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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
| x | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterquarterly period ended
OCTOBER 31, 2001
APRIL 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
¨ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to ______________
Commission file number 0-5449
COMARCO, INC.
(Exact
(Exact name of registrant as specified in its charter)
--------------------
California 95-2088894
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
California | | 95-2088894 |
(State or other jurisdiction | | (I.R.S. Employer |
of incorporation or organization) | | Identification No.) |
2 Cromwell, Irvine, California 92618
(Address
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: principal executive offices and zip code)
(949) 599-7400
- --------------------------------------------------------------------------------
(Registrant’s telephone number, including area code)
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 waswa s required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]x No [ ]
As of December 13, 2001, there were 6,887,235¨
The registrant had 6,976,596 shares of
Common Stock
outstanding.
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COMARCO,common stock outstanding as of June 10, 2002.
SCOMARCO, INC. AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q
OCTOBER 31, 2001
FOR THE THREE MONTHS ENDED APRIL 30, 2002
TABLE OF CONTENTS
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PART I --— FINANCIAL INFORMATION | | |
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| ITEM 1. | | FINANCIAL STATEMENTS.......................................................... 3
STATEMENTS | | |
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| | | | 3 |
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| | | | 4 |
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| | | | 5 |
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| | | | 6 |
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ITEM 2. MANAGEMENT'S | | | | 11 |
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| ITEM 3. | | | | 16 |
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PART II --— OTHER INFORMATION | | |
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| ITEM 1. | | | | 17 |
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| ITEM 2. | | | | 17 |
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| ITEM 3. | | | | 17 |
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| ITEM 4. | | | | 17 |
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| ITEM 5. | | | | 17 |
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| ITEM 6. | | | | 17 |
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| | 18 |
2
PART I --— FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS COMARCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
OCTOBER 31, JANUARY 31,
2001 2001
----------- -----------
(UNAUDITED)
Current Assets:
Cash and cash equivalents ................ $19,765,000 $24,903,000
Short-term investments ................... 3,291,000 3,819,000
Accounts receivable, net ................. 10,838,000 8,418,000
Inventory ................................ 5,903,000 5,277,000
Deferred tax asset ....................... 1,683,000 2,133,000
Other current assets ..................... 841,000 1,746,000
----------- -----------
Total current assets ................. 42,321,000 46,296,000
Property and equipment, net .................. 3,873,000 3,695,000
Software development costs, net .............. 9,594,000 7,249,000
Intangible assets, net ....................... 7,680,000 8,381,000
Other assets ................................. 1,146,000 430,000
----------- -----------
$64,614,000 $66,051,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ......................... $ 482,000 $ 1,050,000
Deferred revenue ......................... 4,894,000 6,786,000
Accrued liabilities ...................... 7,142,000 9,364,000
----------- -----------
Total current liabilities ............ 12,518,000 17,200,000
Deferred compensation ........................ 3,291,000 3,918,000
Deferred income taxes ........................ 2,287,000 1,406,000
Minority interest ............................ 487,000 32,000
Stockholders' equity ......................... 46,031,000 43,495,000
----------- -----------
$64,614,000 $66,051,000
=========== ===========
(In thousands)
| | | April 30, | | January 31, |
| | | 2002
| | 2002
|
| | | (Unaudited) | | |
ASSETS | | | | | | |
| Current Assets: | | | | | | |
| Cash and cash equivalents | | $ | 22,018 | | $ | 21,288 |
| Short-term investments | | | 3,184 | | | 3,325 |
| Accounts receivable, net | | | 5,558 | | | 9,694 |
| Inventory | | | 5,943 | | | 6,002 |
| Deferred tax assets, net | | | 1,432 | | | 1,475 |
| Other current assets | | | 959 | | | 922 |
| | |
|
| |
|
|
| Total current assets | | | 39,094 | | | 42,706 |
|
| Property and equipment, net | | | 3,592 | | | 3,834 |
| Software development costs, net | | | 10,333 | | | 10,139 |
| Goodwill and acquired intangible assets, net | | | 8,030 | | | 8,118 |
| Other assets | | | 1,147 | | | 1,145 |
| | |
|
| |
|
|
| | | $ | 62,196 | | $ | 65,942 |
| | |
|
| |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
| Current Liabilities: | | | | | | |
| Accounts payable | | $ | 527 | | $ | 200 |
| Deferred revenue | | | 4,603 | | | 5,299 |
| Accrued liabilities | | | 4,406 | | | 7,186 |
| | |
|
| |
|
|
| Total current liabilities | | | 9,536 | | | 12,685 |
|
| Deferred compensation | | | 3,184 | | | 3,325 |
| Deferred tax liabilities, net | | | 2,506 | | | 2,269 |
| Minority interest | | | 74 | | | 76 |
| Stockholders’ equity | | | 46,896 | | | 47,587 |
| | |
|
| |
|
|
| | | $ | 62,196 | | $ | 65,942 |
| | |
|
| |
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
COMARCO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenue ............................................ $ 12,320,000 $ 13,153,000 $ 38,372,000 $ 35,202,000
Cost of sales ...................................... 6,405,000 6,414,000 19,337,000 16,978,000
------------ ------------ ------------ ------------
Gross profit ....................................... 5,915,000 6,739,000 19,035,000 18,224,000
Selling, general and administrative costs .......... 2,873,000 3,236,000 9,733,000 9,132,000
Engineering and support costs ...................... 1,630,000 1,239,000 4,287,000 3,568,000
------------ ------------ ------------ ------------
Operating income before severance costs ............ 1,412,000 2,264,000 5,015,000 5,524,000
Severance costs .................................... -- -- -- 1,325,000
------------ ------------ ------------ ------------
Operating income ................................... 1,412,000 2,264,000 5,015,000 4,199,000
Other income ....................................... 206,000 327,000 780,000 501,000
Minority interest .................................. (18,000) (2,000) (44,000) (4,000)
------------ ------------ ------------ ------------
Income before income taxes ......................... 1,600,000 2,589,000 5,751,000 4,696,000
Income tax expense ................................. 590,000 946,000 2,120,000 1,715,000
------------ ------------ ------------ ------------
Net income from continuing operations .............. 1,010,000 1,643,000 3,631,000 2,981,000
Net income (loss) from discontinued operations ..... -- (121,000) -- 378,000
------------ ------------ ------------ ------------
Net income ......................................... $ 1,010,000 $ 1,522,000 $ 3,631,000 $ 3,359,000
============ ============ ============ ============
Earnings per share -- continuing operations:
Basic .......................................... $ 0.14 $ 0.24 $ 0.52 $ 0.45
============ ============ ============ ============
Diluted ........................................ $ 0.14 $ 0.22 $ 0.48 $ 0.40
============ ============ ============ ============
Earnings (loss) per share -- discontinued
operations:
Basic .......................................... $ -- $ (0.02) $ -- $ 0.05
============ ============ ============ ============
Diluted ........................................ $ -- $ (0.02) $ -- $ 0.05
============ ============ ============ ============
Earnings per share:
Basic .......................................... $ 0.14 $ 0.22 $ 0.52 $ 0.50
============ ============ ============ ============
Diluted ........................................ $ 0.14 $ 0.20 $ 0.48 $ 0.45
============ ============ ============ ============
OPERATIONS (Unaudited, in thousands, except per share amounts)
| | | Three Months Ended April 30,
| |
| | | 2002
| | | 2001
| |
| Revenue | | $ | 7,765 | | | $ | 12,042 | |
| Cost of revenue | | | 4,980 | | | | 6,171 | |
| | |
|
|
| |
|
|
|
| Gross profit | | | 2,785 | | | | 5,871 | |
| Selling, general and administrative costs | | | 2,335 | | | | 3,358 | |
| Engineering and support costs | | | 1,417 | | | | 1,257 | |
| | |
|
|
| |
|
|
|
| Operating income (loss) | | | (967 | ) | | | 1,256 | |
| Other income, net | | | 107 | | | | 322 | |
| Minority interest in earnings of subsidiary | | | 1 | | | | (1 | ) |
| | |
|
|
| |
|
|
|
| Income (loss) before income taxes | | | (859 | ) | | | 1,577 | |
| Income tax expense (benefit) | | | (314 | ) | | | 570 | |
| | |
|
|
| |
|
|
|
| Net income (loss) | | $ | (545 | ) | | $ | 1,007 | |
| | |
|
|
| |
|
|
|
| Earnings (loss) per share: | | | | | | | | |
| Basic | | $ | (0.08 | ) | | $ | 0.14 | |
| | |
|
|
| |
|
|
|
| Diluted | | $ | (0.08 | ) | | $ | 0.13 | |
| | |
|
|
| |
|
|
|
| Weighted average common shares outstanding: | | | | | | | | |
| Basic | | | 6,968 | | | | 7,064 | |
| | |
|
|
| |
|
|
|
| Diluted | | | 6,968 | | | | 7,164 | |
| | |
|
|
| |
|
|
|
| Common shares outstanding | | | 6,969 | | | | 7,061 | |
| | |
|
|
| |
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
COMARCO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED OCTOBER 31,
-------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations ............................... $ 3,631,000 $ 2,981,000
Adjustments to reconcile net income from continuing operations to net
cash provided by operating activities:
Depreciation and amortization ................................... 4,127,000 3,298,000
Gain on disposal of property and equipment ...................... (16,000) (2,000)
Tax benefit from exercise of stock options ...................... 615,000 1,500,000
Deferred income taxes ........................................... 1,331,000 657,000
Provision for doubtful accounts receivable ...................... (31,000) 18,000
Provision for obsolete inventory ................................ 321,000 228,000
Minority interest in earnings of subsidiary ..................... 44,000 4,000
Changes in operating assets and liabilities:
Decrease (increase) in trading securities ................... 453,000 (665,000)
Increase in accounts receivable ............................. (2,435,000) (4,211,000)
Increase in inventory ....................................... (947,000) (884,000)
Decrease in other assets .................................... 911,000 885,000
Deferred compensation ....................................... (627,000) 666,000
Increase (decrease) in current liabilities .................. (3,510,000) 4,291,000
------------ ------------
Net cash provided by operating activities ........................... 3,867,000 8,766,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of investments ............... 72,000 11,000
Purchases of property and equipment ............................. (1,675,000) (1,528,000)
