UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
APRIL 30,OCTOBER 31, 2003
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
Commission file number 0-5449
COMARCO, INC.
(Exact name of registrant as specified in its charter)
California | 95-2088894 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer | |
Identification No.) |
2 Cromwell, Irvine, California 92618
(Address of 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 was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No þ
The registrant had 7,024,3257,217,051 shares of common stock outstanding as of JuneDecember 10, 2003.
COMARCO, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED APRIL 30,OCTOBER 31, 2003
Page | ||||||
PART I — FINANCIAL INFORMATION | ||||||
ITEM 1. | FINANCIAL STATEMENTS | |||||
Condensed Consolidated Balance Sheets as of | 3 | |||||
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended | 4 | |||||
Condensed Consolidated Statements of Cash Flows for the | 5 | |||||
Notes to Condensed Consolidated Financial Statements | 6 | |||||
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |||||
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | |||||
ITEM 4. | CONTROLS AND PROCEDURES | |||||
PART II — OTHER INFORMATION | ||||||
ITEM 1. | LEGAL PROCEEDINGS | |||||
ITEM 2. | CHANGES IN SECURITIES AND USE OF PROCEEDS | |||||
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | |||||
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | |||||
ITEM 5. | OTHER INFORMATION | |||||
ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K | |||||
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMARCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)thousands, except share data)
April 30, 2003 | January 31, 2003 | |||||||||||
(Unaudited) | October 31, 2003 | January 31, 2003 | ||||||||||
ASSETS | ||||||||||||
Current Assets: | ||||||||||||
Cash and cash equivalents | $ | 23,708 | $ | 25,387 | $ | 13,498 | $ | 25,387 | ||||
Short-term investments | 2,143 | 2,386 | 2,629 | 2,386 | ||||||||
Accounts receivable, net | 2,513 | 2,053 | 9,093 | 2,053 | ||||||||
Inventory | 3,583 | 3,656 | 5,176 | 3,656 | ||||||||
Deferred tax assets, net | 2,748 | 2,748 | 3,626 | 2,748 | ||||||||
Other current assets | 1,348 | 1,391 | 1,380 | 1,391 | ||||||||
Total current assets | 36,043 | 37,621 | 35,402 | 37,621 | ||||||||
Property and equipment, net | 3,523 | 3,532 | 3,549 | 3,532 | ||||||||
Software development costs, net | 5,865 | 5,558 | ||||||||||
Capitalized software development costs, net | 5,956 | 5,558 | ||||||||||
Goodwill, net | 2,393 | 2,393 | 2,845 | 2,393 | ||||||||
Acquired intangible assets, net | 830 | 707 | 1,086 | 707 | ||||||||
Other assets | 1,133 | 1,144 | 1,133 | 1,144 | ||||||||
$ | 49,787 | $ | 50,955 | $ | 49,971 | $ | 50,955 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Current Liabilities: | ||||||||||||
Accounts payable | $ | 470 | $ | 310 | $ | 232 | $ | 310 | ||||
Deferred revenue | 3,776 | 3,552 | 3,215 | 3,552 | ||||||||
Accrued liabilities | 5,544 | 5,845 | 6,635 | 5,845 | ||||||||
Total current liabilities | 9,790 | 9,707 | 10,082 | 9,707 | ||||||||
Deferred compensation | 2,143 | 2,386 | 2,629 | 2,386 | ||||||||
Deferred tax liabilities, net | 877 | 877 | 958 | 877 | ||||||||
Minority interest | 542 | 564 | 169 | 564 | ||||||||
Stockholders’ equity: | ||||||||||||
Preferred stock, no par value, 10,000,000 shares authorized, no shares outstanding at April 30, 2003 and January 31, 2003 | — | — | ||||||||||
Common stock, $0.10 par value, 50,625,000 shares authorized, 7,027,565 and 7,049,565 shares outstanding at April 30, 2003 and January 31, 2003, respectively | 703 | 705 | ||||||||||
Preferred stock, no par value, 10,000,000 shares authorized, no shares outstanding at October 31, 2003 and January 31, 2003 | — | — | ||||||||||
Common stock, $0.10 par value, 50,625,000 shares authorized, 7,160,801 and 7,049,565 shares outstanding at October 31, 2003 and January 31, 2003, respectively | 716 | 705 | ||||||||||
Additional paid-in capital | 11,032 | 11,198 | 11,986 | 11,198 | ||||||||
Retained earnings | 24,700 | 25,518 | 23,431 | 25,518 | ||||||||
Total stockholders’ equity | 36,435 | 37,421 | 36,133 | 37,421 | ||||||||
$ | 49,787 | $ | 50,955 | $ | 49,971 | $ | 50,955 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
COMARCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended April 30, | ||||||||
2003 | 2002 | |||||||
Revenue | $ | 6,456 | $ | 7,765 | ||||
Cost of revenue | 3,954 | 4,980 | ||||||
Gross profit | 2,502 | 2,785 | ||||||
Selling, general and administrative costs | 2,319 | 2,335 | ||||||
