ITEM 1. Business
COMARCO, Inc. and its subsidiaries (the "Company", "COMARCO", or the "registrant") is a California corporation whose common stock has been publicly traded since 1971 when it was spun-off from Genge Industries, Inc. Two subsidiaries, Decisions and Designs, Inc. and International Business Services, Inc., were acquired in late 1985 and early 1986. A third subsidiary, Comarco Wireless Technologies, Inc. ("Comarco Wireless"), was formed in January 1994 to further develop the Company's wireless communications products business. A fourth subsidiary, LCTI, Inc., was acquired in August 1994. LCTI develops special purpose software for military and commercial applications. A fifth subsidiary, Manufacturing Technology Training Center, Inc. (MTTC), was formed in January 1996 to further develop the Company's technology training business. A sixth subsidiary, Comarco Wireless Europe Inc., a wholly-owned subsidiary of Comarco Wireless Technologies, Inc., was formed in April 1996 to market and provide post-contract customer support for the Company's wireless communications products to international customers. A seventh subsidiary, Comarco Staffing, Inc. (formerly known as CoSource Solutions, Inc.), was formed in August 1996 to acquire the assets of a commercial outsourced staffing services company. An eighth subsidiary, Comarco Systems, Inc., was formed in January 1997 to further develop the Company's outsourced engineering and technical services business.
BUSINESS AREAS
The business and major customer information provided in the Company's Consolidated Financial Statements contained in this report are incorporated herein by reference. In particular, see Note 1 of the Notes to Consolidated Financial Statements and Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition.
The Company has historically engaged in providing outsourced staffing services (engineering, technical, and airport management) to agencies of the United States Government, government prime contractors, and local government agencies. To broaden its existing outsourced staffing services business, the Company acquired a commercial outsourced staffing services company in August 1996. During the past three years, the Company, through its subsidiary, Comarco Wireless Technologies, Inc., has invested more of its resources in developing products for the wireless communications industry. This effort has resulted in COMARCO realizing over 75% of its operating income from this business area.
Summarized financial information by business segment for the Company's Fiscal Year 1997, which ended January 31, 1997, is as follows:
WIRELESS COMMUNICATIONS PRODUCTS - --------------------------------
The Company's wireless communications products business, through its subsidiary, Comarco Wireless Technologies, Inc., is presently comprised of three product families: field measurement products, revenue assurance products and wireless applications products.
o Field measurement products provide a method for benchmarking and analyzing the performance of wireless system networks. The field measurement product line includes the Generation II cellular survey system, the NES250 network evaluation system, the NRS network readiness system, the CDPD data survey product, and the Company's latest product introduction, the LT 100, which permits day-to-day network performance monitoring of cellular and PCS networks.
o The revenue assurance product line includes system products and services that test the integrity of cellular carriers' billing systems.
o Wireless applications products include wireless data telemetry systems and emergency callbox systems. The Company's wireless data telemetry system is the Cellular Data Gateway that is used to transport data and is optimized for wide area applications. In October 1996, the Company purchased certain callbox product line assets from GTE. The installed base purchased from GTE consists of over 18,000 units, of which approximately 11,000 are being serviced by the Company under long-term maintenance contracts. In addition, in February 1997, the Company acquired certain callbox product line assets of Cubic Communications, Inc. The installed base purchased from Cubic Communications consists of approximately 6,500 units. The combination of the two product lines establishes the Company as a major vendor to this niche of the wireless application products marketplace.
Comarco Wireless Technologies' revenues increased to 27% of the Company's total revenue in Fiscal Year 1997, a 36% increase over the prior fiscal year. Operating income increased 41% year-to-year and represented 79% of the Company's consolidated operating income for Fiscal Year 1997. Continued growth in Comarco Wireless revenues and income is predicated on a number of factors, including the continued success of the Company's product development efforts, a continued geographical expansion to international markets and continued acceptance of the Company's products by its customers, none of which can be assured.
International sales in Fiscal Year 1997 totalled $5.4 million, up from $1.4 million in the prior fiscal year. The Company expects this segment of its business to continue to grow. Marketing and post-contract customer support offices have recently been opened and staffed in Singapore and London, England.
PRODUCT DEVELOPMENT
As part of its product development program, the Company is continuing its product development program in its wireless communications business. Because a common thread of technology runs through all Comarco Wireless product lines, the Company believes that it can leverage its investment and maintain the focus and concentration of its technical and marketing resources, although there can be no assurance in that regard. The Company in general has been developing and continues to plan to develop products that will be compatible with all wireless communications air interfaces worldwide. New products this year included GSM and CDMA air interface products and the introduction of our LT-100 platform to our field measurement product line. The Company's wireless product life cycle is estimated to be two to five years, depending on the product.
The Company is also continuing its development of a new product line, a rechargeable power adapter for laptop computers and cellular telephones. The objective of this product is to be smaller, lighter and more versatile than existing products on the market and is based on the Company's patented power transfer technology. The product is currently in FCC and UL testing. Potential customers would include after market and original equipment manufacturers. There can be no assurance that the Company will be successful in bringing this product to market, or that this product will be successful. If the Company is successful, the production, marketing, and sale of this product will require a significant amount of working capital for the financing of inventory and accounts receivable.
The Company plans to continue to invest substantially in product development efforts. Its products are characterized by rapidly changing technologies, evolving standards, and continuous improvements in products and services. The Company's future prospects will depend in part on its ability to enhance the functionality of its existing products in a timely and cost-effective manner and to identify, develop, and achieve market acceptance of new products that address new technologies and standards and meet customer needs in the wireless communications marketplace. There can be no assurance that the Company will be able to respond to technological advances, changes in customer requirements, or changes in regulatory requirements or industry standards, and any significant delays in development, introduction or shipment of products, or achievement of acceptable product costs, could have a material adverse effect on the Company's business, operating results and financial condition.
As part of its product development program, the Company is continuing its software product development program in its wireless communications business. During Fiscal Year 1997 and Fiscal Year 1996, the Company's wireless communications business capitalized approximately $2.2 million and $1.4 million of software product development costs, respectively, in accordance with Statement of Financial Accounting Standards Number 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Of the amounts capitalized, $1.0 million and $1.1 million, respectively, were amortized in Fiscal Years 1997 and 1996 against product sales in accordance with Statement No. 86.
In addition, during Fiscal Years 1997, 1996, and 1995, Comarco Wireless had expenditures of $1.9 million, $1.8 million and $340,000, respectively, for research and development expenses (includes Company-sponsored software development costs prior to determination of technological feasibility) on current and anticipated products.
BACKLOG
The value of unfilled orders at Comarco Wireless as of January 31, 1997 is approximately $19.6 million, compared to $4.4 million as of January 31, 1996. The current year balance includes $3.9 million of product orders for the field measurement and revenue assurance product lines, and $2.3 million of deferred revenue for basic and extended warranty commitments. Management believes that approximately 90% of this backlog amount (of $6.2 million) will result in revenue during Fiscal Year 1998. In general, most of the Company's products orders are filled within months from the receipt of the order. The remaining value of unfilled orders of $13.4 million is related to the callbox product line. This backlog balance consists of $9.3 million of long-term maintenance agreements and a $4.1 million contract to upgrade the Los Angeles County callbox system to comply with the Americans with Disabilities Act's requirements for use by hearing and speech impaired individuals. The Company currently expects the majority of the Los Angeles contract to be performed in the latter half of Fiscal Year 1998.
SEASONALITY
Comarco Wireless has experienced in each of the past three years a seasonal fluctuation in wireless communications products activity, with greater sales in the third and fourth quarters of its fiscal year and lesser amounts in the first and second quarters. This fluctuation may or may not continue due to a number of factors, including: the timing, cancellation, or delay of customer orders; the timing of new product introductions by the Company or its competitors; the size of customers' capital budgets, which are the traditional source of customer funding for the purchase of the Company's products; market acceptance of the Company and its customers' products; and other competitive factors. Therefore, the nature of the wireless communications products business is inherently unpredictable and sales and profits may fluctuate significantly from quarter to quarter.