Proceeds from sales of property and equipment ................... 20,000 2,000
Investment in SwissQual ......................................... (1,073,000) --
Cash paid for acquisition of minority interest .................. (118,000) --
Software development costs ...................................... (4,193,000) (3,500,000)
------------ ------------
Net cash used in investing activities ............................... (6,967,000) (5,015,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock ...................... 283,000 1,592,000
Net proceeds from issuance of subsidiary common stock ........... 134,000 40,000
Purchase and retirement of common stock ......................... (1,680,000) --
------------ ------------
Net cash provided by (used in) financing activities ................. (1,263,000) 1,632,000
------------ ------------
Net increase (decrease) in cash and cash equivalents --
continuing operations ........................................... (4,363,000) 5,383,000
Net increase (decrease) in cash and cash equivalents --
discontinued operations ......................................... (775,000) 7,939,000
------------ ------------
Net increase (decrease) in cash and cash equivalents ................ (5,138,000) 13,322,000
Cash and cash equivalents, beginning of period ...................... 24,903,000 5,064,000
------------ ------------
Cash and cash equivalents, end of period ............................ $ 19,765,000 $ 18,386,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest .......................................... $ -- $ --
============ ============
Cash paid for income taxes ...................................... $ 994,000 $ 500,000
============ ============
(Unaudited, in thousands)
| | | Three Months Ended April 30,
| |
| | | 2002
| | | 2001
| |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
| Net income (loss) from continuing operations | | $ | (545 | ) | | $ | 1,007 | |
| Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization | | | 1,565 | | | | 1,353 | |
| Tax benefit from exercise of stock options | | | 11 | | | | — | |
| Deferred income taxes | | | 280 | | | | 535 | |
| Provision for doubtful accounts receivable | | | 6 | | | | 99 | |
| Provision for obsolete inventory | | | (38 | ) | | | (105 | ) |
| Minority interest in earnings of subsidiary | | | (1 | ) | | | 1 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Trading securities | | | 141 | | | | 168 | |
| Accounts receivable | | | 4,130 | | | | 418 | |
| Inventory | | | 97 | | | | (411 | ) |
| Other assets | | | (40 | ) | | | 749 | |
| Deferred compensation | | | (141 | ) | | | (342 | ) |
| Current liabilities | | | (3,071 | ) | | | (3,101 | ) |
| | |
|
|
| |
|
|
|
| Net cash provided by operating activities | | | 2,394 | | | | 371 | |
| | |
|
|
| |
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
| Proceeds from sales and maturities of investments | | | — | | | | 72 | |
| Purchases of property and equipment | | | (329 | ) | | | (697 | ) |
| Software development costs | | | (1,100 | ) | | | (1,341 | ) |
| | |
|
|
| |
|
|
|
| Net cash used in investing activities | | | (1,429 | ) | | | (1,966 | ) |
| | |
|
|
| |
|
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|
|
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Net proceeds from issuance of common stock | | | 121 | | | | — | |
| Purchase and retirement of common stock | | | (278 | ) | | | (76 | ) |
| | |
|
|
| |
|
|
|
| Net cash used in financing activities | | | (157 | ) | | | (76 | ) |
| | |
|
|
| |
|
|
|
| Net increase (decrease) in cash and cash equivalents – continuing operations | | | 808 | | | | (1,671 | ) |
| Net decrease in cash and cash equivalents – discontinued operations | | | (78 | ) | | | (259 | ) |
| | |
|
|
| |
|
|
|
| Net increase (decrease) in cash and cash equivalents | | | 730 | | | | (1,930 | ) |
| Cash and cash equivalents, beginning of period | | | 21,288 | | | | 24,903 | |
| | |
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|
| |
|
|
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| Cash and cash equivalents, end of period | | $ | 22,018 | | | $ | 22,973 | |
| | |
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| |
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| Supplemental disclosures of cash flow information: | | | | | | | | |
| Cash paid for interest | | $ | — | | | $ | — | |
| | |
|
|
| |
|
|
|
| Cash paid for income taxes | | $ | 103 | | | $ | 328 | |
| | |
|
|
| |
|
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|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
COMARCO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
COMARCO,Organization
Comarco, Inc., through its wireless technologies subsidiary Comarco Wireless Technologies, Inc. (collectively, "COMARCO"“Comarco” or the "Company"“Company”), is a leading provider of advanced technologyhardware and software products and services for the wireless Internet. COMARCOindustry. Comarco also designs and manufactures remote voice systems and mobile power products for notebook computers, cellular telephones, and personal
organizers. COMARCO, Inc.handheld devices. Comarco is a California corporation that became a public company in 1971 when it was spun-off from Genge Industries, Inc. Comarco Wireless Technologies, Inc. ("CWT"(“CWT”) was incorporated in the state of Delaware in September 1993. During October 1999, the Company embarked on a plan to divest its non-wireless businesses, which included the defense and commercial staffing businesses. The divestiture plan was completed during November 2000. Accordingly, the Company'sCompany’s continuing operations consist solely of the operations of CWT.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Summary of Significant Accounting Policies
Basis of Presentation:
The interim condensed consolidated financial statements of COMARCOComarco included herein have been prepared without audit in accordance with accounting
principles generally accepted in the United States of Americaaccounting principles for interim information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The Company believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the audited consolidated financial statements included in the Company's Annual ReportCompany’s annual report on Form 10-K for the year ended January 31, 2001 and the Company's Quarterly
Reports on Form 10-Q for the prior quarters of the current fiscal year.2002. The financial information presented herein reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results for the three and nine months ended October 31, 2001April 30, 2002 are not necessarily indicative of the results to be expected for the year ended January 31, 2002.
2003.
Principles of Consolidation:
The condensed consolidated financial statements of the Company include the accounts of COMARCO,Comarco, Inc., CWT, and wholly owned subsidiaries primarily reported as discontinued operations. All material intercompany balances, transactions, and profits have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date ofin the financial statements and accompanying notes. Significant estimates made in preparing the reported amountsfinancial statements include the allowances for doubtful accounts, inventory reserves, goodwill and purchased intangible asset valuations, deferred income tax asset valuation allowances, warranty reserves, litigation, and other contingencies. To the extent there are material differences between estimates and the actual results, future results of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
operations will be affected.
Reclassifications:
Certain prior period balances have been reclassified to conform to the current period presentation.
Stock Split:
In October 2000,
3. Recent Accounting Pronouncements
Effective February 1, 2002, the Company
effectedimplemented Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 establishes new standards for goodwill acquired in a
stock splitbusiness combination, eliminates amortization of
three sharesgoodwill, and sets forth methods for
every two shares of common stock outstanding. All references in the condensed
consolidated financial statementsperiodically evaluating goodwill for impairment. Impairment losses that arise due to the
numberinitial application of
shares and to per share
amounts have been retroactively restated to reflect this
stock split.
6
standard will be reported as a cumulative effect of a change in accounting principle. The first step of the impairment test, which COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS—(Continued)
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements:
In
must be completed by July 2001,31, 2002, will identify potential impairment of goodwill and other intangible assets deemed to have indefinite lives. The second step of the Financial Accounting Standards Board ("FASB") issued
Statementimpairment test, which must be completed prior to the issuance of Financial Accounting Standards ("SFAS")the Company’s fiscal 2003 annual financial statements, will measure the amount of impairment loss, if any.
As required by SFAS No. 141, "Business
Combinations," which was effective upon issuance. This statement requires that142, the purchase methodCompany ceased amortizing goodwill and other intangible assets deemed to have indefinite lives of $6.9 million beginning February 1, 2002, thereby eliminating amortization of approximately $181,000 per quarter.
The following supplemental pro forma information presents the Company’s net income (loss) and earnings (loss) per share information as if the Company had been accounting be usedfor its goodwill under SFAS No. 142 for all business combinations
initiated after June 30, 2001. periods presented (in thousands):
| | | Three Months Ended April 30,
|
| | | 2002
| | | 2001
|
| Net income (loss) — as reported | | $ | (545 | ) | | $ | 1,007 |
| Adjustments: | | | | | | | |
| Amortization of goodwill, net of tax | | | — | | | | 106 |
| Net income (loss) — as adjusted | | $ | (545 | ) | | $ | 1,113 |
| | |
|
|
| |
|
|
| Adjusted basic earnings (loss) per share | | $ | (0.08 | ) | | $ | 0.16 |
| | |
|
|
| |
|
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| Adjusted diluted earnings (loss) per share | | $ | (0.08 | ) | | $ | 0.15 |
| | |
|
|
| |
|
|
The adoptionCompany has begun performing the first of this standard isthe required impairment tests under the new rules but has not expected toyet determined the effect, if any, the impairment tests will have a material effect on the Company's financial condition, consolidatedits results of operations or cash flows.
In July 2001,and financial condition. The Company’s evaluation may result in an impairment under this new method of evaluating goodwill.
Effective February 1, 2002, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which is effective January 1, 2002. This statement requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment. The Company has not yet
completed its analysis of the effect this standard will have on the Company's
financial condition, consolidated results of operations or cash flows.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement provides the accounting requirements for
retirement obligations associated with long-lived assets. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2001, and early adoption is
permitted. The adoption of this standard is not expected to have a material
effect on the Company's financial condition, consolidated results of operations,
or cash flows.
