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, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 0-5449
COMARCO, INC.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2088894
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(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
22800 Savi Ranch Parkway, Suite 214
Yorba Linda, California 92887
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(Address of principal executive office) (Zip Code)
(714) 282-3832
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
none
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Common stock outstanding at February 27, 1998 - 4,718,710
shares.
Aggregate market value of
Class shares held by non-affiliates
Common Stock...................................... $46,429,011
The total number of shares held by non-affiliates on February 27, 1998 was
2,146,510. This number was multiplied by $21.63 per share (the closing sale
price of the Common Stock on February 27, 1998 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, 1998 a definitive Proxy Statement (the "1998 Proxy Statement") relating
to its 1998 Annual Meeting of Stockholders, which meeting involves the election
of directors and certain related matters. The 1998 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 1998 Proxy Statement
under which the information required in Part III of this Form 10-K may be found.
<TABLE>
Form
10-K
Item
No. Item in Form 10-K Item in 1998 Proxy Statement
--- ----------------- ----------------------------
<S> <C>
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"
</TABLE>
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.
<PAGE>
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. 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; and Comarco Systems, Inc.,
which was formed in January 1997 to further develop the Company's information
technology and engineering 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 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 1998, which ended January 31, 1998, is as follows:
<TABLE>
Wireless Outsourced
Communications Staffing Services
Products and Other Revenue Corporate and Other Total
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(Dollars in Thousands)
<S> <C> <C> <C> <C>
Revenues $ 29,524 $ 55,615 $ --- $ 85,139
Operating income 6,733 795 (69) 7,459
Identifiable assets 18,884 10,148 14,862 43,894
</TABLE>
o 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 introductions, the LT 100 and LT 200,
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 ireless data telemetry
systems and emergency roadside 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 produc 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 mainte-
nance contracts. In addition, in February 1997, the Company
acquired certain assets of the Cubic Communications, Inc. callbox
product line. The installed base purchased from Cubic Communica-
tions consists of approximately 6,500 units. Management believes
that the combination of these two product lines establishes the
Company as a major vendor to this niche of the wireless applica-
tion products marketplace.
Comarco Wireless Technologies' revenues increased to 35% of the Company's total
revenue in Fiscal Year 1998, representing an increase of 51% over the prior
fiscal year. Operating income increased 28% year-to-year and represented over
80% of the Company's consolidated operating income for Fiscal Year 1998.
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
communication 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 1998 totaled $8.9 million, up from $5.4
million in the prior fiscal year. 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 significant part of total revenues. Marketing and
post-contract customer support offices are opened and staffed in Singapore and
London, England.
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 field measurement and revenue assurance
products including CDMA, GSM, PC 1800/1900, and IS-136 and further expansion of
the Company's LT line with the introduction of the LT 200. 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 transfer technology. The
product has recently completed both FCC and UL testing, but the Company has not
commenced the sale of this product. Potential customers would include after
market and original equipment manufacturers. The Company's current strategy is
to initially pursue after market customers. The power requirements of laptop
computers are increasing due to the introduction of more powerful
microprocessors. This factor will require the Company to continue its product
development program to increase the power capacity of its power adapter
products. The Company believes that the higher power adapter is the product that
may also appeal to original equipment manufacturers. There can be no assurance
that the Company will be successful in bringing this 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 1998 and Fiscal Year 1997, the Company's wireless
communications business capitalized approximately $2.5 million and $2.2 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, $1.4 million and $1.0 million, respectively, were amortized in
Fiscal Years 1998 and 1997 against product sales in accordance with Statement
No. 86.
In addition, during Fiscal Years 1998, 1997, and 1996, Comarco Wireless had
expenditures of $1.5 million, $1.9 million and $1.8 million, respectively, for
research and development expenses (including Company-sponsored software
development costs prior to determination of technological feasibility).
BACKLOG
Unfilled orders at Comarco Wireless as of January 31, 1998 are approximately
$17.7 million, compared to $19.6 million as of January 31, 1997. The current
year balance includes $1.9 million of product orders for the field measurement
and revenue assurance product lines, and $1.5 million of deferred revenue for
basic and extended warranty commitments. Management believes that substantially
all of this backlog amount (of $3.4 million) will result in revenue during
Fiscal Year 1999. In general, most of the Company's product orders are filled
within months from the receipt of the order. The remaining unfilled orders of
$14.3 million are related to the callbox product line. This backlog balance
consists of $0.7 million of new product orders, $9.8 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 late in Fiscal Year 1999 and continue into Fiscal Year 2000.
SEASONALITY/FLUCTUATION IN QUARTERLY RESULTS
Comarco Wireless has experienced, in each of the past four 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 four 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 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. 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-Pacific and Europe, respectively. 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 has limited 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.
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, 1998, Comarco Wireless employed approximately 140 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 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 small niches (field 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 one patent 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 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 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 $55.6 million or 65% of the Company's revenues, and
approximately $0.8 million of its operating income (after a $0.7 million
non-recurring charge for write-off of intangible assets), for the fiscal
year ended January 31, 1998 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
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The Company also specializes in the development and application of
computer-based test instruments and automated test systems with particular
focus on:
o Interoperability testing of communications and information systems;
o Developmental and operational testing of C4I, ordnance, tactical
weapon and data systems; and o Automated Test Systems (ATS).
The Company provides engineering and testing support to assure that
communications and computer-based systems interoperate effectively and
reliably.
The Company provides design and fabrication of special purpose test support
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. Current significant efforts include a contract supporting the
Metropolitan Washington Airports Authority at Reagan Washington National
Airport through September 30, 1998 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 airport services
contract in February 1997 for Riverside County, California and on another
contract in May 1997 for 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 additional office in Corona, 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. The Company is currently one of seven
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, 1998 was $35 million, compared to $51
million as of January 31, 1997. 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 70% of the firm backlog will be realized in Fiscal
Year 1999.
