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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended January 31, 1999 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.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2088894
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(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
1551 N. Tustin Avenue, Suite 840
Santa Ana, California 92705
(Address of principal executive office) (Zip Code)
(714) 796-1808
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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
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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 26, 1999 - 4,456,460
shares.
Aggregate market value of
Class shares held by non-affiliates
Common Stock........................................ $56,607,691
The total number of shares held by non-affiliates on February 26, 1999 was
2,310,518. This number was multiplied by $24.50 per share (the closing sale
price of the Common Stock on February 26, 1999 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, 1999 a definitive Proxy Statement (the "1999 Proxy Statement") relating
to its 1999 Annual Meeting of Stockholders, which meeting involves the election
of directors and certain related matters. The 1999 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 1999 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 1999 Proxy Statement
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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
Except for the historical information contained herein, the matters discussed in
this Form 10-K are forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, that involve risks and uncertainties. The
actual results that the Company achieves may differ materially from any
forward-looking projections due to such risks and uncertainties. Factors which
could cause a material difference in results include, but are not limited to,
the following: regional and national economic conditions; changes in interest
rates; changes in government spending policies and/or decisions concerning
specific programs; individual business decisions of customers and business
partners; developments in technology; new and expanding product lines;
competition for employee resources; competitive factors and pricing pressures;
the Year 2000 compliance of the Company's customers and business partners; the
Company's ability to achieve the objectives of its business plans; and changes
in government laws or regulations. Words such as "believes," "anticipates,"
"expects," "future," "intends," and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
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. Active
subsidiaries other than the parent company include: Comarco Wireless
Technologies, Inc. ("Comarco Wireless"), which was formed in January 1994 to
further develop the Company's wireless communications products business;
Manufacturing Technology Training Center, Inc. (MTTC), which was formed in
January 1996 to further develop the Company's technology training business;
Comarco Wireless International, Inc. (formerly known as Comarco Wireless Europe,
Inc.), a wholly-owned subsidiary of Comarco Wireless Technologies, Inc., which
was formed in April 1996 to market and provide post-contract customer support
for the Company's wireless communications products to international customers;
Comarco Staffing, Inc. which was formed in August 1996 to acquire the assets of
a commercial outsourced staffing services company; Comarco Systems, Inc., which
was formed in January 1997 to further develop the Company's information
technology and staffing services business; and Comarco Services, Inc., which was
formed in January 1999 to further develop the Company's airport management
services and staffing 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 information technology and
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 information technology and staffing
services business, the Company acquired a commercial outsourced staffing
services company in August 1996. During the past four years, the Company,
through its subsidiary, Comarco Wireless Technologies, Inc., has invested more
of its corporate resources in expanding its wireless communications products
business area. This effort has resulted in COMARCO realizing the majority of its
operating income from this business area.
Summarized financial information by business segment for the Company's Fiscal
Year 1999, which ended January 31, 1999, is as follows:
Information
Wireless Technology
Communications and Staffing Corporate and
Products Services Other Total
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(Dollars in Thousands)
Revenues $ 34,004 $ 57,960 $ --- $ 91,964
Operating income 7,148 1,729 (9) 8,868
Identifiable assets 22,392 16,404 8,491 47,287
o Wireless Communications Products
The Company's wireless communications products business, through its subsidiary,
Comarco Wireless Technologies, Inc., is presently comprised of four product
families: test and measurement, revenue assurance, callbox systems, and portable
device power adapters.
o The test and measurement marketplace is covered by the LTX00
product family used to monitor network performance, the X50
family used to solve complex engineering problems, and the
BaseLINE(TM) family used to benchmark competitors. These products
provide a method for monitoring, analyzing, and benchmarking the
performance of wireless system networks of a customer's
competitor, as well as that of its own network.
o The revenue assurance marketplace is covered by RAP(TM) to
automate call-through testing and to verify the accuracy and
integrity of the billing system.
o The callbox systems marketplace is covered by a number of callbox
products that provide emergency service over wire-line and
wireless backbones. In addition to providing the callbox product,
Comarco Wireless Technologies also provides project installation
and long-term maintenance services. In October 1996, the Company
purchased certain callbox product line assets from GTE. The
installed base purchased from GTE consists of over 14,000 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 assets of the Cubic Communica-
tions, Inc. callbox product line. The installed base purchased
from Cubic Communications consists of approximately 5,200 units.
Management believes that the combination of these two product
lines establishes the Company as a major vendor to this niche of
the wireless applications products marketplace.
o Universal power adapters for cellular phones, laptop computers,
personal assistants and other portable devices are under
development, and market trials are in progress. If market trials
are successful, the Company plans to continue its investment in
this marketplace.
Comarco Wireless Technologies' revenues increased to 37% of the Company's total
revenue in Fiscal Year 1999, representing an increase of 15% over the prior
fiscal year. Operating income increased 6% year-to-year and represented over 80%
of the Company's consolidated operating income for Fiscal Year 1999. 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, continued geographical expansion to international markets, continued
growth and increased availability of cellular and other wireless communications
services, including PCS, in the United States and internationally, and continued
acceptance of the Company's products by its customers, none of which can be
assured.
International revenues in Fiscal Year 1999 totaled $5.6 million, down from $8.9
million in the prior fiscal year. Year-to-year decreased international revenue
is due to lower activity in Asia due to the general economic conditions and
lower activity in Europe due to one large order in Fiscal Year 1998. The
majority of these sales have been made to Europe, Asia-Pacific and Latin
America. The Company expects that international revenues will continue to be a
key area of growth, although the activity may continue to be weak in the near
term. Marketing and post-contract customer support offices are opened and
staffed in Singapore, England, and Mexico.
PRODUCT DEVELOPMENT
The Company continues 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 plans to continue to develop products
that will be compatible with all wireless communications air interfaces
worldwide. New product introductions this year included adding other air
interfaces to the Company's line of test and measurement and revenue assurance
products including CDMA, GSM, PC 1800/1900, and IS-136; further expansion of the
Company's LT line with the introduction of the LT 200; and the release of the
BaseLINE(TM) range of products which represents state of the art technology in
comparative network analysis. The BaseLINE(TM) product also includes Comarco
Wireless' innovative Q-MOS(TM) technology, which permits wireless carriers to
assess the audio quality of their networks and compare it directly with that
offered by competing carriers. 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 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 conversion technology.
The Company commenced market trials including limited sales of the first version
of this product in Fiscal Year 1999, with a more powerful version currently
under development. Potential customers are replacement market buyers and
original equipment manufacturers. The Company's market trial is focused on
replacement market buyers. The power requirements of laptop computers are
increasing due to the introduction of more powerful microprocessors and more
advanced battery technologies. This requires the Company to continue its product
development program to increase the power capacity of its power adapter
products. There can be no assurance that the Company will be successful in
bringing the higher power adapter product to market, or that this product will
be successful. The Company is aware that the power supply market is extremely
competitive. 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 arising from sales of the
product.
The Company plans to continue to invest substantially in product development
efforts. Its products are characterized by rapidly changing technologies,
evolving standards, and continuous improvements in products and services. The
Company's future prospects will depend in part on its ability to enhance the
functionality of its existing products in a timely and cost-effective manner and
to identify, develop, and achieve market acceptance of new products that address
new technologies and standards and meet customer needs in the wireless
communications marketplace. There can be no assurance that the Company will be
able to respond to technological advances, changes in customer requirements, or
changes in regulatory requirements or industry standards, and any significant
delays in development, introduction or shipment of products, or achievement of
acceptable product costs, could have a material adverse effect on the Company's
business, operating results and financial condition.
As part of its product development program, the Company is continuing its
software product development program in its wireless communications business.
During Fiscal Year 1999 and Fiscal Year 1998, the Company's wireless
communications business capitalized approximately $2.9 million and $2.5 million
of software product development costs, respectively, in accordance with
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed. Of the amounts
capitalized, $1.9 million and $1.4 million, respectively, were amortized in
Fiscal Years 1999 and 1998 against product sales in accordance with Statement
No. 86.
In addition, during Fiscal Years 1999, 1998, and 1997, Comarco Wireless had
expenditures of $.8 million, $1.2 million and $1.3 million, respectively, for
research and development expenses (including Company-sponsored software
development costs prior to determination of technological feasibility), for
product design and development expenses, as well as design expenses associated
with component replacements, reducing the cost, and improving the
manufacturability of existing products. The reduced Fiscal Year 1999 research
and development expenses are due to the transition of the universal power
adapter development to initial production and market trial shipments during the
year.
BACKLOG
Unfilled orders at Comarco Wireless as of January 31, 1999 are approximately
$17.2 million, compared to $17.7 million as of January 31, 1998. The current
year balance includes $2.5 million of product orders for the test and
measurement and revenue assurance product lines, and $2.7 million of deferred
revenue for basic and extended warranty commitments. The current year balance
also includes $1.0 million of product orders for the power adapter product line.
Management believes that substantially all of this backlog amount (of $6.2
million) will result in revenue during Fiscal Year 2000. In general, most of the
Company's product orders are filled within months from the receipt of the order.
The remaining unfilled orders of $11.0 million are related to the callbox
product line. This backlog balance consists of $1.2 million of new product
orders, $6.0 million of long-term maintenance agreements, and the remaining $3.8
million is 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 Fiscal Year 2000.
SEASONALITY/FLUCTUATION IN QUARTERLY RESULTS
Comarco Wireless has experienced, in each of the past five years, a seasonal
fluctuation in wireless communications products activity, with greater sales in
the latter half of its fiscal year and lesser amounts in the first half of the
fiscal year, although this trend has been declining over the same five years.
This fluctuation may or may not continue due to a number of factors, including:
the timing, cancellation, or delay of customer orders; the timing of new product
introductions by the Company or its competitors; the deployment schedule of
wireless network operators in both North American and international markets,
which can be delayed by both economic and political issues; the size of
customers' capital budgets, which are the traditional source of customer funding
for the purchase of the Company's products; market acceptance of the Company and
its customers' products; variations in manufacturing capacities, efficiencies
and costs; the availability and cost of components; capacity and production
constraints associated with single source component suppliers; and other
competitive factors. Therefore, the nature of the wireless communications
products business is inherently unpredictable; sales and profits may fluctuate
significantly from quarter to quarter; and therefore, period-to-period
comparisons of its operating results are not necessarily meaningful and such
comparisons cannot be relied upon as indicators of future performance.
MARKETING, SALES DISTRIBUTION, FOREIGN SALES
Comarco Wireless maintains its own internal sales force for the marketing and
sales of the Company's product offerings in the United States. In addition, the
Company has opened and staffed direct sales and customer support offices in
Singapore, England, and Mexico to service Asia-Pacific, Europe, and Latin/South
America, respectively. The international offices manage a network of agents and
distributors for the coordination of sales activity outside of the United
States. This expansion overseas faces a number of inherent barriers, including:
the need for export licenses; tariffs and other potential trade restrictions;
changes in laws governing the imposition of duties, quotas, taxes, or other
charges relating to the import or export of its products; political and economic
instability, the difficulty of administering business globally, longer accounts
receivable cycles, and currency exchange fluctuations. 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 sales efforts will be successful.