In August 2001, the FASB issuedimplemented SFAS No. 144, "Accounting“Accounting for the Impairment or Disposal of Long-Lived Assets,"” which supersedes both SFAS No. 121, "Accounting“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"Of” and the accounting and reporting provisions of APBAccounting Principles Board (“APB”) Opinion No. 30, "Reporting“Reporting the Results of Operations--ReportingOperations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions"Transactions” (“APB 30”), for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental
provisions in SFAS No. 121 for recognizing and measuring impairment losses on
long-lived assets held for use and long-lived assets to be disposed of by sale,
while also resolving significant implementation issues associated with SFAS No.
121. For example, SFAS No. 144 provides guidance on how a long-lived asset that
is used as part of a group should be evaluated for impairment, establishes
criteria for when a long-lived asset is held for sale, and prescribes the
accounting for a long-lived asset that will be disposed of other than by sale.
SFAS No. 144 retains the basic provisions of APB Opinion No. 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will
never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under SFAS No. 142, "Goodwill and Other Intangible Assets."
The Company is required to adopt SFAS No. 144 no later than the year
beginning after December 15, 2001, and plans to adopt its provisions for the
quarter ending April 30, 2002. Management does not expect the adoption of SFAS No. 144 for long-lived assets held for use todid not have a material impact on the Company's financial statements because the impairment assessment under SFAS No.
144 is largely unchanged from SFAS No. 121. The provisions of SFAS No. 144
pertaining to assets held for sale or other disposal generally are required to
be applied prospectively after the adoption date to newly initiated disposal
activities. Therefore, management cannot determine the potential effects that
adoption of SFAS No. 144 will have on the Company's financial condition,
consolidatedCompany’s results of operations or cash flows.
3. STOCKHOLDERS' EQUITY
financial position.
4. Stockholders’ Equity
During 1992,
the Company'sour Board of Directors authorized a stock repurchase program of up to 3.0 million shares of our common stock. From program inception through
October 31, 2001,April 30, 2002, the Company has repurchased approximately
2.42.5 million shares for an average price of
$8.08$8.23 per share. During the
thirdfirst quarter ended
October 31, 2001,April 30, 2002, the Company repurchased
108,80026,200 shares of
our common stock in the open market for an average price of
$13.31$10.62 per share.
For the nine
months ending October 31, 2001, the Company repurchased 124,900 shares of common
stock in the open market for an average price of $13.46 per share.
7
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. EARNINGS PER SHARE
5. Earnings (Loss) Per Share
The Company calculates net income
(loss) per share in accordance with SFAS No. 128,
"Earnings“Earnings Per Share.
"” Under
this statement,SFAS No. 128, basic net income
(loss) per share is calculated by dividing net income
(loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted net income
(loss) per share reflects the effects of potentially dilutive securities.
Since the Company incurred a net loss for the first quarter ended April 30, 2002, basic and diluted net loss per share were the same because the inclusion of the dilutive securities would have been antidilutive. The following tables present reconciliations of the numerators and denominators of the basic and diluted earnings
(loss) per share computations for net
income. In the tables below,
"Income" represents the numerator and "Shares" represent the denominator:
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
----------------------------- -----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
BASIC:
Net income from continuing operations ............... $ 1,010,000 $ 1,643,000 $ 3,631,000 $ 2,981,000
Weighted average shares outstanding ................. 7,002,000 6,831,000 7,040,000 6,677,000
----------- ----------- ----------- -----------
Basic income per share from continuing
operations ...................................... $ 0.14 $ 0.24 $ 0.52 $ 0.45
=========== =========== =========== ===========
Net income (loss) from discontinued operations ...... $ -- $ (121,000) $ -- $ 378,000
Weighted average shares outstanding ................. 7,002,000 6,831,000 7,040,000 6,677,000
----------- ----------- ----------- -----------
Basic income (loss) per share from discontinued
operations ...................................... $ -- $ (0.02) $ -- $ 0.05
=========== =========== =========== ===========
Net income .......................................... $ 1,010,000 $ 1,522,000 $ 3,631,000 $ 3,359,000
Weighted average shares outstanding ................. 7,002,000 6,831,000 7,040,000 6,677,000
----------- ----------- ----------- -----------
Basic income per share .............................. $ 0.14 $ 0.22 $ 0.52 $ 0.50
=========== =========== =========== ===========
DILUTED:
Net income from continuing operations ............... $ 1,010,000 $ 1,643,000 $ 3,631,000 $ 2,981,000
Effect of subsidiary options ........................ (44,000) (95,000) (178,000) (211,000)
----------- ----------- ----------- -----------
Net income used in calculation of diluted
income per share from continuing
operations ...................................... $ 966,000 $ 1,548,000 $ 3,453,000 $ 2,770,000
=========== =========== =========== ===========
Weighted average shares outstanding ................. 7,002,000 6,831,000 7,040,000 6,677,000
Effect of dilutive securities --
stock options ................................... 86,000 220,000 96,000 293,000
----------- ----------- ----------- -----------
Weighted average shares used in calculation
of diluted income per share from
continuing operations ........................... 7,088,000 7,051,000 7,136,000 6,970,000
=========== =========== =========== ===========
Diluted income per share from continuing
operations ...................................... $ 0.14 $ 0.22 $ 0.48 $ 0.40
=========== =========== =========== ===========
8
income (loss).COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS—(Continued)
(UNAUDITED)
4. EARNINGS PER SHARE (CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
----------------------------- -----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income (loss) from discontinued
operations .................................. $ -- $ (121,000) $ -- $ 378,000
Effect of subsidiary options .................... -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) used in calculation of
diluted income per share from
discontinued operations ..................... $ -- $ (121,000) $ -- $ 378,000
=========== =========== =========== ===========
Weighted average shares outstanding ............. 7,002,000 6,831,000 7,040,000 6,677,000
Effect of dilutive securities --
stock options ............................... 86,000 220,000 96,000 293,000
----------- ----------- ----------- -----------
Weighted average shares used in calculation
of diluted income per share from
discontinued operations ..................... 7,088,000 7,051,000 7,136,000 6,970,000
=========== =========== =========== ===========
Diluted income (loss) per share from
discontinued operations ..................... $ -- $ (0.02) $ -- $ 0.05
=========== =========== =========== ===========
Net income ...................................... $ 1,010,000 $ 1,522,000 $ 3,631,000 $ 3,359,000
Effect of subsidiary options .................... (44,000) (95,000) (178,000) (211,000)
----------- ----------- ----------- -----------
Net income used in calculation of diluted
income per share ............................ $ 966,000 $ 1,427,000 $ 3,453,000 $ 3,148,000
=========== =========== =========== ===========
Weighted average shares outstanding ............. 7,002,000 6,831,000 7,040,000 6,677,000
Effect of dilutive securities --
stock options ............................... 86,000 220,000 96,000 293,000
----------- ----------- ----------- -----------
Weighted average shares used in calculation
of diluted income per share ................. 7,088,000 7,051,000 7,136,000 6,970,000
=========== =========== =========== ===========
Diluted income per share ........................ $ 0.14 $ 0.20 $ 0.48 $ 0.45
=========== =========== =========== ===========
5. INVENTORY
In the tables below, “Income” or “Loss” represents the numerator and “Shares” represents the denominator (in thousands, except per share amounts):
| | | Three Months Ended April 30,
| |
| | | 2002
| | | 2001
| |
Basic: | | | | | | | | |
| Net income (loss) | | $ | (545 | ) | | $ | 1,007 | |
| Weighted average shares outstanding | | | 6,968 | | | | 7,064 | |
| | |
|
|
| |
|
|
|
| Basic income (loss) per share | | $ | (0.08 | ) | | $ | 0.14 | |
| | |
|
|
| |
|
|
|
|
Diluted: | | | | | | | | |
| Net income (loss) | | $ | (545 | ) | | $ | 1,007 | |
| Effect of subsidiary options | | | 21 | | | | (53 | ) |
| | |
|
|
| |
|
|
|
| Net income used in calculation of diluted income (loss) per share | | $ | (524 | ) | | $ | 954 | |
| | |
|
|
| |
|
|
|
|
| Weighted average shares outstanding | | | 6,968 | | | | 7,064 | |
| Effect of dilutive securities — stock options | | | — | | | | 100 | |
| | |
|
|
| |
|
|
|
| Weighted average shares used in calculation of diluted income (loss) per share | | | 6,968 | | | | 7,164 | |
| | |
|
|
| |
|
|
|
| Diluted income (loss) per share | | $ | (0.08 | ) | | $ | 0.13 | |
| | |
|
|
| |
|
|
|
6. Inventory
Inventory consists of the following
(dollars in(in thousands):
OCTOBER 31, JANUARY 31,
2001 2001
----------- -----------
Raw materials .......................... $4,477 $4,695
Work in progress ....................... 654 363
Finished goods ......................... 772 219
------ ------
$5,903 $5,277
====== ======
9
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SOFTWARE DEVELOPMENT COSTS, NET
| | | April 30, 2002
| | January 31, 2002
|
| Raw materials | | $ | 4,525 | | $ | 4,657 |
| Work in progress | | | 245 | | | 420 |
| Finished goods | | | 1,173 | | | 925 |
| | |
|
| |
|
|
| | | $ | 5,943 | | $ | 6,002 |
| | |
|
| |
|
|
7. Software Development Costs, Net
Software development costs consist of the following
(dollars in(in thousands):
OCTOBER 31, JANUARY 31,
2001 2001
----------- -----------
Capitalized software development costs ....... $ 16,778 $ 12,585
Less accumulated amortization ................ (7,184) (5,336)
-------- --------
$ 9,594 $ 7,249
======== ========
| | | April 30, 2002
| | | January 31, 2002
| |
| Capitalized software development costs | | $ | 19,156 | | | $ | 18,056 | |
| Less accumulated amortization | | | (8,823 | ) | | | (7,917 | ) |
| | |
|
|
| |
|
|
|
| | | $ | 10,333 | | | $ | 10,139 | |
| | |
|
|
| |
|
|
|
Capitalized software development costs for the three monthsquarters ended October 31,April 30, 2002 and 2001 and 2000 totaled $1.4$1.1 million and $1.2 million, respectively.
