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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended January 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 0-5449
COMARCO, INC.
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(Exact name of registrant as specified in its charter
CALIFORNIA 95-2088894
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
22800 Savi Ranch Parkway, Suite 214
Yorba Linda, California 92887
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(Address of principal executive office) (Zip Code)
(714) 282-3832
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(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 28, 1997 - 4,780,959
shares.
Aggregate market value of
Class shares held by non-affiliates
Common Stock..................................... $42,541,408
The total number of shares held by non-affiliates on February 28, 1997 was
2,447,722. This number was multiplied by $17.38 per share (the closing sale
price of the Common Stock on February 28, 1997 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 by
May 30, 1997 a definitive Proxy Statement (the "1997 Proxy Statement") relating
to its 1997 Annual Meeting of Stockholders, which meeting involves the election
of directors and certain related matters. The 1997 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 1997 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 1997 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 6-10, 13-20, 35 and 36
of Business, and paragraphs 6, 10, 11, 13, 22, 26, 28, 33, 37, 40 and 41 of
Management's Discussion and Analysis of Results of Operations and Financial
Condition. Actual results may differ from those identified in such
forward-looking statements.
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. A
sixth subsidiary, Comarco Wireless Europe Inc., a wholly-owned subsidiary of
Comarco Wireless Technologies, Inc., was formed in April 1996 to market and
provide post-contract customer support for the Company's wireless communications
products to international customers. A seventh subsidiary, Comarco Staffing,
Inc. (formerly known as CoSource Solutions, Inc.), was formed in August 1996 to
acquire the assets of a commercial outsourced staffing services company. An
eighth subsidiary, Comarco Systems, Inc., was formed in January 1997 to further
develop the Company's outsourced engineering and technical services 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 outsourced staffing services
(engineering, technical, and airport management) to agencies of the United
States Government, government prime contractors, and local government agencies.
To broaden its existing outsourced staffing services business, the Company
acquired a commercial outsourced staffing services company in August 1996.
During the past three 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 over 75% of its operating income from this business area.
Summarized financial information by business segment for the Company's Fiscal
Year 1997, which ended January 31, 1997, is as follows:
Wireless Outsourced
Communications Staffing Services Corporate
Products and Other Revenue and Other Total
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(Dollars in Thousands)
Revenues $ 19,519 $ 51,895 $ --- $ 71,414
Operating income 5,250 1,396 (28) 6,618
Identifiable assets 11,610 7,123 20,477 39,210
WIRELESS COMMUNICATIONS PRODUCTS
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The Company's wireless communications products business, through its subsidiary,
Comarco Wireless Technologies, Inc., 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. The field measurement product
line includes the Generation II cellular survey system, the NES250 network
evaluation system, the NRS network readiness system, the CDPD data survey
product, and the Company's latest product introduction, the LT 100, which
permits day-to-day network performance monitoring of cellular and PCS
networks.
o The revenue assurance product line includes system products and services
that test the integrity of cellular carriers' billing systems.
o Wireless applications products include wireless data telemetry systems and
emergency callbox systems. The Company's wireless data telemetry system is
the Cellular Data Gateway that is used to transport data and is optimized
for wide area applications. In October 1996, the Company purchased certain
callbox product line assets from GTE. The installed base purchased from GTE
consists of over 18,000 units, of which approximately 11,000 are being
serviced by the Company under long-term maintenance contracts. In addition,
in February 1997, the Company acquired certain callbox product line assets
of Cubic Communications, Inc. The installed base purchased from Cubic
Communications consists of approximately 6,500 units. The combination of
the two product lines establishes the Company as a major vendor to this
niche of the wireless application products marketplace.
Comarco Wireless Technologies' revenues increased to 27% of the Company's total
revenue in Fiscal Year 1997, a 36% increase over the prior fiscal year.
Operating income increased 41% year-to-year and represented 79% of the Company's
consolidated operating income for Fiscal Year 1997. 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 continued
geographical expansion to international markets and continued acceptance of the
Company's products by its customers, none of which can be assured.
International sales in Fiscal Year 1997 totalled $5.4 million, up from $1.4
million in the prior fiscal year. The Company expects this segment of its
business to continue to grow. Marketing and post-contract customer support
offices have recently been opened and staffed in Singapore and London, England.
PRODUCT DEVELOPMENT
As part of its product development program, the Company is continuing its
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, although there can be no
assurance in that regard. 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. New products this year included GSM and
CDMA air interface products and the introduction of our LT-100 platform to our
field measurement product line. The Company's wireless product life cycle is
estimated to be two to five years, depending on the product.
The Company is also continuing its development of a new product line, a
rechargeable power adapter for laptop computers and cellular telephones. The
objective of this product is to be smaller, lighter and more versatile than
existing products on the market and is based on the Company's patented power
transfer technology. The product is currently in FCC and UL testing. Potential
customers would include after market and original equipment manufacturers. There
can be no assurance that the Company will be successful in bringing this product
to market, or that this product will be successful. If the Company is
successful, the production, marketing, and sale of this product will require a
significant amount of working capital for the financing of inventory and
accounts receivable.
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 1997 and Fiscal Year 1996, the Company's wireless
communications business capitalized approximately $2.2 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, $1.0 million and $1.1 million, respectively, were amortized in
Fiscal Years 1997 and 1996 against product sales in accordance with Statement
No. 86.
In addition, during Fiscal Years 1997, 1996, and 1995, Comarco Wireless had
expenditures of $1.9 million, $1.8 million and $340,000, 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, 1997 is
approximately $19.6 million, compared to $4.4 million as of January 31, 1996.
The current year balance includes $3.9 million of product orders for the field
measurement and revenue assurance product lines, and $2.3 million of deferred
revenue for basic and extended warranty commitments. Management believes that
approximately 90% of this backlog amount (of $6.2 million) will result in
revenue during Fiscal Year 1998. In general, most of the Company's products
orders are filled within months from the receipt of the order. The remaining
value of unfilled orders of $13.4 million is related to the callbox product
line. This backlog balance consists of $9.3 million of long-term maintenance
agreements and a $4.1 million contract to upgrade the Los Angeles County callbox
system to comply with the Americans with Disabilities Act's requirements for use
by hearing and speech impaired individuals. The Company currently expects the
majority of the Los Angeles contract to be performed in the latter half of
Fiscal Year 1998.