GOVERNMENT CONTRACTS
A significant portion of the Company's total revenues (approximately 32% in
FY98, 39% in FY97, and 51% in FY96) was derived from contracts with the United
States Government, principally agencies of the Department of Defense.
Significant portions of the Company's revenues are derived from contracts with
the U.S. military services: Department of Defense, 5%; U.S. Army, 9%; U.S. Navy,
11%; and U.S. Air Force, 7%. 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
1998, orders under these vehicles total approximately $600,000 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
contract with a 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 recompetitions of work the Company was already
performing. Contract periods are generally three to five years, including
options. The Company's airport contract at Reagan Washington National Airport
ends at 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 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, 1998, the Company employed approximately 840 full-time employees,
of which 700 were part of the outsourced staffing services business area. In
addition, the Company has approximately 420 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. Approximately 65 of
the Company's employees in this business area at Reagan Washington National
Airport are represented by the International Brotherhood of Teamsters and are
covered by a collective bargaining agreement.
ITEM 2. Properties
The Company's principal facilities on January 31, 1998, aggregating
approximately 113,000 square feet, are located in the cities of Yorba Linda,
Irvine, Camarillo, Victorville, Corona, and Ridgecrest, California; Vienna and
Petersburg, Virginia; Sierra Vista, Arizona; Warner Robins, Georgia; Bloomfield,
Indiana; Colorado Springs, Colorado; Huntsville, Alabama; Gaithersburg,
Maryland; Belton, Texas; London, England; 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 1998 was
approximately $1.4 million. The aggregate annual property rent in the year
ending January 31, 1999 is expected to be approximately $1.3 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 19
of the Notes to Consolidated Financial Statements.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
<PAGE>
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
<TABLE>
Price
------------------------
High Low
-------- ---------
<S> <C> <C>
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
1997
First Quarter................................. $ 16.25 $ 13.00
Second Quarter................................ 22.50 14.88
Third Quarter................................. 18.25 14.88
Fourth Quarter................................ 19.00 16.25
</TABLE>
The Company had approximately 594 shareholders of record on February 27, 1998.
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.
<PAGE>
ITEM 6. Selected Financial Data
SELECTED FINANCIAL DATA
(Figures in thousands, except per share amounts)
<TABLE>
Years Ended January 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract revenues...................... $ 55,030 $ 50,858 $ 54,278 $ 58,796 $ 59,500
Product sales.......................... 30,109 20,556 15,563 9,520 6,808
-------------- ------------ ------------ ------------ -----------
85,139 71,414 69,841 68,316 66,308
Direct costs:
Contract costs......................... 37,960 35,599 36,540 39,276 39,553
Cost of product sales.................. 14,050 7,417 6,644 5,388 3,764
-------------- ------------ ------------ ------------ ------------
52,010 43,016 43,184 44,659 43,317
Indirect costs............................ 24,960 21,780 21,112 18,652 19,628
Intangible asset write-off................ 710 --- --- --- ---
-------------- ------------ ------------ ------------ ------------
77,680 64,796 64,296 63,311 62,945
Operating income ......................... 7,459 6,618 5,545 5,005 3,363
Interest expense.......................... --- --- 44 231 333
Interest income........................... 404 559 541 298 349
-------------- ------------ ------------ ------------ ------------
Income before income taxes ............... 7,863 7,177 6,042 5,072 3,379
Income tax expense ....................... 2,988 2,512 2,157 1,743 980
-------------- ------------ ------------ ------------ ------------
Net income ............................... $ 4,875 $ 4,665 $ 3,885 $ 3,329 $ 2,399
============== ============ ============ ============ ============
Earnings per share:
Basic:
Net income....................... $ 1.03 $ .98 $ .84 $ .71 $ .46
============== ============ ============ ============ ============
Diluted:
Net income....................... $ .89 $ .86 $ .75 $ .68 $ .45
============== ============ ============ ============ ============
Dividends declared per share.............. None None None None None
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA
(In thousands)
<TABLE>
January 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Working capital .......................... $ 20,937 $ 20,429 $ 16,049 $ 12,394 $ 14,879
Total assets.............................. 43,629 39,210 29,989 25,810 24,891
Borrowings under bank line of credit...... -- -- -- -- --
Long-term debt, including current maturities
(1).................................... --- --- --- 844 2,984
Stockholders' equity ..................... 30,470 26,977 21,738 17,203 15,144
</TABLE>
(1) Includes Convertible Subordinated Debentures of $844,000 at January 31, 1995
and $2,984,000 at January 31, 1994.
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
<TABLE>
Years Ended January 31,
-----------------------------------------------------
1998 1997 1996
------------- ------------- --------------
<S> <C> <C> <C>
Revenues......................................... 100.0% 100.0% 100.0%
Operating income................................. 8.8 9.3 7.9
Interest expense................................. -- -- .1
Interest income.................................. .5 .8 .8
Income tax expense............................... 3.5 3.5 3.0
Net income....................................... 5.7 6.5 5.6
</TABLE>
Percentage Increase (Decrease)
<TABLE>
Years Ended January 31,
-------------------------------------
1998-1997 1997-1996
--------------- ---------------
<S> <C> <C>
Revenues......................................... 19.2% 2.3%
Operating income................................. 12.7 19.4
Interest expense................................. -- (100.0)
Interest income.................................. (27.7) 3.3
Income tax expense............................... 18.9 16.5
Net income....................................... 4.5 20.1
</TABLE>
<PAGE>
FISCAL YEAR ENDED JANUARY 31, 1998 COMPARED TO FISCAL YEAR ENDED
JANUARY 31, 1997
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. 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
outsourced staffing services including engineering, technical, and airport
management services to government and commercial entities.