Capitalized software development costs for the nine months ended October 31,
2001 and 2000 totaled $4.2 million and $3.5$1.3 million, respectively. Amortization of software development costs for the three monthsquarters ended October 31,April 30, 2002 and 2001 totaled $906,000 and 2000 totaled $680,000$612,000, respectively, and $916,000, respectively. For the nine months ended
October 31, 2001 and 2000, amortization of software development costs totaled
$1.8 million and $2.4 million, respectively. Amortization of software
development costs hashave been reported in cost of salesrevenue in the accompanying condensed consolidated financial statements.
7. GOODWILL
COMARCO, INC. AND ACQUIRED INTANGIBLE ASSETS
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
8. Goodwill and Acquired Intangible Assets
Goodwill and acquired intangible assets consist of the following
(dollars in(in thousands):
OCTOBER 31, JANUARY 31,
2001 2001
----------- -----------
Purchased technology ....................... $ 1,790 $ 1,790
Customer base .............................. 930 930
Goodwill ................................... 5,032 4,947
Other acquired intangible assets ........... 1,650 1,650
-------- --------
$ 9,402 $ 9,317
Less accumulated amortization .............. (1,722) (936)
======== ========
$ 7,680 $ 8,381
======== ========
| | | April 30, 2002
| | | January 31, 2002
| |
| Purchased technology | | $ | 1,790 | | | $ | 1,790 | |
| Customer base | | | 930 | | | | 930 | |
| Goodwill | | | 5,941 | | | | 5,941 | |
| Other acquired intangible assets | | | 1,450 | | | | 1,450 | |
| | |
|
|
| |
|
|
|
| | | $ | 10,111 | | | $ | 10,111 | |
| Less accumulated amortization | | | (2,081 | ) | | | (1,993 | ) |
| | |
|
|
| |
|
|
|
| | | $ | 8,030 | | | $ | 8,118 | |
| | |
|
|
| |
|
|
|
Amortization of definite lived intangible assets for the three monthsquarters ended October 31,April 30, 2002 and 2001 totaled $88,000 and 2000 totaled $262,000 and $79,000,$261,000, respectively. ForAs discussed in Note 3, the nine months
ended October 31, 2001 and 2000, amortizationCompany ceased amortizing goodwill beginning February 1, 2002 upon adoption of intangibles totaled $786,000
and $236,000, respectively.
8. BUSINESS SEGMENT INFORMATION
SFAS No. 142.
9. Business Segment Information
The Company has two reportable operating segments: wireless infrastructure and wireless applications. Wireless infrastructure provides advanced technology
productsdesigns and servicesmanufactures hardware and software tools for use by wireless carriers, equipment vendors, and others. Radio Frequency (“RF”) engineers, professional technicians, and others use these tools to design, deploy, and optimize wireless networks, and to verify the performance of the wireless Internet. networks once deployed.
Wireless applications designs and manufactures remote voice systems and mobile power products for notebook computers, cellular telephones, and
personal organizers.
10
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. BUSINESS SEGMENT INFORMATION (CONTINUED)
handheld devices. Remote voice systems currently include various call box products that provide emergency communication over existing wireless networks. In addition to the call box products, we provide system installation and long-term maintenance services. Currently, approximately 14,000 CWT call boxes are installed, the majority of which are serviced and maintained under long-term agreements.Performance measurement and resource allocation for the reportable segments are based on many factors. The primary financial measures used are revenue and gross profit. The revenue, gross profit, and gross margin attributable to these segments are as follows
(dollars in(in thousands):
THREE MONTHS ENDED OCTOBER 31, 2001 THREE MONTHS ENDED OCTOBER 31, 2000
------------------------------------------- -------------------------------------------
WIRELESS WIRELESS WIRELESS WIRELESS
INFRASTRUCTURE APPLICATIONS TOTAL INFRASTRUCTURE APPLICATIONS TOTAL
-------------- ------------ -------- -------------- ------------ --------
Revenue ............ $ 6,931 $ 5,389 $ 12,320 $ 9,726 $ 3,427 $ 13,153
Cost of sales ...... 3,185 3,220 6,405 4,091 2,323 6,414
-------- -------- -------- -------- -------- --------
Gross profit ....... $ 3,746 $ 2,169 $ 5,915 $ 5,635 $ 1,104 $ 6,739
======== ======== ======== ======== ======== ========
Gross margin ....... 54.0% 40.2% 48.0% 57.9% 32.2% 51.2%
======== ======== ======== ======== ======== ========
NINE MONTHS ENDED OCTOBER 31, 2001 NINE MONTHS ENDED OCTOBER 31, 2000
------------------------------------------- -------------------------------------------
WIRELESS WIRELESS WIRELESS WIRELESS
INFRASTRUCTURE APPLICATIONS TOTAL INFRASTRUCTURE APPLICATIONS TOTAL
-------------- ------------ -------- -------------- ------------ --------
Revenue ............ $ 22,040 $ 16,332 $ 38,372 $ 25,210 $ 9,992 $ 35,202
Cost of sales ...... 9,487 9,850 19,337 10,132 6,846 16,978
-------- -------- -------- -------- -------- --------
Gross profit ....... $ 12,553 $ 6,482 $ 19,035 $ 15,078 $ 3,146 $ 18,224
======== ======== ======== ======== ======== ========
Gross margin ....... 57.0% 39.7% 49.6% 59.8% 31.5% 51.8%
======== ======== ======== ======== ======== ========
Revenue by geographic area consists of the following (dollars in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
North America ......... $ 11,087 $ 11,152 $ 35,757 $ 31,622
Europe ................ -- 106 16 280
Asia .................. 116 307 970 314
Latin America ......... 1,117 1,588 1,629 2,986
-------- -------- -------- --------
$ 12,320 $ 13,153 $ 38,372 $ 35,202
======== ======== ======== ========
9. CONTINGENCIES
COMARCO was named as a defendant in two lawsuits filed by Mobility
Electronics, Inc. ("Mobility").
Mobility v. Targus Group International, Inc. ("Targus") and CWT was
filed on July 23, 2001. In addition to claims against Targus, the distributor of
the Company's mobile power adapter products, the lawsuit alleges that the
Company intentionally interfered with Mobility's rights under an exclusive
manufacturing agreement with Targus and misappropriated Mobility's trade
secrets.
Targus markets and distributes the Company's 70-Watt AC ChargeSource
universal power adapter. As previously announced, the Company received an $8.6
million purchase order from Targus covering the 70-Watt AC adapter and a new DC
ChargeSource universal power adapter recently introduced by COMARCO. In its
complaint, Mobility contends that it currently has an exclusive contract to
manufacture DC power adapters for Targus. The Company understands that Targus
purchased DC power adapter products from Mobility and that Targus used and sold
11
| | | Three Months Ended April 30, 2002
| |
| | | Wireless Infrastructure
| | | Wireless Applications
| | | Total
| |
| Revenue | | $ | 3,108 | | | $ | 4,657 | | | $ | 7,765 | |
| Cost of revenue | | | 2,177 | | | | 2,803 | | | | 4,980 | |
| | |
|
|
| |
|
|
| |
|
|
|
| Gross profit | | $ | 931 | | | $ | 1,854 | | | $ | 2,785 | |
| | |
|
|
| |
|
|
| |
|
|
|
| Gross margin | | | 29.9 | % | | | 39.8 | % | | | 35.9 | % |
| | |
|
|
| |
|
|
| |
|
|
|
| | | Three Months Ended April 30, 2001
| |
| | | Wireless Infrastructure
| | | Wireless Applications
| | | Total
| |
| Revenue | | $ | 6,692 | | | $ | 5,350 | | | $ | 12,042 | |
| Cost of revenue | | | 2,863 | | | | 3,308 | | | | 6,171 | |
| | |
|
|
| |
|
|
| |
|
|
|
| Gross profit | | $ | 3,829 | | | $ | 2,042 | | | $ | 5,871 | |
| | |
|
|
| |
|
|
| |
|
|
|
| Gross margin | | | 57.2 | % | | | 38.2 | % | | | 48.8 | % |
| | |
|
|
| |
|
|
| |
|
|
|
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS—(Continued)
(UNAUDITED)
9. CONTINGENCIES (CONTINUED)
DC power adapter products from Mobility under a terminable, non-exclusive
license agreement between the Company and Targus involving patented COMARCO
technology. Prior to the filing
Revenue by geographic area consisted of the lawsuit, the Company had terminated the
license agreement with Targus in accordance with the provisions of the license
agreement.
During October 2001, the three parties to the lawsuit entered into a
settlement agreement and, on November 26, 2001, the lawsuit was dismissed with
prejudice.
Mobility v. COMARCO No. CIV011489PHXMHM was filed on August 10, 2001.
This lawsuit alleges that the Company, through the manufacture and sale of its
70-Watt AC ChargeSource universal power adapter, infringed upon a patent
purchased by Mobility on August 6, 2001.