Engineering and support costs | 1,544 | 1,417 | ||||||
Operating loss | (1,361 | ) | (967 | ) | ||||
Other income, net | 108 | 107 | ||||||
Minority interest in losses of subsidiary | 22 | 9 | ||||||
Loss before income taxes and cumulative effect of change in accounting principle | (1,231 | ) | (851 | ) | ||||
Income tax benefit | (413 | ) | (314 | ) | ||||
Net loss before cumulative effect of change in accounting principle | $ | (818 | ) | $ | (537 | ) | ||
Cumulative effect of change in accounting principle | — | (2,926 | ) | |||||
Net loss | $ | (818 | ) | $ | (3,463 | ) | ||
Net loss per share before cumulative effect of change in accounting principle: | ||||||||
Basic | $ | (0.12 | ) | $ | (0.08 | ) | ||
Diluted | $ | (0.12 | ) | $ | (0.08 | ) | ||
Net loss per share: | ||||||||
Basic | $ | (0.12 | ) | $ | (0.50 | ) | ||
Diluted | $ | (0.12 | ) | $ | (0.50 | ) | ||
Weighted average common shares outstanding: | ||||||||
Basic | 7,034 | 6,968 | ||||||
Diluted | 7,034 | 6,968 | ||||||
Common shares outstanding | 7,028 | 6,969 | ||||||
Three Months Ended October 31, | Nine Months Ended October 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Revenue | $ | 11,222 | $ | 13,033 | $ | 23,203 | $ | 30,808 | ||||||||
Cost of revenue | 6,229 | 6,693 | 14,491 | 18,891 | ||||||||||||
Gross profit | 4,993 | 6,340 | 8,712 | 11,917 | ||||||||||||
Selling, general and administrative costs | 2,113 | 2,369 | 7,870 | 7,099 | ||||||||||||
Asset impairment charges | — | — | — | 8,407 | ||||||||||||
Engineering and support costs | 1,352 | 1,703 | 4,327 | 4,423 | ||||||||||||
Operating income (loss) | 1,528 | 2,268 | (3,485 | ) | (8,012 | ) | ||||||||||
Other income, net | 39 | 94 | 205 | 297 | ||||||||||||
Minority interest | (10 | ) | (15 | ) | 40 | 64 | ||||||||||
Income (loss) before income taxes | 1,557 | 2,347 | (3,240 | ) | (7,651 | ) | ||||||||||
Income tax expense (benefit) | 572 | 861 | (1,153 | ) | (1,874 | ) | ||||||||||
Income (loss) before cumulative effect of change in accounting principle | 985 | 1,486 | (2,087 | ) | (5,777 | ) | ||||||||||
Cumulative effect of change in accounting principle | — | — | — | (2,926 | ) | |||||||||||
Net income (loss) | $ | 985 | $ | 1,486 | $ | (2,087 | ) | $ | (8,703 | ) | ||||||
Net income (loss) per share — basic and diluted: | ||||||||||||||||
Income (loss) before cumulative effect of change in accounting principle | $ | 0.14 | $ | 0.21 | $ | (0.29 | ) | $ | (0.83 | ) | ||||||
Cumulative effect of change in accounting principle | — | — | — | (0.42 | ) | |||||||||||
Net income (loss) per share — basic and diluted | $ | 0.14 | $ | 0.21 | $ | (0.29 | ) | $ | (1.25 | ) | ||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 7,161 | 6,987 | 7,108 | 6,975 | ||||||||||||
Diluted | 7,191 | 7,010 | 7,108 | 6,975 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
COMARCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended April 30, | ||||||||
2003 | 2002 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (818 | ) | $ | (3,463 | ) | ||
Adjustments to reconcile net loss from continuing operations to net cash provided | ||||||||
Cumulative effect of change in accounting principle | — | 2,926 | ||||||
Depreciation and amortization | 1,009 | 1,565 | ||||||
Tax benefit from exercise of stock options | — | 11 | ||||||
Deferred income taxes | — | 280 | ||||||
Provision for doubtful accounts receivable | 10 | 6 | ||||||
Provision for obsolete inventory | (114 | ) | (38 | ) | ||||
Minority interest in losses of subsidiary | (22 | ) | (9 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (470 | ) | 4,130 | |||||
Inventory | 187 | 97 | ||||||
Other assets | 54 | (40 | ) | |||||
Accounts payable | 160 | 327 | ||||||
Deferred revenue | 223 | (696 | ) | |||||
Accrued liabilities | (274 | ) | (2,702 | ) | ||||
Net cash provided by (used in) operating activities | (55 | ) | 2,394 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of property and equipment | (483 | ) | (329 | ) | ||||
Software development costs | (785 | ) | (1,100 | ) | ||||
Acquired intangible assets | (161 | ) | — | |||||
Net cash used in investing activities | (1,429 | ) | (1,429 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net proceeds from issuance of common stock | — | 121 | ||||||
Purchase and retirement of common stock | (168 | ) | (278 | ) | ||||
Net cash used in financing activities | (168 | ) | (157 | ) | ||||
Net increase (decrease) in cash and cash equivalents – continuing operations | (1,652 | ) | 808 | |||||
Net decrease in cash and cash equivalents – discontinued operations | (27 | ) | (78 | ) | ||||