MARKETING, SALES DISTRIBUTION
Comarco Wireless maintains its own internal sales force for the marketing and sales of the Company's product offerings in the United States. The Company has established a network of agents and distributors for the coordination of sales activity outside of the United States. In addition, the Company has opened and staffed marketing and customer support offices in Singapore and London, England to service Asia and Europe, respectively. This expansion overseas faces a number of inherent barriers, including: the need for export licenses; tariffs and other potential trade restrictions; and changes in laws governing the imposition of duties, quotas, taxes, or other charges relating to the import or export of its products. The Company currently has limited experience in penetrating the foreign marketplace and, therefore, companies having a presence or already doing business overseas may have a competitive advantage over the Company. There can be no assurance that the Company's international operations will be successful.
CAPITAL REQUIREMENTS
Comarco Wireless' working capital needs primarily consist of the cost of the upfront product development effort required to expand the Company's product offerings, inventory requirements, including long lead time materials, and the financing of accounts receivable, which will generally become longer upon the Company's planned geographical expansion into Europe, Asia and Latin America. Certain components used by the Company in its existing products are only available from single sources, and certain other components are presently available or acquired only from a limited number of suppliers. In the event that any of its single source suppliers are unable to fulfill Company requirements or discontinue the manufacture of a key component, the Company may experience an interruption in production. The radio interface devices designed into the Company's products are key purchased components whose lack of availability could have a material adverse impact on sales and profits. Working capital requirements are expected to be financed from operations and the financial resources of the Company.
TECHNICAL REQUIREMENTS
Comarco Wireless is selling its products into a market that is growing rapidly and technological obsolescence and market timing of product introductions is critical for success. In the development of new or expanded product offerings, the Company's access to the technical design of air interface devices is essential for the Company to anticipate and develop compatible wireless communications products. The inability to obtain the technical designs on a timely basis will have a direct impact on product design and schedule and could have a material adverse effect on the Company's business, operating results, and financial condition.
EMPLOYEES
As of April 1, 1997, Comarco Wireless employed approximately 100 employees. The Company believes its employee relations to be good. The majority of the Company's employees are professional or technical personnel having training and experience in engineering, computer science, and management. The Company's future success depends in large part on the continued service of its key technical, marketing, and management personnel, and on its ability to continue to attract and retain qualified employees, particularly those highly skilled design, process, and test engineers involved in the development of new products. The competition for such personnel is intense, and the loss of key employees could have a material adverse effect on the Company's business, operating results, and financial condition. Recognizing this reality, the Company has instituted a long-term incentive stock option plan for key Comarco Wireless employees, whereby they will directly participate in the success of Comarco Wireless (see Note 11 of the Notes to Consolidated Financial Statements). The Company obtains its employees through a variety of means including advertisements, technical job fairs, engineering recruiters, and engineering temporary staffing firms.
COMPETITION
Comarco Wireless competes in a small niche (field measurement equipment) of the wireless communications marketplace. The business is competitive and there are other companies, many of which are larger and have greater financial resources, who provide or could provide the same type of products. The ability of the Company to compete successfully depends upon a number of factors, including the rate at which customers accept the Company's products in overseas markets, product quality and performance, experienced sales and marketing personnel, rapid development of new products and features, evolving industry standards, and the number and nature of the Company's competitors. The Company believes there are companies that provide or have the ability to provide the products the Company is planning for overseas users. Also, companies having a presence or already doing business overseas may have an advantage in knowing how to penetrate those markets. There can be no assurance that the Company will be able to compete successfully in the future, either domestically or internationally.
PROPRIETARY INFORMATION
The Company has one patent for its small power adapter for portable computing devices and cellular telephones, and patents covering its emergency callbox product. However, the Company currently relies primarily on a combination of trade secrets, copyrights, trademarks, and contractual rights to protect its intellectual property in the wireless products area. There can be no assurance that the steps taken by the Company will be adequate to deter misappropriation or impede third-party development of its technology. In addition, the laws of certain foreign countries in which the Company's products may be sold do not protect the Company's intellectual property rights to the same extent as do the laws of the United States. The failure of the Company to protect its proprietary information could have a material adverse effect on the Company's business, operating results, and financial condition.
Outsourced Staffing Services And Other Revenue - ----------------------------------------------
These services are primarily in the fields of:
o Information Technologies o Intelligent Instrumentation and Automated Test Systems o Ordnance and Weapon Systems Engineering Services o Airport Management Services o Commercial Staffing Services o Manufacturing Training
Approximately $51.9 million or 73% of the Company's revenues, and approximately $1.4 million, or 21% of its operating income, for the fiscal year ended January 31, 1997 were derived from contracts and subcontracts for such services.
Information Technologies - ------------------------
The Company specializes in the application of information technologies to support agencies of the U.S. Department of Defense. This includes:
o Creating and operating computer-based environments that simulate, emulate, and stimulate communications and target computer-based systems. o Designing, building, and employing instrumentation for testing information systems. o Designing, engineering, integrating, testing, administering, and maintaining local- and wide-area network and office automation systems. o Designing, populating, and maintaining complex databases. o Specifying, developing, testing, integrating, and supporting communications protocols, links, and application software. o Developing and employing data reduction and analysis techniques and records management systems, including image processing systems.
The Company also designs, specifies, acquires, integrates, tests, installs, operates, and maintains systems for its customers' uses.
Intelligent Instrumentation and Automated Test Systems - ------------------------------------------------------
The Company also specializes in the development and application of computer-based test instruments and automated test systems with particular focus on:
o Interoperability testing of communications and information systems; o Developmental and operational testing of C4I, ordnance, tactical weapon and data systems; and o Automated Test Systems (ATS).
The Company provides engineering and testing support to assure that communications and computer-based systems interoperate effectively and reliably.
The Company provides design and fabrication of special purpose test support hardware such as aircraft subsystems, missile launchers, missile guidance and control interface electronics, and gun system platforms.
Through the Company's software products business and its LEXSYS(TM) product line, it offers computer-aided software engineering tools for engineering of computer-based test program sets (TPSs) and related documentation. The Company also applies ATS to develop test program sets (TPSs) and interface devices (IDs) for operational performance verification and failure diagnosis of mission-critical electronic assemblies and subassemblies.
Ordnance and Weapon Systems Engineering Services - ------------------------------------------------
The Company offers U.S. military customers a variety of specialized engineering services applicable to ordnance and weaponry, including:
o System engineering for complex C4I, ordnance, weapon and weapon-platform integration concepts. o Design and test engineering of embedded computers, avionics, software, lasers, optics, seekers, guidance and control systems, interior and exterior ballistics, airframes, electronics, energetic materials, propulsion, warheads, fuses, and insensitive munitions. o Quality assurance, reliability, maintainability, system safety, producibility, logistics, and standard engineering. o Documentation, CAD/CAE (CALS and EDMICS compliant), configuration and data management, and records archiving and management services.
The Company is providing environmental and safety engineering including:
o Pollution prevention studies o Evaluation of site developments for environmental compliance o Air, water, and soil sampling and analysis o Waste system analysis o Permit renewal preparation o Other environmental support
Current customers for information technologies, intelligent instrumentation and automated test systems and ordnance and weapons systems engineering services include agencies of the U.S. Government and government prime contractors.
Airport Management Services - ---------------------------
The Company provides airport management services for local government agencies. Current significant efforts include a contract supporting the Metropolitan Washington Airports Authority at Washington National Airport and a long-term contract to manage five general aviation airports in Los Angeles County. Support in this area includes managing airport operations, ground transportation services, computerized revenue collection, and general management support functions. In addition, the Company began work on a long-term aviation services contract in February 1997 for Riverside County, California.
Commercial Staffing Services - ----------------------------
In August 1996 the Company acquired the assets of RAL Consulting and Staffing Services, Inc. This operation provides engineering, technical, light industrial, and administrative staffing services to the commercial marketplace. Specific areas of expertise include: temporary personnel, general recruitment, substance abuse testing, OSHA compliance, and human resources consulting.
