive
Officer and Director
(Principal Executive
/s/ DON M. BAILEY Officer) April 24, 1996
- -------------------------
Don M. Bailey
Vice President
and
Treasurer (Principal Financia
/s/ THOMAS P. BAIRD and Accounting Officer) April 24, 1996
- -------------------------
Thomas P. Baird
/s/ WILBUR L. CREECH Director April 24, 1996
- -------------------------
Wilbur L. Creech
/s/ WESLEY L. MCDONALD Director April 24, 1996
- -------------------------
Wesley L. McDonald
/s/ WALTER V. STERLING Director April 24, 1996
- -------------------------
Walter V. Sterling
/s/ PAUL G. YOVOVICH Director April 24, 1996
- -------------------------
Paul G. Yovovich
COMARCO, INC. AND SUBSIDIARIES
SCHEDULE VIII - RESERVES
Three Years Ended January 31, 1996
(Dollars in thousands)
Other
Balance at Charged to Changes
Beginning of Cost and Add Balance at
Year Expense Deductions (Deduct) End of Year
------------- ------------ ------------ ------------ ------------
Year ended January 31, 1996:
Allowance for doubtful accounts and
provision for unbilled receivables
(deducted from accounts receivable),
and income tax valuation
allowance......................... $ 1,036 $ 30 $ 280(1) $ -- $ 786
Year ended January 31, 1995:
Allowance for doubtful accounts and
provision for unbilled receivables
(deducted from accounts receivable),
and income tax valuation
allowance......................... $ 1,388 $ 12 $ 364 1) $ -- $ 1,036
Year ended January 31, 1994:
Allowance for doubtful accounts
and provision for unbilled
receivables (deducted from accounts
receivable)....................... $ 1,934 $ 18 $ 564(1) $ -- $ 1,388
(1) Write off of uncollectible receivables and reduction in income tax valuation
allowance.