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 has
established a network of agents and distributors for the coordination of sales
activity outside of the United States. In addition, the Company has opened and
staffed marketing and customer support offices in Singapore and London, England
to service Asia and Europe, respectively. This expansion overseas faces a number
of inherent barriers, including: the need for export licenses; tariffs and other
potential trade restrictions; 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 a competitive advantage over the Company. There can
be no assurance that the Company's international operations will be successful.
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, Asia and Latin America.
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, 1997, Comarco Wireless employed approximately 100 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 11 of the Notes to Consolidated Financial Statements). The
Company obtains its employees through a variety of means including
advertisements, technical job fairs, engineering recruiters, and engineering
temporary staffing firms.
COMPETITION
Comarco Wireless competes in a small niche (field measurement equipment) of the
wireless communications marketplace. 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, either domestically or internationally.
PROPRIETARY INFORMATION
The Company has one patent for its small power adapter for portable computing
devices and cellular telephones, and patents covering its emergency callbox
product. 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.
Outsourced Staffing Services And Other Revenue
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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 Commercial Staffing Services
o Manufacturing Training
Approximately $51.9 million or 73% of the Company's revenues, and approximately
$1.4 million, or 21% of its operating income, for the fiscal year ended January
31, 1997 were derived from contracts and subcontracts for such services.
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
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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 aircraft subsystems, missile launchers, missile guidance and
control interface electronics, and gun system platforms.
Through the Company's software products business and its LEXSYS(TM) product
line, it offers computer-aided software engineering tools for engineering of
computer-based test program sets (TPSs) and related documentation. The Company
also applies 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
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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
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The Company provides airport management services for local government agencies.
Current significant efforts include a contract supporting the Metropolitan
Washington Airports Authority at Washington National Airport and a long-term
contract to manage five general aviation airports in Los Angeles County. Support
in this area includes managing airport operations, ground transportation
services, computerized revenue collection, and general management support
functions. In addition, the Company began work on a long-term aviation services
contract in February 1997 for Riverside County, California.
Commercial Staffing Services
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In August 1996 the Company acquired the assets of RAL Consulting and Staffing
Services, Inc. This operation provides engineering, technical, light industrial,
and administrative staffing services to the commercial marketplace. Specific
areas of expertise include: temporary personnel, general recruitment, substance
abuse testing, OSHA compliance, and human resources consulting.
Manufacturing Training
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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.
BACKLOG
The Company's backlog from outsourced staffing services and other revenue
believed to be firm as of January 31, 1997 was $51 million, compared to $31
million as of January 31, 1996. The primary reason for the increase year-to-year
is due to the award of a TPS contract by the Air Force to support the B-2
program, and the award of the Riverside County airports contract, as well as the
exercise of a two-year option extending work on the Company's contract at
Washington National Airport until September 30, 1998. 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 approximately 64% of the firm backlog
will be realized in Fiscal Year 1998.
GOVERNMENT CONTRACTS
A significant portion of the Company's total revenues (approximately 39% in
FY97, 51% in FY96, and 58% in FY95) were derived from contracts with the United
States Government, principally agencies of the Department of Defense.
Significant portions of the Company's revenue are derived from contracts with
the U.S. Army and U.S. Navy, 18% and 16%, respectively. Should changes in
procurement policies or reductions in government expenditures occur, revenue and
net 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. None of the Company's Fiscal Year 1997
government contracts are scheduled to end in Fiscal Year 1998. The Company plans
to aggressively compete for its existing work and selectively pursue other high
value Government procurements. There can be no assurance that the Company will
be selected and awarded work under any future proposals.
COMPETITION
Approximately 80% of the Company's outsourced staffing services 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, 1997, the Company employed approximately 970 full-time employees,
of which 870 were part of the outsourced staffing services business area. In
addition, the Company has approximately 260 employees working as temporaries in
its commercial outsourced staffing business. 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 75 of the Company's employees in this
business area are represented by the International Brotherhood of Teamsters and
are covered by a collective bargaining agreement.
ITEM 2. Properties
The Company's principal facilities on January 31, 1997, aggregating
approximately 107,000 square feet, are located in the cities of Yorba Linda,
Irvine, Camarillo, Anaheim, Victorville, and Ridgecrest, California; Vienna and
Petersburg, Virginia; Sierra Vista, Arizona; Warner Robins, Georgia; Bloomfield,
Indiana; Colorado Springs, Colorado; Huntsville, Alabama; Gaithersburg,
Maryland; London; and Singapore, and are occupied under leases expiring prior to
Fiscal Year 2004. With the exception of an 8,000 square foot area used for light
manufacturing, all facilities are used for office space. The Company's aggregate
annual property rent during Fiscal Year 1997 was approximately $1.0 million. The
aggregate annual property rent in the year ending January 31, 1998 is expected
to be approximately $1.1 million. 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 in the manufacturying operations of Comarco Wireless,
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 17 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
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1997
First Quarter......................... $ 16.25 $ 13.00
Second Quarter........................ 22.50 14.88
Third Quarter......................... 18.25 14.88
Fourth Quarter........................ 19.00 16.25
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
The Company had approximately 648 shareholders of record on February 28, 1997.