Manufacturing Training - ----------------------
Created under a Cooperative Research and Development Agreement (CRADA) with the Navy, the Company's subsidiary, MTTC, operates a school to provide training in world-class electronics manufacturing. Specializing in both manual and automated electronics interconnection methods, the Company offers certification and operator training in accordance with the commercial standard, IPC A-610. The Company is currently one of three authorized IPC electronics manufacturing training centers in the country.
BACKLOG
The Company's backlog from outsourced staffing services and other revenue believed to be firm as of January 31, 1997 was $51 million, compared to $31 million as of January 31, 1996. The primary reason for the increase year-to-year is due to the award of a TPS contract by the Air Force to support the B-2 program, and the award of the Riverside County airports contract, as well as the exercise of a two-year option extending work on the Company's contract at Washington National Airport until September 30, 1998. The source of backlog is primarily contracts with the U.S. and local governments. Government contracts normally have a base and option periods totalling three to five years in duration. In many instances, government entities must issue work orders, delivery orders, or task orders prior to the Company commencing work. These entities have the discretion to terminate any contract at their convenience, and are normally obligated only to pay for costs incurred to date under a contract. In addition, these entities may elect to remove funding previously attached to a contract. Many of the Company's contracts are multi-year, with options to provide services for additional periods of time. There can be no assurances that the government entities will exercise the options, will not withdraw funds already committed, nor that the entities will fund the unfunded portions of the Company's contracts. It is estimated that approximately 64% of the firm backlog will be realized in Fiscal Year 1998.
GOVERNMENT CONTRACTS
A significant portion of the Company's total revenues (approximately 39% in FY97, 51% in FY96, and 58% in FY95) were derived from contracts with the United States Government, principally agencies of the Department of Defense. Significant portions of the Company's revenue are derived from contracts with the U.S. Army and U.S. Navy, 18% and 16%, respectively. Should changes in procurement policies or reductions in government expenditures occur, revenue and net income of the Company could be adversely affected (see Management's Discussion and Analysis of Results of Operations and Financial Condition). The Company's government contracts business is not seasonal; however variations may occur at the expiration of major contracts until such contracts are renewed or new contracts obtained. In the course of the Company's business, its contracts are periodically opened for competition. None of the Company's Fiscal Year 1997 government contracts are scheduled to end in Fiscal Year 1998. The Company plans to aggressively compete for its existing work and selectively pursue other high value Government procurements. There can be no assurance that the Company will be selected and awarded work under any future proposals.
COMPETITION
Approximately 80% of the Company's outsourced staffing services and other revenue business is awarded through competitive procurements. Government contracting services industries consist of thousands of companies, many of which are larger and have greater financial resources than the Company, who can provide the same type of services. The business is highly competitive. The Company obtains much of its business on the basis of submitted proposals to new and existing customers. Competition generally centers on price, past performance, technical capability, management plan, and personnel. There is no single company that competes directly with the Company on all of the Company's services and products.
PROPRIETARY INFORMATION
The United States Government has certain proprietary rights in software programs and products developed by the Company in its performance of government contracts.
EMPLOYEES
As of April 1, 1997, the Company employed approximately 970 full-time employees, of which 870 were part of the outsourced staffing services business area. In addition, the Company has approximately 260 employees working as temporaries in its commercial outsourced staffing business. The Company believes its employee relations to be good. The majority of the Company's employees are professional or technical personnel having training and experience in engineering, computer science, and management. Approximately 75 of the Company's employees in this business area are represented by the International Brotherhood of Teamsters and are covered by a collective bargaining agreement.
ITEM 2.
ITEM 2. Properties
The Company's principal facilities on January 31, 1997, aggregating approximately 107,000 square feet, are located in the cities of Yorba Linda, Irvine, Camarillo, Anaheim, Victorville, and Ridgecrest, California; Vienna and Petersburg, Virginia; Sierra Vista, Arizona; Warner Robins, Georgia; Bloomfield, Indiana; Colorado Springs, Colorado; Huntsville, Alabama; Gaithersburg, Maryland; London; and Singapore, and are occupied under leases expiring prior to Fiscal Year 2004. With the exception of an 8,000 square foot area used for light manufacturing, all facilities are used for office space. The Company's aggregate annual property rent during Fiscal Year 1997 was approximately $1.0 million. The aggregate annual property rent in the year ending January 31, 1998 is expected to be approximately $1.1 million. Management believes that all facilities currently occupied by the Company provide sufficient space for the Company's present needs, and that suitable additional space will be available, if needed. Comarco Wireless operates from a single-site manufacturing operation. Any material disruption in the manufacturying operations of Comarco Wireless, whether due to fire, natural disaster, or otherwise, could have a material adverse effect on the Company's business, operating results, and financial condition.
ITEM 3.
ITEM 3. Legal Proceedings
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial condition of the Company. In particular, see Note 17 of the Notes to Consolidated Financial Statements.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
ITEM 5.
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
The Company had approximately 648 shareholders of record on February 28, 1997.
The terms of the Company's current bank loan agreement limit the payment of dividends under certain circumstances. The Company anticipates that dividends will not be paid for the foreseeable future and that all earnings will be retained for use in the Company's business and for stock repurchases.
ITEM 6.
ITEM 6. Selected Financial Data
SELECTED FINANCIAL DATA (Figures in thousands, except per share amounts)
SELECTED FINANCIAL DATA (In thousands)
(1) Includes Convertible Subordinated Debentures of $844,000 at January 31, 1995, $2,984,000 at January 31, 1994, and $3,384,000 at January 31, 1993.
ITEM 7.
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
Percentage Increase (Decrease)
FISCAL YEAR ENDED JANUARY 31, 1997 COMPARED TO FISCAL YEAR ENDED JANUARY 31, 1996
The Company is involved in two distinct business areas: development and manufacture of wireless communications products and services; and providing outsourced staffing services including engineering, technical, and airport management services to government and commercial entities.
Fiscal Year 1997 revenues totaled $71.4 million, up 2% from the prior year. Increased year-to-year revenue is primarily due to:
o sales of the Company's wireless communications products, including various field measurement and revenue assurance systems to major cellular carriers o acquisition as of October 1, 1996 of the cellular callbox product line from GTE o acquisition as of August 1, 1996 of a commercial outsourced staffing company partially offset by: o reduced revenue levels from government outsourced staffing services, primarily due to the Company's contract with the Naval Air Warfare Center ("NAWC") which ended in the prior fiscal year.
Wireless Communications Products
Wireless communications products revenues increased 36% to $19.5 million for Fiscal Year 1997 from $14.4 million for the comparable period last year. Wireless communication product revenues comprised approximately 27.3% of total Company revenues during Fiscal Year 1997, up from 20.5% in the prior fiscal year. This increase is due to increased sales of the Company's network evaluation and revenue assurance systems to major cellular telephone carriers and the acquisition of the callbox product line from GTE. During the year the Company continued to broaden its product line with the continued introduction of its second generation of field measurement equipment including products supporting the GSM and CDMA air interfaces. In addition, the Company introduced the LT-100, the latest member of its field measurement product line.
Operating income from wireless communications products increased 41% year-to-year, comprising 79% of the Company's total operating income for Fiscal Year 1997. Summary operating results for Comarco Wireless Technologies, Inc., the Company's wireless communications products subsidiary, are as follows:
*Indirect costs include selling, general and administrative expenses, as well as research and development expenses.
Increased gross margin percentage is due to the incremental benefit of spreading the fixed costs of operations over a larger activity base.
The increase in indirect costs is due to the additional selling and general administrative costs associated with international expansion during Fiscal Year 1997. Research and development expense totaled $1,900,000 during Fiscal Year 1997, compared to $1,800,000 in the prior fiscal year. The Company plans to continue to invest heavily in new product development. There can be no assurance that the Company will be successful in generating future revenue from such development efforts.
Operating income increased 41% to $5.2 million in Fiscal Year 1997 from $3.7 million in the prior fiscal year. Operating income as a percentage of revenues is 26.9% for Fiscal Year 1997, compared to 25.8% for the comparable prior period. The increase is due to the improvement in gross margin percentage noted above, which was partially offset by the increased selling and general administrative expenses.