Net increase (decrease) in cash and cash equivalents | (1,679 | ) | 730 | |||||
Cash and cash equivalents, beginning of period | 25,387 | 21,288 | ||||||
Cash and cash equivalents, end of period | $ | 23,708 | $ | 22,018 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | — | $ | — | ||||
Cash paid for income taxes | $ | 2 | $ | 103 | ||||
Nine Months Ended October 31, | ||||||||
2003 | 2002 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (2,087 | ) | $ | (8,703 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 3,845 | 3,997 | ||||||
Tax benefit from exercise of stock options | 99 | 151 | ||||||
Deferred income taxes | (796 | ) | (2,007 | ) | ||||
Asset impairment charges | — | 9,666 | ||||||
Loss on disposal of property and equipment | 57 | 154 | ||||||
Cumulative effect of change in accounting principle | — | 2,926 | ||||||
Provision for doubtful accounts receivable | 370 | (66 | ) | |||||
Provision for obsolete inventory | (271 | ) | 276 | |||||
Minority interest in loss of subsidiary | (40 | ) | (64 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Decrease (increase) in accounts receivable | (7,410 | ) | 2,367 | |||||
Decrease (increase) in inventory | (1,249 | ) | 106 | |||||
Decrease (increase) in other assets | 22 | (414 | ) | |||||
Increase (decrease) in accounts payable | (79 | ) | 782 | |||||
Decrease in deferred revenue | (337 | ) | (1,103 | ) | ||||
Increase (decrease) in accrued liabilities | 821 | (492 | ) | |||||
Net cash provided by (used in) operating activities | (7,055 | ) | 7,576 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Proceeds from sales of property and equipment | — | 131 | ||||||
Purchases of property and equipment | (1,637 | ) | (1,462 | ) | ||||
Acquired intangible assets | (520 | ) | (250 | ) | ||||
Capitalized software development costs | (2,540 | ) | (3,135 | ) | ||||
Net cash used in investing activities | (4,697 | ) | (4,716 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net proceeds from issuance of common stock | — | 226 | ||||||
Net proceeds from issuance of subsidiary common stock | 89 | 78 | ||||||
Purchase of common stock | (195 | ) | (402 | ) | ||||
Net cash used in financing activities | (106 | ) | (98 | ) | ||||
Net increase (decrease) in cash and cash equivalents – continuing operations | (11,858 | ) | 2,762 | |||||
Net increase (decrease) in cash and cash equivalents – discontinued operations | (31 | ) | 162 | |||||
Net increase (decrease) in cash and cash equivalents | (11,889 | ) | 2,924 | |||||
Cash and cash equivalents, beginning of period | 25,387 | 21,288 | ||||||
Cash and cash equivalents, end of period | $ | 13,498 | $ | 24,212 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | — | $ | 14 | ||||
Cash paid for income taxes | $ | 2 | $ | 478 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Comarco, Inc., through its subsidiary Comarco Wireless Technologies, Inc. (collectively, “Comarco” or the “Company”), is a leading provider of wireless field test solutionsapplications for the wireless industry. Comarco also designs and manufactures emergency call box systems and mobile power products for notebook computers, cellular telephones, PDAs, and other handheld devices. Comarco Wireless Technologies, Inc. (“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’s continuing operations consist solely of the operations of CWT.
During the first quarter2. Summary of fiscal 2003, the Comarco Board of Directors adopted a preferred stock rights plan. The plan is designed to ensure that Comarco’s shareholders receive fair and equal treatment in the event of any attempted takeover of Comarco, and to guard against partial tender offers, open market accumulations, and other tactics designed to gain control of Comarco without paying all of Comarco’s shareholders a fair price for their shares. Each preferred stock purchase right will entitle the holder to buy one one-one hundredth of a share of the Company’s Series A Participating Preferred Stock at an exercise price of $75. The rights will expire in 10 years.Significant Accounting Policies
Basis of Presentation:
The interim condensed consolidated financial statements of Comarco included herein have been prepared without audit in accordance with generally accepted accounting 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 report on Form 10-K for the year ended January 31, 2003. 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 April 30,October 31, 2003 are not necessarily indicative of the results to be expected for the year ending January 31, 2004.