COMARCO's management believes that Mobility's infringement claim against
the Company is without merit and intends to vigorously defend the lawsuit.
following (in thousands):
| | | Three Months Ended April 30,
|
| | | 2002
| | 2001
|
| North America | | $ | 7,080 | | $ | 11,727 |
| Europe | | | 372 | | | 16 |
| Asia | | | 122 | | | 275 |
| Latin America | | | 191 | | | 24 |
| | |
|
| |
|
|
| | | $ | 7,765 | | $ | 12,042 |
| | |
|
| |
|
|
10. Contingencies
The Company is from time to time involved in various legal proceedings incidental to the conduct of our business. We believe that the outcome of all other such pending legal proceedings will not in the aggregate have a material adverse effect on our
business, financial condition
or results of operations.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
and operating results. | | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this quarterly report on Form 10-Q. This report includes
"forward-looking statements" that are subject to risks, uncertainties, and other
factors that could cause actual results or outcomes to differ materially from
those contemplated by thecontains forward-looking statements. Forward-lookingThese statements in this release are generally identifiedrelate to future events or our future financial performance. In some cases, you can identify forward-looking statements by wordsterminology such as "believes,"
"anticipates," "plans," "expects," "will," "would," and similar expressions that“may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms, or other comparable terminology. These statements are intended to identify forward-looking statements. A number of importantonly predictions. Actual events or results may differ materially. Important factors couldwhich may cause ouractual results to differ materially from those indicated by
thesethe forward-looking statements including, among others, the impact of
perceived or actual weakening of economic conditions on customers' and
prospective customers' spending on our products and services; quarterly
fluctuations in our revenue or other operating results; failure to meet
financial expectations of analysts and investors, including failure from
significant reductions in demand from earlier anticipated levels; potential
difficultiesare described in the assimilation of operations, strategies, technologies,
personnel and products of acquired companies and technologies; risks related to
market acceptance of our products and our ability to meet contractual and
technical commitments with our customers; activities by us and others regarding
protection of intellectual property; and competitors' release of competitive
products and other actions. Further information on potential factors that could
affect our financial results are includedsection entitled “Risk Factors” in risks detailed from time to time in
our Securities and Exchange Commission filings, including without limitation our
quarterly reports on Form 10-Q for the prior quartersPart I, Item 1 of the current fiscal year
and our annual report ofon Form 10-K for the year ended January 31, 2001.
2002, and other risks identified from time to time in our filings with the Securities and Exchange Commission, press releases, and other communications.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither any other person nor we assume responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
OVERVIEW
COMARCO,
Overview
Comarco, Inc., through its wireless technologies subsidiary Comarco Wireless Technologies, Inc. (collectively, "COMARCO,"“Comarco,” or the "Company"“Company”), is a leading provider of advanced technologyhardware and software products and services for the wireless Internet. COMARCOindustry. Comarco also designs and manufactures remote voice systems and mobile power products for notebook computers, cellular telephones, and personal
organizers. COMARCO,handheld devices. Comarco, Inc. is a California corporation that became a public company in 1971 when it was spun-off from Genge Industries, Inc. Comarco Wireless Technologies, Inc. ("CWT"(“CWT”) was incorporated in the State of Delaware in September 1993. During October 1999, we embarked on a plan to divest our non-wireless businesses, which included the defense and commercial staffing businesses. The divestiture plan was completed during November 2000. Accordingly, our continuing operations consist solely of the operations of CWT.
RESULTS OF OPERATIONS -- CONTINUING OPERATIONS
Results of Operations – Continuing Operations
We have two reportable operating segments: wireless infrastructure and wireless applications.
Wireless Infrastructure
This operating segment
Our wireless infrastructure business designs and manufactures
advanced technology hardware and software tools for use by wireless carriers, equipment vendors, and others.
These tools are used by radioRadio frequency
("RF") engineers, professional technicians, and others
use these tools to design, deploy, and optimize wireless networks, and to
test and measureverify the
Qualityperformance of
Service once the wireless networks
areonce deployed.
The wireless infrastructure segment is also a provider of engineering
services that assist the wireless carriers, equipment vendors, and others in all
phases of the wireless network lifecycle.
13
Wireless Applications
This operating segment
Our wireless applications business designs and manufactures remote voice systems and mobile power products for notebook computers, cellular telephones, and personal
organizers.handheld devices. Remote voice systems currently include various call box products that provide emergency communication over existing wireless networks. In addition to the call box products, we provide system installation and long-term maintenance services. Currently, approximately 14,000 CWT call boxes are installed, the majority of which are serviced and maintained under long-term agreements.
The wireless applications segmentbusiness also includes the ChargeSource family of mobile power products. The 70-watt universal AC power adapter, our second-generation mobile power system, thatcharges and powers and charges most laptop computers, cellular telephones, handheld devices, and portable printers. This product is currently distributed by Targus Group
International ("Targus"). The ChargeSource product offering has been expanded withto include the newly designed DC ChargeSource universal DC power adapter. TheThis universal DC power adapter allows the
traveling professionalprofessionals to use all of their existing ChargeSource SmartTips on the road or in the air. The new device connects to the in-seat power outlet available on most major airlines or the cigarette lighter plug found in cars today. The new ChargeSource universal DC power adapter began shipping during the third quarter of fiscal 2002. Targus currently distributes these two products. We anticipate expanding the currentChargeSource product offering with a 20-watt universal power adapter with both AC and DC inputs during the third quarter of fiscal year.2003. This new product is also being
distributed by Targus.
targeted at the users of cellular telephones, pocket PCs, handheld devices, and digital cameras and camcorders.
The following table sets forth certain items as a percentage of revenue from our condensed consolidated statements of
incomeoperations for the three
and nine
months ended
October 31, 2001April 30, 2002 and
2000.2001. The table and discussion that follows
provideprovides information which management believes is relevant to an assessment and understanding of our condensed consolidated results of operations and financial condition. The discussion should be read in conjunction with the condensed consolidated financial statements and accompanying notes thereto included elsewhere herein.
PERCENTAGE OF REVENUE
-----------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
-------------------- --------------------
2001 2000 2001 2000
------ ------ ------ ------
Revenue ........................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales .................................. 52.0 48.8 50.4 48.2
------ ------ ------ ------
Gross margin ................................... 48.0 51.2 49.6 51.8
Selling, general and administrative costs ...... 23.3 24.6 25.4 25.9
Engineering and support costs .................. 13.2 9.4 11.2 10.2
------ ------ ------ ------
Operating income before severance costs ........ 11.5 17.2 13.0 15.7
Severance costs ................................ -- -- -- 3.8
------ ------ ------ ------
Operating income ............................... 11.5 17.2 13.0 11.9
Other income ................................... 1.7 2.5 2.0 1.4
Minority interest .............................. (0.2) -- (0.1) --
------ ------ ------ ------
Income before income taxes ..................... 13.0 19.7 14.9 13.3
Income tax expense ............................. 4.8 7.2 5.5 4.8
------ ------ ------ ------
Net income from continuing operations .......... 8.2% 12.5% 9.4% 8.5%
====== ====== ====== ======
14
COMPARISON OF THE THREE MONTHS ENDED OCTOBER 31, 2001 TO THE THREE MONTHS ENDED
OCTOBER 31, 2000
CONSOLIDATED
| | | Three Months Ended April 30,
| |
| | | 2002
| | | 2001
| |
| Revenue | | 100.0 | % | | 100.0 | % |
| Cost of revenue | | 64.1 | | | 51.2 | |
| | |
|
| |
|
|
| Gross profit | | 35.9 | | | 48.8 | |
|
| Selling, general and administrative costs | | 30.1 | | | 27.9 | |
| Engineering and support costs | | 18.2 | | | 10.5 | |
| | |
|
| |
|
|
| Operating income (loss) | | (12.4 | ) | | 10.4 | |
| Other income, net | | 1.4 | | | 2.7 | |
| Minority interest in earnings of subsidiary | | — | | | — | |
| | |
|
| |
|
|
| Income (loss) before income taxes | | (11.0 | ) | | 13.1 | |
| Income tax expense (benefit) | | (4.0 | ) | | 4.7 | |
| | |
|
| |
|
|
| Net income (loss) | | (7.0 | )% | | 8.4 | % |
| | |
|
| |
|
|
Consolidated
Revenue
Total revenue for the thirdfirst quarter of fiscal 2003, which ended April 30, 2002, decreased 35.5 percent to $7.8 million compared to the first quarter of fiscal 2002, which ended October
31, 2001,primarily due to significantly lower revenue generated by our wireless infrastructure business.
Cost of Revenue and Gross Margin
Total cost of revenue for the first quarter of fiscal 2003 decreased 6.319.3 percent to $12.3$5.0 million compared to the thirdfirst quarter of fiscal 2001. As discussed below, the decrease is attributable to decreased
sales from our wireless infrastructure segment, partially offset by an increase
in sales from our wireless applications segment.
Cost of Sales and Gross Margin
Total cost of sales was $6.4 million for the third quarters of both
fiscal 2002 and 2001.2002. As a percentage of revenue, gross margin for the third
quarter of fiscal 2002 was 48.0decreased to 35.9 percent as compared to 51.2from 48.8 percent for the thirdfirst quarter of the prior fiscal year. As discussed below, theThe decrease in gross margin iswas primarily attributable to significantly lower sales fromrevenue generated by our wireless infrastructure segment partially offset by an improved contribution from increased sales from
our wireless applications segment.
business and reduced absorption of related fixed costs.