The Company is continuing its software product development program in its wireless communications products business. In accordance with Financial Accounting Standard No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, the Company's wireless communications business capitalized and amortized $2.2 million and $1.0 million, respectively, during Fiscal Year 1997. The Company's wireless communications business capitalized and amortized $1.4 million and $1.1 million in Fiscal Year 1996, respectively. These amounts are in addition to the research and development expense discussed above.
The Company's orders for wireless communications products totaled $34.7 million for Fiscal Year 1997, up from $17.1 million during Fiscal Year 1996. Included within the Fiscal Year 1997 booking total is $10 million of long-term maintenance service business associated with the purchase of the GTE callbox product line. The value of unfilled orders at January 31, 1997 totaled $19.6 million, of which $9.3 million is associated with the long-term maintenance contracts. An additional $2.3 million of deferred revenue has been recorded for anticipated customer warranty obligations.
In February 1997, the Company acquired the callbox product line from Cubic Communications, Inc. This acquisition, coupled with the prior acquisition of the GTE callbox product line, establishes Comarco Wireless Technologies as one of the leading companies in the callbox niche of the wireless communications industry.
The Company has experienced fluctuations in wireless communications products activity in each of the past three years, with greater sales in the second half of its fiscal year and lesser amounts in the first half. This trend may or may not continue as the Company broadens its product offerings. The nature of the wireless communications products business is inherently unpredictable as the Company will normally not have a significant amount of unfilled orders at the end of a period. Therefore, sales levels and profits are difficult to predict and may fluctuate significantly from quarter to quarter.
Outsourced Staffing Services and Other Revenue
Revenues provided by the outsourced staffing services business area decreased from $55.5 million in Fiscal Year 1996 to $51.9 million in Fiscal Year 1997. Revenues for outsourced staffing services for Fiscal Year 1997 comprised 73% of the Company's total revenues compared with 80% in the prior year. This decrease is primarily due to the completion of the Company's contract with the Naval Air Warfare Center at China Lake, California in the prior year, partially offset by the acquisition of a commercial staffing business as of August 1, 1996.
Sales to the U.S. Government as well as to government prime contractors were 32% and 39% of the Company's total revenue during the fourth quarter and the fiscal year ended January 31, 1997, respectively. In the course of the Company's business, its government contracts are periodically opened for competition. During Fiscal Year 1997, the Company announced the award of several contracts with a total estimated value over the lives of the contracts of $60 million to provide engineering and management services to various Government agencies. The majority of these contract awards were recompetition of work the Company was already performing. Contract periods are generally three to five years, including options. None of the Company's government contracts are scheduled to end in Fiscal Year 1998. The Company plans to aggressively compete for all work opened for competition to the extent possible and selectively pursue certain high value Government procurements. There can be no assurance that the Company will be selected and awarded the work associated with any of its future proposals. In addition, government agencies may terminate their contracts in whole or in part at their convenience. Government agencies may remove funding previously provided or may not exercise option periods. Therefore, there can be no assurance that the Government will fund the portions of existing contracts that are unfunded, or that the Governmental agencies will exercise any options.
Operating income (revenues less direct costs, indirect costs, and depreciation and amortization) for outsourced staffing services is down 26% year-to-year from $1.9 million in Fiscal Year 1996 to $1.4 million in Fiscal Year 1997. The reduced operating income is primarily due to the completion of the Company's contract with the Naval Air Warfare Center at China Lake, California in the prior year, partially offset by the contribution from the commercial staffing business acquired as of August 1, 1996.
Net interest income (interest income, less amortization of offering costs and interest expense) for Fiscal Year 1997 totaled $559,000 compared to $497,000 for the prior fiscal year. The increase is principally due to higher available investable balances year-to-year.
The Company's effective tax rate is 35.0% for Fiscal Year 1997 versus 35.7% for the previous fiscal year. The decreased effective tax rate is due to a reduction in the income tax valuation allowance and an increased level of current tax credits available to offset income taxes on current taxable income.
The overall increase in net income from the prior year is primarily due to the significant increase in sales of wireless communications products at a higher operating income margin, increased investment net earnings, and a lower effective income tax rate.
FISCAL YEAR ENDED JANUARY 31, 1996 COMPARED TO FISCAL YEAR ENDED JANUARY 31, 1995
Fiscal Year 1996 revenues totaled $69.8 million, up 2% from the prior year. Increased year-to-year revenue is primarily due to:
o sales of the Company's wireless communications products, including various field measurement and revenue assurance systems to major cellular telephone companies, o increased efforts providing testing of C4I systems and field test instrumentation for the U.S. Armed Forces at various locations, and o increased efforts in support of the Naval Surface Warfare Center at Crane, Indiana; partially offset by: o substantial completion as of September 30, 1995, of the Company's contract with the Naval Air Warfare Center ("NAWC") at China Lake, California, and o reduction in activity as a subcontractor in support of the Army's Software Development Center at Ft. Lee, Virginia.
Wireless Communications Products
Wireless communications products revenues increased 58% to $14.4 million for Fiscal Year 1996 from $9.1 million for Fiscal Year 1995. Wireless communications products revenues comprised approximately 20.5% of total Company revenues during Fiscal Year 1996, up from 13.3% in the prior fiscal year. This increase is due to increased sales of the Company's network evaluation and revenue assurance systems to major cellular telephone carriers. During the year the Company continued to broaden its product line with the introduction of its second generation of field measurement equipment, including products supporting the AMPS, TDMA, NAMPS, ETACS and GSM air interfaces. Revenues from sales of callboxes were minimal during Fiscal Year 1996 as states other than California have not yet progressed past the field testing stage of these units.
Operating income from wireless communications products increased 91% year-to-year, comprising 67% of the Company's total operating income for Fiscal Year 1996. Summary operating results for Comarco Wireless Technologies, Inc., the Company's wireless communications products subsidiary, are as follows:
*Indirect costs include selling, general and administrative expenses, as well as research and development expenses.
The increased gross margin percentage is due to the incremental benefit of spreading the fixed costs of operations over a larger activity base and the ability to obtain economic order buys on component materials.
The increase in indirect costs, excluding research and development expenses, are in line with the increase in revenues. Research and development expense totaled $1.8 million during Fiscal Year 1996, compared to $340,000 in the prior fiscal year. The substantial increase year-to-year is due to a concerted effort by the Company in Fiscal Year 1996, to accelerate the expansion of both its product development program and its efforts to upgrade its existing product line. The Company plans to continue to invest heavily in new product development. There can be no assurance that the Company will be successful in generating future revenues from such development efforts.
Operating income increased 91% to $3.7 million in Fiscal Year 1996 from $1.9 million in the prior fiscal year. Operating income as a percentage of revenues is 25.8% for Fiscal Year 1996, compared to 21.4% for the comparable prior period. The increase is due to the improvement in gross margin percentage noted above, which was partially offset by an increase in indirect costs, as discussed above.
As part of its product development program, the Company is continuing its software product development program in it wireless communications products business. In accordance with Financial Accounting Standard No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, the Company capitalized and amortized $1.4 million and $1.1 million, respectively, during Fiscal Year 1996. The Company capitalized and amortized $1.4 million and $900,000 in Fiscal Year 1995, respectively. These amounts are in addition to the research and development expense discussed above.
The Company's orders for wireless communications products totaled $17.1 million for Fiscal Year 1996, up from $9.6 million during Fiscal Year 1995. The value of unfilled orders at January 31, 1996 totaled $3.1 million. An additional $1.3 million of deferred revenue has been recorded for anticipated customer warranty obligations.
The Company has experienced fluctuations in wireless communications products activity in each of the past three years, with greater sales in the second half of its fiscal year and lesser amounts in the first half. This trend may or may not continue as the Company broadens its product offerings. The nature of the wireless communications products business is inherently less predictable (than the Company's traditional Government contracting business) as the Company will normally not have a significant amount of unfilled orders at the end of a period. Therefore, sales levels and profits are more difficult to predict and may fluctuate significantly from quarter to quarter.