The Company currently sells to its major customers under purchase orders that
are usually placed with short-term delivery requirements. Therefore, the Company
maintains significant inventory levels and associated production and technical
staff in order to respond to the short-term delivery requirements. If the
customer orders, as forecasted, do not materialize or are delayed, the Company
will have higher levels of inventory than otherwise needed, increasing the risk
of obsolescence. The higher levels of inventory and production and technical
staffing would also reduce the Company's liquidity and profitability.
The Company's standard terms require foreign customers to pay for the Company's
products with U.S. dollars. As such, a strengthening of the U.S. dollar as
compared to a foreign customer's local currency effectively increases the cost
of the Company's products for that customer, thereby making the Company's
products less attractive to that customer. For those orders denominated in
foreign currencies, the Company may limit its exposure to losses from foreign
currency transactions by the purchase of forward foreign exchange contracts.
Such activity to date has been insignificant. There can be no assurance that a
currency hedging strategy will be successful in avoiding exchange-related losses
in the future.
Significant weakness in foreign currency exchange rates can also create economic
uncertainty, including weakness in banking systems and equity markets. Such
weaknesses can impact customers' demand for the Company's products and their
ability to pay for the Company's products with U.S. dollars.
Therefore, any significant change in a foreign country's exchange rates,
economy, or a deterioration of U.S. trade relations or the economies or
political stability of foreign locations in which the Company sells its products
could have a material adverse effect on the Company's business, operating
results, and financial condition.
The Company is still in the process of receiving its ISO 9002 certification, a
uniform worldwide quality-control standard, on its headquarters and
manufacturing facility located in Irvine, California. Customers and potential
customers throughout the world, particularly in Europe, may require that their
suppliers be ISO certified. In addition, some customers may require that their
suppliers purchase components only from subcontractors that are ISO certified.
Therefore, the Company's current status could have an impact on its ability to
successfully compete in the international marketplace.
SERVICE AND WARRANTY
The Company's warranties vary by product type and typically cover defects in
materials and workmanship. Warranty obligations and other maintenance services
for the Company's products are primarily performed by the Company at its
facilities in California. The Company currently has service employees located in
Singapore, England, and Mexico to service their respective geographical regions.
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 continued planned geographical expansion into Europe, Asia-Pacific 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. 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. 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 would be required to purchase a comparable component from
other sources and modify its products to function properly with the replacement
component or redesign its products to use other components, either of which
could result in delays in production and delivery. Working capital requirements
are expected to be financed from operations and the financial resources of the
Company.
Comarco Wireless also operates from a single-site manufacturing operation. Any
material disruption in the manufacturing operations of Comarco Wireless, whether
due to fire, natural disasters, or otherwise, will have a material adverse
effect on the Company's business, operating results, and financial condition.
TECHNICAL REQUIREMENTS
Comarco Wireless is selling its products into a market that is growing rapidly
and subject to 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, 1999, Comarco Wireless employed approximately 150 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 as
well as the failure to recruit and train additional technical personnel in a
timely manner could have a material adverse effect on the Company's business,
operating results, and financial condition. Recognizing this reality, the
Company has instituted a long-term incentive stock option plan for key Comarco
Wireless employees, whereby they will directly participate in the success of
Comarco Wireless (see Note 12 of the Notes to Consolidated Financial
Statements). The Company obtains its employees through a variety of means
including advertisements, technical job fairs, engineering recruiters, and
engineering temporary staffing firms.
COMPETITION
Comarco Wireless competes in small niches (test and measurement equipment,
revenue assurance equipment, and emergency roadside callboxes) 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 penetrating 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 three patents for its small power adapter for laptop computers
and cellular telephones, and patents covering its emergency roadside callbox
product. However, the Company currently relies primarily on a combination of
trade secrets, copyrights, and contractual rights to protect its intellectual
property in the wireless communications 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.
o Information Technology and Staffing Services Revenue
These services are primarily in the fields of:
o Information Technologies
o Intelligent Instrumentation and Automated Test Systems
o Ordnance and Weapon Systems Engineering Services
o Airport Management Services
o Commercial Staffing Services
o Manufacturing Training
Approximately $58.0 million or 63% of the Company's revenues, and
approximately $1.7 million of its operating income for the fiscal year
ended January 31, 1999 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, other Federal
Government agencies, local governments, and various commercial customers.
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 infor-
mation 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.
o Developing and integrating Geographic Information Systems.
The Company also designs, specifies, acquires, integrates, tests, installs,
operates, and maintains systems for its customers' uses.
Intelligent Instrumentation and Automated Test Systems
------------------------------------------------------
The Company also specializes in the development and application of
computer-based test instruments and automated test systems with particular
focus on:
o Interoperability testing of communications and information systems;
o Developmental and operational testing of C4I, ordnance, tactical
weapon and data systems; and o Automated Test Systems (ATS).
The Company provides engineering and testing support to assure that
communications and computer-based systems interoperate effectively and
reliably.
The Company provides design and fabrication of special purpose test support
software and hardware for testing aircraft, missile launchers, missiles,
gun and other complex electronics-based systems and their subsystems and
components.
The Company develops test program sets (TPS's) and interface devices (ID's)
for operational performance verification and failure diagnosis of
mission-critical electronic assemblies and subassemblies.
Ordnance and Weapon Systems Engineering Services
------------------------------------------------
The Company offers U.S. military customers a variety of specialized
engineering services applicable to ordnance and weaponry, including:
o System engineering for complex C4I, ordnance, weapon and weapon-
platform integration concepts.
o Design and test engineering of embedded computers, avionics, software,
lasers, optics, seekers, guidance and control systems, interior
and exterior ballistics, airframes, electronics, energetic materials,
propulsion, warheads, fuses, and insensitive munitions.
o Quality assurance, reliability, maintainability, system safety,
productibility, logistics, and standard engineering.
o Documentation, CAD/CAE (CALS and EDMICS compliant), configuration
and data management, and records archiving and management services.
The Company is providing environmental and safety engineering including:
o Pollution prevention studies
o Evaluation of site developments for environmental compliance
o Air, water, and soil sampling and analysis
o Waste system analysis
o Permit renewal preparation
o Other environmental support
Current customers for information technologies, intelligent instrumentation
and automated test systems and ordnance and weapons systems engineering
services include agencies of the U.S. Government and government prime
contractors.
Airport Management Services
---------------------------
The Company provides airport management services for local government
agencies. The Company's contract supporting the Metropolitan Washington
Airports Authority at Reagan Washington National Airport ended September
30, 1998. The Company decided not to pursue the recompete of this contract
since it was marginally profitable, and it would have been unprofitable if
reawarded to the Company. The Company has 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 has similar long-term airport services contracts
with Riverside County, California and with Tacoma Narrows Airport, Tacoma,
Washington.
Commercial Staffing Services
----------------------------
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. The main office is in Victorville, California,
serving the Apple Valley area of the High Desert. During Fiscal Year 1998,
the Company opened an office in Corona, California, and during Fiscal Year
1999, the Company opened an office in Temecula, California.
Manufacturing Training
----------------------
Created under a Cooperative Research and Development Agreement (CRADA) with
the Navy, the Company's subsidiary, MTTC, Inc., 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.
BACKLOG
The Company's backlog from information technology and staffing services revenue
believed to be firm as of January 31, 1999 was $47 million, compared to $35
million as of January 31, 1998. The source of backlog is primarily contracts
with the U.S. and local governments. Government contracts normally have a base
and option periods totaling 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, or that the
entities will fund the unfunded portions of the Company's contracts. It is
estimated that approximately 55% of the firm backlog will be realized in Fiscal
Year 2000.
GOVERNMENT CONTRACTS
A significant portion of the Company's total revenues (approximately 34% in
FY99, 32% in FY98, and 39% in FY97) was derived from contracts with the United
States Government, principally agencies of the Department of Defense.
Significant portions of the Company's Fiscal Year 1999 revenues were derived
from contracts with the U.S. military services: Department of Defense, 8%; U.S.
Army, 8%; U.S. Navy, 12%; and U.S. Air Force, 6%. 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. Further, the Federal Government is increasing its use of
General Services Administration multiple award schedules (GSA MAS) and other
very broad-based contract vehicles to acquire information technology related
services. The Company has responded to this shift in its Federal Government
market by successfully obtaining awards of its own GSA MAS in February 1998 and
teaming with other companies on similar vehicles they have obtained. As of April
1999, orders under these vehicles total approximately $5.3 million since
September 1997. In the course of the Company's business, its contracts are
periodically opened for competition. In March 1998, the Company announced the
award of a five-year Government contract (three-year base period with two
one-year options) with an estimated value of $75 million to continue to provide
engineering and management services to the U.S. Navy at Crane, Indiana. Contract
periods are generally three to five years, including options. The Company's
airport management services contract at Reagan Washington National Airport ended
on September 30, 1998. The Company decided not to pursue the recompete of this
contract since it was marginally profitable, and it would have been unprofitable
if reawarded to the Company. 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 information technology and staffing services
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.
SEASONALITY
The Company's information technology and staffing services business in general
is not seasonal, although the summer and winter holiday seasons affect revenue
of the Company because of their impact on the Company's labor sales. Variations
in the Company's business may also occur at the expiration of major contracts
until such contracts are renewed or new contracts obtained.
EMPLOYEES
As of April 1, 1999, the Company employed approximately 780 full-time employees,
of which 630 were part of the information technology and staffing services
business area. In addition, the Company has approximately 440 employees (on a
full-time equivalent basis) 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.
ITEM 2. Properties
The Company's principal facilities on January 31, 1999, aggregating
approximately 128,000 square feet, are located in the cities of Santa Ana,
Irvine, Camarillo, Victorville, Corona, Temecula and Ridgecrest, California;
Vienna and Petersburg, Virginia; Sierra Vista, Arizona; Warner Robins, Georgia;
Bloomfield, Indiana; Colorado Springs, Colorado; Huntsville, Alabama;
Germantown, Maryland; London, England; and Singapore, and are occupied under
leases expiring prior to Fiscal Year 2005. 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 1999 was
approximately $1.4 million. The aggregate annual property rent in the year
ending January 31, 2000 is expected to be approximately $1.5 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 manufacturing operations
of Comarco Wireless, whether due to fire, natural disaster, or otherwise, will
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 that arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
Company's operating results and financial condition. In particular, see Note 20
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
-------- ---------
1999
First Quarter........................... $ 22.38 $ 20.50
Second Quarter.......................... 23.19 19.63
Third Quarter........................... 21.50 16.81
Fourth Quarter.......................... 24.25 19.88
1998
First Quarter........................... $ 18.13 $ 16.38
Second Quarter.......................... 20.00 16.38
Third Quarter........................... 24.00 19.38
Fourth Quarter.......................... 24.00 20.13
The Company had approximately 544 shareholders of record on February 26, 1999.