Selling, General and Administrative Costs
Selling, general, and administrative costs for the thirdfirst quarter of fiscal 2003 were $2.3 million compared to $3.4 million for the first quarter of fiscal 2002, were $2.9a decrease of $1.1 million comparedor 30.5 percent. This decrease was due to $3.2 million forreduced selling expenses and incentive compensation driven by significantly lower revenue generated by our wireless infrastructure business. Additionally, as of the thirdfirst quarter of fiscal 2001, a decrease2003, and in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we no longer amortize goodwill and other intangible assets
deemed to have indefinite lives. For the first quarter of $0.4 million or 11.2 percent. Excluding costs
attributable to EDX Engineering, Inc. ("EDX"), which was acquired on December 7,
2000,fiscal 2002, selling, general and administrative costs for the third quarterincluded $0.1 million of 2002
decreased $0.7 million in comparisonamortization of goodwill and other intangible assets deemed to the corresponding quarter of the prior
fiscal year. This decrease was driven by lower third quarter sales in comparison
to the prior fiscal year, as well as enterprise-wide cost reductions that were
put in place during the preceding 12 months. These cost reductions include the
elimination of direct sales and marketing efforts for our ChargeSource mobile
power products, closing the sales and support office in London and reorganizing
our call box business resulting in a significant reduction of indirect costs.have indefinite lives. As a percentage of revenue, selling, general and administrative costs decreased to
23.3were 30.1 percent from 24.6and 27.9 percent for the third quarter of the prior fiscal year.
quarters ended April 30, 2002 and 2001, respectively.
Engineering and Support Costs
Engineering and support costs, net of capitalized software development costs, for the thirdfirst quarter of fiscal 2002 were $1.62003 increased 12.7 percent to 1.4 million as compared to $1.2
million for the thirdfirst quarter of fiscal 2001, an increase of $0.4 million or
31.6 percent. Excluding costs attributable to EDX, gross2002. Gross engineering and support costs for the thirdfirst quarter of fiscal 20022003 were $2.8 million comparedflat in comparison to $2.4
million for the third quartercorresponding period of the prior fiscal 2001, an increase of $0.4 million or
14.2 percent. This increase is primarily due to continued investment in our
product development programs, which include GPRS and 1XRTT products (2.5G
technologies), as well as 3G scanners. Capitalized software development costs,
which totaled $1.4 million and $1.2 million for the three months ended October
31, 2001 and 2000, respectively, partially offsets the increase in gross
engineering costs. The increase inyear, while capitalized software development costs is
consistent with our ongoingdecreased by approximately $0.2 million resulting in a net increase in engineering and support costs. For the first quarter of fiscal 2003 and 2002, gross engineering and support costs were offset by capitalized software development programs.
costs totaling $1.1 million and $1.3 million, respectively.
Other Income
Other income consistingconsists primarily of interest income, decreased
$121,000income.
Income Tax Expense
Due to
$206,000the loss for the
three months ended October 31, 2001 from $327,000
for the three months ended October 31, 2000. The decrease was primarily due to
lower interest rates during the thirdfirst quarter of fiscal
2002.
Income Tax Expense2003, we recognized an income tax benefit of $0.3 million based on the expected annual effective tax rate of 36.6 percent for the fiscal year ending January 31, 2003. The effective tax rate for the
quartersquarter ended
October 31,April 30, 2001
and 2000
was
36.5 percent, applied on pre-tax income before minority interest expense.
15
WIRELESS INFRASTRUCTURE
THREE MONTHS ENDED
OCTOBER 31,
-------------------------
2001 2000
-------- --------
(DOLLARS IN THOUSANDS)
Revenue ...................................... $ 6,931 $ 9,726
Cost of sales ................................ 3,185 4,091
-------- --------
Gross profit ................................. $ 3,746 $ 5,635
======== ========
Gross margin ................................. 54.0% 57.9%
======== ========
36.1 percent. Wireless Infrastructure
| | | Three Months Ended April 30,
| |
| | | 2002
| | | 2001
| |
| | | (Dollars in thousands) | |
| Revenue | | $ | 3,108 | | | $ | 6,692 | |
| Cost of revenue | | | 2,177 | | | | 2,863 | |
| | |
|
|
| |
|
|
|
| Gross profit | | $ | 931 | | | $ | 3,829 | |
| | |
|
|
| |
|
|
|
| Gross margin | | | 29.9 | % | | | 57.2 | % |
| | |
|
|
| |
|
|
|
Revenue
Revenue from our wireless infrastructure segmentbusiness for the thirdfirst quarter of fiscal 2003 was $3.1 million compared to $6.7 million for the first quarter of fiscal 2002, a decrease of $3.6 million or 53.6 percent. Many of our customers, primarily wireless carriers, continue to be negatively impacted by a wireless industry experiencing slowing subscriber growth, intensifying price competition, reduced access to capital, and the need to manage cash flow. Coupled with a weakened economy, wireless carriers have responded to these challenges by reducing capital spending and focusing on projects that can most directly contribute to their revenue. Wireless carriers now appear focused on satisfying customer demand for enhanced data services, seamless and comprehensive coverage, improved quality of service, and faster data transmission. Many of these initiatives require capital spending for additional network capacity and next-generation technologies. With reduced availability of capital and the transition to next-generation technologies, plans, projects, and capital spending are subject to frequent change as wireless carriers reevaluate and reorder their priorities. As a result, their spending patterns continue to be volatile and difficult to predict. The downturn in the wireless industry has reduced overall demand for our wireless infrastructure products and services, and continues to make it difficult for us to forecast our wireless infrastructure operations for fiscal 2003.
Additionally, the downturn in the wireless industry has caused us to reevaluate our strategy of providing engineering services. We began offering engineering services, which are complementary to our wireless
infrastructure products, to wireless carriers and equipment vendors during the fourth quarter of fiscal 2000. During the subsequent two years, we were awarded several profitable multi-million dollar contracts, as well as numerous smaller engagements. However, as wireless carriers continue to reduce their spending, the competition to provide engineering services has become more intense. Lower contract pricing and fewer opportunities are resulting in reduced revenue and profitability for all engineering services providers. We currently do not have a major contract to provide engineering services. Accordingly, we have reduced staffing and related costs to a level sufficient to meet our remaining customer commitments, which we expect to be completed by the end of June 2002. We currently do not anticipate providing engineering services during the balance of fiscal 2003. Revenue from engineering services totaled 0.5 million for the first quarter of fiscal 2003. For fiscal 2003, we expect revenue from engineering services to total approximately $0.9 million, a significant decrease in comparison to $7.5 million for fiscal 2002.
Cost of Revenue and Gross Margin
Cost of revenue from our wireless infrastructure business for the first quarter of fiscal 2003 was $6.9$2.2 million compared to $9.7$2.9 million for the third quarter
of fiscal 2001, a decrease of $2.8 million or 28.7 percent. This decrease was
attributable to decreased sales of our test and measurement products partially
offset by increased sales of our engineering services. Our new order flow for
test and measurement products was negatively impacted by the tragic events of
September 11. Additionally, during fiscal 2001, a national wireless carrier
purchased a significant number of baseLINE systems, our Quality of Service
competitive benchmarking system. These sales were not expected to recur in the
current fiscal year. In April 2001, we were awarded a $6.6 million contract to
provide network optimization services. Revenue from this contract resulted in
increased sales of engineering services in the thirdfirst quarter of fiscal 2002, in
comparison to the third quarter of fiscal 2001.
Cost of Sales and Gross Margin
Cost of sales from our wireless infrastructure segment in the third
quarter of fiscal 2002 was $3.2 million compared to $4.1 million for the third
quarter of fiscal 2001, a decrease of approximately $0.9$0.7 million or 22.123.9 percent. As a percentage of revenue, gross margin decreased to 54.029.9 percent from 57.957.2 percent infor the third quartercorresponding period of the prior fiscal year. The decrease in cost of revenue was due to decreased sales volumes of our hardware and software tools partially offset by increased amortization of capitalized software development costs. Increased amortization of software development costs was primarily due the release of RAPcentral, the first application based on a newly developed stationary testing platform. This application, which consists of hardware and software, automates data collection, analysis, and delivery of revenue assurance information that is critical to wireless carriers in their efforts to capture and bill for all minutes of use. Amortization of software development costs for the first quarter ended April 30, 2002 and 2001 totaled $0.9 million and $0.6 million. The decrease in gross margin iswas primarily attributable to decreasedsignificantly lower revenue generated from the sale of our hardware and software tools and engineering services and reduced absorption of related fixed costscosts.
Wireless Applications
| | | Three Months Ended April 30,
| |
| | | 2002
| | | 2001
| |
| | | (Dollars in thousands) | |
| Revenue | | $ | 4,657 | | | $ | 5,350 | |
| Cost of revenue | | | 2,803 | | | | 3,308 | |
| | |
|
|
| |
|
|
|
| Gross profit | | $ | 1,854 | | | $ | 2,042 | |
| | |
|
|
| |
|
|
|
| Gross margin | | | 39.8 | % | | | 38.2 | % |
| | |
|
|
| |
|
|
|
Revenue
Revenue from our wireless applications business for the first quarter of 2003 was $4.7 million compared to $5.4 million for the first quarter of 2002, a decrease of approximately $0.7 million or 13.0 percent. This decrease was due to lowera $1.2 million decrease in sales of our testcall box products, which tend to fluctuate quarter-to-quarter, partially offset by a $0.5 million increase in sales of our ChargeSource products. First quarter revenue included sales of our ChargeSource universal DC power adapter, which went into production during the third quarter of fiscal 2002.
Cost of Revenue and measurement products.