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 field 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 outsourced 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 communication 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 communication product 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 field
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:
<PAGE>
<TABLE>
January 31, January 31,
-------------------------------------------
1998 1997
-------------------------------------------
<S> <C> <C>
Product $ 29,524,000 $ 19,519,000
sales.......................
Cost of products sold......... 13,573,000 7,065,000
------------------ ------------------
Gross margin................. 15,951,000 12,454,000
Percentage.................... 54.0% 63.8%
Indirect costs*............... 9,218,000 7,204,000
================== ==================
Operating income.............. $ 6,733,000 $ 5,250,000
================== ==================
</TABLE>
*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 field 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 totaled $1.5 million during Fiscal Year 1998,
compared to $1.9 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 Financial
Accounting Standard 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 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 are to be
applied prospectively and are effective for Fiscal Year 1999. The Company has
not completed its analysis of the impact on the financial statements that will
be caused by the adoption of this Statement.
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.
Outsourced Staffing Services and Other Revenue
Revenues provided by the outsourced 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 contract with
an award 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
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.
In January 1998, the Company recorded a $710,000 charge against earnings from
the impairment of certain assets of its outsourced staffing 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 statement of income.
Operating income (revenues less direct costs, indirect costs, and depreciation
and amortization) for outsourced 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 curent year adjustment of the income tax valuation allowance as well as
lower levels of tax-exempt interest.
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.
<PAGE>
FISCAL YEAR ENDED JANUARY 31, 1997 COMPARED TO FISCAL YEAR ENDED
JANUARY 31, 1996
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 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 field measurement
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:
<TABLE>
January 31, January 31,
-------------------------------------------
1997 1996
-------------------------------------------
<S> <C> <C>
Product sales $ 19,519,000 $ 14,352,000
Cost of products sold ....... 7,065,000 5,679,000
------------------ ------------------
Gross margin.................. 12,454,000 8,673,000
Percentage.................. 63.8% 60.4%
Indirect costs*............... 7,204,000 4,964,000
================== ==================
Operating income.............. $ 5,250,000 $ 3,709,000
================== ==================
</TABLE>
*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
products business capitalized and amortized $2.2 million and $1.0 million,
respectively, during Fiscal Year 1997. The Company's wireless communications
products 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. Unfilled orders at January 31, 1997 totaled $19.6 million, of
which $9.3 million is associated with the long-term maintenance contracts and
$2.3 million is associated with post-contract customer support obligations
which has been recorded as deferred revenue.
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 is 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.
Liquidity and Capital Resources
The Company signed a loan agreement with a bank effective September 26, 1994,
which was last amended effective August 15, 1997. The loan agreement consists
of (1) an $8 million revolving credit facility, which expires May 31, 1999, and
(2) a $5 million guidance line of credit, which expires May 31, 1998. 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 $8.1 million (includes highly liquid long-term investments with
maturities of 12 to 36 months) during the fourth quarter of Fiscal Year 1998.
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 1998, the Company's average days' sales in accounts
receivable have increased, primarily due to increased sales of wireless
communication products, including a significant increase in international
sales. The Company's wireless communications products revenues have a slightly
longer collection cycle than the Company's outsourced staffing revenues.
Several additional key factors indicating the Company's financial condition
include:
<TABLE>
January 31, January 31,
-------------------------------------------
1998 1997
-------------------------------------------
<S> <C> <C>
Current ratio................. 2.75 2.87
Working capital.............. $ 20,937,000 $ 20,429,000
Book value per share......... $ 6.46 $ 5.65
</TABLE>
The Company continued to demonstrate solid financial strength in the above
financial factors during Fiscal Year 1998, 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, 1998 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 $2.5 million and $1.4 million, respectively, in Fiscal Year 1998.
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, totaling approximately $1.7 million, was
funded from the Company's available working capital.
The Company's Board of Directors has authorized a stock repurchase program of
up to 1,500,000 shares. As of January 31, 1998, the Company has repurchased and
retired approximately 929,000 shares. The average price paid per share
repurchased under the program was $6.55.
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 19 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 1999.
Year 2000
The Company's computer systems, software and related technologies are affected
by the Year 2000 compliance issue. The Company has been identifying and
correcting affected applications to ensure that all key computer systems will
be Year 2000 compliant by late 1998. The Company is also working with vendors
and suppliers to ensure their compliance. Costs to modify such applications
have been, and are estimated to remain, immaterial to the Company's results of
operations and financial condition.
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 compre-
hensive income, requiring its components to be reported in a financial statement
that is displayed with the same prominence as other financial statements. The
Company will adopt this Standard in the first quarter of fiscal year 1999. The
adoption of SFAS No. 130 will have no impact on the Company's consolidated
results of operations, financial condition or cash flows.
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
Company is in the process of evaluating segment disclosures for purposes of
reporting under SFAS No. 131. The adoption of SFAS No. 131 will have no impact
on the Company's consolidated results of operations, financial condition or cash
flows.
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.............................................. 25
Financial Statements:
Consolidated Balance Sheets, January 31, 1998 and 1997............... 26
Consolidated Statements of Income, Years Ended
January 31, 1998, 1997, and 1996..................................... 27
Consolidated Statements of Cash Flows, Years Ended
January 31, 1998, 1997, and 1996..................................... 28
Notes to Consolidated Financial Statements,
January 31, 1998, 1997, and 1996..................................... 29
Financial Statement Schedule
VIII Reserves, Years Ended January 31, 1998, 1997,
and 1996............................................................. 52
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.