Stock-Based Compensation:
The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants using the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and FASB Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions Involving Stock-Based Compensation, an Interpretation of APB Opinion No. 25” and related interpretations in accounting for its stock-based compensation plans.Employees,” as amended. The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Accordingly, no compensation expense ishas been recognized for the stock option grants. Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant date for awards during the quartersthree and nine months ended April 30,October 31, 2003 and 2002 consistent with the provisions of SFAS No. 123, the Company’s Net Loss,Income (loss), Basic LossEarnings (loss) Per Share, and Diluted LossEarnings (loss) Per Share would have been reduced to the pro forma amounts as follows:follows (in thousands, except per share amounts):
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||||||||||
Net income (loss): | |||||||||||||||||||
As reported | $ 985 | $ | 1,486 | $ | (2,087 | ) | $ | (8,703 | ) | ||||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (156 | ) | (153 | ) | (470 | ) | (460 | ) | |||||||||||
Pro forma | $ 829 | $ | 1,333 | $ | (2,557 | ) | $ | (9,163 | ) | ||||||||||
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(UNAUDITED)
Three Months Ended April 30, | Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2003 | 2002 | |||||||||||||||||||||
Net loss: | ||||||||||||||||||||||||||
As reported | $ | (818 | ) | $ | (3,463 | ) | ||||||||||||||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (153 | ) | (151 | ) | ||||||||||||||||||||||
Pro forma | $ | (971 | ) | $ | (3,614 | ) | ||||||||||||||||||||
Loss per common share — basic: | ||||||||||||||||||||||||||
Earnings (loss) per common share — basic: | ||||||||||||||||||||||||||
As reported | $ | (0.12 | ) | $ | (0.50 | ) | $ | 0.14 | $ | 0.21 | $ | (0.29 | ) | $ | (1.25 | ) | ||||||||||
Pro forma | (0.14 | ) | (0.52 | ) | 0.12 | 0.19 | (0.36 | ) | (1.31 | ) | ||||||||||||||||
Loss per common share — diluted: | ||||||||||||||||||||||||||
Earnings (loss) per common share — diluted: | ||||||||||||||||||||||||||
As reported | $ | (0.12 | ) | $ | (0.50 | ) | $ | 0.14 | $ | 0.21 | $ | (0.29 | ) | $ | (1.25 | ) | ||||||||||
Pro forma | (0.14 | ) | (0.52 | ) | 0.11 | 0.18 | (0.36 | ) | (1.31 | ) |
The fair value of options granted under the Company’s stock option plans during the nine months ended October 31, 2003 and 2002 was estimated on the date of grant using the Black-Scholes option-pricing model utilizing the following weighted average assumptions:
Nine Months Ended October 31, | ||||||
2003 | 2002 | |||||
Weighted average risk-free interest rate | 3.1 | % | 4.4 | % | ||
Expected life (in years) | 6 | 6 | ||||
Expected stock volatility | 46.3 | % | 42.9 | % | ||
Dividend yield | None | None |
Principles of Consolidation:
The condensed consolidated financial statements of the Company include the accounts of 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 consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the period reported. Actual results could differ from those estimates.
Certain accounting principles require subjective and complex judgments to be used in the preparation of financial statements. Accordingly, a different financial presentation could result depending on the judgments, estimates, or assumptions that are used. Such estimates and assumptions include, but are not specifically limited to, those required in the valuation of long-lived assets, allowance for doubtful accounts, and valuation allowances for deferred tax assets.
Reclassifications:
Certain prior period balances have been reclassified to conform to the current period presentation.
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Exit or Disposal Activities.” SFAS No. 146 addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS No. 146 also addresses recognition of certain costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees and termination of benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted the provisions of SFAS No. 146 as of
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
February 1, 2003, and such adoption hasdid not hadhave a material effect on the Company’s consolidated results of operations or financial position.
In October 2002, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” The EITF indicated that this guidance is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The provisionsadoption of EITF Issue No. 00-21 aredid not expected to have a material effect on the Company’s consolidated results of operations or financial position because the Company’s qualifying arrangements arewere historically treated in a manner consistent with the stated provisions.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34.” This Interpretation34” (“FIN No. 45”). FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The InterpretationFIN No. 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the InterpretationFIN No. 45 are applicable to guarantees issued or modified after December 31, 2002. The Company adopted the accounting and disclosure provisions of the InterpretationFIN No. 45 effective February 1, 2003. WhileSuch adoption did not have a material impact on the Company has various indemnity obligations included in contracts entered into in the normal courseCompany’s consolidated results of business, the obligations are primarily in the form of indemnities that could result in increases in future costs but do not represent significant commitmentsoperations or contingent liabilities of the indebtedness of others.financial position.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB StatementSFAS No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to the accompanying condensed consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” This Interpretation51” (“FIN No. 46”). FIN No. 46 addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The InterpretationFIN No. 46 applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests inbecomes effective as of the first interim period after December 15, 2003 for variable interest entities created or obtained after January 31,before February 1, 2003. The application of this Interpretation isFIN No. 46 did not expected to have a material effect on the Company’s consolidated results of operations or financial position. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that we will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. The Company has no variable interest entities whichthat would require disclosure or consolidationsconsolidation under this Interpretation.FIN No. 46.
In April 2003, FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of Statement 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FIN 45, and (4) amends certain other existing pronouncements, which will collectively result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts and hedging relationships entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a material
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
impact on the Company’s consolidated financial statements as the Company has not entered into any derivative or hedging transactions.