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,
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1997 1996 1995 1994 1993
------------- ------------ ------------- ------------ -------------
Revenues:
Contract revenues...................... $ 50,858 $ 54,278 $ 58,796 $ 59,500 $ 79,051
Product sales.......................... 20,556 15,563 9,520 6,808 5,655
------------- ------------ ------------- ------------ -------------
71,414 69,841 68,316 66,308 84,706
------------- ------------ ------------- ------------ -------------
Direct costs:
Contract costs......................... 35,599 36,540 39,271 39,553 53,188
Cost of product sales.................. 7,417 6,644 5,388 3,764 3,320
------------- ------------ ------------- ------------ -------------
43,016 43,184 44,659 43,317 56,508
Indirect costs............................ 21,780 21,112 18,652 19,628 23,856
------------- ------------ ------------- ------------ -------------
64,796 64,296 63,311 62,945 80,364
------------- ------------ ------------- ------------ -------------
Operating income ......................... 6,618 5,545 5,005 3,363 4,342
Interest expense.......................... __ 44 231 333 436
Interest income........................... 559 541 298 349 284
------------- ------------ ------------- ------------ -------------
Income before income taxes and
extraordinary item..................... 7,177 6,042 5,072 3,379 4,190
Income tax expense ....................... 2,512 2,157 1,743 980 922
------------- ------------ ------------- ------------ -------------
Income before extraordinary item.......... 4,665 3,885 3,329 2,399 3,268
Extraordinary item - gain on extinguishment
of subordinated debentures, net of
income tax expense..................... -- -- -- -- 4
------------- ------------ ------------- ------------ -------------
Net income ............................... $ 4,665 $ 3,885 $ 3,329 $ 2,399 $ 3,272
============= ============ ============= ============ =============
Earnings per share:
Primary:
Before extraordinary item............ $ .86 $ .75 $ .68 $ .45 $ .60
Extraordinary item................... -- -- -- -- ---
------------- ------------ ------------- ------------ -------------
Net income........................... $ .86 $ .75 $ .68 $ .45 $ .60
============= ============ ============= ============ =============
Fully diluted:
Before extraordinary item............ $ .85 $ .73 $ .66 $ .45 $ .60
Extraordinary item................... -- -- -- -- ---
------------- ------------ ------------- ------------ -------------
Net income.......................... $ .85 $ .73 $ .66 $ .45 $ .60
============= ============ ============= ============ =============
Dividends declared per share.............. None None None None None
SELECTED FINANCIAL DATA
(In thousands)
January 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------ ------------- ------------ -------------
Working capital .......................... $ 20,429 $ 16,049 $ 12,394 $ 14,879 $ 13,829
Total assets.............................. 39,210 29,989 25,810 24,891 25,147
Borrowings under bank line of credit...... -- -- -- -- ---
Long-term debt, including current
maturities (1)......................... --- --- 844 2,984 3,384
Stockholders' equity ..................... 26,977 21,738 17,203 15,144 14,406
(1) Includes Convertible Subordinated Debentures of $844,000 at January 31,
1995, $2,984,000 at January 31, 1994, and $3,384,000 at January 31, 1993.
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,
-----------------------------------------------------
1997 1996 1995
------------- ------------- --------------
Revenues.............................. 100.0% 100.0% 100.0%
Operating income...................... 9.3 7.9 7.3
Interest expense...................... -- .1 .3
Interest income....................... .8 .8 .4
Income tax expense.................... 3.5 3.0 2.6
Net income............................ 6.5 5.6 4.9
Percentage Increase (Decrease)
Years Ended January 31,
-------------------------------------
1997-1996 1996-1995
--------------- ---------------
Revenues.............................. 2.3% 2.2%
Operating income...................... 19.4 10.8
Interest expense...................... (100.0) (81.0)
Interest income....................... 3.3 81.5
Income tax expense.................... 16.5 23.8
Net income............................ 20.1 16.7
FISCAL YEAR ENDED JANUARY 31, 1997 COMPARED TO FISCAL YEAR ENDED
JANUARY 31, 1996
The Company is involved in two distinct business areas: development and
manufacture of wireless communications products and services; and providing
outsourced staffing services including engineering, technical, and airport
management services to government and commercial entities.
Fiscal Year 1997 revenues totaled $71.4 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 carriers
o acquisition as of October 1, 1996 of the cellular callbox product line from
GTE o acquisition as of August 1, 1996 of a commercial outsourced staffing
company
partially offset by:
o reduced revenue levels from government outsourced staffing services,
primarily due to the Company's contract with the Naval Air Warfare Center
("NAWC") which ended in the prior fiscal year.
Wireless Communications Products
Wireless communications products revenues increased 36% to $19.5 million for
Fiscal Year 1997 from $14.4 million for the comparable period last year.
Wireless communication product revenues comprised approximately 27.3% of total
Company revenues during Fiscal Year 1997, up from 20.5% 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
and the acquisition of the callbox product line from GTE. During the year the
Company continued to broaden its product line with the continued introduction
of its second generation of field measurement equipment including products
supporting the GSM and CDMA air interfaces. In addition, the Company introduced
the LT-100, the latest member of its field measurement product line.
Operating income from wireless communications products increased 41%
year-to-year, comprising 79% of the Company's total operating income for Fiscal
Year 1997. Summary operating results for Comarco Wireless Technologies, Inc.,
the Company's wireless communications products subsidiary, are as follows:
January 31, January 31,
-------------------------------------------
1997 1996
-------------------------------------------
Product sales................. $ 19,519,000 $ 14,352,000
Cost of products sold......... 7,065,000 5,679,000
------------------ ------------------
Gross margin................... 12,454,000 8,673,000
Percentage..................... 63.8% 60.4%
Indirect costs*................ 7,204,000 4,964,000
================== ==================
Operating income............... $ 5,250,000 $ 3,709,000
================== ==================
*Indirect costs include selling, general and administrative expenses, as well
as research and development expenses.
Increased gross margin percentage is due to the incremental benefit of
spreading the fixed costs of operations over a larger activity base.
The increase in indirect costs is due to the additional selling and general
administrative costs associated with international expansion during Fiscal Year
1997. Research and development expense totaled $1,900,000 during Fiscal Year
1997, compared to $1,800,000 in the prior fiscal year. 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 revenue from
such development efforts.
Operating income increased 41% to $5.2 million in Fiscal Year 1997 from $3.7
million in the prior fiscal year. Operating income as a percentage of revenues
is 26.9% for Fiscal Year 1997, compared to 25.8% for the comparable prior
period. The increase is due to the improvement in gross margin percentage noted
above, which was partially offset by the increased selling and general
administrative expenses.
The Company is continuing its software product development program in its
wireless communications products business. In accordance with Financial
Accounting Standard No. 86, Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed, the Company's wireless communications
business capitalized and amortized $2.2 million and $1.0 million, respectively,
during Fiscal Year 1997. The Company's wireless communications business
capitalized and amortized $1.4 million and $1.1 million in Fiscal Year 1996,
respectively. These amounts are in addition to the research and development
expense discussed above.
The Company's orders for wireless communications products totaled $34.7 million
for Fiscal Year 1997, up from $17.1 million during Fiscal Year 1996. Included
within the Fiscal Year 1997 booking total is $10 million of long-term
maintenance service business associated with the purchase of the GTE callbox
product line. The value of unfilled orders at January 31, 1997 totaled $19.6
million, of which $9.3 million is associated with the long-term maintenance
contracts. An additional $2.3 million of deferred revenue has been recorded for
anticipated customer warranty obligations.
In February 1997, the Company acquired the callbox product line from Cubic
Communications, Inc. This acquisition, coupled with the prior acquisition of
the GTE callbox product line, establishes Comarco Wireless Technologies as one
of the leading companies in the callbox niche of the wireless communications
industry.
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 unpredictable 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 difficult to predict
and may fluctuate significantly from quarter to quarter.