<PAGE>
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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended January 31, 1998, 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, 1998
<PAGE>
COMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
ASSETS
January 31,
---------------------------------
1998 1997
------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 5,256 $ 12,711
Short-term investments............................... 2,348 1,824
Accounts receivable, net............................. 17,815 11,526
Inventory............................................ 5,247 3,042
Deferred tax asset................................... 1,383 1,418
Other current assets................................. 832 839
------------- --------------
Total current assets............................... 32,881 31,360
Long-term investments................................... 2,364 1,859
Property and equipment, net............................. 2,240 1,408
Software development costs, net......................... 3,131 2,434
Intangible assets, net.................................. 2,660 1,842
Other assets............................................ 618 307
============= ==============
$ 43,894 $ 39,210
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 493 $ 217
Deferred revenue..................................... 1,914 2,678
Accrued liabilities.................................. 9,537 8,036
------------ ------------
Total current liabilities.......................... 11,944 10,931
Deferred income taxes................................... 1,480 1,302
Stockholders' equity:
Common stock, $.10 par value, 33,750,000 shares
authorized; shares outstanding of 4,718,710 in 1998
and 4,777,959 in 1997................................ 472 478
Paid-in capital...................................... 3,074 4,450
Retained earnings.................................... 26,924 22,049
------------ ------------
Total stockholders' equity......................... 30,470 26,977
Commitments and contingencies (Notes 13 and 19)
============ =============
$ 43,894 $ 39,210
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
<TABLE>
Years Ended January 31,
-----------------------------------------------------
1998 1997 1996
------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Contract revenues...................... $ 55,030 $ 50,858 $ 54,278
Product sales.......................... 30,109 20,556 15,563
------------- ------------- -------------
85,139 71,414 69,841
------------- ------------- -------------
Direct costs:
Contract costs......................... 37,960 35,599 36,540
Cost of product sales.................. 14,050 7,417 6,644
------------- ------------- -------------
52,010 43,016 43,184
Indirect costs............................ 24,960 21,780 21,112
Intangible asset write-off................ 710 --- ---
------------- ------------- -------------
77,680 64,796 64,296
------------- ------------- -------------
Operating income.......................... 7,459 6,618 5,545
Interest expense.......................... --- --- 44
Interest income........................... 404 559 541
------------- ------------- -------------
Income before income taxes................ 7,863 7,177 6,042
Income tax expense........................ 2,988 2,512 2,157
============= ============= =============
Net income................................ $ 4,875 $ 4,665 $ 3,885
============= ============= =============
Earnings per common share:
Basic:
Net income........................... $ 1.03 $ .98 $ .84
============= ============= =============
Diluted:
Net income........................... $ .89 $ .86 $ .75
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
Years Ended January 31,
------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 4,875 $ 4,665 $ 3,885
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss (gain) on disposal of property and equipment.... --- 23 (26)
Depreciation and amortization........................ 3,164 2,263 2,117
Provision for doubtful accounts receivable........... 123 62 30
Intangible asset write-off........................... 710 --- ---
Deferred income taxes................................ 213 (509) 247
Changes in operating assets and liabilities, net of
effects from the purchases of RAL, GTE & Cubic:
Increases in investments......................... (537) (785) (357)
Decrease (increase) in accounts receivable......... (6,862) (2,308) 1,338
Increase in inventory.............................. (1,644) (470) (826)
Decrease (increase) in other current assets........ 280 (432) 147
Decrease (increase) in other assets................ (311) (36) 14
Increase (decrease) in accounts payable............ 276 (330) (69)
Increase (decrease) in deferred revenue............ (764) 1,243 366
Increase (decrease) in accrued liabilities......... 1,408 1,693 (73)
------------- ------------- -------------
Net cash provided by operating activities................ 658 5,079 6,793
Cash flows from investing activities:
Purchases of investements................................ (1,204) (1,572) (1,903)
Proceeds from sales of investments...................... 712 2,172 1,724
Purchases of property and equipment...................... (1,630) (872) (740)
Proceeds from sales of property and equipment............ 14 13 53
Software development costs............................... (2,506) (2,210) (1,900)
Cost of acquisition of Cubic, net of cash acquired....... (1,717) --- ---
Cost of acquisition of RAL, net of cash acquired......... (400) (1,198) ---
Cost of acquisition of GTE callbox, net of cash acquired. --- (1,076) ---
------------- ------------- -------------
Net cash used in investing activities.................... (6,731) (4,743) (2,766)
Cash flows from financing activities:
Purchase of convertible subordinated debentures.......... --- --- (844)
Proceeds from issuance of stock, including tax benefit... 453 1,052 650
Purchase of common stock................................. (1,835) (478) ---
------------- ------------- -------------
Net cash provided (used) by financing activities......... (1,382) 574 (194)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents........ (7,455) 910 3,833
Cash and cash equivalents, beginning of year................ 12,711 11,801 7,968
============= ============= =============
Cash and cash equivalents, end of year...................... $ 5,256 $ 12,711 $ 11,801
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998 AND 1997 AND 1996
1. Significant Accounting Policies
a. The Company--COMARCO, Inc. and its subsidiaries' (the "Company")
traditional business area consists of providing a broad range of outsourced
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 32%, 39%, and 51% of
revenues for the years ended January 31, 1998, 1997, and 1996, respectively.
Sales to the Metropolitan Washington Airports Authority for a contract at Reagan
Washington National Airport were 10%, 12%, and 12% of revenues for the years
ended January 31, 1998, 1997, and 1996, respectively. This contract will end on
September 30, 1998, and the Company has decided not to pursue the recompete of
this contract since, if reawarded, it would be unprofitable. 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. 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 $5.1 million and $12.0 million at January 31, 1998 and 1997,
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. 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.