In May 2003, FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both debt and equity and requires an issuer to classify the following instruments as liabilities in its balance sheet:
A financial instrument issued in the form of shares that is mandatorily redeemable and embodies an unconditional obligation that requires the issuer to redeem it by transferring its assets at a specified or determinable date or upon an event that is certain to occur; |
A financial instrument, other than an outstanding share, that embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation, and requires the issuer to settle the obligation by transferring assets; and |
· | A financial instrument that embodies an unconditional obligation that the issuer must settle by issuing a variable number of its equity shares if the monetary value of the obligation is based solely or predominantly on (1) a fixed monetary amount, (2) variations in something other than the fair value of the issuer’s equity shares, or (3) variations inversely related to changes in the fair value of the issuer’s equity shares. |
SFAS No. 150 is effective for financial instruments as of the first interim period beginning after December 15, 2004. SFAS No. 150 is to be implemented by reporting the cumulative effect of a change in accounting principle. The Company does not expect the adoption of SFAS No. 150 will have a material impact on its consolidated financial statements.
4. Stockholders’ Equity
During 1992, our Board of Directors authorized a stock repurchase program of up to 3.0 million shares of the Company’s common stock. From program inception through April 30,October 31, 2003, the Company has repurchased approximately 2.6 million shares for an average price of $8.22 per share. During the firstthird quarter ended April 30,October 31, 2003, the Company repurchased 22,200did not repurchase any shares of its common stock in the open market for an average price of $7.65 per share.stock.
5. ChargeSource Product Recall
In cooperation with the Consumer Products Safety Commission, on March 20, 2003, Comarco voluntarily initiated a product safety recall of certain of its ChargeSource AC power adapters. This product safety recall impacts
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
approximately 125,000 units that were sold in fiscal 2003. Comarco and Targus Group International (“Targus”), the Company’s exclusive distributor of ChargeSource products, entered into an agreement to address the impact of the recall action. Under the terms of the agreement Comarco issued a $3.2 million credit to Targus in fiscal 2003 in consideration of a full release. Additionally, the Company accrued $554,000 in costs related to the recall action.
The following table presents a reconciliation of the use of the product recall accrual (in thousands):
Product Recall 1/31/03 | Adjustments | Payments | Product Recall Liability 4/30/03 | Adjustments | Payments | Product Recall Liability 10/31/03 | ||||||
$554 | $ — | $39 | $515 | $ — | $(284) | $270 | ||||||
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The product recall liability is included in accrued liabilities in the accompanying condensed consolidated balance sheets. The Company believes that the balance remaining as of April 30,October 31, 2003 is adequate to cover additional product recall costs expected to be incurred.paid.
Additionally, of the $3.2 million credit issued to Targus in the fourth quarter of fiscal 2003, qualifying product returns totaling $1.3$2.1 million have been madewere received from Targus through April 30,September 14, 2003, the date through which returns were allowed under the terms of the agreement. The remaining unused portion of the credit in the amount of $1.1 million was recorded as revenue during the third quarter ended October 31, 2003.
6. Income (Loss) Per Share
The Company calculates net income (loss) per share in accordance with SFAS No. 128, “Earnings Per Share.” Under 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 quarternine months ended April 30,October 31, 2003 and April 30,October 31, 2002, basic and diluted net loss per share were the same because 24,889 and 58,789 dilutive securities, respectively, were not included because the effectinclusion of potential common shares in the calculation would have been antidilutive.
The following tables presenttable presents reconciliations of the numerators and denominators of the basic and diluted loss per share computations for net loss. In the tables below, “Net Loss”“Loss” represents the numerator and “Shares” represents the denominator (in thousands, except per share amounts):
Three Months Ended April 30, | ||||||||
2003 | 2002 | |||||||
Basic and Diluted: | ||||||||
Net loss before cumulative effect of change in accounting principle | $ | (818 | ) | $ | (537 | ) | ||
Weighted average shares outstanding | 7,034 | 6,968 | ||||||
Basic and diluted loss per share before cumulative effect of change in accounting principle | $ | (0.12 | ) | $ | (0.08 | ) | ||
Cumulative effect of change in accounting principle | $ | — | $ | (2,926 | ) | |||
Weighted average shares outstanding | 7,034 | 6,968 | ||||||
Basic and diluted loss per share from cumulative effect of change in accounting principle | $ | — | $ | (0.42 | ) | |||
Net loss | $ | (818 | ) | $ | (3,463 | ) | ||
Weighted average shares outstanding | 7,034 | 6,968 | ||||||
Basic and diluted loss per share | $ | (0.12 | ) | $ | (0.50 | ) | ||
Three Months Ended October 31, | Nine Months Ended October 31, | |||||||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||||||