Outsourced Staffing Services and Other Revenue
Revenues provided by the outsourced staffing services business area decreased
from $55.5 million in Fiscal Year 1996 to $51.9 million in Fiscal Year 1997.
Revenues for outsourced staffing services for Fiscal Year 1997 comprised 73% of
the Company's total revenues compared with 80% in the prior year. This decrease
is primarily due to the completion of the Company's contract with the Naval Air
Warfare Center at China Lake, California in the prior year, partially offset by
the acquisition of a commercial staffing business as of August 1, 1996.
Sales to the U.S. Government as well as to government prime contractors were
32% and 39% of the Company's total revenue during the fourth quarter and the
fiscal year ended January 31, 1997, respectively. In the course of the
Company's business, its government contracts are periodically opened for
competition. During Fiscal Year 1997, the Company announced the award of
several contracts with a total estimated value over the lives of the contracts
of $60 million to provide engineering and management services to various
Government agencies. The majority of these contract awards were recompetition
of work the Company was already performing. Contract periods are generally
three to five years, including options. None of the Company's government
contracts are scheduled to end in Fiscal Year 1998. The Company plans to
aggressively compete for all work opened for competition to the extent possible
and selectively pursue certain high value Government procurements. There can be
no assurance that the Company will be selected and awarded the work associated
with any of its future 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 outsourced staffing services is down 26% year-to-year
from $1.9 million in Fiscal Year 1996 to $1.4 million in Fiscal Year 1997. The
reduced operating income is primarily due to the completion of the Company's
contract with the Naval Air Warfare Center at China Lake, California in the
prior year, partially offset by the contribution from the commercial staffing
business acquired as of August 1, 1996.
Net interest income (interest income, less amortization of offering costs and
interest expense) for Fiscal Year 1997 totaled $559,000 compared to $497,000
for the prior fiscal year. The increase is principally due to higher available
investable balances year-to-year.
The Company's effective tax rate is 35.0% for Fiscal Year 1997 versus 35.7% for
the previous fiscal year. The decreased effective tax rate is due to a
reduction in the income tax valuation allowance and an increased 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, increased investment net earnings, and a lower
effective income tax rate.
FISCAL YEAR ENDED JANUARY 31, 1996 COMPARED TO FISCAL YEAR ENDED
JANUARY 31, 1995
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 the Company'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
-------------------------------------------
Product sales................. $ 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 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.
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. 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.
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.
Liquidity and Capital Resources
The Company signed a loan agreement with a bank effective September 26, 1994,
which was last amended effective August 30, 1996. The loan agreement consists
of (1) an $8 million revolving credit facility, which expires June 30, 1998,
and (2) a $5 million guidance line of credit, which expires June 30, 1997. 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 million (includes highly liquid long-term investments with
maturities of 12 to 36 months) during the fourth quarter of Fiscal Year 1997.
However, maintaining such cash balances is predicated on the Company
maintaining its business base and is subject to the cost of financing new
contracts, acquisitions, geographic expansion, software product development
costs, and stock re-purchases.
At the end of Fiscal Year 1997, the Company's average days' sales in accounts
receivable increased to approximately 59 days, compared with 38 days from the
prior fiscal year's levels. The increase is due to increased sales of wireless
communications products in the latter part of the fourth quarter of Fiscal Year
1997, which have a slightly longer collection cycle than the Company's
outsourced staffing revenues.
Several additional key factors indicating the Company's financial condition
include:
January 31, January 31,
-------------------------------------------
1997 1996
-------------------------------------------
Current ratio................. 2.87 3.09
Working capital............... $ 20,429,000 $ 16,049,000
Book value per share......... $ 5.65 $ 4.62
The Company continued to demonstrate solid financial strength in the above
financial factors during Fiscal Year 1997, primarily due to increased operating
earnings from increased sales of wireless communications products.
The Company has a significant commitment for capital expenditures at January
31, 1997 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 the Company's wireless communications products
business in accordance with Financial Accounting Standard No 86, Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,
totaled $2.2 million and $1.0 million, respectively, in Fiscal Year 1997.
In February 1997, the Company's subsidiary, Comarco Wireless Technologies,
Inc., completed the acquisition of another callbox product line from Cubic
Communications, Inc. This acquisition, totalling approximately $1.7 million,
was funded from the Company's available working capital.
The Company's Board of Directors has authorized a stock re-purchase program of
up to 1,000,000 shares. As of January 31, 1997, the Company has repurchased and
retired approximately 826,000 shares. The average price paid per share
re-purchased under the program was $5.15. As of April 25, 1997, subsequent to
year-end, the Company had re-purchased an additional 38,000 shares for
approximately $644,000 under the stock re-purchase program.
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 (see Note 17 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 during Fiscal Year 1998.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.............................................. 19
Financial Statements:
Consolidated Balance Sheets, January 31, 1997 and 1996............... 20
Consolidated Statements of Income, Years Ended
January 31, 1997, 1996, and 1995..................................... 21
Consolidated Statements of Cash Flows, Years
Ended January 31, 1997, 1996, and 1995............................... 22
Notes to Consolidated Financial Statements,
January 31, 1997, 1996, and 1995..................................... 23
Financial Statement Schedule:
VIII Reserves, Years Ended January 31, 1997,
1996, and 1995..................................................... 43
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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended January 31, 1997, 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 25, 1997
COMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
January 31,
---------------------------------
1997 1996
------------- --------------
Current assets:
Cash and cash equivalents.................................................... $ 12,711 $ 11,801
Short-term investments....................................................... 1,824 2,657
Accounts receivable, net..................................................... 11,526 7,335
Inventory.................................................................... 3,042 1,361
Other current assets......................................................... 2,257 573
------------- --------------
Total current assets....................................................... 31,360 23,727
Long-term investments........................................................... 1,859 841
Property and equipment, net..................................................... 1,408 1,174
Software development costs, net................................................. 2,434 1,401
Intangible assets, net.......................................................... 1,842 2,578
Other assets.................................................................... 307 268
------------- --------------
============= ==============
$ 39,210 $ 29,989
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 217 $ 547
Deferred revenue............................................................. 2,678 1,410
Accrued liabilities.......................................................... 8,036 5,721
------------- --------------
Total current liabilities.................................................. 10,931 7,678
Deferred income taxes........................................................... 1,302 573
Stockholders' equity:
Common stock, $.10 par value, 33,705,000 shares authorized; shares outstanding
of 4,777,959 in 1997 and 4,707,709 in 1996................................. 478 471
Paid-in capital.............................................................. 4,450 3,883
Retained earnings............................................................ 22,049 17,384
------------- --------------
Total stockholders' equity................................................. 26,977 21,738
Commitments and contingencies (Notes 12 and 17)
============= ==============
$ 39,210 $ 29,989
============= ==============
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,
-----------------------------------------------------
1997 1996 1995
------------- ------------- --------------
Revenues:
Contract revenues.................. $ 50,858 $ 54,278 $ 58,796
Product sales...................... 20,556 15,563 9,520
------------- ------------- --------------
71,414 69,841 68,316
------------- ------------- --------------
Direct costs:
Contract costs..................... 35,599 36,540 39,271
Cost of product sales.............. 7,417 6,644 5,388
------------- ------------- --------------
43,016 43,184 44,659
Indirect costs........................ 21,780 21,112 18,652
------------- ------------- --------------
64,796 64,296 63,311
------------- ------------- --------------
Operating income...................... 6,618 5,545 5,005
Interest expense...................... --- 44 231
Interest income....................... 559 541 298
------------- ------------- --------------
Income before income taxes............ 7,177 6,042 5,072
Income tax expense.................... 2,512 2,157 1,743
------------- ------------- --------------
Net income............................ $ 4,665 $ 3,885 $ 3,329
============= ============= ==============
Earnings per common share:
Primary:
Net income....................... $ .86 $ .75 $ .68
============= ============= ==============
Fully diluted:
Net income....................... $ .85 $ .73 $ .66
============= ============= ==============
See accompanying notes to consolidated financial
statements.
COMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended January 31,
------------------------------------------------------
1997 1996 1995
-------------- ------------- --------------
Cash flows from operating activities:
Net income............................................... $ 4,665 $ 3,885 $ 3,329
Adjustments to reconcile net income to net cash provided
by operating activities:
Loss (gain) on disposal of property and equipment.... 23 (26) ---
Depreciation and amortization........................ 2,263 2,117 1,728
Provision for doubtful accounts receivable........... 62 30 12
Deferred income taxes................................ (509) 247 83
Changes in operating assets and liabilities, net of
effects from the purchases of LCTI, RAL, and GTE:
Increases in investments......................... (785) (357) ---
Decrease (increase) in accounts receivable......... (2,308) 1,338 513
Increase in inventory.............................. (470) (826) (71)
Decrease (increase) in other current assets........ (432) 147 130
Decrease (increase) in other assets................ (36) 14 86
Decrease in accounts payable....................... (330) (69) (215)
Increase in deferred revenue....................... 1,243 366 442
Increase (decrease) in accrued liabilities......... 1,693 (73) 47
-------------- ------------- --------------
Net cash provided by operating activities................ 5,079 6,793 6,084
Cash flows from investing activities:
Purchases of (1,572) (1,903) (3,038)
investments.............................................
Proceeds from sales of investments....................... 2,172 1,724 76
Purchases of property and equipment...................... (872) (740) (588)
Proceeds from sales of property and equipment............ 13 53 1
Software development costs............................... (2,210) (1,900) (1,597)
Cost of acquisition of LCTI, net of cash acquired........ --- --- (65)
Cost of acquisition of RAL, net of cash acquired......... (1,198) --- ---
Cost of acquisition of GTE callbox, net of cash acquired. (1,076) --- ---
------------- ------------ ---------------
Net cash used in investing activities.................... (4,743) (2,766) (5,181)
Cash flows from financing activities:
Principal payments on long-term debt..................... --- --- (821)
Purchase of convertible subordinated debentures.......... --- (844) (2,140)
Proceeds from issuance of common stock,
including tax benefit.................................. 1,052 650 122
Purchase of common stock................................. (478) --- (1,392)
-------------- ------------- --------------
Net cash provided (used) by financing activities......... 574 (194) (4,231)
-------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents........ 910 3,833 (3,328)
Cash and cash equivalents, beginning of year................ 11,801 7,968 11,296
-------------- ------------- --------------
Cash and cash equivalents, end of year...................... $ 12,711 $ 11,801 $ 7,968
============== ============= ==============
See accompanying notes to consolidated financial statements.
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996 AND 1995
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 39%, 51%, and 58% of revenues for the
years ended January 31, 1997, 1996, and 1995, 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. In August 1996, a newly-formed
subsidiary of COMARCO, Comarco Staffing, Inc. (formerly known as CoSource
Solutions, Inc.), acquired the assets of RAL Consulting and Staffing Services,
Inc. In October 1996, Comarco Wireless Technologies, Inc. acquired the callbox
assets of GTE Cellular Communications Corporation. The purchase prices for these
transactions could be increased in future periods based upon the achievement of
certain performance objectives or completing specified sales transactions. These
acquisitions were 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 for the LCTI
purchase. The difference between the estimated fair values of the acquired net
tangible and identifiable intangible assets and the assumed liabilities has been
recorded to goodwill for the RAL purchase. The difference between the estimated
fair values of the acquired net tangible and identifiable intangible assets and
the assumed liabilities has been recorded to negative goodwill for the GTE
purchase. The results of acquired operations have been included in the Company's
consolidated results of operations since the respective acquisition dates. The
acquisitions did not have a significant pro-forma impact on operations. In
February 1997, Comarco Wireless Technologies, Inc. acquired an additional
callbox product line from Cubic Communications, Inc. This acquisition, totaling
approximately $1.7 million, will be accounted for using the purchase method, and
the difference between identified tangible and intangible assets and assumed
liabilities will be recorded as goodwill. This acquisition was funded from the
Company's working capital.
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 $12.0 million and $10.9 million at January 31, 1997 and 1996,
respectively, consist primarily of variable rate securities, money market funds,
and commercial paper, which are stated at cost, which approximates fair value.
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 $2.2 million and $1.2 million respectively, in the
year ended January 31, 1997. Capitalized software development costs and
associated amortization expense were approximately $1.9 million and $1.2
million, respectively, in the year ended January 1996. Capitalized software
development costs and associated amortization expense were approximately $1.6
million and $921,000 respectively, in the year ended January 31, 1995.
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 periods of ten to forty years. 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.
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. Stock Option Plan--Prior to February 1, 1996, the Company accounted for
its stock option plan in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. On February 1, 1996, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation, which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income and
pro forma earnings per share disclosures for employee stock option grants made
in the year ended January 31, 1996 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
m. Reclassifications-Certain reclassifications of 1995 and 1996 amounts
have been made to conform with the 1997 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, 1996 and 1997.