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 $2.5 million and $1.8 million respectively, in the
year ended January 31, 1998. Capitalized software development costs and
associated amortization expense were approximately $2.2 million and $1.2
million, respectively, in the year ended January 1997. Capitalized software
development costs and associated amortization expense were approximately $1.9
million and $1.2 million respectively, in the year ended January 31, 1996.
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--During the year ended January 31, 1998, the
Company adopted Statement of Financial Accounting Standards No. 128, Earnings
per Share, and computed 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 for 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.
l. 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.
m. 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.
n. Reclassifications--Certain reclassifications of 1997 and 1996 amounts
have been made to conform to the 1998 presentation.
2. Investments
Securities classified as available for sale are as follows at January 31, 1998
and 1997:
<TABLE>
Gross Gross
Unrealized Unrealized Aggregate
Security Holding Holding Fair
Year Type Cost Gains Losses Value
- ---- -------- ---- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
1998 Equity $127 -- -- $127
1997 Equity $262 -- -- $262
</TABLE>
Securities classified as held-to-maturity are as follows at January 31, 1998 and
1997:
<TABLE>
Gross Gross
Unrealized Unrealized Aggregate
Security Amortized Holding Holding Fair
Year Type Cost Gains Losses Value
- ---- -------- --------- ----------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
1998 Debt $2,905 $14 $ 22 $2,897
1997 Debt $2,278 $12 $ 7 $2,283
</TABLE>
Maturities of debt securities classified as held-to maturity are as follows at
January 31, 1998:
<TABLE>
Aggregate
Security Fair
Type Cost Value
-------- ---- ----------
(Dollars in thousands)
<S> <C> <C>
Tax-exempt obligations:
Within one year $ 541 $ 533
One through five years $ 2,364 $ 2,364
</TABLE>
Proceeds from the sales of available-for-sale securities in the years ended
January 31, 1998 and 1997 were $135,000 and $24,000, respectively. No gross
realized gains or losses were recorded on sales of available-for-sale securities
in the years ended January 31, 1998 and 1997.
Short-term investments at January 31, 1998 and 1997 included restricted amounts
of $1.7 million and $1.1 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, 1998 and 1997 were $92,000 and $82,000, respectively.
3. Accounts Receivable
Accounts receivable consist of the following:
<TABLE>
January 31,
----------------------------
1998 1997
----------- -----------
(Dollars in thousands)
<S> <C> <C>
U.S. Government
Billed................................... $ 3,277 $ 3,027
Unbilled................................. 3,081 1,457
Commercial.................................. 11,498 7,091
Other ...................................... 290 166
----------- -----------
18,146 11,741
Less: Allowances for doubtful (331) (215)
accounts.................................
=========== ===========
$ 17,815 $ 11,526
=========== ===========
</TABLE>
Included in unbilled accounts receivable are retainages due upon completion of
contracts of approximately $750,000 and $232,000 as of January 31, 1998 and
1997, respectively. Of total accounts receivable at January 31, 1998, there are
approximately $473,000 of unbilled receivables which, based upon the Company's
experience, may not be collected within the next fiscal year.
Included in unbilled accounts receivable is approximately $700,000 related to a
claim filed with the Armed Services Board of Contract Appeals regarding certain
costs charged to a cost-reimbursable contract.
4. Inventory
Inventory consists of the following:
<TABLE>
January 31,
----------------------------
1998 1997
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Raw materials................................... $ 4,493 $ 2,787
Work-in-process................................. 573 139
Finished goods.................................. 181 116
----------- -----------
$ 5,247 $ 3,042
=========== ===========
</TABLE>
5. Property and Equipment
Property and equipment consist of the following:
<TABLE>
January 31,
----------------------------
1998 1997
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Office furnishings and fixtures.................... $ 1,518 $ 1,148
Equipment.......................................... 4,117 2,892
Software........................................... 296 254
----------- -----------
5,931 4,294
Less: Accumulated depreciation and amortization.... (3,691) (2,886)
=========== ===========
$ 2,240 $ 1,408
=========== ===========
</TABLE>
6. Intangible Assets
Intangible assets consist of the following:
<TABLE>
January 31,
----------------------------
1998 1997
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Costs in excess of net assets acquired...................... $ 2,440 $ 1,408
Other intangible assets, based on allocated
purchase price........................................... 852 1,845
----------- -----------
3,292 3,253
Less: Accumulated amortization.............................. (632) (1,411)
=========== ===========
$ 2,660 $ 1,842
=========== ===========
</TABLE>
Amortization of intangible assets for the years ended January 31, 1998, 1997,
and 1996 amounted to $451,000, $447,000, and $433,000, 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 May 31, 1999, and a $5 million guidance
line of credit, which expires May 31, 1998. The revolving credit facility and
the guidance line of credit are 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 8.5% at January 31, 1998. There were no
borrowings under the line of credit at January 31, 1998 or 1997. The loan
agreement also includes certain restrictive covenants.
8. Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
January 31,
----------------------------
1998 1997
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Accrued payroll and related expenses......... $ 6,398 $ 5,193
Other....................................... 3,139 2,843
========== ==========
$ 9,537 $ 8,036
========== ==========
</TABLE>
9. Stockholders' Equity
Changes in the components of stockholders' equity for the years ended January
31, 1996, 1997, and 1998 were as follows:
<TABLE>
Common Paid-in Retained
Stock Capital Earnings Total
------------- ------------ ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at January 31, 1995.............. $ 460 $ 3,244 $ 13,499 $ 17,203
Net income............................ -- -- 3,885 3,885
Exercise of stock options
105,700 shares....................... 11 476 -- 487
Tax benefit from exercise of stock
options............................. --- 163 -- 163
------------- ------------ ------------- -------------
Balance at January 31, 1996.............. 471 3,883 17,384 21,738
Net income............................ -- -- 4,665 4,665
Exercise of stock options, 100,350
shares.............................. 10 326 -- 336
Tax benefit from exercise of stock
options............................. -- 716 -- 716
Purchase and retirement of common
stock 30,100 shares................. (3) (475) --- (478)
------------- ------------ ------------- -------------
Balance at January 31, 1997.............. 478 4,450 22,049 26,977
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.............. $ 472 $ 3,074 $ 26,924 $ 30,470
============= ============ ============= =============
</TABLE>
10. Income Taxes
Income taxes consist of the following amounts:
<TABLE>
Years Ended January 31,
-----------------------------------------------------
1998 1997 1996
------------- ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Federal income tax:
Current.......................... $ 2,146 $ 2,358 $ 1,415
Deferred......................... 170 (421) 206
State income taxes:
Current.......................... 629 663 495
Deferred......................... 43 (88) 41
============= ============= ==============
$ 2,988 $ 2,512 $ 2,157
============= ============= ==============
</TABLE>
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, 1998,
1997 and 1996 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, 1998, 1997, and 1996 are as
follows:
<TABLE>
Years Ended January 31,
---------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
Percent Percent Percent
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax on income before
extraordinary items and income taxes... $ 2,752 35.0% $ 2,512 35.0% $ 2,115 35.0%
Surtax exemption.......................... (79) (1.0) (72) (1.0) (60) (1.0)
State tax, net of federal benefit......... 444 5.6 380 5.3 354 5.9
Change in valuation allowance............. --- --- (530) (7.4) (170) (2.8)
Other, net................................ (129) (1.6) 222 3.1 (82) (1.4)
========= ========= ========= ========= ========= =========
Taxes on income........................... $ 2,988 38.0% $ 2,512 35.0% $ 2,157 35.7%
========= ========= ========= ========= ========= =========
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at January 31, 1998 and
1997 are presented below:
<TABLE>
January 31,
--------------------------------------------
1998 1997
--------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Accounts receivable.................................... $ 289 $ 527
Property and equipment, principally due to differing
depreciation methods.................................. 133 74
Employee benefits, principally due to accrual for
financial reporting purposes.......................... 1,296 971
Other.................................................. 38 75
------------- -------------
Total gross deferred tax assets........................ 1,756 1,647
Less valuation allowance............................... --- ---
------------- -------------
Net deferred tax assets................................ $ 1,756 $ 1,647
------------- -------------
Deferred tax liabilities:
Prepaid expenses....................................... $ 258 $ 135
Property and equipment, principally due to differing
depreciation methods.................................. 42 124
Software development costs............................. 1,284 998
Other........................................... 269 274
------------- -------------
Total gross deferred tax liabilities................... $ 1,853 $ 1,531
============= =============
Net deferred tax asset (liability).................... $ (97) $ 116
============= =============
</TABLE>
There was no valuation allowance for deferred tax assets as of February 1, 1997,
and no change in the valuation allowance for the year ended January 31, 1998.
The Company believes that deferred tax assets will be recoverable through normal
operations.
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, 1998 are summarized below:
<TABLE>
Outstanding Options
----------------------------------------------
Number of Shares Weighted-Average
Exercise Price
------------------ -----------------------------
<S> <C> <C>
Balance, January 31, 1995................... 547,700 $ 3.75
Options granted.......................... 129,000 $ 9.07
Options canceled or expired.............. (20,250) $ 5.04
Options exercised........................ (105,700) $ 4.61
---------------
Balance, January 31, 1996................... 550,750 $ 4.78
Options granted.......................... 115,000 $ 14.93
Options canceled or expired.............. (13,500) $ 10.90
Options exercised........................ (100,350) $ 3.34
---------------
Balance, January 31, 1997................... 551,900 $ 7.01
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
===============
</TABLE>
The following table summarizes information about stock options outstanding at
January 31, 1998:
<TABLE>
Options Outstanding Options Exercisable
----------------------------------------------------------- -------------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 1/31/98 Contractual Life Exercise Price at 1/31/98 Exercise Price
- -------------------------------------- ------------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C> <C>
$1.88 to 2.00 142,500 3.0 years $1.94 142,500 $1.94
4.56 to 6.25 148,375 5.2 5.33 144,625 5.33
8.63 to 11.50 95,000 7.1 9.08 47,500 9.08
14.50 to 17.50 190,000 8.6 15.97 26,250 14.95
23.25 76,000 9.8 23.25 --- ---
---------------- ----------------
$1.88 to 23.25 651,875 6.5 $10.32 360,875 $5.18
================ ================
</TABLE>
Stock options exercisable at January 31, 1998, 1997, and 1996 were 360,875,
330,925, and 345,625, respectively. Shares available under the plans for future
grants at January 31, 1998, 1997, and 1996 were 293,355, 437,230, and 538,730
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, 1998, 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, 1996, 140,000 options were granted
at exercise prices ranging from $4.30 to $11.97. 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. Stock options exercisable at January 31, 1998, 1997
and 1996 were 257,000, 155,000, and 60,000 respectively. Shares available under
the plan for future grants at January 31, 1998, 1997 and 1996 were 181,000,
192,000, and 220,000 respectively.