WIRELESS APPLICATIONS
THREE MONTHS ENDED
OCTOBER 31,
-------------------------
2001 2000
-------- --------
(DOLLARS IN THOUSANDS)
Revenue ...................................... $ 5,389 $ 3,427
Cost of sales ................................ 3,220 2,323
-------- --------
Gross profit ................................. $ 2,169 $ 1,104
======== ========
Gross margin ................................. 40.2% 32.2%
======== ========
Revenue
RevenueGross Margin Cost of revenue from our wireless applications segment for the thirdfirst quarter of 2002fiscal 2003 was $5.4$2.8 million compared to $3.4$3.3 million for the third quarter of 2001, an
increase of approximately $2.0 million or 57.3 percent. The increase was
attributable to increased sales of the ChargeSource 70-watt universal AC power
adapter, our second-generation mobile power system that began shipping during
the fourth quarter of fiscal 2001, and the introduction of the new ChargeSource
DC adapter that began shipping during the third quarter of fiscal 2002.
Cost of Sales and Gross Margin
Cost of sales from our wireless applications segment for the thirdfirst quarter of fiscal 2002, was $3.2 million compared to $2.3 million for the third
quartera decrease of fiscal 2001, an increase of $0.9$0.5 million or 38.615.3 percent. The decrease
in cost of revenue was due to decreased sales volumes of our callbox products partially offset by increased sales of our ChargeSource products. As a percentage of revenue, gross margin increased to
40.239.8 percent from
32.238.2 percent
in the third quarter of the prior fiscal year. The
16
increases in cost of sales and gross margin are attributable to sales of the
ChargeSource 70-watt universal AC power adapter, our second-generation mobile
power system that went into production during the fourth quarter of fiscal 2001,
as well as our newly developed ChargeSource DC adapter that went into production
during the third quarter of the current fiscal year.
COMPARISON OF THE NINE MONTHS ENDED OCTOBER 31, 2001 TO THE NINE MONTHS ENDED
OCTOBER 31, 2000
CONSOLIDATED
Revenue
Total revenue for the nine months ended October 31, 2001, increased 9.0
percent to $38.4 million compared to the corresponding period of the prior fiscal year. As discussed below, theThe increase is attributable to increased sales
from our wireless applications segment, partially offset by a decrease in sales
from our wireless infrastructure segment.
Cost of Sales and Gross Margin
Total cost of sales for the nine months ended October 31, 2001 increased
13.9 percent to $19.3 million compared to the corresponding period of fiscal
2001. As a percentage of revenue, gross margin was 49.6 percent as compared to
51.8 percent for the nine months ended October 31, 2000. As discussed below, the
decrease in gross margin is attributablethe result of call box cost controls implemented in fiscal 2002. Discontinued Operations
As discussed above, we embarked on a plan to lower salesdivest our non-wireless businesses, which included the defense and commercial staffing businesses. The divestiture plan was completed during November 2000.
Liquidity and Capital Resources
Our financial position remains strong, with cash and cash equivalents of $22.0 million at April 30, 2002.
Cash Flows from our wireless
infrastructure segment partially offset by an improved contributionOperating Activities
We generated cash from
increased sales from our wireless applications segment.
Selling, General, and Administrative Costs
Selling, general, and administrative costsoperations of $2.4 million for the
nine months ended
October 31, 2001 were $9.7 millionfirst quarter of fiscal 2003 compared to
$9.1$0.4 million for the corresponding period of the prior fiscal
year, an increase of $0.6 million or
6.6 percent. Excluding costs attributable to EDX, selling, general, and
administrative costs for the nine months ended October 31, 2001 decreased by
$0.6 million in comparison to the corresponding period of the prior fiscal year.
This decrease was driven by lower sales in the third quarter of fiscal 2002, as
well as enterprise-wide cost reductions discussed above. As a percentage of
revenue, total selling, general, and administrative costs were consistent at
25.4 percent and 25.9 percent for the nine months ended October 31, 2001 and
2000, respectively.
Engineering and Support Costs
Engineering and support costs, net of capitalized software development
costs, for the nine months ended October 31, 2001 were $4.3 million compared to
$3.6 million for the nine months ended October 31, 2000, an increase of $0.7
million or 20.2 percent. Excluding costs attributable to EDX, gross engineering
and support costs for the nine months ended October 31, 2001 were $8.0 million
compared to $7.0 million for the nine months ended October 31, 2000, an increase
of $1.0 million or 12.2 percent. This increase is primarily due to continued
investment in our product development programs, which include GPRS and 1XRTT
products (2.5G technologies), as well as 3G scanners. Capitalized software
development costs, which totaled $4.2 million and $3.5 million for the nine
months ended October 31, 2001 and 2000, respectively, partially offset the
increase in gross engineering costs. The increase in
capitalized software
development costs is consistent with our ongoing development programs.
Severance Costs
During the nine months ended October 31, 2000 and in conjunction with
the disposition of the Company's non-wireless businesses, COMARCO was required
to record a $1.3 million charge to continuing operations for costs related to
severance agreementscash generation for the
Company's outgoing corporate staff. No comparable
costs were incurred during the nine months ended October 31, 2001.
17
Other Income
Other income, consisting primarily of interest income, increased
$279,000 to $780,000 for the nine months ending October 31, 2001 from $501,000
for the nine months ended October 31, 2000. The increasefirst quarter was primarily due to higher invested cash balances duringsignificant collections of accounts receivable partially offset by the first half of fiscal 2002.
Income Tax Expense
The effective tax ratenet loss for the nine months ended October 31, 2001 and
2000 was 36.5 percent, applied on pre-tax income before minority interest
expense.
WIRELESS INFRASTRUCTURE
NINE MONTHS ENDED
OCTOBER 31,
-------------------------
2001 2000
-------- --------
(DOLLARS IN THOUSANDS)
Revenue ...................................... $ 22,040 $ 25,210
Cost of sales ................................ 9,487 10,132
-------- --------
Gross profit ................................. $ 12,553 $ 15,078
======== ========
Gross margin ................................. 57.0% 59.8%
======== ========
Revenue
Revenue from our wireless infrastructure segment for the nine months
ended October 31, 2001 was $22.0quarter. Accounts receivable decreased $4.1 million compared to $25.2 million for the nine
months ended October 31, 2000, a decrease of $3.2 million or 12.6 percent.
Excluding revenue attributable to EDX, the decrease in revenue was $4.5 million
or 17.7 percent. This decrease was attributable to decreased sales of our test
and measurement products. As previously discussed, our business was disrupted
during the third quarter of fiscal 2002 and our new order flow for test and
measurement products was negatively impacted. Additionally, during fiscal 2001,
a national wireless carrier purchased a significant number of baseLINE systems,
our Quality of Service competitive benchmarking system. These sales were not
expected to recur in the current fiscal year.
Cost of Sales and Gross Margin
Cost of sales from our wireless infrastructure segment in the nine
months ended October 31, 2001 was $9.5 million compared to $10.1 million for the
nine months ended October 31, 2000, a decrease of approximately $0.6 million or
6.4 percent. As a percentage of revenue, gross margin decreased to 57.0 percent
from 59.8 percent for the nine months ended October 31, 2000. The decrease in
gross margin is attributable to decreased absorption of fixed costs due to lower
sales of our test and measurement products.
WIRELESS APPLICATIONS
NINE MONTHS ENDED
OCTOBER 31,
-------------------------
2001 2000
-------- --------
(DOLLARS IN THOUSANDS)
Revenue ...................................... $ 16,332 $ 9,992
Cost of sales ................................ 9,850 6,846
-------- --------
Gross profit ................................. $ 6,482 $ 3,146
======== ========
Gross margin ................................. 39.7% 31.5%
======== ========
18
Revenue
Revenue from our wireless applications segment for the nine months ended
October 31, 2001 was $16.3 million compared to $10.0 million for the nine months
ended October 31, 2000, an increase of approximately $6.3 million or 63.5
percent. The increase was attributable to increased sales of the ChargeSource
70-watt universal AC power adapter, our second-generation mobile power system
that began shipping during the fourth quarter of fiscal 2001, and the
introduction of the new ChargeSource DC adapter that began shipping during the
third quarter of fiscal 2002.
Cost of Sales and Gross Margin
Cost of sales from our wireless applications segment for the nine months
ended October 31, 2001 was $9.9 million compared to $6.8 million for the nine
months ended October 31, 2000, an increase of $3.0 million or 43.9 percent. As a
percentage of revenue, gross margin increased to 39.7 percent from 31.5 percent
for the nine months ended October 31, 2001. The increases in cost of sales and
gross margin are attributable to sales of the ChargeSource 70-watt universal AC
power adapter, our second-generation mobile power system that went into
production during the fourth quarter of fiscal 2001, as well as our newly
developed ChargeSource DC adapter that went into production during the third
quarter of fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $19.8$5.6 million at October 31, 2001
compared to $24.9April 30, 2002 from $9.7 million at January 31, 2001, a decrease of $5.1 million. The
$5.1 million decrease is2002, primarily due to investments made in software
development, property and equipment, a minority interest in SwissQual AG
("SwissQual"), and the purchase and retirement of $1.7 million of common stock,
partially offsetsignificantly lower revenue generated by cash provided by operations.
Cash Flows from Operating Activities
Cash provided by operating activities is primarily derived from the sale
of the Company's products and from providing engineering services. Cash provided
by operating activities was $3.9 million and $8.8 millionour wireless infrastructure business for the nine months
ended October 31, 2001 and 2000, respectively.
Cash provided by operating activities during the nine months ended
October 31, 2001 was primarily a resultfirst quarter of the Company's net income from
continuing operations before non-cash charges, a tax benefit on stock options
exercised of $0.6 million, and a net change in deferred income taxes of $1.3
million offset by a decrease in current liabilities and an increase in accounts
receivable. The $3.5 million decrease in current liabilities was primarily due
to $1.5 million in prepaid sales that were recognized as revenue during the nine
months ended October 31, 2001, as well as income tax payments and the timing of
payments of trade accounts payable. Cash provided by operating activities during
the nine months ended October 31, 2000 was primarily a result of the Company's
net income from continuing operations before non-cash charges, a tax benefit on
stock options exercised of $1.5 million, a decrease in other assets, and an
increase in current liabilities, offset by an increase in accounts receivable
and inventory.
fiscal 2003. Cash Flows from Investing Activities
Cash
Net cash used in investing activities was $7.0 million and $5.0$1.4 million for the nine months ended October 31, 2001 and 2000, respectively. Investing
activitiesfirst quarter of fiscal 2003 compared to $2.0 million for the nine months ended October 31, 2001 and 2000 consisted
primarilycorresponding quarter of cash paidfiscal 2002. In both periods, capital expenditures for property and equipment and software development constituted substantially all of our cash used in support of the Company's
growth and for theinvesting activities.