Government Contracting and Other Revenue
Revenues provided by the Company's traditional Government contracting services business area decreased from $59.2 million in Fiscal Year 1995 to $55.5 million in Fiscal Year 1996. Revenues for Government contracting services for Fiscal Year 1996 comprised 80% of the Company's total revenues compared with 87% in the prior year. This decrease is primarily due to the reduced activity in the Company's contracts with the Naval Air Warfare Center at China Lake, California and the Army's Software Development Center at Ft. Lee, Virginia. The China Lake contract substantially ended on September 30, 1995 and accounted for approximately 11% of the Company's total revenues and approximately 14% of total Government contracting revenues during Fiscal Year 1996 and will not generate any revenue in Fiscal Year 1997. This contract also accounted for approximately 11% of the Company's total operating income and approximately 21% of total Government contracting operating income during Fiscal Year 1996.
Sales to the U.S. Government as well as to government prime contractors were 43% and 51% of the Company's total revenue during the fourth quarter and the fiscal year ended January 31, 1996, respectively. In the course of the Company's business, its government contracts are periodically opened for competition. Approximately 29% of the Company's current Government contracting services revenues will either end or will be open for competition during Fiscal Year 1997. The Company plans to aggressively compete for all work opened for competition to the extent possible and selectively pursue certain high value Government procurements. There can be no assurance that the Company will be selected and awarded the work associated with these outstanding proposals. In addition, government agencies may terminate their contracts in whole or in part at their convenience. Government agencies may remove funding previously provided or may not exercise option periods. Therefore, there can be no assurance that the Government will fund the portions of existing contracts that are unfunded, or that the Governmental agencies will exercise any options.
Operating income (revenues less direct costs, indirect costs, and depreciation and amortization) for Government contracting services is down 37% year-to-year from $3.0 million in Fiscal Year 1995 to $1.9 million in Fiscal Year 1996. The reduced operating income is primarily due to the operating loss of $1.1 million incurred by the Company's software products line in Fiscal Year 1996.
Net interest income (interest income, less amortization of offering costs and interest expense) for Fiscal Year 1996 totaled $497,000 compared to $67,000 for the prior fiscal year. The increase is principally due to the retirement of the Company's remaining convertible subordinated debentures and accelerated amortization of offering costs related to the Company's purchase of its convertible subordinated debentures during the first quarters of Fiscal Years 1996 and 1995, as well as higher available investable balances year-to-year. The Company recorded accelerated offering cost amortization of $23,000 and $64,000 in Fiscal Years 1996 and 1995, respectively. The Company retired the remaining $844,000 of its convertible subordinated debentures on April 15, 1995, leaving no outstanding debt as of January 31, 1996.
The Company's effective tax rate is 35.7% for Fiscal Year 1996 versus 34.4% for the previous fiscal year. The increased effective tax rate is due to a reduced level of current tax credits available to offset income taxes on current taxable income.
The overall increase in net income from the prior year is primarily due to the significant increase in sales of wireless communications products at a higher operating income margin and increased investment net earnings, partially offset by the operating loss incurred by the Company's software products business and a higher effective income tax rate.
Liquidity and Capital Resources
The Company signed a loan agreement with a bank effective September 26, 1994, which was last amended effective August 30, 1996. The loan agreement consists of (1) an $8 million revolving credit facility, which expires June 30, 1998, and (2) a $5 million guidance line of credit, which expires June 30, 1997. The revolving credit facility and the guidance line of credit are unsecured provided that the Company maintains certain covenants. Currently, management anticipates that cash flow will remain at a level which will enable the Company to avoid utilizing the credit facility except to support letters of credit and acquisition financing, and that the Company will be able to purchase investments on a regular basis. The Company's cash and investment balances averaged $13 million (includes highly liquid long-term investments with maturities of 12 to 36 months) during the fourth quarter of Fiscal Year 1997. However, maintaining such cash balances is predicated on the Company maintaining its business base and is subject to the cost of financing new contracts, acquisitions, geographic expansion, software product development costs, and stock re-purchases.
At the end of Fiscal Year 1997, the Company's average days' sales in accounts receivable increased to approximately 59 days, compared with 38 days from the prior fiscal year's levels. The increase is due to increased sales of wireless communications products in the latter part of the fourth quarter of Fiscal Year 1997, which have a slightly longer collection cycle than the Company's outsourced staffing revenues.
Several additional key factors indicating the Company's financial condition include:
The Company continued to demonstrate solid financial strength in the above financial factors during Fiscal Year 1997, primarily due to increased operating earnings from increased sales of wireless communications products.
The Company has a significant commitment for capital expenditures at January 31, 1997 for Comarco Wireless Technologies, Inc. The Company has developed and intends to continue to develop numerous new product line extensions for the wireless communications industry. This software product development program is expected to be funded from the Company's current working capital. The amounts capitalized and amortized in the Company's wireless communications products business in accordance with Financial Accounting Standard No 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, totaled $2.2 million and $1.0 million, respectively, in Fiscal Year 1997.
In February 1997, the Company's subsidiary, Comarco Wireless Technologies, Inc., completed the acquisition of another callbox product line from Cubic Communications, Inc. This acquisition, totalling approximately $1.7 million, was funded from the Company's available working capital.
The Company's Board of Directors has authorized a stock re-purchase program of up to 1,000,000 shares. As of January 31, 1997, the Company has repurchased and retired approximately 826,000 shares. The average price paid per share re-purchased under the program was $5.15. As of April 25, 1997, subsequent to year-end, the Company had re-purchased an additional 38,000 shares for approximately $644,000 under the stock re-purchase program.
The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial condition of the Company (see Note 17 of the Notes to Consolidated Financial Statements).
The Company believes that its cash flow from operations and available bank borrowings will be sufficient to satisfy the current and anticipated capital requirements for operations during Fiscal Year 1998.
Item 8.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ----
Independent Auditors' Report.............................................. 19 Financial Statements: Consolidated Balance Sheets, January 31, 1997 and 1996............... 20 Consolidated Statements of Income, Years Ended January 31, 1997, 1996, and 1995..................................... 21 Consolidated Statements of Cash Flows, Years Ended January 31, 1997, 1996, and 1995............................... 22 Notes to Consolidated Financial Statements, January 31, 1997, 1996, and 1995..................................... 23 Financial Statement Schedule: VIII Reserves, Years Ended January 31, 1997, 1996, and 1995..................................................... 43
All other schedules are omitted because the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or the notes thereto.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders COMARCO, Inc.:
We have audited the consolidated financial statements of COMARCO, Inc. and Subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of COMARCO, Inc. and Subsidiaries as of January 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended January 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
McLean, Virginia March 25, 1997
COMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
See accompanying notes to consolidated financial statements.
COMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
COMARCO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
See accompanying notes to consolidated financial statements.
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996 AND 1995
1. Significant Accounting Policies
a. The Company--COMARCO, Inc. and its subsidiaries' (the "Company") traditional business area consists of providing a broad range of support services to agencies of the United States Government, government prime contractors, and local governments, primarily in the fields of information technologies; intelligent instrumentation and automated test systems; ordnance and weapon system engineering services; airport management services; and manufacturing training. The Company, operating in a newer business area through one of its subsidiaries, Comarco Wireless Technologies, Inc., designs and develops products for the wireless communications industry. Sales to the United States Government and government prime contractors were 39%, 51%, and 58% of revenues for the years ended January 31, 1997, 1996, and 1995, respectively. In August 1994, the Company acquired all of the outstanding stock of LCTI, Inc. As negotiated under the purchase agreement, the Company was not required to pay any consideration to the former owners of LCTI at the acquisition date, but may be required to make payments to these former owners based upon the results of LCTI's operations over a five-year period from the date of acquisition. In August 1996, a newly-formed subsidiary of COMARCO, Comarco Staffing, Inc. (formerly known as CoSource Solutions, Inc.), acquired the assets of RAL Consulting and Staffing Services, Inc. In October 1996, Comarco Wireless Technologies, Inc. acquired the callbox assets of GTE Cellular Communications Corporation. The purchase prices for these transactions could be increased in future periods based upon the achievement of certain performance objectives or completing specified sales transactions. These acquisitions were accounted for using the purchase method. There was no difference between the estimated fair values of the acquired net tangible and identifiable intangible assets and the assumed liabilities for the LCTI purchase. The difference between the estimated fair values of the acquired net tangible and identifiable intangible assets and the assumed liabilities has been recorded to goodwill for the RAL purchase. The difference between the estimated fair values of the acquired net tangible and identifiable intangible assets and the assumed liabilities has been recorded to negative goodwill for the GTE purchase. The results of acquired operations have been included in the Company's consolidated results of operations since the respective acquisition dates. The acquisitions did not have a significant pro-forma impact on operations. In February 1997, Comarco Wireless Technologies, Inc. acquired an additional callbox product line from Cubic Communications, Inc. This acquisition, totaling approximately $1.7 million, will be accounted for using the purchase method, and the difference between identified tangible and intangible assets and assumed liabilities will be recorded as goodwill. This acquisition was funded from the Company's working capital.