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,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- ------------- ------------ ------------- -------------
Revenues:
Contract revenues...................... $ 57,910 $ 55,030 $ 50,858 $ 54,278 $ 58,796
Product sales.......................... 34,054 30,109 20,556 15,563 9,520
------------- ------------- ------------ ------------ -----------
91,964 85,139 71,414 69,841 68,316
Direct costs:
Contract costs......................... 39,411 37,960 35,599 36,540 39,271
Cost of product sales.................. 14,857 14,050 7,417 6,644 5,388
-------------- ------------- ------------ ------------- -------------
54,268 52,010 43,016 43,184 44,659
Indirect costs............................ 28,828 24,960 21,780 21,112 18,652
Intangible asset write-off..................... -- 710 -- -- --
-------------- ------------- ------------ ------------- -------------
83,096 77,680 64,796 64,296 63,311
Operating income ......................... 8,868 7,459 6,618 5,545 5,005
Interest expense.......................... __ __ __ 44 231
Interest income........................... 298 404 559 541 298
-------------- ------------- ------------ ------------- -------------
Income before income taxes ............... 9,166 7,863 7,177 6,042 5,072
Income tax expense ....................... 3,483 2,988 2,512 2,157 1,743
-------------- ------------- ------------ ------------- -------------
Net income ............................... $ 5,683 $ 4,875 $ 4,665 $ 3,885 $ 3,329
============== ============= ============ ============= =============
Earnings per share:
Basic:
Net income....................... $ 1.23 $ 1.03 $ .98 $ .84 $ .71
============== ============= ============ ============= =============
Diluted:
Net income....................... $ 1.13 $ .89 $ .86 $ .75 $ .68
============== ============= ============ ============= =============
Dividends declared per share.............. None None None None None
SELECTED FINANCIAL DATA
(In thousands)
January 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- ------------ ------------- ------------ -------------
Working capital .......................... $ 21,833 $ 20,937 $ 20,429 $ 16,049 $ 12,394
Total assets.............................. 47,287 43,894 39,210 29,989 25,810
Borrowings under bank line of credit...... -- -- -- -- --
Long-term debt, including current maturities
(1).................................... -- -- -- -- 844
Stockholders' equity ..................... 31,202 30,470 26,977 21,738 17,203
(1) Includes Convertible Subordinated Debentures of $844,000 at January 31,
1995.
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,
-----------------------------------------------------
1999 1998 1997
------------- ------------- --------------
Revenues............................... 100.0% 100.0% 100.0%
Operating income....................... 9.6 8.8 9.3
Interest expense....................... -- -- --
Interest income........................ .3 .5 .8
Income tax expense..................... 3.8 3.5 3.5
Net income............................. 6.2 5.7 6.5
Percentage Increase (Decrease)
Years Ended January 31,
-------------------------------------
1999-1998 1998-1997
--------------- ---------------
Revenues............................... 8.0% 19.2%
Operating income....................... 18.9 12.7
Interest expense....................... -- --
Interest income........................ (26.2) (27.7)
Income tax expense..................... 16.6 18.9
Net income............................. 16.6 4.5
Fiscal Year Ended January 31, 1999 Compared to Fiscal Year Ended
January 31, 1998
Except for the historical information contained herein, the matters discussed in
this Form 10-K are forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, that involve risks and uncertainties. The
actual results that the Company achieves may differ materially from any
forward-looking projections due to such risks and uncertainties. Factors which
could cause a material difference in results include, but are not limited to,
the following: regional and national economic conditions; changes in interest
rates; changes in government spending policies and/or decisions concerning
specific programs; individual business decisions of customers and business
partners; developments in technology; new and expanding product lines;
competition for employee resources; competitive factors and pricing pressures;
the Year 2000 compliance of the Company's customers and business partners; the
Company's ability to achieve the objectives of its business plans; and changes
in government laws or regulations. Words such as "believes," "anticipates,"
"expects," "future," "intends," and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
The Company is involved in two distinct business areas: development and
manufacture of wireless communications products and services; and providing
information technology and staffing services, including engineering, technical,
and airport management services to government and commercial entities.
Fiscal Year 1999 revenues totaled $92.0 million, up 8% from the prior year.
Increased year-to-year revenue is primarily due to:
o a 15% increase in sales of the Company's wireless communications
products, which primarily include various test and measurement, revenue
assurance, and emergency roadside callbox systems;
o a 4% increase in information technology and staffing services,
consisting of a 17% increase in information technology services and a
22% increase in commercial staffing services, offset by a reduction in
airport management staffing services due to the completion of the
Company's contract at Reagan Washington National Airport, which expired
on September 30, 1998. This contract contributed $6.0 million in
revenue in the past fiscal year.
Operating income for Fiscal Year 1999 increased to $8.9 million, up 19% from
$7.5 million last year (after the effect of a $.7 million non-recurring,
non-cash charge for the write-off of the remaining intangible assets associated
with the Company's information technology and staffing services software
development operation in Fiscal Year 1998). Before this non-recurring charge in
Fiscal Year 1998, operating income was up 9% compared to the same period last
year. Increased operating income is primarily due to increased sales of wireless
communications systems and the increase in the information technology staffing
services business noted above.
Wireless Communications Products
Wireless communications products revenues increased 15% to $34.0 million for
Fiscal Year 1999 from $29.5 million for the comparable period last year.
Wireless communications products revenues comprised approximately 37.0% of total
Company revenues during Fiscal Year 1999, up from 34.7% in the prior fiscal
year. This increase is due to increased sales of the Company's test and
measurement, revenue assurance, and emergency callbox systems and the initial
introduction and market trials of CHARGESOURCE(TM), a universal power adapter.
The rapid growth of cellular and PCS markets, proliferation of digital
communication technologies, and the expanding number of telephone carriers have
created greater demand for the Company's products. During Fiscal Year 1999, the
Company's product introductions included BaseLINE(TM), allowing wireless
carriers to track the quality of their networks as well as the quality of their
competitors' systems. The Company's emergency callbox systems also had
significant growth in Fiscal Year 1999, which, management believes, should
continue in Fiscal Year 2000 with the recently announced callbox contracts in
the Los Angeles and San Francisco markets. Late in the year, the Company
commenced market trials of its universal power adapter, CHARGESOURCE(TM), which
is designed to charge all of the devices needed by a business traveler.
Operating income from wireless communications products increased to $7.1
million, up 6% year to year and comprised approximately 80% of the Company's
total operating income for Fiscal Year 1999. Summary operating results for
Comarco Wireless Technologies, Inc., the Company's wireless communications
products subsidiary, are as follows:
January 31, January 31,
-------------------------------------------
1999 1998
-------------------------------------------
Product sales................. $ 34,004,000 $ 29,524,000
Cost of products sold......... 14,802,000 11,455,000
------------------ ----------------
Gross margin.................. 19,202,000 18,069,000
Percentage.................... 56.5% 61.2%
Indirect costs*............... 12,054,000 11,336,000
================== ================
Operating income.............. $ 7,148,000 $ 6,733,000
================== =================
*Indirect costs include selling, general and administrative expenses, as well as
research and development expenses.
The decreased gross margin percentage is due to greater sales of the Company's
emergency callbox products and market trial sales of the universal power
adapter product, which have lower gross margins than the test and measurement
and revenue assurance product families.
Indirect costs increased $.7 million or 6% year to year. Selling and general
and administrative expenses totaled $8.5 million in Fiscal Year 1999, up 9%
from the comparable period last year. Research and development expense and
sustaining engineering and product support expenses totaled $3.6 million during
Fiscal Year 1999, up slightly from 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 (revenues less direct costs, indirect costs and depreciation
and amortization) for wireless communications products increased 6% to $7.1
million in Fiscal Year 1999 from $6.7 million in the prior fiscal year.
Operating income as a percentage of revenues was 21.0% for Fiscal Year 1999,
compared to 22.8% for the comparable prior period. The year-to-year decrease in
operating income percentage is primarily due to lower margin callbox and
universal power adapter product lines, as discussed above.
The Company is continuing its software product development program in its
wireless communications products business. In accordance with Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed, the Company's wireless
communications products business capitalized and amortized $2.9 million and
$1.9 million, respectively, during Fiscal Year 1999. The Company's wireless
communications products business capitalized and amortized $2.5 million and
$1.4 million, respectively, in Fiscal Year 1998. These amounts are in addition
to the research and development expense discussed above.
The Company's orders for wireless communications products totaled $33.5 million
for Fiscal Year 1999, compared with $27.6 million during Fiscal Year 1998.
Unfilled orders at January 31, 1999 totaled $17.2 million, of which $6.0
million is associated with the long-term maintenance contracts and $2.7 million
is associated with post-contract customer support obligations which has been
recorded as deferred revenue. The Company expects that the majority of the
remaining unfilled orders of $8.5 million will result in revenue during Fiscal
Year 2000.
In October 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
97-2 entitled Software Revenue Recognition. This Statement updates SOP 91-1
which was issued in 1991, and it provides guidance on when revenue should be
recognized and in what amounts for licensing, selling, leasing, or otherwise
marketing computer software. The provisions of the new Statement were applied
prospectively in Fiscal Year 1999. The adoption of this Statement did not have
a material impact on the financial position or operating results of the
Company.
The Company has experienced fluctuations in wireless communications products
activity in each of the past five years, with greater sales in the second half
of its fiscal year and lesser amounts in the first half, although this trend
has been declining over the same five years. This trend may or may not continue
as the Company broadens its wireless communications products offerings. The
nature of the wireless communications products business is inherently
unpredictable; sales and profits may fluctuate significantly from quarter to
quarter; and therefore, period-to-period comparisons of its operating results
are not necessarily meaningful and such comparisons cannot be relied upon as
indicators of future performance.
Information Technology and Staffing Services Revenue
Revenues provided by the information technology and staffing services business
totaled $58.0 million in Fiscal Year 1999 compared to $55.6 million in the prior
year. The increased revenue of 4% year-to-year is due to a 17% increase in
information technology staffing services and a 22% increase in commercial
staffing services, offset by a reduction in airport management staffing services
due to the completion of the Company's contract at Reagan Washington National
Airport, which ended on September 30, 1998. This contract contributed $6.0
million in revenue in the past fiscal year. The Company decided not to pursue
the recompete of this contract since it was marginally profitable, and it would
have been unprofitable if reawarded to the Company. Sales to the U.S. Government
as well as to government prime contractors were 34% of the Company's total
revenue for the fiscal year ended January 31, 1999. In the course of the
Company's business, its contracts are periodically opened for competition. In
March 1998, the Company announced the award of a five-year Government contract
(three-year base period with two one-year options) with an estimated value of
$75 million to continue to provide engineering and management services to the
U.S. Navy at Crane, Indiana. Contract periods are generally three to five years,
including options. 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 the work under any
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.