Basic: | ||||||||||||||||||||
Income (loss) before cumulative effect of accounting change | $ | 985 | $ | 1,486 | $ | (2,087 | ) | $ | (5,777 | ) | ||||||||||
Weighted average shares outstanding | 7,161 | 6,987 | 7,108 | 6,975 | ||||||||||||||||
Basic income (loss) per share before cumulative effect of accounting change | $ | 0.14 | $ | 0.21 | $ | (0.29 | ) | $ | (0.83 | ) | ||||||||||
Cumulative effect of accounting change | $ | — | $ | — | $ | — | $ | (2,926 | ) | |||||||||||
Weighted average shares outstanding | 7,161 | 6,987 | 7,108 | 6,975 | ||||||||||||||||
Basic loss per share from cumulative effect of accounting change | $ | — | $ | — | $ | — | $ | (0.42 | ) | |||||||||||
Net income (loss) | $ | 985 | $ | 1,486 | $ | (2,087 | ) | $ | (8,703 | ) | ||||||||||
Weighted average shares outstanding | 7,161 | 6,987 | 7,108 | 6,975 | ||||||||||||||||
Basic income (loss) per share | $ | 0.14 | $ | 0.21 | $ | (0.29 | ) | $ | (1.25 | ) | ||||||||||
Diluted: | ||||||||||||||||||||
Income (loss) before cumulative effect of accounting change | $ | 985 | $ | 1,486 | $ | (2,087 | ) | $ | (5,777 | ) | ||||||||||
Effect of subsidiary options | (10 | ) | (36 | ) | — | — | ||||||||||||||
Income (loss) used in calculation of diluted income (loss) per share before cumulative effect of accounting change | $ | 975 | $ | 1,450 | $ | (2,087 | ) | $ | (5,777 | ) | ||||||||||
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(UNAUDITED)
Three Months Ended October 31, | Nine Months Ended October 31, | |||||||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||||||
Weighted average shares outstanding | 7,161 | 6,987 | 7,108 | 6,975 | ||||||||||||||||
Effect of dilutive securities – stock options | 30 | 23 | — | — | ||||||||||||||||
Weighted average shares used in calculation of diluted income (loss) per share before cumulative effect of accounting change | 7,191 | 7,010 | 7,108 | 6,975 | ||||||||||||||||
Diluted income (loss) per share before cumulative effect of accounting change | $ | 0.14 | $ | 0.21 | $ | (0.29 | ) | $ | (0.83 | ) | ||||||||||
Cumulative effect of accounting change | $ | — | $ | — | $ | — | $ | (2,926 | ) | |||||||||||
Effect of subsidiary options | — | — | — | — | ||||||||||||||||
Net loss used in calculation of diluted loss per share from cumulative effect of accounting change | $ | — | $ | — | $ | — | $ | (2,926 | ) | |||||||||||
Weighted average shares outstanding | 7,161 | 6,987 | 7,108 | 6,975 | ||||||||||||||||
Effect of dilutive securities – stock options | 30 | 23 | — | — | ||||||||||||||||
Weighted average shares used in calculation of diluted loss per share from cumulative effect of accounting change | 7,191 | 7,010 | 7,108 | 6,975 | ||||||||||||||||
Diluted loss per share from cumulative effect of accounting change | $ | — | $ | — | $ | — | $ | (0.42 | ) | |||||||||||
Net income (loss) | $ | 985 | $ | 1,486 | $ | (2,087 | ) | $ | (8,703 | ) | ||||||||||
Effect of subsidiary options | (10 | ) | (36 | ) | — | — | ||||||||||||||
Net income (loss) used in calculation of diluted income (loss) per share | $ | 975 | $ | 1,450 | $ | (2,087 | ) | $ | (8,703 | ) | ||||||||||
Weighted average shares outstanding | 7,161 | 6,987 | 7,108 | 6,975 | ||||||||||||||||
Effect of dilutive securities – stock options | 30 | 23 | — | — | ||||||||||||||||
Weighted average shares used in calculation of diluted income (loss) per share | 7,191 | 7,010 | 7,108 | 6,975 | ||||||||||||||||
Diluted income (loss) per share | $ | 0.14 | $ | 0.21 | $ | (0.29 | ) | $ | (1.25 | ) | ||||||||||
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Inventory
Inventory consists of the following (in thousands):
April 30, 2003 | January 31, 2003 | |||||
Raw materials | $ | 2,369 | $ | 2,483 | ||
Work in progress | 74 | 352 | ||||
Finished goods | 1,140 | 821 | ||||
$ | 3,583 | $ | 3,656 | |||
October 31, 2003 | January 31, 2003 | |||||||
Raw materials | $ | 4,212 | $ | 2,483 | ||||
Work in progress | 301 | 352 | ||||||
Finished goods | 663 | 821 | ||||||
$ | 5,176 | $ | 3,656 | |||||
Inventories are net of write downs for excess and obsolete inventory of approximately $2.3 million and $2.6 million as of October 31, 2003 and January 31, 2003, respectively. The Company regularly reviews inventory quantities on hand and records a write down for excess and obsolete inventory based primarily on historical usage, forecasted product demand, and production requirements for the next twelve months.
8. Capitalized Software Development Costs, Net
Capitalized software development costs consist of the following (in thousands):
April 30, 2003 | January 31, 2003 | October 31, 2003 | January 31, 2003 | |||||||||||||||
Capitalized software development costs | $ | 6,991 | $ | 9,362 | $ | 8,746 | $ | 9,362 | ||||||||||
Less: accumulated amortization | (1,126 | ) | (3,804 | ) | (2,790 | ) | (3,804 | ) | ||||||||||
$ | 5,865 | $ | 5,558 | $ | 5,956 | $ | 5,558 | |||||||||||
CapitalizedAmortization of software development costs for the quartersthree months ended April 30,October 31, 2003 and 2002 totaled $0.8$1.0 million and $1.1$0.3 million, respectively. For the nine months ended October 31, 2003 and 2002, amortization of software development costs totaled $2.1 million and $2.4 million, respectively. Amortization of software development costs for the quarters ended April 30, 2003 and 2002 totaled $478,000 and $906,000, respectively, and havehas been reported in cost of revenue in the accompanying condensed consolidated financial statements.