b. Principles of Consolidation--The accompanying financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances, transactions and profits have been eliminated in consolidation.
c. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
d. Revenues--Substantially all of the Company's contract revenues are earned under long-term agreements and are recorded using the percentage-of-completion method. Contract revenue is recorded as costs are incurred, and profit is recognized on each contract based on the percentage that the incurred costs bear to estimated total costs. The fees under certain government contracts may be increased or decreased in accordance with cost or performance incentive provisions which measure actual performance against established targets or other criteria. Such incentive fee awards or penalties are included in contract revenues at the time the amounts can be reasonably determined. Costs to complete are reviewed periodically and revised as required. Provisions are made for the full amount of anticipated losses, if any, on all contracts in the period in which they are first determinable.
Revenues from product sales are primarily recorded as products are shipped or when customers have accepted the products, depending on the contract terms. The estimated sales value of post contract customer support which is included as part of an initial warranty period is deferred and amortized over the warranty period. Revenues from extended warranty agreements are recognized ratably over the term of the agreement.
e. Cash and Cash Equivalents--For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash equivalents of $12.0 million and $10.9 million at January 31, 1997 and 1996, respectively, consist primarily of variable rate securities, money market funds, and commercial paper, which are stated at cost, which approximates fair value.
f. Inventory--Inventory is stated at the lower of cost or market. Cost is determined using standard cost, which approximates actual costs on a first-in, first-out (FIFO) method.
g. Property and Equipment--Property and equipment are stated at cost and are depreciated using the straight-line method, over useful lives of three to seven years.
h. Software Development Costs--Capitalization of internally developed software begins upon the determination by the Company of a product's technological feasibility. Capitalized software development costs are amortized over related sales on a per-unit basis based upon estimated total sales, with a minimum amortization based on a straight-line method over a two to five year useful life. Capitalized software development costs and associated amortization expense were approximately $2.2 million and $1.2 million respectively, in the year ended January 31, 1997. Capitalized software development costs and associated amortization expense were approximately $1.9 million and $1.2 million, respectively, in the year ended January 1996. Capitalized software development costs and associated amortization expense were approximately $1.6 million and $921,000 respectively, in the year ended January 31, 1995.
i. Intangible Assets--Intangible assets are being amortized over periods of five to thirty years. Costs in excess of net assets acquired are being amortized over periods of ten to forty years. All such amortization is computed on the straight-line basis.
j. Taxes on Income--Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Future tax benefits recognized as deferred tax assets must be reduced by a valuation allowance where it is more likely than not that the benefits may not be realized.
k. Per Share Information--The outstanding shares used for earnings per share calculations for all years presented include the weighted average effect of common shares and common share equivalents outstanding during the year. Common share equivalents include dilutive stock options and warrants computed using the treasury stock method. Convertible subordinated debentures are not considered common stock equivalents and are not considered in the computation of fully diluted earnings per share since the effect would be antidilutive. Consolidated net income of the Company used for earnings per share purposes is diluted as a result of stock options issued by the Company's subsidiaries which enable their holders to obtain the subsidiaries' common stock.
l. Stock Option Plan--Prior to February 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On February 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in the year ended January 31, 1996 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
m. Reclassifications-Certain reclassifications of 1995 and 1996 amounts have been made to conform with the 1997 presentation.
2. Investments
Effective February 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Statement 115 prescribes how companies are to account for and report investments in equity securities that have readily determinable fair values and for all investments in debt securities. The adoption of Statement 115 had no material impact on the Company's consolidated statement of income for the years ended January 31, 1995, 1996 and 1997.
Securities classified as available for sale are as follows at January 31, 1997 and 1996:
Securities classified as held-to-maturity are as follows at January 31, 1997 and 1996:
Maturities of debt securities classified as held-to maturity are as follows at January 31, 1997:
Proceeds from the sales of available-for-sale securities in the years ended January 31, 1997 and 1996 were $24,000 and $363,000, respectively. No gross realized gains or losses were recorded on sales of available-for-sale securities in the years ended January 31, 1997 and 1996.
Short-term investments at January 31, 1997 and 1996 included restricted amounts of $1.1 million and $357,000, respectively, related to balances maintained in a non-qualified deferred compensation plan for Company executives.
The amount of net unrealized holding gains on trading securities recorded in the years ended January 31, 1997 and 1996 were $82,000 and $25,000, respectively.
3. Accounts Receivable
Accounts receivable consist of the following:
Included in unbilled accounts receivable are retainages due upon completion of contracts of approximately $232,000 and $154,000 as of January 31, 1997 and 1996, respectively. Of total accounts receivable at January 31, 1997, there are approximately $838,000 of unbilled receivables which, based upon the Company's experience, may not be collected within the next fiscal year.
4. Inventory
Inventory consists of the following:
5. Property and Equipment
Property and equipment consist of the following:
6. Intangible Assets
Intangible assets consist of the following:
Amortization of intangible assets for the years ended January 31, 1997, 1996, and 1995 amounted to $447,000, $433,000, and $341,000, respectively.
7. Bank Line of Credit
As a part of a loan agreement with a bank, the Company has an $8 million revolving credit facility, which expires June 30, 1998, and a $5 million guidance line of credit, which expires June 30, 1997. The revolving credit facility and the guidance line of credit are unsecured provided that the Company maintains certain covenants. Outstanding loans under this agreement bear interest at no less than the bank's prime rate or the London Interbank Offered Rate (LIBOR) plus 150 basis points, at the Company's option. The interest rates can be increased by the bank dependent upon the Company maintaining certain financial ratios. The bank's prime rate was 8.25% at January 31, 1997. There were no borrowings under the line of credit at January 31, 1997 or 1996. The loan agreement also includes certain restrictive covenants.
8. Accrued Liabilities
Accrued liabilities consist of the following:
9. Stockholders' Equity
Changes in the components of stockholders' equity for the years ended January 31, 1995, 1996, and 1997 were as follows:
10. Income Taxes
Income taxes consist of the following amounts:
Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial statement reporting purposes and such amounts recognized for tax filing purposes. The principal items making up the deferred tax provision in the years ended January 31, 1997, 1996 and 1995 were differing depreciation methods, the amortization of intangibles, accrued vacation, software development costs, and prepaid expenses.
The differences between the effective income tax rate and the statutory federal income tax rates for the years ended January 31, 1997, 1996, and 1995 are as follows:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at January 31, 1997 and 1996 are presented below:
The valuation allowance for deferred tax assets as of February 1, 1996 was $530,000. The net change in the valuation allowance for the year ended January 31, 1997 was a decrease of $530,000.