Securities classified as available for sale are as follows at January 31, 1997
and 1996:
Gross Gross
Unrealized Unrealized Aggregate
Security Holding Holding Fair
Year Type Cost Gains Losses Value
- ---- -------- ---- ----------- ---------- ---------
(Dollars in thousands)
1997 Equity $262 -- -- $262
1996 Equity $286 -- -- $286
Securities classified as held-to-maturity are as follows at January 31, 1997 and
1996:
Gross Gross
Unrealized Unrealized Aggregate
Security Amortized Holding Holding Fair
Year Type Cost Gains Losses Value
- ---- -------- --------- ----------- ----------- ---------
(Dollars in thousands)
1997 Debt $2,278 $12 $ 7 $2,283
1996 Debt $2,855 $17 $ 5 $2,867
Maturities of debt securities classified as held-to maturity are as follows at
January 31, 1997:
Aggregate
Security Fair
Type Cost Value
- --------- ---- ---------
(Dollars in thousands)
Tax-exempt obligations:
Within one year $ 419 $ 420
One through five years $1,859 $1,863
Proceeds from the sales of available-for-sale securities in the years ended
January 31, 1997 and 1996 were $24,000 and $363,000, respectively. No gross
realized gains or losses were recorded on sales of available-for-sale securities
in the years ended January 31, 1997 and 1996.
Short-term investments at January 31, 1997 and 1996 included restricted amounts
of $1.1 million and $357,000, 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, 1997 and 1996 were $82,000 and $25,000, respectively.
3. Accounts Receivable
Accounts receivable consist of the following:
January 31,
----------------------------
1997 1996
----------- -----------
(Dollars in thousands)
U.S. Government
Billed...................................... $ 3,027 $ 3,096
Unbilled.................................... 1,457 1,566
Commercial.................................... 7,091 2,490
Other ...................................... 166 439
----------- -----------
11,741 7,591
Less: Allowances for doubtful accounts....... (215) (256)
----------- -----------
$ 11,526 $ 7,335
=========== ===========
Included in unbilled accounts receivable are retainages due upon completion of
contracts of approximately $232,000 and $154,000 as of January 31, 1997 and
1996, respectively. Of total accounts receivable at January 31, 1997, there are
approximately $838,000 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,
----------------------------
1997 1996
----------- -----------
(Dollars in thousands)
Raw materials................................ $ 2,787 $ 830
Work-in-process.............................. 139 278
Finished goods............................... 116 253
----------- -----------
$ 3,042 $ 1,361
=========== ===========
5. Property and Equipment
Property and equipment consist of the following:
January 31,
----------------------------
1997 1996
----------- -----------
(Dollars in thousands)
Office furnishings and fixtures............... $ 1,148 $ 1,056
Equipment..................................... 2,892 2,281
Software...................................... 254 225
----------- -----------
4,294 3,562
Less: Accumulated depreciation and
amortization................................ (2,886) (2,388)
----------- -----------
$ 1,408 $ 1,174
=========== ===========
6. Intangible Assets
Intangible assets consist of the following:
January 31,
----------------------------
1997 1996
----------- -----------
(Dollars in thousands)
Costs in excess of net assets acquired........ $ 1,408 $ 1,697
Other intangible assets, based on allocated
purchase price............................. 1,845 1,845
----------- -----------
3,253 3,542
Less: Accumulated amortization................ (1,411) (964)
----------- -----------
$ 1,842 $ 2,578
=========== ===========
Amortization of intangible assets for the years ended January 31, 1997, 1996,
and 1995 amounted to $447,000, $433,000, and $341,000, 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, 1998, and a $5 million
guidance line of credit, which expires June 30, 1997. 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 8.25% at January 31, 1997. There
were no borrowings under the line of credit at January 31, 1997 or 1996. The
loan agreement also includes certain restrictive covenants.
8. Accrued Liabilities
Accrued liabilities consist of the following:
January 31,
----------------------------
1997 1996
----------- -----------
(Dollars in thousands)
Accrued payroll and related expenses........ $ 5,193 $ 4,247
Other....................................... 2,843 1,474
----------- -----------
$ 8,036 $ 5,721
=========== ===========
9. Stockholders' Equity
Changes in the components of stockholders' equity for the years ended January
31, 1995, 1996, and 1997 were as follows:
Common Paid-in Retained
Stock Capital Earnings Total
------------- ------------ ------------- -------------
(Dollars in thousands)
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 11
shares................................ 476 -- 487
Tax benefit from exercise of stock
options............................... -- 163 -- 163
------------- ------------ ------------- -------------
Balance at January 31, 1996................ 471 3,883 17,384 21,738
Net income.............................. --- --- 4,665 4,665
Exercise of stock options, 100,350
shares................................ 10 326 --- 336
Tax benefit from exercise of stock
options............................... --- 716 --- 716
Purchase and retirement of common
stock, 30,100 shares.................. (3) (475) --- (478)
------------- ------------ ------------- -------------
Balance at January 31, 1997................ $ 478 $ 4,450 $ 22,049 $ 26,977
============= ============ ============= =============
10. Income Taxes
Income taxes consist of the following amounts:
Years Ended January 31,
-----------------------------------------------------
1997 1996 1995
------------- ------------- --------------
(Dollars in thousands)
Federal income tax:
Current............................ $ 2,358 $ 1,415 $ 1,160
Deferred........................... (421) 206 80
State income taxes:
Current............................ 663 495 500
Deferred........................... (88) 41 3
------------- ------------- --------------
$ 2,512 $ 2,157 $ 1,743
============= ============= ==============
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, 1997,
1996 and 1995 were differing depreciation methods, the amortization of
intangibles, accrued vacation, software development costs, and prepaid expenses.