The following table summarizes information about CWT stock options outstanding
at January 31, 1998:
<TABLE>
Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 1/31/98 Contractual Life Exercise Price at 1/31/98 Exercise Price
- --------------------------------- ------------------- ------------------ ---------------- -------------------
<S> <C> <C> <C> <C> <C>
$2.53 to 4.30 320,000 6.7 years $2.97 220,000 $2.85
11.97 to 13.22 88,000 7.9 12.37 37,000 12.21
17.62 11,000 9.1 17.62 --- ---
---------------- ------------------- ------------------ ---------------- -------------------
$2.53 to 17.62 419,000 7.0 $5.33 257,000 $4.20
================ =================== ================== ================ ===================
</TABLE>
The per share weighted-average fair value of employee and director stock options
granted during the years ended January 31, 1998 and 1997 was $8.93 and $7.73,
respectively, on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions:
<TABLE>
Years ended January 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Expected dividend yield 0.0% 0.0%
Expected volatility 34.2% 45.1%
Risk-free interest rate 6.1% 5.8%
Expected life 6 years 6 years
</TABLE>
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:
<TABLE>
Years ended January 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
Years ended January 31,
----------------------------
1998 1997
----------- -----------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Net income: As reported................................. $ 4,875 $ 4,665
Pro forma................................... 4,481 4,414
Earnings per common share - basic:
As reported................................. $ 1.03 $ .98
Pro forma................................... .94 .93
Earnings per common share - diluted:
As reported................................. $ .89 $ .86
Pro forma................................... .86 .85
</TABLE>
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.
12. 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):
<TABLE>
Year ended January 31, 1998
----------------------------------
$ Per
Income Shares Share
----------- ---------- -----------
<S> <C> <C> <C>
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
=========== ========== ===========
Year ended January 31, 1996
----------------------------------
$ Per
Income Shares Share
----------------------------------
<S> <C> <C> <C>
Basic Earnings Per Share:
Net income.................. $ 3,885 4,627 $ .84
Effect of subsidiary options (155) ---
Effect of dilutive securities:
Stock options............... --- 351
Convertible debentures...... --- 15
----------- ---------- -----------
Diluted Earnings per Share:
Net income.................. $ 3,730 4,993 $ .75
=========== ========== ===========
</TABLE>
13. Lease Commitments
Rental commitments under noncancelable operating leases, principally on the
Company's office space, equipment and automobiles were $2,950,000 at January 31,
1998, payable as follows: $871,000, $719,000, $682,000, $634,000, and $44,000 in
the years ended January 31, 1999, 2000, 2001, 2002, and 2003, 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,
1998, 1997, and 1996 was $1,593,000, $1,183,000, and $1,361,000, respectively.
14. Employee Benefit Plans
The Company has a Savings and Retirement Plan which provides benefits to
eligible employees. Under the Plan, as amended effective 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, 1998, 1997, and 1996 were approximately
$623,000, $542,000, and $560,000, respectively.
15. Supplemental Disclosures of Cash Flow Information
<TABLE>
Years Ended January 31,
-----------------------------------------------------
1998 1997 1996
------------- ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest........................... $ --- $ --- $ 44
Income taxes....................... $2,656 $2,051 $2,209
</TABLE>
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. An additional $400,000 was paid in October 1997 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.
16. Research and Development Costs
The Company incurred research and development costs (includes Company-sponsored
software development costs prior to determination of technological feasibility)
of approximately $2,000,000, $2,800,000, and $2,800,000, in the years ended
January 31, 1998, 1997, and 1996, respectively, related to wireless
communications products and development of software tools. These costs were
expensed as incurred.
17. Business Segment Information
The Company's operations have been classified into two business areas: wireless
communications products and 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 1998 is as
follows:
<TABLE>
Outsourced Staffing
Wireless Services and Other
Communications Products Revenues Corporate and Other Total
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
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 10,148 14,862 43,894
Depreciation and
amortization 1,938 711 515 3,164
Capital expenditures 1,273 311 46 1,630
</TABLE>
Summarized financial information by business segment for Fiscal Year 1997 is as
follows:
<TABLE>
Outsourced Staffing
Wireless Services and Other
Communications Products Revenues Corporate and Other Total
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Revenues $ 19,519 $ 51,895 --- $ 71,414
Operating income 5,250 1,396 $ (28) 6,618
Identifiable assets 11,610 7,123 20,477 39,210
Depreciation and
amortization 1,398 365 500 2,263
Capital expenditures 686 179 7 872
</TABLE>
International sales totaled $8.9 million and $5.4 million in the years ended
January 31, 1998 and 1997, 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.
18. Intangible Asset Write-off
In January 1998, the Company recorded a $710,000 charge against earnings from
the impairment of certain assets of its outsourced staffing 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 statement of income.
19. 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, 1995. The Company
also has filed a claim with the Armed Services Board of Contract Appeals
regarding certain costs charged to a cost-reimbursable contract. The amounts
that are subject to this review by the Government total approximately $700,000.
The Company believes that it has meritorious defenses, and if necessary, the
Company intends to vigorously defend its positions through the appellate
process. Management believes that sufficient reserves are available to offset
any potential adjustments.
20. Quarterly Financial Data (Unaudited)
Unaudited summarized financial data by quarter for Fiscal Years 1998 and 1997 is
as follows (in thousands, except per share data):
<TABLE>
Fiscal Year 1998 Quarter Ended
------------------------------------------------------------
April 30 July 31 October 31 January 31
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
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
============== ============= ============= ==============
Fiscal Year 1997 Quarter Ended
------------------------------------------------------------
April 30 July 31 October 31 January 31
-------------- ------------- ------------- --------------
Revenues............................. $ 16,408 $ 16,098 $ 18,370 $ 20,538
Operating income..................... 1,625 1,551 1,521 1,921
Net income........................... 1,102 1,088 1,089 1,386
-------------- ------------- ------------ --------------
Basic earnings per common share...... $ .23 $ .23 $ .23 $ .29
============== ============= ============= ==============
------------- ------------- -------------- --------------
Diluted earnings per common share.... $ .21 $ .20 $ .20 $ .25
============== ============= ============= ==============
</TABLE>
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 1998 annual meeting of shareholders, which the Company expects to file
with the SEC by May 30, 1998.