11. Stock Options
The Company has two employee stock option plans and a director stock option plan under which officers, key employees, and directors may be granted options to purchase shares of common stock of the Company at not less than 100% of the fair market value at the date of grant, unless the optionee is a 10% shareholder of the Company, in which case the price must not be less than 110% of the fair market value. The options are exercisable in installments determined by the compensation committee of the Company's Board of Directors, however no option may be exercised prior to one year following the grant of the option. The options expire as determined by the committee, but no later than ten years and one week after the date of grant (five years for 10% shareholders). Transactions and other information relating to these plans for the three years ended January 31, 1997 are summarized below:
The following table summarizes information about stock options outstanding at January 31, 1997:
Stock options exercisable at January 31, 1997, 1996, and 1995 were 330,925, 345,625, and 387,825, respectively. Shares available under the plans for future grants at January 31, 1997, 1996, and 1995 were 437,230, 538,730, and 297,605, respectively.
One of the Company's subsidiaries, Comarco Wireless Technologies, Inc. (CWT), also has a stock option plan under which officers and key employees of CWT may be granted options to purchase up to 60,000 shares of common stock of CWT at not less than 100% of the fair market value at the date of grant. As of January 31, 1997, all 300,000 outstanding shares of CWT common stock are owned by the Company. The fair market value of the shares and the exercise dates of the options are determined by the compensation committee of the Company's Board of Directors, however no option may be exercised prior to one year following the grant of the option. The options expire as determined by the committee, but not later than ten years and one week after the date of grant. In the fiscal year ended January 31, 1995, 24,000 options were granted at an exercise price of $25.33. In the fiscal year ended January 31, 1996, 14,000 options were granted at exercise prices ranging from $43.00 to $119.73. In the fiscal year ended January 31, 1997, 2,800 options were granted at an exercise price of $132.16. Stock options exercisable at January 31, 1997, 1996 and 1995 were 15,500, 6,000 and none, respectively. Shares available under the plan for future grants at January 31, 1997, 1996 and 1995 were 19,200, 22,000 and 36,000, respectively.
The following table summarizes information about CWT stock options outstanding at January 31, 1997:
The per share weighted-average fair value of employee and director stock options granted during the years ended January 31, 1997 and 1996 was $7.73, and $4.75, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:
Years ended January 31, ---------------------------- 1997 1996 ----------- ----------- Expected dividend yield 0.0% 0.0% Expected volatility 45.1% 42.8% Risk-free interest rate 5.8% 7.3% Expected life 6 years 6 years
The per share weighted-average fair value of CWT stock options granted during the years ended January 31, 1997 and 1996 was $57.38, and $36.68, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:
Years ended January 31, ---------------------------- 1997 1996 ----------- ----------- Expected dividend yield 0.0% 0.0% Expected volatility 40.2% 45.1% Risk-free interest rate 5.4% 6.6% Expected life 5 years 5 years
The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Pro forma net income and earnings per share reflect only options granted in the years ended January 31, 1997 and 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income and earnings per share amounts presented above because compensation cost is reflected over the options' vesting period of four years and compensation cost for options granted prior to February 1, 1995 is not considered.
12. Lease Commitments
Rental commitments under noncancelable operating leases, principally on the Company's office space, equipment and automobiles were $3,086,000 at January 31, 1997, payable as follows: $779,000, $722,000, $616,000, $505,000, and $464,000 in the years ended January 31, 1998, 1999, 2000, 2001, and 2002, respectively. Certain of the rental commitments are subject to increases based on the change in the Consumer Price Index. Rental expense for the years ended January 31, 1997, 1996, and 1995 was $1,183,000, $1,361,000, and $1,456,000, respectively.
13. Employee Benefit Plans
The Company has a Savings and Retirement Plan which provides benefits to eligible employees. Under the Plan, as amended effective January 1, 1996, employees who have been with the Company in excess of three months and are at least 20 1/2 years of age may participate by contributing between 1% and 15% of earnings. Company contributions match employee contributions at levels as specified in the Plan document. In addition, the Company may contribute a portion of its net profits as determined by the Board of Directors. Company contributions, which consist of matching contributions, with respect to the Plan for the years ended January 31, 1997, 1996, and 1995 were approximately $542,000, $560,000, and $553,000, respectively.
14. Supplemental Disclosures of Cash Flow Information
In August 1994, the Company acquired all of the common stock of LCTI, Inc. No cash was paid for the acquisition of the stock. In connection with this acquisition, the Company acquired tangible assets with a fair value of $615,000 and assumed liabilities of $1,059,000. The difference between the fair value of the tangible assets acquired and the liabilities assumed was assigned to certain intangible assets.
In August 1996, the Company acquired the assets of RAL Consulting and Staffing Services, Inc. for $1,198,000. In connection with this acquisition, the Company acquired tangible assets with a fair value of $777,000 and assumed liabilities of $31,000.
In October 1996, the Company acquired the assets of the callbox operation of GTE Cellular Communications Corp. for $1,076,000. In connection with this acquisition, the Company acquired tangible assets with a fair value of $1,983,000, and assumed liabilities of $614,000.
Subsequent to year-end, in February 1997, the Company acquired the assets of the callbox operation of Cubic Communications Inc., for approximately $1.7 million.
15. Research and Development Costs
The Company incurred research and development costs (includes Company-sponsored software development costs prior to determination of technological feasibility) of approximately $2,800,000, $2,800,000, and $520,000, in the years ended January 31, 1997, 1996, and 1995, respectively, related to wireless communications products and development of software tools. These costs were expensed as incurred.
16. Business Segment Information
The Company's operations have been classified into two business areas: Wireless communications products and outsourced staffing services. The wireless communications products area develops, produces, and markets a variety of products and services used in the wireless communications industry. The outsourced staffing services area provides services to Federal and local government and commercial customers pursuant to established contracts. Corporate and other consists primarily of cash and cash equivalents, fixed assets, and other assets.
Summarized financial information by business segment for Fiscal Year 1997 is as follows:
Summarized financial information by business segment for Fiscal Year 1996 is as follows:
International sales in Fiscal Year 1997 totalled $5.4 million, up from $1.4 million in the prior fiscal year. The majority of these sales have been made to Europe.
17. Commitments and Contingencies
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management and the Company's legal counsel, the amount of ultimate liability with respect to these actions will not materially affect the financial condition of the Company.
Costs under cost-reimbursable contracts are subject to audit by the customer upon contract completion. Therefore, all contract costs, including direct and indirect costs, are potentially subject to adjustment prior to final reimbursement. Based on the results of audits conducted, the Company currently has open issues regarding certain costs charged to cost-reimbursable contracts on which the Company is awaiting final decisions from contracting officers. The amounts which are subject to this review by the Government total approximately $600,000. The Company believes that it has meritorious defenses, and if necessary, the Company intends to vigorously defend its positions through the appeals and claims process. Management believes that sufficient reserves are available to offset any potential adjustments.
18. Quarterly Financial Data (Unaudited)
Unaudited summarized financial data by quarter for Fiscal Years 1997 and 1996 is as follows (in thousands, except per share data):
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant
Information concerning Directors and Executive Officers of the Company is incorporated herein by reference from the Company's definitive proxy statement for the 1997 annual meeting of shareholders, which the Company expects to file with the SEC by May 30, 1997.
ITEM 11.
ITEM 11. Executive Compensation
Information regarding executive compensation is incorporated by reference from the Company's definitive proxy statement for the 1997 annual meeting of shareholders, which the Company expects to file with the SEC by May 30, 1997.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information regarding Security Ownership is incorporated by reference from the section entitled "Ownership of Securities" in the Company's definitive proxy statement for the 1997 annual meeting of shareholders, which the Company expects to file with the SEC by May 30, 1997.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions
The information concerning certain relationships and related transactions of the Registrant is incorporated by reference from the section entitled "Executive Compensation" in the Company's definitive proxy statement for the 1997 annual meeting of shareholders, which the Company expects to file with the SEC by May 30, 1997.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements (See Item 8)
2. Financial Statement Schedule:
The following additional information for the fiscal years ended January 31, 1997, 1996, and 1995 is submitted herewith: VIII Reserves
All other schedules are omitted because the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or the notes thereto.
3. Exhibits
3.1 Articles of Incorporation. The Articles of Incorporation are incorporated herein by reference from the Company's report on Form 8 filed with the Securities and Exchange Commission on November 16, 1988.