The Company is experiencing a greater percentage of its information technology
and staffing services revenue from fixed-price and fixed labor rate contracts
versus cost-reimbursable contracts. Fixed-price and fixed labor-rate contracts
shift more of the performance risk to the Company. Therefore, if the Company's
assumptions or performance do not meet expectations, reduced profits or losses
could be realized. Under one multi-year fixed price contract, the Company is
anticipating a contract modification. The contract is scheduled to end on
September 30, 1999, and the Company cannot complete the statement of work due to
Government delays in providing required equipment. The Company has submitted a
request for a 22-month extension and additional funding of $2.7 million.
Negotiations are ongoing, and management currently expects official modification
will not occur until the second quarter of Fiscal Year 2000, at the earliest.
The Company believes that it has a meritorious position and, if necessary, the
Company intends to seek all remedies available under Federal procurement laws.
In Fiscal Year 1998, the Company recorded a $710,000 charge against earnings
from the impairment of certain assets of its information technology and staffing
services software development operation. This charge was recorded in accordance
with Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
Based upon recent marketing initiatives which proved unsuccessful in the fourth
quarter, the Company determined that the expected future cash flows were not
sufficient to cover the remaining unamortized intangible assets. Accordingly,
the complete impairment of these assets was recorded in the consolidated
statement of income.
Operating income (revenues less direct costs, indirect costs, and depreciation
and amortization) for information technology and staffing services was up 113%
year-to-year to $1.7 million in Fiscal Year 1999 from $0.8 million in Fiscal
Year 1998 (after giving effect to a $.7 million non-recurring, non-cash charge
for the write-off of the remaining intangible assets associated with the
Company's information technology and staffing services software development
operation). Before this non-recurring charge in Fiscal Year 1998, operating
income was up $.2 million or 13% year-to-year.
Net interest income (interest income, less interest expense) for Fiscal Year
1999 totaled $298,000 compared to $404,000 for the prior fiscal year. The
decrease is principally due to lower available investable balances
year-to-year along with lower interest rates.
The Company's effective tax rate is 38.0% for Fiscal Year 1999, which is level
with the 38.0% for the previous fiscal year.
The overall increase in net income from the prior year is primarily due to the
increase in sales of wireless communications products at slightly lower
operating income margins, with no comparative non-recurring charge in Fiscal
Year 1999.
Fiscal Year Ended January 31, 1998 Compared to Fiscal Year Ended
January 31, 1997
Fiscal Year 1998 revenues totaled $85.1 million, up 19% from the prior year.
Increased year-to-year revenue is primarily due to:
o sales of the Company's wireless communications products, including
various test and measurement, revenue assurance, and emergency roadside
callbox systems;
o full year versus one-half year in the prior year from the acquisition
of a $10 million per year commercial staffing business.
Operating income for Fiscal Year 1998 increased to $7.5 million (after the
effect of a $.7 million non-recurring, non-cash charge for the write-off of the
remaining intangible assets associated with the Company's information technology
and staffing services software development operation), up 13% from $6.6 million
last year. Before this non-recurring charge, operating income was $8.2 million,
up 23% compared to the same period last year. Increased operating income is
primarily due to increased sales of wireless communications systems as noted
above.
Wireless Communications Products
Wireless communications products revenues increased 51% to $29.5 million for
Fiscal Year 1998 from $19.5 million for the comparable period last year.
Wireless communications products revenues comprised approximately 34.7% of total
Company revenues during Fiscal Year 1998, up from 27.3% in the prior fiscal
year. This increase is due to increased sales of the Company's test and
measurement, revenue assurance, and emergency callbox systems. The rapid growth
of cellular and PCS markets and proliferation of numerous digital air interfaces
is driving demand for the Company's products worldwide. During Fiscal Year 1998,
the Company's product introductions included adding other air interfaces, such
as CDMA, GSM, PC 1800/1900, and IS-136. These product introductions fueled a
significant increase in international sales for Comarco Wireless to
approximately $8.9 million or 30% of Fiscal Year 1998 revenues.
Operating income from wireless communications products increased to $6.7
million, up 28% year to year and comprised approximately 90% of the Company's
total operating income for Fiscal Year 1998. Summary operating results for
Comarco Wireless Technologies, Inc., the Company's wireless communications
products subsidiary, are as follows:
January 31, January 31,
-------------------------------------------
1998 1997
-------------------------------------------
Product sales.................. $ 29,524,000 $ 19,519,000
Cost of products sold.......... 11,455,000 6,625,000
------------------ ------------------
Gross margin................... 18,069,000 12,894,000
Percentage .................... 61.2% 66.1%
Indirect costs*................ 11,336,000 7,644,000
================== ==================
Operating income............... $ 6,733,000 $ 5,250,000
================== ==================
*Indirect costs include selling, general and administrative expenses, as well as
research and development expenses.
The decreased gross margin percentage is due to the increased costs incurred to
increase the capacity of the wireless communications products business, which
included additional staffing, moving to a larger facility in California,
associated costs to support future anticipated higher sales levels, and the
addition of the emergency roadside callbox product lines which have lower gross
margins than the test and measurement and revenue assurance product families.
The increase in indirect costs is primarily due to the additional selling and
general administrative costs associated with international expansion during
Fiscal Year 1998. Selling and general and administrative expenses totaled $7.7
million in Fiscal Year 1998, up 45% from the comparable period last year.
Research and development expense and sustaining engineering and product support
expenses totaled $3.5 million during Fiscal Year 1998, compared to $2.5 million
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 28% to $6.7 million in Fiscal Year 1998 from $5.2
million in the prior fiscal year. Operating income as a percentage of revenues
is 22.8% for Fiscal Year 1998, compared to 26.9% for the comparable prior
period. The year-to-year decrease is primarily due to the increased costs
related to business expansion and the addition of the lower margin callbox
product line, as discussed above.
The Company is continuing its software product development program in its
wireless communications products business. In accordance with Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed, the Company's wireless
communications products business capitalized and amortized $2.5 million and
$1.4 million, respectively, during Fiscal Year 1998. The Company's wireless
communications products business capitalized and amortized $2.2 million and
$1.0 million in Fiscal Year 1997, respectively. These amounts are in addition
to the research and development expense discussed above.
The Company's orders for wireless communications products totaled $27.6 million
for Fiscal Year 1998, compared with $34.7 million during Fiscal Year 1997.
Included within the above totals are $4.1 million and $10.0 million of
long-term maintenance service business associated with the purchase of the
Cubic Communications and GTE callbox product lines during Fiscal Year 1998 and
1997, respectively. Unfilled orders at January 31, 1998 totaled $17.7 million,
of which $9.8 million is associated with the long-term maintenance contracts
and $1.5 million is associated with post-contract customer support obligations
which has been recorded as deferred revenue.
In February 1997, the Company acquired an additional 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 four years, with greater sales in the second half
of its fiscal year and lesser amounts in the first half, although this trend
has been declining over the same four years. 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; sales and profits
may fluctuate significantly from quarter to quarter; and therefore,
period-to-period comparisons of its operating results are not necessarily
meaningful and such comparisons cannot be relied upon as indicators of future
performance.
Information Technology and Staffing Services Revenue
Revenues provided by the information technology and staffing services business
area increased in Fiscal Year 1998, totaling $55.6 million compared to $51.9
million in the prior year. The increased revenue of 7.1% year-to-year is due to
the acquisition of the commercial outsourced staffing company on August 1, 1996,
which contributed $10.2 million of revenue in Fiscal Year 1998, versus $5.1
million during Fiscal Year 1997. Sales to the U.S. Government as well as to
government prime contractors were 30% and 32% of the Company's total revenue
during the fourth quarter and the fiscal year ended January 31, 1998,
respectively. In the course of the Company's business, its contracts are
periodically opened for competition. In March 1998, the Company announced the
award of a five-year Government contract (three-year base period with two
one-year options) with an estimated value of $75 million to continue to provide
engineering and management services to the U.S. Navy at Crane, Indiana. This
contract, along with the contract awards during Fiscal Year 1997 with award
values of approximately $60 million, were recompetition of work the Company was
already performing. Contract periods are generally three to five years,
including options. In addition, the Company began work on a long-term airport
services contract in February 1997 for Riverside County, California and on
another contract in May 1997 for Tacoma Narrows Airport, Tacoma, Washington. The
Company's airport contract at Reagan Washington National Airport ends on
September 30, 1998. The Company has decided not to pursue the recompete of this
contract. This contract's annual revenues approximate $8.8 million, it has been
marginally profitable, and it would be unprofitable if reawarded to the Company.
Two other multi-year government contracts are scheduled to end in Fiscal Year
1999 with annual revenues of approximately $3.8 million. The Company plans to
aggressively compete for this other work opened for competition to the extent
possible and selectively pursue other high value Government procurements. There
can be no assurance that the Company will be selected and awarded the work under
any 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.
In January 1998, the Company recorded a $710,000 charge against earnings from
the impairment of certain assets of its information technology and staffing
services software development operation. This charge was recorded in accordance
with Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
Based upon marketing initiatives which proved unsuccessful in the fourth
quarter, the Company determined that the expected future cash flows were not
sufficient to cover the remaining unamortized intangible assets. Accordingly,
the complete impairment of these assets was recorded in the consolidated
statement of income.
Operating income (revenues less direct costs, indirect costs, and depreciation
and amortization) for information technology and staffing services is down 43%
year-to-year from $1.4 million in Fiscal Year 1997 to $0.8 million in Fiscal
Year 1998. The decrease is due to the start-up costs of the two new long-term
airport services contracts as discussed above, as well as a decrease in the
profitability of the Reagan Washington National Airport contract due to a
reduction in the management fee effective October 1, 1996.
Net interest income (interest income, less interest expense) for Fiscal Year
1998 totaled $404,000 compared to $559,000 for the prior fiscal year. The
decrease is principally due to lower available investable balances
year-to-year along with lower interest rates.
The Company's effective tax rate is 38.0% for Fiscal Year 1998 versus 35.0% for
the previous fiscal year. The increased effective tax rate is principally due
to no current year adjustment of the income tax valuation allowance as well as
lower levels of tax-exempt interest 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 slightly
lower operating income margin; partially offset by the decrease in airport
services contracts' operating income 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 21, 1998. The loan agreement consists
of a $10 million revolving credit facility, which expires June 30, 2000. The
revolving credit facility is unsecured provided that the Company maintains
certain covenants. Currently, management anticipates that cash flow will remain
at a level which will enable the Company to avoid utilizing the credit facility
except to support letters of credit and acquisition financing, and that the
Company will be able to purchase investments on a regular basis. The Company's
cash and investment balances averaged $5 million (includes highly liquid
long-term investments with maturities of 12 to 36 months) during the fourth
quarter of Fiscal Year 1999. 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.
During Fiscal Year 1999, the Company's average days' sales in accounts
receivable have increased, primarily due to increased sales of wireless
communications products and a higher percentage of fixed price funding
contracts in the information technology and staffing business area which
require retainage holdbacks.