Additionally, during the first quarter of fiscal 2004, fully amortized software development costs totaling $3.2 million and the corresponding accumulated amortization were retired.
9. Goodwill and Acquired Intangible Assets, Net
Goodwill and acquired intangible assets consist of the following (in thousands):
April 30, 2003 | January 31, 2003 | |||||||
Goodwill | $ | 2,796 | $ | 2,796 | ||||
Less: accumulated amortization | (403 | ) | (403 | ) | ||||
$ | 2,393 | $ | 2,393 | |||||
Acquired intangible assets | $ | 1,613 | $ | 1,452 | ||||
Less: accumulated amortization | (783 | ) | (745 | ) | ||||
$ | 830 | $ | 707 | |||||
Amortization of definite lived acquired intangible assets for the quarters ended April 30, 2003 and 2002 totaled $38,000 and $88,000, respectively. The Company ceased amortizing goodwill beginning February 1, 2002 upon adoption of SFAS No. 142.
October 31, 2003 | January 31, 2003 | |||||||||
Goodwill | $ | 3,248 | $ | 2,796 | ||||||
Less: accumulated amortization | (403 | ) | (403 | ) | ||||||
$ | 2,845 | $ | 2,393 | |||||||
Definite-lived intangible assets | $ | 971 | $ | 452 | ||||||
Less: accumulated amortization | (140 | ) | — | |||||||
$ | 831 | $ | 452 | |||||||
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(UNAUDITED)
October 31, 2003 | January 31, 2003 | |||||||||
Indefinite-lived intangible assets | $ | 1,000 | $ | 1,000 | ||||||
Less: accumulated amortization | (745 | ) | (745 | ) | ||||||
$ | 255 | $ | 255 | |||||||
The Company ceased amortizing goodwill and indefinite-lived intangible assets beginning February 1, 2002 upon adoption of SFAS No. 142. Amortization of definite-lived acquired intangible assets for the three months ended October 31, 2003 totaled $64,000. No amortization expense was recorded for the three months ended October 31, 2002. Amortization of definite-lived acquired intangible assets for the nine months ended October 31, 2003 and 2002, totaled $140,000 and $176,000, respectively.
Additions to goodwill totaled $0.5 million for the nine months ended October 31, 2003. There were no such additions for the three months ended October 31, 2003. The current fiscal year increase represents the Company’s purchase of a minority interest in CWT. For the three and nine months ended October 31, 2003, additions of definite-lived intangible assets totaled $0.3 million and $0.5 million, respectively. The additions represent costs incurred for license rights related to mobile phone technologies.
10. Customer Concentrations
The Company’s sales have historically been concentrated with a small number of customers. During the three months ended October 31, 2003 and 2002, sales to customers that accounted for 10 percent or more of revenues for the period totaled $4.8 million and $6.8 million, respectively. Sales to Targus accounted for approximately 53 percent and 52 percent of total revenue for the three months ended October 31, 2003 and 2002, respectively. During the three months ended October 31, 2003 and 2002, no other customer accounted for more than 10 percent of revenue.
For the nine months ended October 31, 2003 and 2002, sales to customers that accounted for 10 percent or more of revenue for the period totaled $8.1 million and $13.5 million, respectively. Sales to Targus accounted for approximately 35 percent and 44 percent of total revenues during those periods, respectively. For the nine months ended October 31, 2003 and 2002, no other customer constituted more than 10 percent of revenue.
As of October 31, 2003, approximately 51 percent of total accounts receivable related to one customer that accounted for 10 percent or more of Comarco’s total revenue. The loss of, or reduction in, sales to this customer could have a material adverse effect on the Company’s business, results of operations, and financial position.
11. Business Segment Information
The Company has two reportable operating segments: wireless test solutions and wireless applications.
Wireless test solutions designs and manufactures hardware and software tools for use by wireless carriers, equipment vendors, and others. Radio frequency engineers, professional technicians, and others use these tools to design, deploy, and optimize wireless networks, and to verify the performance of the wireless networks once deployed.
Wireless applications designs and manufactures call box systems and mobile power products for notebook computers, cellular telephones, PDAs, and other handheld devices. Call box systems provide emergency communication over existing wireless networks. In addition to the call box products, the Company provides 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, which expire at various timesdates through February 2011.