The development of software
is critical to
be used inour products currently under development.
The Company intends to continueWe intend to invest aggressively in
a
software development
programprograms designed to bring new products and services for the wireless communications industry to market in a timely manner.
ThisWe are currently developing a new wireless infrastructure product platform, the XPort, which is in response to wireless carriers’ needs for flexible, scalable, and high-value mobile test and measurement tools. We currently anticipate completing the development of the XPort product platform by the end of fiscal 2003. We expect to fund software
and hardware development
program is expected to be fundedprograms with current cash balances and cash provided by operating activities.
On July 31, 2001, the Company acquired an 18% equity stake in SwissQual
for $1.0 million in cash. Based in Zuchwil, Switzerland, SwissQual is a
developer of Quality of Service ("QoS") systems and software for measuring,
monitoring, and optimizing the quality of mobile, fixed, and IP based voice and
data communications. Under this
19
alliance, COMARCO and SwissQual will jointly develop, sell and support wireless
network QoS and optimization products and services for the European marketplace.
In addition to expanding COMARCO's access to European wireless carriers,
SwissQual will provide domain expertise and development guidance in the
evolution of 2.5G and 3G system test solutions.
Cash Flows from Financing Activities
Cash provided by
Net cash used in financing activities for the nine months ended October
31, 2001first quarter of fiscal 2003 consisted of $0.3 million from the sales of common stock issued through
the Company's employee and director stock option plans, and $0.1 million from
the sales of common stock issued through the Company's subsidiary stock option
plan, offset by the$278,000 that was used to repurchase of 124,90026,200 shares of the Company'sCompany’s common stock in the open market for an average price of $10.62 per share under our share repurchase program. From program inception in 1992 through April 30, 2002, the Company has repurchased approximately $1.7 million. Cash provided by financing
activities2.5 million shares for an average price of $8.23 per share. Proceeds from the nine months ended October 31, 2000 consisted primarily of
$1.6 million from salessale of common stock issued through the Company's employee and director stock option plans.
During 1992,plans generated $121,000 during the Company's Boardfirst quarter of Directors authorized a stockfiscal 2003.
Net cash used in financing activities for the first quarter of fiscal 2002 consisted of $76,000 that was used to repurchase program of up to three million5,700 shares of the Company’s common stock. From program
inception through October 31, 2001, the Company has repurchased approximately
2,400,000 shares for an average per share price of $8.08 per share. For the nine
months ended October 31, 2001, 124,900 shares were repurchased. Subsequent to
October 31, 2001, the Company repurchased an additional 78,800 sharesstock in the open market bringing the total number of shares repurchased to approximately
2,490,000 shares for an average price of $13.38 per share price of $8.20 per share.
The Company maintained a $10 million unsecured revolving credit facility
("Credit Facility"). The Credit Facility expired in June 2001 and was not
renewed by the Company. The Company will negotiate new terms with the bank when
deemed necessary.
The Company believesunder our share repurchase program.
We believe that currentour existing cash balances and cash provided by
operating activitiesequivalent balances will beprovide us sufficient funds to satisfy the Company's working capital
and capital expenditureour cash requirements for at least the next twelve months. Future
acquisitions, if any, mayIn addition to our cash and cash equivalent balances, we derive a portion of our liquidity from our cash flows from operations. We currently expect fiscal 2003 revenue and operating results attributable to our wireless infrastructure business to be funded through the use of currentsignificantly less than fiscal 2002, and, as a result we expect fiscal 2003 cash flows from operations to also decrease in comparison to fiscal 2002. To address
this, we are focused on preserving our cash balances or
long-term borrowingsby continuously monitoring expenses, identifying cost savings, and investing only in those development programs and products most likely to contribute to our profitability.
Critical Accounting Policies
We have identified the following as critical accounting policies to our company: revenue recognition, capitalized software development costs, accounts receivable, inventory, income taxes, valuation of goodwill, and valuation of long-lived assets. These critical accounting policies have been applied during the first quarter of fiscal 2003 consistent with the prior periods and the issuanceyear ended January 31, 2002, except as discussed in Note 3 with respect to goodwill amortization and impairment valuation.
For further information, refer to the discussion of additional equity or debt securities.
critical accounting policies included in Management’s Discussion and Analysis in the Company’s annual report on Form 10-K for the year ended January 31, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Currency Risk
The Company is exposed to marketthe risk includingof changes in interest
rates and currency exchange rates. As of October 31, 2001, the CompanyApril 30, 2002, we had no material accounts receivable denominated in foreign currencies. The Company'sOur standard terms require foreign customers to pay for the Company'sour products and services within U.S. dollars. For those orders denominated in foreign currencies, the
Companywe may limit itsour exposure to losses from foreign currency transactions through the purchase of forward foreign exchange contract.
contracts. To date, sales denominated in foreign currencies have not been significant and we have not entered into any foreign exchange contracts.
Interest Rate Sensitivity
The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we have invested in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline in value. To minimize this risk, we maintain a significant portion of our cash balances in money market funds. In general, money market funds are not subject to interest rate risk because the interest paid on such funds fluctuates with the prevailing interest rate.
We do not hold any derivative financial instruments.
Our cash and cash equivalents have maturities dates of three months or less and the fair value approximates the carrying value in our financial statements.
Equity Price Risk
Our short-term investments consist primarily of balances maintained in a non-qualified deferred compensation plan funded by our executives and directors. We value these investments using the closing market value for the last day of each month. These investments are subject to market price volatility. We reflect these investments on our balance sheet at their market value, with the unrealized gains and losses excluded from reported operations. We have also invested in equity instruments of SwissQual, a privately held company. We evaluate whether any decline in value of certain public and non-public equity investments is other than temporary.
Due to the inherent risk associated with some of our investments, and in light of current stock market conditions, we may incur future losses on the sales, write-downs, or write-offs of our investments. We do not currently hedge against equity price changes.
PART II --— OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
COMARCO Comarco, Inc. was named as a defendant in
two lawsuitsa lawsuit filed by Mobility Electronics, Inc.
("Mobility"(“Mobility”). Mobility v.
Targus Group International,Comarco, Inc.
("Targus") and Comarco Wireless Technologies, Inc.
("CWT"), Case No.
CV2001-012640 was filed on July 23, 2001
in the Arizona SuperiorCIV-01-1489-PHX-MHM, U.S. District Court for
Maricopa County, Arizona. In addition to
claims against Targus, the
distributorDistrict of
the Company's mobile power adapter
products, the lawsuit alleges that the Company intentionally interfered with
Mobility's rights under an exclusive manufacturing agreement with Targus and
misappropriated Mobility's trade secrets.
Targus markets and distributes the Company's 70-Watt AC ChargeSource
universal power adapter. As previously announced, the Company received an $8.6
million purchase order from Targus covering the 70-Watt AC
20
adapter and a new DC ChargeSource universal power adapter recently introduced by
COMARCO. In its complaint, Mobility contends that it currently has an exclusive
contract to manufacture DC power adapters for Targus. The Company understands
that Targus purchased DC power adapter products from Mobility and that Targus
used and sold DC power adapter products from Mobility under a terminable,
non-exclusive license agreement between the Company and Targus involving
patented COMARCO technology. Prior to the filing of the lawsuit, the Company had
terminated the license agreement with Targus in accordance with the provisions
of the license agreement.
During October 2001, the three parties to the lawsuit entered into a
settlement agreement and, on November 26, 2001, the lawsuitArizona was dismissed with
prejudice.
Mobility v. COMARCO No. CIV011489PHXMHM was filedserved on August 10, 2001. This lawsuit alleges that the Company, through the manufacture and sale of its ChargeSource 70-Watt universal AC ChargeSource universal power adapter, infringed upon a patent purchased by Mobility on August 6, 2001. COMARCO's management believesMobility has amended its lawsuit to further seek declaratory judgments of non-infringement, patent invalidity, and/or patent unenforceability of three patents owned by us. Comarco has moved for dismissal of the amended complaint in its entirety. The motion has been fully briefed and argued, and the parties are awaiting a ruling. We believe that Mobility'sMobility’s infringement claim, as well as the amended claims against the Company isus are without merit, and intendswe intend to vigorously defend the lawsuit.
The Company is
We are from time to time involved in various legal proceedings incidental to the conduct of our business. We believe that the outcome of all other such pending legal proceedings will not in the aggregate have a material adverse effect on our business, financial condition or results of operations.
and operating results.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
None.
ITEM 5. OTHER INFORMATION
Not applicable.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11 Schedule of Computation of Net Income (Loss) Per Share
(b) Report on Form 8-K:
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, in the City of Irvine, State of California, on
December 13, 2001.
COMARCO, INC.
By: /s/ Daniel R. Lutz
-------------------------------
Daniel R. Lutz
Vice President and
Chief Financial Officer
22
EXHIBIT INDEX
June 10, 2002.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11 Schedule of Computation of Net Income Per Share
COMARCO, INC. |
| By: | | /s/ DANIEL R. LUTZ
|
| | Daniel R. Lutz |
| | Vice President and Chief Financial Officer |
18