Several additional key factors indicating the Company's financial condition
include:
January 31, January 31,
--------------------------------------
1999 1998
--------------------------------------
Current ratio....................... 2.54 2.75
Working capital..................... $ 21,833,000 $ 20,937,000
Book value per share................ $ 7.00 $ 6.46
The Company continued to demonstrate solid financial strength in the above
financial factors during Fiscal Year 1999, primarily due to increased operating
earnings from increased sales in both business segments; offset partially from
the $5.2 million stock re-purchases during the fiscal year.
During Fiscal Year 1999, the Company generated $5.7 million of cash flows from
operating activities, up sharply from $.7 million in the prior year. The
increase is due to increased earnings and better management of the Company's
working capital. Cash flows from operating activities, along with a portion of
the Company's investments, were used to fund a number of financing and investing
activities, as discussed below.
The Company has a significant commitment for capital expenditures at January 31,
1999 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 Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed, totaled $2.9 million and $1.9 million, respectively, in Fiscal Year
1999.
In May 1998, the Company completed the purchase of intellectual property and
related software assets from Industrial Technology, Inc. This acquisition,
totaling approximately $1.0 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 1,500,000 shares. As of January 31, 1999, the Company has re-purchased and
retired approximately 1,210,000 shares of which 281,500 shares in the amount of
$5.2 million were re-purchased during Fiscal Year 1999. The average price paid
per share re-purchased under the program was $9.33. Subsequent to Fiscal Year
1999 and through April 30, 1999, the Company has re-purchased another 40,600
shares for an aggregate amount of $.8 million.
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial condition of the Company (see Note 20 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 2000.
Year 2000
Many computer systems and software products currently in use by businesses and
government organizations are coded to accept two digits, rather than four, to
specify the year. Such computer systems and software products will be unable to
properly interpret dates beyond the year 1999, which could lead to business
disruptions (the "Year 2000 Issue"). The Company's technical personnel are in
the process of assessing the impact of the Year 2000 Issue on the Company's
products and services.
The Company has established a two-phase program to complete its year 2000
efforts. The first phase includes planning, inventory, and assessment; the final
phase consists of correction, testing, deployment, and acceptance. The Company
has divided its efforts into the categories of internal information systems,
products, non-IT systems, business partners, and customers. The status of each
with respect to the Company's two-phase process is addressed below.
Information Systems
The Company has received letters or has completed remediation whereby all of its
accounting and manufacturing software has been determined to be year 2000
compliant. The Company is completing its inventory of computers and computer
peripheral equipment and has determined that a few older units are not year 2000
compliant. These units will be replaced as part of the regular replacement
program this year. Remediation efforts on the readiness of the Company's
internal information systems are expected to be completed by mid-1999.
Products
The Company has assessed the year 2000 compliance of its software-based products
along with the associated components. The following detailed actions have been
taken to date:
Test and measurement/revenue assurance products - Most software programs have
been determined to be year 2000 compliant. For those requiring remediation, a
detailed upgrade program has been sent to each customer, and the effort is being
coordinated through the Company's normal upgrade program.
Emergency callboxes - The technology acquired from GTE has been determined to be
substantially year 2000 compliant. Changes required are minimal. The Company has
assessed the year 2000 reliability of the technology acquired from Cubic
Communications and determined that some problems exist, and remedies are being
designed. Implementation is being coordinated with each customer as part of its
product upgrade program. The financial impact to the Company, if any, cannot be
determined until the product upgrade program is completely coordinated with each
member of the customer base. The Company believes that the Cubic Communications
technology remediation will be completed by the latter part of 1999.
Other Software Products - Over the years, the Company has been associated with a
modest number of software products. A review of commercial products has been
completed for their year 2000 exposure. The Company concluded that Year 2000
Issues related to these products are minimal and that required remediation
efforts are insignificant.
The Company's program to assess and correct any Year 2000 Issues with its
products is well underway, and upgrade programs are or will be in place during
1999 to coordinate the efforts involved. Efforts are being coordinated through
the Company's normal upgrade channels, and at this time no additional resources
need to be assigned to the effort.
Non-IT Systems
Non-IT systems include embedded technology such as micro-controllers. The
Company's assessment indicated that the equipment utilized in its manufacturing
process is not date dependent. The Company has assessed the impact of non-IT
issues on its other office equipment (telephone systems, copiers, facsimile
machines, etc.) and facility infrastructure for which it is responsible.
Responses are being received from the respective vendors, and the Company does
not expect any significant issues in this area. The Company will continue to
assess non-IT systems and expects substantial resolution by July 1999.
Business Partners
Business partners include, but are not limited to: suppliers, the Company's
bank, insurance and benefit providers, and property management firms. The
Company's operations are dependent to varying degrees on the readiness of these
and other partners. The Company has issued questionnaires to or has received
correspondence from most of the currently identified business partners. To date,
the responses received indicate that many of the Company's business partners are
actively addressing the Year 2000 Issue. The Company is continuing to pursue
responses in order to complete its evaluation. By mid-1999, the Company expects
to have identified and developed contingency plans for business partners that
cannot give adequate assurances that they will be year 2000 ready.
Customers
The Company is contacting its customers to assess the state of their readiness
and the potential impact on the Company's operations. The Company's main concern
is principally with U.S. and State and local government entities. The primary
concern is that there will be delays in contract payments to the Company, which
would require a temporary increase in working capital funded from bank
borrowings. The Company has substantial borrowing capacity available under its
current line of credit, which extends to June 2000. The Company will continue to
evaluate the cash flow impact of Year 2000 Issues and develop additional
contingency financing plans, if required.
The Company will use both internal and external resources to ensure that it is
year 2000 ready. The Company has not deferred any significant information
technology projects as a result of the year 2000 effort. The total cost of the
program is being funded through operating cash flows. The total cost associated
with the year 2000 effort, except for certain product modifications discussed
above, is not expected to be material to the Company's consolidated results of
operations and financial position.
Although the Company's year 2000 efforts are intended to minimize the adverse
effects of the Year 2000 Issue on the its business and operations, the actual
effects of the issue and the success or failure of the Company's efforts
described above cannot be known until the year 2000. Therefore, in the opinion
of management, the most reasonable likely worst case scenario is the possibility
that the Company's major business partners, other material service providers, or
customers will not adequately address their respective Year 2000 Issues in a
timely manner, the effect of which could have a material adverse effect on the
Company's business, results of operations, and financial condition.
The Company will be developing contingency plans with respect to this most
likely worst case scenario as additional information is obtained from both
business partners and customers. Such plans will not be finalized until mid-1999
at the earliest.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income, requiring its components to be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company adopted this Standard in the first quarter of Fiscal
Year 1999.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 establishes standards for reporting financial information about operating
segments in annual financial statements and required reporting of selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Operating segments
are defined as components of an enterprise about which separate financial
information is available and evaluated regularly by the chief operating decision
makers in deciding how to allocate resources and in assessing performance. The
adoption of SFAS No. 131 did not modify the Company's identification of segments
and had no impact on the Company's consolidated results of operations, financial
condition or cash flows.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk, including changes in interest rates and
currency exchange rates. As of January 31, 1999, the Company had no accounts
receivable denominated in foreign currencies. The Company's standard terms
require foreign customers to pay for the Company's products with U.S. dollars.
For those orders denominated in foreign currencies, the Company may limit its
exposure to losses from foreign currency transactions by the purchase of forward
foreign exchange contracts. Such activity to date has been insignificant.
The Company's interest rate risk is limited to approximately $526,000 of
available-for-sale investments as of January 31, 1999. These investments are
high-grade municipal debt securities with maturities from one to five years
which are subject to interest rate fluctuations.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report............................................. 28
Financial Statements:
Consolidated Balance Sheets, January 31, 1999 and 1998.............. 29
Consolidated Statements of Income, Years Ended
January 31, 1999, 1998, and 1997.................................... 30
Consolidated Statements of Cash Flows, Years Ended
January 31, 1999, 1998, and 1997.................................... 31
Consolidated Statements of Comprehensive Income,
Years Ended January 31, 1999, 1998, and 1997........................ 32
Notes to Consolidated Financial Statements,
January 31, 1999, 1998, and 1997.................................... 33
Financial Statement Schedule
II Reserves, Years Ended January 31, 1999, 1998,
and 1997............................................................ 58
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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended January 31, 1999, 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 LLP
McLean, Virginia
March 17, 1999
COMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
January 31,
---------------------------------
1999 1998
------------- --------------
Current assets:
Cash and cash equivalents.............................................. $ 3,220 $ 5,256
Short-term investments................................................. 2,775 2,348
Accounts receivable, net............................................... 23,151 17,815
Inventory.............................................................. 4,157 5,247
Deferred tax asset..................................................... 2,112 1,383
Other current assets................................................... 575 832
------------- --------------
Total current assets................................................. 35,990 32,881
Long-term investments..................................................... 526 2,364
Property and equipment, net............................................... 2,424 2,240
Software development costs, net........................................... 4,185 3,131
Intangible assets, net.................................................... 3,587 2,660
Other assets.............................................................. 575 618
============= ==============
$ 47,287 $ 43,894
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 1,075 $ 493
Deferred revenue....................................................... 2,902 1,914
Accrued liabilities.................................................... 10,180 9,537
------------- --------------
Total current liabilities............................................ 14,157 11,944
Deferred income taxes..................................................... 1,928 1,480
Stockholders' equity:
Common stock, $.10 par value, 33,750,000 shares authorized; shares
outstanding of 4,456,460 in 1999 and 4,718,710 in 1998................ 446 472
Paid-in capital........................................................ 2,795 3,074
Other comprehensive income:
Unrealized investment gains.......................................... 16 --
Retained earnings...................................................... 27,945 26,924
------------- --------------
Total stockholders' equity........................................... 31,202 30,470
Commitments and contingencies (Notes 14 and 20)
============= ==============
$ 47,287 $ 43,894
============= ==============
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,
-----------------------------------------------------
1999 1998 1997
------------- ------------- --------------
Revenues:
Contract revenues........................................ $ 57,910 $ 55,030 $ 50,858
Product sales............................................ 34,054 30,109 20,556
------------- ------------- --------------
91,964 85,139 71,414
------------- ------------- --------------
Direct costs:
Contract costs........................................... 39,411 37,960 35,599
Cost of product sales.................................... 14,857 14,050 7,417
------------- -------------- -------------
54,268 52,010 43,016
Indirect costs.............................................. 28,828 24,960 21,780
Intangible asset write-off.................................. -- 710 --
------------- ------------- --------------
83,096 77,680 64,796
------------- ------------- --------------
Operating income............................................ 8,868 7,459 6,618
Interest income............................................. 298 404 559
------------- ------------- --------------
Income before income taxes.................................. 9,166 7,863 7,177
Income tax expense.......................................... 3,483 2,988 2,512
============= ============= ==============
Net income.................................................. $ 5,683 $ 4,875 $ 4,665
============= ============= ==============
Earnings per common share:
Basic:
Net income............................................. $ 1.23 $ 1.03 $ .98
============= ============= ==============
Diluted:
Net income............................................. $ 1.13 $ .89 $ .86
============= ============= ==============
See accompanying notes to consolidated financial statements.
COMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended January 31,
------------------------------------------------------
1999 1998 1997
-------------- ------------- --------------
Cash flows from operating activities:
Net income............................................... $ 5,683 $ 4,875 $ 4,665
Adjustments to reconcile net income to net cash provided
by operating activities:
Loss (gain) on disposal of property and equipment.... (1) -- 23
Depreciation and amortization........................ 3,288 3,164 2,263
Provision for doubtful accounts receivable........... 321 123 62
Intangible asset write-off........................... -- 710 --
Deferred income taxes................................ (281) 213 (509)
Changes in operating assets and liabilities, net of
effects from the purchases of RAL, GTE & Cubic:
Increases in investments........................... (980) (537) (785)
Increase in accounts receivable.................... (5,657) (6,862) (2,308)
Decrease (increase) in inventory................... 1,090 (1,644) (470)
Decrease (increase) in other current assets........ 257 7 (432)
Decrease (increase) in other assets................ 43 (311) (36)
Increase (decrease) in accounts payable............ 582 276 (330)
Increase (decrease) in deferred revenue............ 988 (764) 1,243
Increase in accrued liabilities.................... 643 1,408 1,693
-------------- ------------- --------------
Net cash provided by operating activities................ 5,976 658 5,079
Cash flows from investing activities:
Purchases of investments................................. -- (1,204) (1,572)
Proceeds from sales of investments....................... 2,407 712 2,172
Purchases of property and equipment...................... (1,339) (1,630) (872)
Proceeds from sales of property and equipment............ 4 14 13
Software development costs............................... (2,936) (2,506) (2,210)
Cost of acquisition of ITI technology.................... (1,000) -- --
Cost of acquisition of Cubic, net of cash acquired....... -- (1,717) --
Cost of acquisition of RAL, net of cash acquired......... (181) (400) (1,198)
Cost of acquisition of GTE callbox, net of cash acquired. -- -- (1,076)
-------------- ------------- --------------
Net cash used in investing activities.................... (3,045) (6,731) (4,743)
Cash flows from financing activities:
Proceeds from issuance of stock, including tax benefit... 227 453 1,052
Purchase of common stock................................. (5,194) (1,835) (478)
-------------- ------------- --------------
Net cash provided (used) by financing activities......... (4,967) (1,382) 574
-------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents........ (2,036) (7,455) 910
Cash and cash equivalents, beginning of year................ 5,256 12,711 11,801
============== ============= ==============
Cash and cash equivalents, end of year...................... $ 3,220 $ 5,256 $ 12,711
============== ============= ==============
See accompanying notes to consolidated financial statements.
COMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Years Ended January 31,
-----------------------------------------------------
1999 1998 1997
------------- ------------- --------------
Net income.................................................. $ 5,683 $ 4,875 $ 4,665
Other comprehensive income:
Unrealized holding gains on investments, net of tax...... 16 -- --
============= ============= ==============
Comprehensive income........................................ $ 5,699 $ 4,875 $ 4,665
============= ============= ==============
See accompanying notes to consolidated financial statements.
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999 AND 1998 AND 1997
1. Significant Accounting Policies
a. The Company--COMARCO, Inc. and its subsidiaries' (the "Company")
traditional business area consists of providing a broad range of information
technology and staffing 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 34%, 32%, and
39% of revenues for the years ended January 31, 1999, 1998, and 1997,
respectively. Sales to the Metropolitan Washington Airports Authority for a
contract at Reagan Washington National Airport were 7%, 10%, and 12% of revenues
for the years ended January 31, 1999, 1998, and 1997, respectively. This
contract ended on September 30, 1998. 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. In February
1997, Comarco Wireless Technologies, Inc. acquired the callbox assets of Cubic
Communications, Inc. In May 1998, Comarco Wireless Technologies, Inc. acquired
certain intellectual property and related software assets of Industrial
Technology, Inc. ("ITI"). These acquisitions were accounted for using the
purchase method. 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 difference between identified tangible and
intangible assets and assumed liabilities was recorded as goodwill for the Cubic
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.
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 that 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 financial
statements, the Company considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents. Cash
equivalents of $3.1 million and $5.1 million at January 31, 1999 and 1998,
respectively, consist primarily of money market funds, which are stated at cost,
which approximates fair value.
f. Investments--Investments at January 31, 1999 consist of high-grade
municipal debt and equity securities. The Company classifies its debt and equity
securities in one of three categories: trading, available-for-sale, or
held-to-maturity. Trading securities are bought and held principally for the
purpose of selling them in the near term. Held-to-maturity securities are those
securities in which the Company has the ability and intent to hold the security
until maturity. All securities not included in trading or held-to-maturity are
classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses on trading securities are included in earnings. Unrealized holding gains
and losses, net of the related tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component of other
comprehensive income until realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific identification basis.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed to be other than temporary results in a
reduction in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established. Premiums and
discounts are amortized and accreted over the life of the related
held-to-maturity or available-for-sale security as an adjustment to yield using
the effective interest method. Dividend and interest income are recognized when
earned.
During Fiscal Year 1999, the Company reclassified its portfolio of
held-to-maturity securities to available-for-sale securities, as a portion of
these investments were needed to fund the unusually high level of Company stock
re-purchases during the year.
g. 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. Inventory consists primarily of electronic components,
and the Company regularly assesses the need to adjust inventory valuations for
obsolescence due to rapid technological changes in the wireless communications
products industry.
h. Property and Equipment--Property and equipment are stated at cost and
are depreciated using the straight-line method. Office furnishings and fixtures
are depreciated over useful lives of five to seven years, and equipment and
software are depreciated over useful lives of three to five years.
i. Software Development Costs--Capitalization of internally developed
software begins upon the determination by the Company of a product's
technological feasibility, generally upon completion of a detail program design.
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.
j. 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.
k. 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 would be reduced by a valuation allowance
where it is more likely than not that the benefits may not be realized.
l. Per Share Information--During the year ended January 31, 1998, the
Company adopted Statement of Financial Accounting Standards No. 128, Earnings
per Share, and computes basic and diluted net income per share based on the
weighted average number of shares of common stock and potential common stock
outstanding during the period. Potential common stock, for purposes of
determining diluted earnings per share, includes the effects of dilutive stock
options and convertible securities. The effect of such potential common stock is
computed using the treasury stock method or the if-converted method, as
applicable. Comparative earnings per share data have been restated for prior
periods. Consolidated net income of the Company used in computing diluted
earnings per share purposes is diluted as a result of stock options issued by
the Company's subsidiaries which enable their holders to obtain the
subsidiaries' common stock.
m. Stock Option Plans--Prior to February 1, 1996, the Company accounted for
its stock option plans 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.
n. Fair Value of Financial Instruments--The estimated fair values of the
Company's financial instruments have been determined using available market
information. The estimates are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have an effect on the estimated
fair value amounts. The fair value of current financial assets, current
liabilities, and other assets are estimated to be equal to their carrying
amounts.
o. Comprehensive Income--As of February 1, 1998, the Company adopted SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income consists of net income and net
unrealized gains on securities, net of income tax, and is presented in the
consolidated statements of comprehensive income. SFAS No. 130 requires only
additional disclosures in the consolidated financial statements; it does not
affect the Company's financial position or results of operations. Prior years'
consolidated financial statements have been reclassified to conform with the
requirements of SFAS No. 130.
p. Reclassifications--Certain reclassifications of 1998 and 1997 amounts
have been made to conform to the 1999 presentation.
2. Investments
Securities classified as available for sale are as follows at January 31, 1999
and 1998:
Gross Gross
Unrealized Unrealized Aggregate
Security Amortized Holding Holding Fair
Year Type Cost Gains Losses Value
- ---- -------- ---------- ----------- ----------- ---------
(Dollars in thousands)
1999 Debt $512 $14 -- $526
1999 Equity 102 14 -- 116
1998 Equity 127 -- -- 127
Securities classified as held-to-maturity are as follows at January 31, 1998:
Gross Gross
Unrealized Unrealized Aggregate
Security Amortized Holding Holding Fair
Year Type Cost Gains Losses Value
- ---- -------- --------- ----------- ----------- ----------
(Dollars in thousands)
1998 Debt $2,905 $14 $ 22 $2,897
Maturities of debt securities classified as available for sale are as follows at
January 31, 1999:
Aggregate
Security Amortized Fair
Type Cost Value
--------- ---------- ----------
(Dollars in thousands)
Tax-exempt obligations:
One through five years $ 512 $ 526
Proceeds from the sales of available-for-sale securities in the years ended
January 31, 1999 and 1998 were $2.4 million and $135,000, respectively. No gross
realized gains or losses were recorded on sales of available-for-sale securities
in the years ended January 31, 1999 and 1998.
Short-term investments at January 31, 1999 and 1998 included restricted amounts
of $2.7 million and $1.7 million, respectively, related to balances maintained
in a non-qualified deferred compensation plan for Company executives and
directors.
The amount of net unrealized holding gains on trading securities recorded in the
years ended January 31, 1999 and 1998 were $281,000 and $92,000, respectively.
3. Accounts Receivable
Accounts receivable consist of the following:
January 31,
----------------------------
1999 1998
----------- -----------
(Dollars in thousands)
U.S. Government
Billed................................................... $ 5,075 $ 3,277
Unbilled................................................. 3,862 3,081
Commercial.................................................. 14,377 11,498
Other ...................................................... 181 290
----------- -----------
23,495 18,146
Less: Allowances for doubtful accounts..................... (344) (331)
=========== ===========
$ 23,151 $ 17,815
=========== ===========
Included in unbilled accounts receivable are retainages due upon completion of
contracts of approximately $1.3 million and $750,000 as of January 31, 1999 and
1998, respectively. Of total accounts receivable at January 31, 1999, there are
approximately $827,000 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,
----------------------------
1999 1998
----------- -----------
(Dollars in thousands)
Raw materials............................................... $ 3,819 $ 4,493
Work-in-process............................................. 196 573
Finished goods.............................................. 142 181
----------- -----------
$ 4,157 $ 5,247
=========== ===========
5. Property and Equipment
Property and equipment consist of the following:
January 31,
----------------------------
1999 1998
----------- -----------
(Dollars in thousands)
Office furnishings and fixtures............................. $ 1,613 $ 1,518
Equipment................................................... 5,128 4,117
Software.................................................... 390 296
----------- -----------
7,131 5,931
Less: Accumulated depreciation and amortization............. (4,707) (3,691)
=========== ===========
$ 2,424 $ 2,240
=========== ===========
6. Software Development Costs
Software development costs consist of the following:
January 31,
----------------------------
1999 1998
----------- -----------
(Dollars in thousands)
Software development costs.................................. $ 8,042 $ 5,106
Less: Accumulated amortization.............................. (3,857) (1,975)
=========== ===========
$ 4,185 $ 3,131
=========== ===========
Capitalization of software development costs for the years ended January 31,
1999, 1998, and 1997 amounted to $2,936,000, $2,506,000, and $2,210,000,
respectively. Amortization of software development costs for the years ended
January 31, 1999, 1998, and 1997 amounted to $1,882,000, $1,809,000, and
$1,177,000, respectively.