3.2 By-Laws. The By-Laws are incorporated by reference from the Company's report on Form 10-Q for the quarter ended July 31, 1986.
10. Material Contracts
10.1 1982 Stock Option Plan. The restated 1982 Stock Option Plan is incorporated herein by reference from Exhibit C to the Company's definitive Proxy Materials filed with the Securities and Exchange Commission on June 25, 1986.
10.2 Lease relating to Bloomfield, Indiana facility dated February 1, 1988 between the Company and Laverne Rollison is incorporated by reference from the Company's report on Form 10-K for the year ended January 31, 1988.
10.3 Director Stock Option Plan dated July 1, 1987 is incorporated by reference from the Company's report on Form 10-K for the year ended January 31, 1988.
10.4 United States Navy Contract dated October 1, 1988 between the Company and the Naval Weapons Center at China Lake, California is incorporated by reference from the Company's report on Form 10-K for the year ended January 31, 1989.
10.5 Contract dated January 22, 1991 between the Company and the County of Los Angeles for the operation and maintenance of County-owned general aviation airports is incorporated by reference from the Company's report on Form 10-K for the year ended January 31, 1991.
10.6 United States Navy Contract dated February 21, 1991 between the Company and the Pacific Missile Test Center, Point Mugu, California is incorporated by reference from the Company's report on Form 10-Q for the quarter ended May 5, 1991.
10.7 Agreement dated April 16, 1991 between the Company and Don M. Bailey, President and Chief Executive Officer, regarding employment termination in the event of a change in control of the Company is incorporated by reference from the Company's report on Form 10-K for the year ended January 31, 1992.
10.8 Agreement dated December 14, 1989 between the Company and ManTech Engineering Corporation to establish the Interop Joint Venture is incorporated by reference from the Company's report on Form 10-K for the year ended January 31, 1992.
10.9 Agreement dated January 4, 1993 between the Company, DynCorp, and Electronic Warfare Associates to establish the Tesco Joint Venture is incorporated by reference from the Company's report on Form 10-K for the year ended January 31, 1993.
10.10 Business Loan Agreement dated September 26, 1994 between the Company and NationsBank of Virginia, N.A. to establish a $5,000,000 Guidance Line of Credit and an $8,000,000 Master Line of Credit is incorporated by reference from the Company's report on Form 10-Q for the quarter ended October 30, 1994.
10.11 Guidance Line of Credit Note for $5,000,000 dated September 26, 1994 between the Company and NationsBank of Virginia, N.A. is incorporated by reference from the Company's report on Form 10-Q for the quarter ended October 30, 1994.
10.12 Master Line of Credit for $8,000,000 dated September 26, 1994 between the Company and NationsBank of Virginia, N.A. is incorporated by reference from the Company's report on Form 10-Q for the quarter ended October 30, 1994.
10.13 Nonqualified Employee Stock Option Plan for Comarco Wireless Technologies, Inc. dated August 1994 is incorporated by reference from the Company's report on Form 10-Q for the quarter ended October 30, 1994.
10.14 Primary Stock Purchase Agreement among COMARCO, Inc. and the prior shareholders of LCTI, Inc., dated August 9, 1994 is incorporated by reference from the Company's report on Form 10-Q for the quarter ended October 30, 1994.
10.15 Second Stock Purchase Agreement among COMARCO, Inc. and the prior shareholders of LCTI, Inc., dated August 9, 1994 is incorporated by reference from the Company's report on Form 10-Q for the quarter ended October 30, 1994.
10.16 1995 Employee Stock Option Plan is incorporated by reference from the Company's report on Form S-8 filed with the Securities and Exchange Commission on October 5, 1995.
10.17 First Amendment to Loan Agreement dated September 26, 1995 between the Company and NationsBank of Virginia, N.A. is incorporated by reference from the Company's report on Form 10-Q for the quarter ended October 29, 1995.
10.18 Amended and Restated Master Line of Credit Note dated October 31, 1995 between the Company and NationsBank of Virginia, N.A. is incorporated by reference from the Company's report on Form 10-Q for the quarter ended October 29, 1995.
10.19 Amended and Restated Guidance Line of Credit Note dated October 31, 1995 between the Company and NationsBank of Virginia, N.A. is incorporated by reference from the Company's report on Form 10-Q for the quarter ended October 29, 1995.
10.20 Second Amendment to Loan Agreement dated August 30, 1996 between the Company and NationsBank of Virginia, N.A. is incorporated by reference from the Company's report on Form 10-Q for the quarter ended July 31, 1996.
10.21 Second Amended and Restated Master Line of Credit Note dated August 30, 1996 between the Company and NationsBank of Virginia, N.A. is incorporated by reference from the Company's report on Form 10-Q for the quarter ended July 31, 1996.
10.22 Second Amended and Restated Guidance Line of Credit Note dated August 30, 1996 between the Company and NationsBank of Virginia, N.A. is incorporated by reference from the Company's report on Form 10-Q for the quarter ended July 31, 1996.
10.23 Asset Purchase Agreement among COMARCO, Inc., CoSource Solutions, Inc.(now known as Comarco Staffing, Inc.), R.A.L. Consulting and Staffing Services, Inc., and Robert A. Lovingood dated July 23, 1996 is incorporated by reference from the Company's report on Form 10-Q for the quarter ended July 31, 1996.
10.24 Employment Agreement between COMARCO, Inc., CoSource Solutions, Inc. (now known as Comarco Staffing, Inc.), and Robert A. Lovingood dated July 23, 1996 is incorporated by reference from the Company's report on Form 10-Q for the quarter ended July 31, 1996.
10.25 Noncompetition and Confidentiality Agreement between COMARCO, Inc., CoSource Solutions, Inc., (now known as Comarco Staffing, Inc.) and Robert A. Lovingood dated July 23, 1996 is incorporated by reference from the Company's report on Form 10-Q for the quarter ended July 31, 1996.
11. Computation of Number of Shares of Common Stock used in the Computation of Earnings Per Share.
21.1 Subsidiaries of the Company. The following are the significant subsidiaries of the Company: Decisions and Designs, Inc. (DDI) incorporated in the Commonwealth of Virginia. International Business Services, Inc. (IBS) incorporated in the District of Columbia. Comarco Wireless Technologies, Inc.(CWT) incorporated in the State of Delaware. LCTI, Inc. incorporated in the State of Maryland. Manufacturing Technology Training Center, Inc. (MTTC) incorporated in the State of Delaware. Comarco Wireless Europe, Inc. incorporated in the State of Delaware. Comarco Staffing, Inc. (formerly known as CoSource Solutions, Inc.), incorporated in the State of California. Comarco Systems, Inc., incorporated in the State of California.
23.1 Consent of Independent Auditors.
99.2 Undertakings of Registrant.
(b) Reports on Form 8-K
None.
COMARCO, INC. AND SUBSIDIARIES SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 22, 1997.
COMARCO, INC.
/s/ DON M. BAILEY ----------------------------------- Don M. Bailey President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf by the Registrant and in the capacities and on the dates so indicated.
Signature Title Date
Chairman of the Board /s/ GERALD D. GRIFFIN and Director April 22, 1997 - ----------------------- Gerald D. Griffin
President, Chief Executive Officer and Director (Principal Executive /s/ DON M. BAILEY Officer) April 22, 1997 - ----------------------- Don M. Bailey
Vice President and Treasurer (Principal Financial /s/ THOMAS P. BAIRD and Accounting Officer) April 22, 1997 - ----------------------- Thomas P. Baird
/s/ WILBUR L. CREECH Director April 22, 1997 - ----------------------- Wilbur L. Creech
/s/ WESLEY L. MCDONALD Director April 22, 1997 - ----------------------- Wesley L. McDonald
/s/ PAUL G. YOVOVICH Director April 22, 1997 ---------------------- Paul G. Yovovich
COMARCO, INC. AND SUBSIDIARIES
SCHEDULE VIII - RESERVES Three Years Ended January 31, 1997 (Dollars in thousands)
(1) Write off of uncollectible receivables and reduction in income tax valuation allowance.