The differences between the effective income tax rate and the statutory federal
income tax rates for the years ended January 31, 1997, 1996, and 1995 are as
follows:
Years Ended January 31,
--------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- ---------------------
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... $ 2,512 35.0% $ 2,115 35.0% $ 1,775 35.0%
Surtax exemption.......................... (72) (1.0) (60) (1.0) (51) (1.0)
State tax, net of federal benefit......... 380 5.3 354 5.9 332 6.5
Change in valuation allowance............. (530) (7.4) (170) (2.8) (300) (5.9)
Other, net................................ 222 3.1 (82) (1.4) (13) (.2)
-------- -------- -------- --------- --------- ---------
Taxes on income........................... $ 2,512 35.0% $ 2,157 35.7% $ 1,743 34.4%
======== ======== ======== ========= ========= =========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at January 31, 1997 and
1996 are presented below:
January 31,
--------------------------------------------
1997 1996
--------------------------------------------
(Dollars in thousands)
Deferred tax assets:
Accounts receivable.................................... $ 527 $ 328
Property and equipment, principally due to differing
depreciation methods.................................. 74 70
Employee benefits, principally due to accrual for
financial reporting purposes.......................... 971 409
Other.................................................. 75 35
------------- -------------
Total gross deferred tax assets........................ 1,647 842
Less valuation allowance............................... --- 530
------------- -------------
Net deferred tax assets................................ $1,647 $ 312
------------- -------------
Deferred tax liabilities:
Prepaid expenses....................................... $ 135 $ 110
Property and equipment, principally due to differing
depreciation methods.................................. 124 73
Software development costs............................. 998 530
Other.................................................. 274 ---
------------- -------------
Total gross deferred tax liabilities................... $1,531 $ 713
------------- -------------
Net deferred tax asset (liability)..................... $116 ($401)
============= =============
The valuation allowance for deferred tax assets as of February 1, 1996 was
$530,000. The net change in the valuation allowance for the year ended January
31, 1997 was a decrease of $530,000.
11. Stock Options
The Company has two employee stock option plans and a director stock option plan
under which officers, key employees, and directors 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 these plans for the three years ended January
31, 1997 are summarized below:
Outstanding Options
-----------------------------------
Number of Weighted-Average
Shares Exercise Price
------------- -----------------
Balance, January 31, 1994............... 570,825 $ 3.59
Options granted...................... 25,000 $ 5.13
Options canceled or expired.......... (13,375) $ 4.08
Options exercised.................... (34,750) $ 1.99
------------- -------------
Balance, January 31, 1995............... 547,700 $ 3.75
Options granted...................... 129,000 $ 9.07
Options canceled or expired.......... (20,250) $ 5.04
Options exercised.................... (105,700) $ 4.61
------------- -------------
Balance, January 31, 1996............... 550,750 $ 4.78
Options granted...................... 115,000 $ 14.93
Options canceled or expired.......... (13,500) $ 10.90
Options exercised.................... (100,350) $ 3.34
------------- -------------
Balance, January 31, 1997............... 551,900 $ 7.01
============= =============
The following table summarizes information about stock options outstanding at
January 31, 1997:
Options Outstanding Options Exercisable
----------------------------------------------------------- -------------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 1/31/97 Contractual Life Exercise Price at 1/31/97 Exercise Price
- -------------------------------------- ------------------- ------------------ ---------------- ------------------
$1.88 to 2.00 154,375 4.0 years $1.94 154,375 $1.94
4.56 to 6.25 175,525 6.3 5.23 148,550 5.31
8.63 to 11.50 112,000 8.1 9.01 28,000 9.01
14.50 to 16.96 110,000 9.2 14.93 - -
---------------- ----------------
$1.88 to 16.96 551,900 6.6 $7.01 330,925 $4.05
================ ================
Stock options exercisable at January 31, 1997, 1996, and 1995 were 330,925,
345,625, and 387,825, respectively. Shares available under the plans for future
grants at January 31, 1997, 1996, and 1995 were 437,230, 538,730, and 297,605,
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,
1997, 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. In the fiscal year ended
January 31, 1997, 2,800 options were granted at an exercise price of $132.16.
Stock options exercisable at January 31, 1997, 1996 and 1995 were 15,500, 6,000
and none, respectively. Shares available under the plan for future grants at
January 31, 1997, 1996 and 1995 were 19,200, 22,000 and 36,000, respectively.
The following table summarizes information about CWT stock options outstanding
at January 31, 1997:
Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 1/31/97 Contractual Life Exercise Price at 1/31/97 Exercise Price
- --------------------------------- ------------------- ------------------ ---------------- -------------------
$25.33 to 43.00 32,000 7.7 years $29.75 14,000 $27.85
119.73 to 132.16 8,800 8.9 123.69 1,500 119.73
---------------- ----------------
$25.33 to 132.16 40,800 8.0 $50.01 15,500 $36.75
================ ================
The per share weighted-average fair value of employee and director stock options
granted during the years ended January 31, 1997 and 1996 was $7.73, and $4.75,
respectively, on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions:
Years ended January 31,
----------------------------
1997 1996
----------- -----------
Expected dividend yield 0.0% 0.0%
Expected volatility 45.1% 42.8%
Risk-free interest rate 5.8% 7.3%
Expected life 6 years 6 years
The per share weighted-average fair value of CWT stock options granted during
the years ended January 31, 1997 and 1996 was $57.38, and $36.68, respectively,
on the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions:
Years ended January 31,
----------------------------
1997 1996
----------- -----------
Expected dividend yield 0.0% 0.0%
Expected volatility 40.2% 45.1%
Risk-free interest rate 5.4% 6.6%
Expected life 5 years 5 years
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
Years ended January 31,
----------------------------
1997 1996
----------- -----------
(Dollars in thousands,
except per share amounts)
Net income: As reported....................... $ 4,665 $ 3,885
Pro forma......................... 4,414 3,794
Earnings per common share - primary:
As reported...................... $ .86 $ .75
Pro forma........................ .82 .73
Earnings per common share - fully diluted:
As reported...................... $ .85 $ .73
Pro forma....................... .81 .72
Pro forma net income and earnings per share reflect only options granted in the
years ended January 31, 1997 and 1996. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net income and earnings per share amounts presented above because
compensation cost is reflected over the options' vesting period of four years
and compensation cost for options granted prior to February 1, 1995 is not
considered.
12. Lease Commitments
Rental commitments under noncancelable operating leases, principally on the
Company's office space, equipment and automobiles were $3,086,000 at January 31,
1997, payable as follows: $779,000, $722,000, $616,000, $505,000, and $464,000
in the years ended January 31, 1998, 1999, 2000, 2001, and 2002, 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,
1997, 1996, and 1995 was $1,183,000, $1,361,000, and $1,456,000, respectively.
13. 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, 1996,
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, 1997, 1996, and 1995 were approximately
$542,000, $560,000, and $553,000, respectively.
14. Supplemental Disclosures of Cash Flow Information
Years Ended January 31,
-----------------------------------------------------
1997 1996 1995
------------- ------------- --------------
(Dollars in thousands)
Cash paid during the year for:
Interest........................ $ --- $ 44 $ 212
Income taxes.................... $2,051 $2,209 $1,468
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.