ITEM 11. Executive Compensation
Information regarding executive compensation is incorporated by reference from
the Company's definitive proxy statement for the 1998 annual meeting of
shareholders, which the Company expects to file with the SEC by May 30, 1998.
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 1998 annual meeting of shareholders, which the Company expects
to file with the SEC by May 30, 1998.
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 1998 annual
meeting of shareholders, which the Company expects to file with the SEC by May
30, 1998.
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, 1998, 1997, and 1996 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.
10.26 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.
10.27 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.
10.28 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.
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 Technology 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.
23.1 Consent of Independent Auditors.
99.2 Undertakings of Registrant.
(b) Reports on Form 8-K
None.
<PAGE>
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, 1998.
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, 1998
- -----------------------------
Gerald D. Griffin
President, Chief Executive
Officer and Director
(Principal Executive
/s/ DON M. BAILEY Officer) April 22, 1998
- -----------------------------
Don M. Bailey
Vice President
and
Treasurer (Principal Financial
/s/ THOMAS P. BAIRD and Accounting Officer) April 22, 1998
- -----------------------------
Thomas P. Baird
/s/ WILBUR L. CREECH Director April 22, 1998
- -----------------------------
Wilbur L. Creech
<PAGE>
COMARCO, INC. AND SUBSIDIARIES
SIGNATURES
Signature Title Date
/s/ WESLEY L. MCDONALD Director April 22, 1998
--------------------------
Wesley L. McDonald
/s/ PAUL G. YOVOVICH Director April 22, 1998
--------------------------
Paul G. Yovovich
<PAGE>
COMARCO, INC. AND SUBSIDIARIES
SCHEDULE VIII - RESERVES
Three Years Ended January 31, 1998
(Dollars in thousands)
<TABLE>
Other
Balance at Charged to Changes
Beginning Cost and Add Balance at End
of Year Expense Deductions (Deduct) of Year
------------ ------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
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) -- --
Year ended January 31, 1996:
Allowance for doubtful accounts and
provision for unbilled receivables
(deducted from accounts
receivable)....................... $ 336 $ 30 $ 110(1) $ -- $ 256
Income tax valuation allowance...... 700 -- 170(1) -- 530
</TABLE>
(1) Write off of uncollectible receivables and reduction in income tax valuation
allowance.
EXHIBIT 11
COMARCO, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
<TABLE>
Years Ended January 31,
----------------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
<S> <C> <C> <C>
Diluted:
Net income.................................... $ 4,875,000 $ 4,665,000 $ 3,885,000
Less-- net income allocated to subsidiary
dilutive stock options outstanding......... (372,000) (267,000) (155,000)
================== ================= =================
Net income used in calculation of diluted income $ 4,503,000 $ 4,398,000 $ 3,730,000
per share..................................
================== ================= =================
Weighted average number of common shares
outstanding during the year................... 4,744,000 4,766,000 4,627,000
Add-- shares issuable upon conversion of 9.75%
subordinated debentures....................... --- --- 15,000
Add--common equivalent shares (determined using the
"treasury stock" method) representing shares
issuable upon exercise of stock options and
warrants...................................... 332,000 350,000 351,000
================== ================= =================
Weighted average number of shares used in
calculation of diluted income per share...... 5,076,000 5,116,000 4,993,000
================== ================= =================
Diluted income per common share.................. $ .89 $ .86 $ .75
================== ================= =================
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
COMARCO, Inc.
We consent to the incorporation by reference in the Registration
Statements Nos. 33-37863, 33-44943, 33-45096, 33-50068, and 33-63219 on Forms
S-8 of COMARCO, Inc. of our report dated March 25, 1998, relating to the
consolidated balance sheets of COMARCO, Inc. and Subsidiaries as of January 31,
1998 and 1997, and the related consolidated statements of income and cash flows
and the related schedule for each of the years in the three-year period ended
January 31, 1998, which report appears in the January 31, 1998 annual report on
Form 10-K of COMARCO, Inc. and Subsidiaries.
KPMG PEAT MARWICK LLP
McLean, Virginia
April 27, 1998
EXHIBIT 99.2
Supplement to Registrant's Registration Statements on Form S-8
In accordance with the requirements of Form S-8, the registrant hereby
supplements any discussion of the indemnification provisions of the registrant
in all of the registrant's registration statements previously filed on Form S-8
with the following undertaking:
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 5,256
<SECURITIES> 4,712
<RECEIVABLES> 17,815
<ALLOWANCES> 0
<INVENTORY> 5,247
<CURRENT-ASSETS> 32,881
<PP&E> 2,240
<DEPRECIATION> 0
<TOTAL-ASSETS> 43,894
<CURRENT-LIABILITIES> 11,944
<BONDS> 0
0
0
<COMMON> 472
<OTHER-SE> 29,998
<TOTAL-LIABILITY-AND-EQUITY> 43,894
<SALES> 30,109
<TOTAL-REVENUES> 85,139
<CGS> 14,050
<TOTAL-COSTS> 77,680
<OTHER-EXPENSES> 25,670
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (404)
<INCOME-PRETAX> 7,863
<INCOME-TAX> 2,988
<INCOME-CONTINUING> 4,875
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,875
<EPS-PRIMARY> 1.03
<EPS-DILUTED> .89
<FN>
NOTE: RECEIVABLES AND PP&E VALUES REPORTED REPRESENT NET AMOUNTS.
</FN>
</TABLE>