7. Intangible Assets
Intangible assets consist of the following:
January 31,
----------------------------
1999 1998
----------- -----------
(Dollars in thousands)
Costs in excess of net assets acquired......................... $ 2,440 $ 2,440
Other intangible assets, based on allocated purchase price..... 2,033 852
----------- -----------
4,473 3,292
Accumulated amortization....................................... (886) (632)
=========== ===========
$ 3,587 $ 2,660
=========== ===========
Amortization of intangible assets for the years ended January 31, 1999, 1998,
and 1997 amounted to $254,000, $451,000, and $447,000, respectively.
8. Bank Line of Credit
As a part of a loan agreement with a bank, the Company has a $10 million
revolving credit facility, which expires June 30, 2000. The revolving credit
facility is unsecured provided that the Company complies with 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, 1999. There were no borrowings under the
line of credit at January 31, 1999 or 1998. The loan agreement also includes
certain restrictive covenants.
9. Accrued Liabilities
Accrued liabilities consist of the following:
January 31,
----------------------------
1999 1998
----------- -----------
(Dollars in thousands)
Accrued payroll and related expenses........................ $ 7,585 $ 6,398
Other....................................................... 2,595 3,139
=========== ===========
$ 10,180 $ 9,537
=========== ===========
10. Stockholders' Equity
Changes in the components of stockholders' equity for the years ended January
31, 1997, 1998, and 1999 were as follows:
Accumulated
Common Other
Stock Paid-in Comprehensive Retained
Par Value Capital Income, Net Earnings Total
-------------- ------------ -------------- ------------- --------------
(Dollars in thousands)
Balance at January 31, 1996,
4,707,709 shares................... 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,
4,777,959 shares................... 478 4,450 -- 22,049 26,977
Net income............................ -- -- -- 4,875 4,875
Exercise of stock options, 43,900
shares.............................. 4 214 -- -- 218
Tax benefit from exercise of stock
options.............................. -- 235 -- -- 235
Purchase and retirement of common
stock, 103,149 shares............... (10) (1,825) -- -- (1,835)
-------------- ------------ ------------- ------------- --------------
Balance at January 31, 1998,
4,718,710 shares................... 472 3,074 -- 26,924 30,470
Net income............................ -- -- -- 5,683 5,683
Exercise of stock options, 19,250
shares.............................. 2 85 -- -- 87
Tax benefit from exercise of stock
options.............................. -- 140 -- -- 140
Purchase and retirement of common
stock, 281,500 shares............... (28) (504) -- (4,662) (5,194)
Recognition of unrealized holding gain
on available for sale securities.... -- -- $ 16 -- 16
============== ============ ============= ============= ==============
Balance at January 31, 1999,
4,456,460 shares................... $ 446 $ 2,795 $ 16 $ 27,945 $ 31,202
============== ============ ============= ============= ==============
11. Income Taxes
Income taxes consist of the following amounts:
Years Ended January 31,
-----------------------------------------------------
1999 1998 1997
------------- ------------- --------------
(Dollars in thousands)
Federal income tax:
Current............................................... $ 3,076 $ 2,146 $ 2,358
Deferred.............................................. (236) 170 (421)
State income taxes:
Current............................................... 700 629 663
Deferred.............................................. (57) 43 (88)
============= ============= ==============
$ 3,483 $ 2,988 $ 2,512
============= ============= ==============
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, 1999,
1998 and 1997 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, 1999, 1998, and 1997 are as
follows:
Years Ended January 31,
---------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
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... $ 3,208 35.0% $ 2,752 35.0% $ 2,512 35.0%
Surtax exemption.......................... (92) (1.0) (79) (1.0) (72) (1.0)
State tax, net of federal benefit......... 424 4.6 444 5.6 380 5.3
Change in valuation allowance............. -- -- -- -- (530) (7.4)
Other, net................................ (57) (.6) (129) (1.6) 222 3.1
========= ========= ========= ========= ========= =========
Taxes on income........................... $ 3,483 38.0% $ 2,988 38.0% $ 2,512 35.0%
========= ========= ========= ========= ========= =========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at January 31, 1999 and
1998 are presented below:
January 31,
--------------------------------------------
1999 1998
--------------- ---------------
(Dollars in thousands)
Deferred tax assets:
Accounts receivable.................................... $ 385 $ 289
Property and equipment, principally due to differing
depreciation methods.................................. 138 133
Employee benefits, principally due to accrual for
financial reporting purposes.......................... 1,745 1,296
Other.................................................. 61 38
------------- -------------
Total gross deferred tax assets........................ 2,329 1,756
Less valuation allowance............................... -- --
------------- -------------
Net deferred tax assets................................ $ 2,329 $ 1,756
------------- -------------
Deferred tax liabilities:
Prepaid expenses....................................... $ 96 $ 258
Long-term investments.................................. 12 --
Property and equipment, principally due to differing
depreciation methods.................................. 56 42
Software development costs............................. 1,716 1,284
Other.................................................. 265 269
------------- -------------
Total gross deferred tax liabilities................... $ 2,145 $ 1,853
============= =============
Net deferred tax asset (liability).................... $ 184 $ (97)
============= =============
There was no valuation allowance for deferred tax assets as of February 1, 1998,
and no change in the valuation allowance for the year ended January 31, 1999.
The Company believes that deferred tax assets will be recoverable through normal
operations.
12. 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, 1999 are summarized below:
Outstanding Options
----------------------------------------------
Number of Shares Weighted-Average
Exercise Price
------------------ -----------------------------
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
Options granted................................ 169,000 $ 19.95
Options canceled or expired.................... (25,125) $ 11.62
Options exercised.............................. (43,900) $ 4.97
---------------
Balance, January 31, 1998......................... 651,875 $ 10.32
Options granted................................ 64,000 $ 21.00
Options canceled or expired.................... (8,500) $ 22.39
Options exercised.............................. (19,250) $ 4.48
===============
Balance, January 31, 1999......................... 688,125 $ 11.33
===============
The following table summarizes information about stock options outstanding at
January 31, 1999:
Options Outstanding Options Exercisable
----------------------------------------------------------- -------------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 1/31/99 Contractual Life Exercise Price at 1/31/99 Exercise Price
- -------------------------------------- ------------------- ------------------ ---------------- ------------------
$1.88 to 2.00 127,500 2.0 years $1.94 127,500 $1.94
4.56 to 6.25 148,375 4.2 5.33 148,375 5.33
8.63 to 11.50 93,500 6.1 9.09 68,750 9.10
14.50 to 17.50 186,750 7.6 15.98 70,500 15.63
20.37 to 23.31 132,000 9.1 22.16 17,000 23.25
---------------- ----------------
$1.88 to 23.31 688,125 5.9 $11.33 432,125 $7.31
================ ================
Stock options exercisable at January 31, 1999, 1998, and 1997 were 432,125,
360,875, and 330,925 respectively. Shares available under the plans for future
grants at January 31, 1999, 1998, and 1997 were 237,855, 293,355, and 437,230,
respectively.
One of the Company's subsidiaries, Comarco Wireless Technologies, Inc. (CWT),
also has a stock option plan. Figures for this plan reflect a 10-for-1 stock
split declared during the year ended January 31, 1998. Under this plan, officers
and key employees of CWT may be granted options to purchase up to 600,000 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, 1999, all 3,000,000 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, 1997, 28,000 options were granted at
an exercise price of $13.22. In the fiscal year ended January 31, 1998, 11,000
options were granted at an exercise price of $17.62. In the fiscal year ended
January 31, 1999, no options were granted. Stock options exercisable at January
31, 1999, 1998 and 1997 were 361,750, 257,000, and 155,000, respectively. Shares
available under the plan for future grants at January 31, 1999, 1998 and 1997
were 181,000, 181,000, and 192,000, respectively.
The following table summarizes information about CWT stock options outstanding
at January 31, 1999:
Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 1/31/99 Contractual Life Exercise Price at 1/31/99 Exercise Price
- --------------------------------- ------------------- ------------------ ---------------- -------------------
$2.53 to 4.30 320,000 5.7 years $2.97 300,000 $2.88
11.97 to 13.22 88,000 6.9 12.37 59,000 12.27
17.62 11,000 8.1 17.62 2,750 17.62
---------------- ------------------- ------------------ ---------------- -------------------
$2.53 to 17.62 419,000 6.0 $5.33 361,750 $4.53
================ =================== ================== ================ ===================
The per share weighted-average fair value of employee and director stock options
granted during the years ended January 31, 1999, 1998, and 1997 was $8.89,
$8.93, and $7.73, respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
Years ended January 31,
-------------------------------
1999 1998 1997
---------- -------- --------
Expected dividend yield 0.0% 0.0% 0.0%
Expected volatility 32.5% 34.2% 45.1%
Risk-free interest rate 5.5% 6.1% 5.8%
Expected life 6 6 6
years years years
The per share weighted-average fair value of CWT stock options granted during
the years ended January 31, 1998 and 1997 was $7.35, and $5.74, respectively, on
the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions:
Years ended January 31,
----------------------------
1998 1997
----------- -----------
Expected dividend yield 0.0% 0.0%
Expected volatility 35.6% 40.2%
Risk-free interest rate 6.2% 5.4%
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,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in thousands, except per
share amounts)
Net income: As reported........................ $ 5,683 $ 4,875 $ 4,665
Pro forma.......................... 5,150 4,481 4,414
Earnings per common share - basic:
As reported........................ $ 1.23 $ 1.03 $ .98
Pro forma.......................... 1.12 .94 .93
Earnings per common share - diluted:
As reported........................ $ 1.13 $ .89 $ .86
Pro forma.......................... 1.05 .86 .85
Pro forma net income and earnings per share reflect only options granted since
February 1, 1995. 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.