In August 1996, the Company acquired the assets of RAL Consulting and Staffing
Services, Inc. for $1,198,000. In connection with this acquisition, the Company
acquired tangible assets with a fair value of $777,000 and assumed liabilities
of $31,000.
In October 1996, the Company acquired the assets of the callbox operation of GTE
Cellular Communications Corp. for $1,076,000. In connection with this
acquisition, the Company acquired tangible assets with a fair value of
$1,983,000, and assumed liabilities of $614,000.
Subsequent to year-end, in February 1997, the Company acquired the assets of the
callbox operation of Cubic Communications Inc., for approximately $1.7 million.
15. 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, $2,800,000, and $520,000, in the years ended
January 31, 1997, 1996, and 1995, respectively, related to wireless
communications products and development of software tools. These costs were
expensed as incurred.
16. Business Segment Information
The Company's operations have been classified into two business areas: Wireless
communications products and outsourced staffing services. The wireless
communications products area develops, produces, and markets a variety of
products and services used in the wireless communications industry. The
outsourced staffing services area provides services to Federal and local
government and commercial customers pursuant to established contracts. Corporate
and other consists primarily of cash and cash equivalents, fixed assets, and
other assets.
Summarized financial information by business segment for Fiscal Year 1997 is as
follows:
Wireless Outsourced Staffing
Communications Products Services and Other Corporate and Other
Revenues Total
-----------------------------------------------------------------------------------------------
Dollars in thousands)
Revenues $ 19,519 $ 51,895 --- $ 71,414
Operating income 5,250 1,396 $ (28) 6,618
Identifiable assets 11,610 7,123 20,477 39,210
Depreciation and
amortization 1,398 365 500 2,263
Capital expenditures 686 179 7 872
Summarized financial information by business segment for Fiscal Year 1996 is as
follows:
Wireless Outsourced Staffing
Communications Products Services and Other Corporate and Other
Revenues 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
International sales in Fiscal Year 1997 totalled $5.4 million, up from $1.4
million in the prior fiscal year. The majority of these sales have been made to
Europe.
17. 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
$600,000. 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.
18. Quarterly Financial Data (Unaudited)
Unaudited summarized financial data by quarter for Fiscal Years 1997 and
1996 is as follows (in thousands, except per share data):
Fiscal Year 1997 Quarter Ended
------------------------------------------------------------
April 30 July 31 October 31 January 31
-------------- ------------- ------------- --------------
Revenues............................................. $ 16,408 $ 16,098 $ 18,370 $ 20,538
Operating income..................................... 1,625 1,551 1,521 1,921
Net income........................................... 1,102 1,088 1,089 1,386
-------------- ------------- ------------- --------------
Primary earnings per common share.................... $ .21 $ .20 $ .20 $ .25
============== ============= ============= ==============
-------------- ------------- ------------- --------------
Fully diluted earnings per common share.............. $ .21 $ .20 $ .20 $ .24
============== ============= ============= ==============
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
============== ============= ============= ==============
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 1997 annual meeting of shareholders, which the Company expects to file
with the SEC by May 30, 1997.
ITEM 11. Executive Compensation
Information regarding executive compensation is incorporated by reference from
the Company's definitive proxy statement for the 1997 annual meeting of
shareholders, which the Company expects to file with the SEC by May 30, 1997.
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 1997 annual meeting of shareholders, which the Company expects
to file with the SEC by May 30, 1997.
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 1997 annual
meeting of shareholders, which the Company expects to file with the SEC by May
30, 1997.
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, 1997, 1996, and 1995 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 1995 Employee Stock Option Plan is incorporated by reference
from the Company's report on Form S-8 filed with the
Securities and Exchange Commission on October 5, 1995.
10.17 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.
10.18 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.
10.19 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.
10.20 Second Amendment to Loan Agreement dated August 30, 1996
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 July 31, 1996.
10.21 Second Amended and Restated Master Line of Credit Note dated
August 30, 1996 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 July 31, 1996.
10.22 Second Amended and Restated Guidance Line of Credit Note dated
August 30, 1996 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 July 31, 1996.
10.23 Asset Purchase Agreement among COMARCO, Inc., CoSource
Solutions, Inc.(now known as Comarco Staffing, Inc.), R.A.L.
Consulting and Staffing Services, Inc., and Robert A.
Lovingood dated July 23, 1996 is incorporated by reference
from the Company's report on Form 10-Q for the quarter ended
July 31, 1996.
10.24 Employment Agreement between COMARCO, Inc., CoSource
Solutions, Inc. (now known as Comarco Staffing, Inc.), and
Robert A. Lovingood dated July 23, 1996 is incorporated by
reference from the Company's report on Form 10-Q for the
quarter ended July 31, 1996.
10.25 Noncompetition and Confidentiality Agreement between COMARCO,
Inc., CoSource Solutions, Inc., (now known as Comarco
Staffing, Inc.) and Robert A. Lovingood dated July 23, 1996 is
incorporated by reference from the Company's report on Form
10-Q for the quarter ended July 31, 1996.
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. Comarco
Staffing, Inc. (formerly known as CoSource Solutions, Inc.),
incorporated in the State of California.
Comarco Systems, Inc., incorporated in the State of California.
23.1 Consent of Independent Auditors.
99.2 Undertakings of Registrant.
(b) Reports on Form 8-K
None.
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 22, 1997.
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 22, 1997
- -----------------------
Gerald D. Griffin
President, Chief Executive
Officer and Director
(Principal Executive
/s/ DON M. BAILEY Officer) April 22, 1997
- -----------------------
Don M. Bailey
Vice President
and
Treasurer (Principal Financial
/s/ THOMAS P. BAIRD and Accounting Officer) April 22, 1997
- -----------------------
Thomas P. Baird
/s/ WILBUR L. CREECH Director April 22, 1997
- -----------------------
Wilbur L. Creech
/s/ WESLEY L. MCDONALD Director April 22, 1997
- -----------------------
Wesley L. McDonald
/s/ PAUL G. YOVOVICH Director April 22, 1997
----------------------
Paul G. Yovovich
COMARCO, INC. AND SUBSIDIARIES
SCHEDULE VIII - RESERVES
Three Years Ended January 31, 1997
(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, 1997:
Allowance for doubtful accounts and
provision for unbilled receivables
(deducted from accounts receivable),
and income tax valuation
allowance......................... $ 786 $ 62 $ 633(1) $ -- $ 215
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
(1) Write off of uncollectible receivables and reduction in income tax
valuation allowance.