13. Earnings per Share
The following tables present reconciliations of the numerators and denominators
of the basic and diluted earnings per share computations for net income. In the
tables below, "Income" represents the numerator (in thousands) and "Shares"
represent the denominator (in thousands):
Year ended January 31, 1999
----------------------------------
$ Per
Income Shares Share
----------- ----------- ----------
Basic Earnings Per Share:
Net income................. $ 5,683 4,608 $ 1.23
Effect of subsidiary options (267) --
Effect of dilutive securities:
Stock options.............. -- 204
----------- ----------- ----------
Diluted Earnings per Share:
Net income................. $ 5,416 4,812 $ 1.13
=========== =========== ==========
Year ended January 31, 1998
----------------------------------
$ Per
Income Shares Share
----------- ----------- ----------
Basic Earnings Per Share:
Net income................. $ 4,875 4,744 $ 1.03
Effect of subsidiary options (372) --
Effect of dilutive securities:
Stock options.............. -- 332
----------- ---------- ----------
Diluted Earnings per Share:
Net income................. $ 4,503 5,076 $ .89
=========== ========== ==========
Year ended January 31, 1997
----------------------------------
$ Per
Income Shares Share
----------- ----------- ----------
Basic Earnings Per Share:
Net income................ $ 4,665 4,766 $ .98
Effect of subsidiary options (267) --
Effect of dilutive securities:
Stock options............. -- 350
----------- ---------- ---------
Diluted Earnings per Share:
Net income................ $ 4,398 5,116 $ .86
=========== =========== ==========
14. Lease Commitments
Rental commitments under noncancelable operating leases, principally on the
Company's office space, equipment and automobiles were $2,831,000 at January 31,
1999, payable as follows: $1,255,000, $817,000, $665,000, $56,000, and $38,000
in the years ended January 31, 2000, 2001, 2002, 2003, and 2004, 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,
1999, 1998, and 1997 was $1,776,000, $1,593,000, and $1,183,000, respectively.
15. Employee Benefit Plans
The Company has a Savings and Retirement Plan which provides benefits to
eligible employees. Under the Plan, as amended effective July 1, 1997, employees
who have been with the Company in excess of three months and are at least 18
years of age may participate by contributing between 1% and 15% of earnings.
Employees at one Company location are permitted to contribute up to 20% 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, 1999, 1998, and 1997 were approximately
$812,000, $623,000, and $542,000, respectively.
16. Supplemental Disclosures of Cash Flow Information
Years Ended January 31,
-----------------------------------------------------
1999 1998 1997
------------- ------------- --------------
Interest................................. $ -- $ -- $ --
Income taxes............................. $3,459 $2,656 $2,051
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. Additional amounts of $400,000 and $181,000 were paid in October
1997 and 1998, respectively, based upon the achievement of certain performance
objectives.
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.
In February 1997, the Company acquired the assets of the callbox operation of
Cubic Communications, Inc., for approximately $1,717,000.
In May 1998, the Company acquired certain intellectual property and related
software assets of Industrial Technology, Inc. for approximately $1,000,000.
17. 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 $.8 million, $1.7 million, and $2.5 million, in the years ended
January 31, 1999, 1998, and 1997, respectively, related to wireless
communications products and development of software tools. These costs were
expensed as incurred.
18. Business Segment Information
The Company's operations have been classified into two business areas: wireless
communications products and information technology and staffing services. The
wireless communications products area develops, produces, and markets a variety
of products and services used in the wireless communications industry. The
information technology and staffing services area provides services to Federal
and local government and commercial customers pursuant to established contracts.
Corporate and other consists primarily of cash and cash equivalents, fixed
assets, and other assets.
Summarized financial information by business segment for Fiscal Year 1999 is as
follows:
Wireless Information
Communications Technology and Corporate and
Products Staffing Services Other Total
-----------------------------------------------------------------------
(Dollars in thousands)
Revenues $ 34,004 $ 57,960 -- $ 91,964
Operating income 7,148 1,729 $ (9) 8,868
Identifiable assets 22,392 16,404 8,491 47,287
Depreciation and
amortization 2,868 363 57 3,288
Capital expenditures 4,944 484 28 5,456
Summarized financial information by business segment for Fiscal Year 1998 is as
follows:
Wireless Information
Communications Technology and Corporate and
Products Staffing Services Other Total
-----------------------------------------------------------------------
(Dollars in thousands)
Revenues $ 29,524 $ 55,615 -- $ 85,139
Intangible asset
Write-off -- 710 -- 710
Operating income 6,733 795 $ (69) 7,459
Identifiable assets 18,884 12,808 12,202 43,894
Depreciation and
amortization 1,988 1,112 64 3,164
Capital expenditures 5,496 711 46 6,253
Summarized financial information by business segment for Fiscal Year 1997 is as
follows:
Wireless Information
Communications Technology and Corporate and
Products Staffing Services Other Total
-----------------------------------------------------------------------
(Dollars in thousands)
Revenues $ 19,519 $ 51,895 --- $ 71,414
Operating income 5,250 1,396 $ (28) 6,618
Identifiable assets 11,610 8,964 18,636 39,210
Depreciation and
amortization 1,398 811 54 2,263
Capital expenditures 3,972 1,377 7 5,356
International sales totaled $5.6 million and $8.9 million in the years ended
January 31, 1999 and 1998, respectively. The majority of these sales have been
made to Europe, Asia-Pacific and Latin America, and are sales of the wireless
communications products segment.
19. Intangible Asset Write-off
In January 1998, the Company recorded a $710,000 charge against earnings from
the impairment of certain assets of its information technology and staffing
services software development operation. This charge was recorded in accordance
with Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
Based upon marketing initiatives which proved unsuccessful, the Company
determined that the expected future cash flows were not sufficient to cover the
remaining unamortized intangible assets. Accordingly, the complete impairment of
these assets was recorded in the consolidated statement of income for the year
ended January 31, 1998.
20. Commitments and Contingencies
The Company is subject to legal proceedings and claims that 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. Audits have been completed through January 31, 1996.
The Company also has a multi-year fixed price contract for which it is
anticipating a contract modification. The contract is scheduled to end on
September 30, 1999, and the Company cannot complete the statement of work due to
Government delays in providing required equipment. The Company has submitted a
request for a 22-month extension and additional funding of $2.7 million.
Negotiations are ongoing, and management currently expects modification will not
occur until the second quarter of Fiscal Year 2000, at the earliest. The Company
believes that it has a meritorious position and, if necessary, the Company
intends to seek all remedies available under Federal procurement laws.
In addition, the Company's Fiscal Years 1997 and 1998 federal income tax returns
are being reviewed by the Internal Revenue Service.
Management believes that sufficient reserves are available for its most probable
assessment of the potential outcomes of the above open matters.
21. Quarterly Financial Data (Unaudited)
Unaudited summarized financial data by quarter for Fiscal Years 1999 and 1998 is
as follows (in thousands, except per share data):
Fiscal Year 1999 Quarter Ended
------------------------------------------------------------
April 30 July 31 October 31 January 31
-------------- ------------- ------------- --------------
Revenues............................................. $ 21,751 $ 22,011 $ 24,201 $ 24,001
Operating income..................................... 1,237 1,971 2,501 3,159
Net income........................................... 840 1,281 1,576 1,986
-------------- ------------- ------------- --------------
Basic earnings per common share...................... $ .18 $ .27 $ .34 $ .44
-------------- ------------- ------------- --------------
-------------- ------------- ------------- --------------
Diluted earnings per common share.................... $ .17 $ .25 $ .31 $ .40
============== ============= ============= ==============
Fiscal Year 1998 Quarter Ended
------------------------------------------------------------
April 30 July 31 October 31 January 31
-------------- ------------- ------------- --------------
Revenues............................................. $ 20,097 $ 21,015 $ 21,975 $ 22,052
Operating income..................................... 1,653 2,001 2,247 1,558
Net income........................................... 1,109 1,315 1,443 1,008
-------------- ------------- ------------- --------------
Basic earnings per common share...................... $ .23 $ .28 $ .31 $ .21
============== ============= ============= ==============
-------------- ------------- ------------- --------------
Diluted earnings per common share.................... $ .21 $ .24 $ .26 $ .18
============== ============= ============= ==============
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 1999 annual meeting of shareholders, which the Company expects to file
with the SEC by May 30, 1999.
ITEM 11. Executive Compensation
Information regarding executive compensation is incorporated by reference from
the Company's definitive proxy statement for the 1999 annual meeting of
shareholders, which the Company expects to file with the SEC by May 30, 1999.
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 1999 annual meeting of shareholders, which the Company expects
to file with the SEC by May 30, 1999.
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 1999 annual
meeting of shareholders, which the Company expects to file with the SEC by May
30, 1999.
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, 1999, 1998, and 1997 is submitted herewith:
II 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 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.
10.3 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.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 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.
10.9 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.
10.10 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.
10.11 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.
10.12 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.
10.13 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.
10.14 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.
10.15 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.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 Third Amendment to Loan Agreement dated August 15, 1997
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, 1997.
10.24 Third Amended and Restated Master Line of Credit Note dated
August 15, 1997 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, 1997.
10.25 Third Amended and Restated Guidance Line of Credit Note dated
August 15, 1997 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, 1997.
10.26 Fourth Amendment to Loan Agreement dated August 21, 1998
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, 1998.
10.27 Fourth Amended and Restated Master Line of Credit Note dated
August 21, 1998 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, 1998.
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 Common-
wealth 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 Technolog Training Center, Inc. (MTTC) incor-
porated in the State of Delaware.
Comarco Wireless International, Inc. (formerly known as
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.
Comarco Services, 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, 1999.
COMARCO, INC.
/s/ DON M. BAILEY
_____________________________
Don M. Bailey
President, Chief Executive Officer
and Chairman of the Board
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
--------- ------- ----
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive
/s/ DON M. BAILEY Officer) April 22, 1999
-----------------------
Don M. Bailey
Vice President
and
Treasurer (Principal Financial
/s/ THOMAS P. BAIRD Accounting Officer) April 22, 1999
- --------------------------
Thomas P. Baird
/s/ WILBUR L. CREECH Director April 22, 1999
- --------------------------
Wilbur L. Creech
/s/ THOMAS A. FRANZA Director April 22, 1999
- --------------------------
Thomas A. Franza
/s/ GERALD D. GRIFFIN Director April 22, 1999
- ------------------------
Gerald D. Griffin
COMARCO, INC. AND SUBSIDIARIES
SIGNATURES
Signature Title Date
--------- ----- ----
/s/ WESLEY L. MCDONALD Director April 22, 1999
------------------------
Wesley L. McDonald
/s/ PAUL G. YOVOVICH Director April 22, 1999
--------------------------
Paul G. Yovovich
COMARCO, INC. AND SUBSIDIARIES
SCHEDULE II - RESERVES
Three Years Ended January 31, 1999
(Dollars in thousands)
Other
Balance at Charged to Changes
Beginning Cost and Add Balance at End
of Year Expense Deductions (Deduct) of Year
------------ ------------ ------------ ------------ ------------------
Year ended January 31, 1999:
Allowance for doubtful accounts and
provision for unbilled receivables
(deducted from accounts
receivable)....................... $ 331 $ 321 $ 308(1) $ -- $ 344
Year ended January 31, 1998:
Allowance for doubtful accounts and
provision for unbilled receivables
(deducted from accounts
receivable)....................... $ 215 $ 123 $ 7(1) $ -- $ 331
Year ended January 31, 1997:
Allowance for doubtful accounts and
provision for unbilled receivables
(deducted from accounts
receivable)....................... $ 256 $ 62 $ 103(1) $ -- $ 215
Income tax valuation allowance...... 530 -- 530(1) -- --
- ----------------------------------
(1) Write off of uncollectible receivables and reduction in income tax valuation
allowance.