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, gross margin, and total assets attributable to these segments are as follows (in thousands):
Three Months Ended April 30, 2003 | Three Months Ended October 31, 2003 | Three Months Ended October 31, 2002 | |||||||||||||||||||||||||||||||||||||
Wireless Test Solutions | Wireless Applications | Corporate | Total | Wireless Test Solutions | Wireless Applications | Total | Wireless Test Solutions | Wireless Applications | Total | ||||||||||||||||||||||||||||||
Revenue | $ | 1,855 | $ | 4,601 | $ | — | $ | 6,456 | $ | 3,171 | $ | 8,051 | $ | 11,222 | $ | 2,909 | $ | 10,124 | $ | 13,033 | |||||||||||||||||||
Cost of revenue | 1,189 | 2,765 | — | 3,954 | 1,981 | 4,248 | 6,229 | 1,110 | 5,583 | 6,693 | |||||||||||||||||||||||||||||
Gross profit | $ | 666 | $ | 1,836 | $ | — | $ | 2,502 | $ | 1,190 | $ | 3,803 | $ | 4,993 | $ | 1,799 | $ | 4,541 | $ | 6,340 | |||||||||||||||||||
Gross margin | 35.9 | % | 39.9 | % | — | 38.8 | % | 37.5 | % | 47.2 | % | 44.5 | % | 61.8 | % | 44.9 | % | 48.6 | % | ||||||||||||||||||||
Total assets | $ | 15,851 | $ | 12,017 | $ | 21,919 | $ | 49,787 | |||||||||||||||||||||||||||||||
Three Months Ended April 30, 2002 | Nine Months Ended October 31, 2003 | Nine Months Ended October 31, 2002 | |||||||||||||||||||||||||||||||||||||
Wireless Test Solutions | Wireless Applications | Corporate | Total | Wireless Test Solutions | Wireless Applications | Total | Wireless Test Solutions | Wireless Applications | Total | ||||||||||||||||||||||||||||||
Revenue | $ | 3,108 | $ | 4,657 | $ | — | $ | 7,765 | $ | 7,505 | $ | 15,698 | $ | 23,203 | $ | 9,394 | $ | 21,414 | $ | 30,808 | |||||||||||||||||||
Cost of revenue | 2,177 | 2,803 | — | 4,980 | 4,360 | 10,131 | 14,491 | 6,732 | 12,159 | 18,891 | |||||||||||||||||||||||||||||
Gross profit | $ | 931 | $ | 1,854 | $ | — | $ | 2,785 | $ | 3,145 | $ | 5,567 | $ | 8,712 | $ | 2,662 | $ | 9,255 | $ | 11,917 | |||||||||||||||||||
Gross margin | 29.9 | % | 39.8 | % | — | 35.9 | % | 41.9 | % | 35.5 | % | 37.5 | % | 28.3 | % | 43.2 | % | 38.7 | % | ||||||||||||||||||||
Total assets | $ | 27,039 | $ | 13,433 | $ | 21,724 | $ | 62,196 | |||||||||||||||||||||||||||||||
Wireless Test Solutions | Wireless Applications | Corporate | Total | |||||||||
Assets at October 31, 2003 | $ | 15,780 | $ | 10,547 | $ | 23,644 | $ | 49,971 | ||||
Assets at October 31, 2002 | $ | 13,120 | $ | 18,786 | $ | 21,535 | $ | 53,441 | ||||
Revenue by geographic area consists of the following (in thousands): | ||||||||||||
Three Months Ended October 31, | Nine Months Ended October 31, | |||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||
North America | $ | 9,669 | $ | 10,595 | $ | 19,176 | $ | 26,010 | ||||
Europe | 482 | 1,838 | 2,269 | 3,155 | ||||||||
Asia | 118 | 540 | 277 | 908 | ||||||||
Latin America | 953 | 60 | 1,481 | 735 | ||||||||
$ | 11,222 | $ | 13,033 | $ | 23,203 | $ | 30,808 | |||||
Revenue by geographic area consisted of the following (in thousands):
Three Months Ended April 30, | ||||||
2003 | 2002 | |||||
North America | $ | 5,780 | $ | 7,080 | ||
Europe | 617 | 372 | ||||
Asia | 31 | 122 | ||||
Latin America | 28 | 191 | ||||
$ | 6,456 | $ | 7,765 | |||
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
12. Commitments and Contingencies |
Comarco was named as a defendant in two lawsuits filed by Mobility Electronics, Inc. (“Mobility”), and subsequently the Company filed two actions against Mobility and affiliates as further discussed below.
Mobility commenced proceedings for patent infringement against the Company and CWT with respect to CWT’s ChargeSource power supply products (the “Mobility Action”). The Company was first served with Mobility’s amended complaint on August 10, 2001. In addition to asserting that the Company and CWT have infringed a Mobility patent, the amended complaint seeks declaratory judgment that three of CWT’s power-supply related patents are either invalid or not infringed by power supplies produced or to be produced by Mobility. The Company and CWT moved for dismissal of the amended complaint in its entirety. The motion was denied, but the Court indicated that based on the results of discovery the Court may grant a renewed motion to dismiss the declaratory judgment claim. The Company and CWT believe that they have meritorious defenses with respect to Mobility’s patent and declaratory judgment causes of actions.
On June 21, 2002, CWT filed an action for patent infringement against the Xtend Micro Products, Inc. (“Xtend”) and its parent entity, iGo Corporation (“iGo”). CWT alleges that certain patents owned by CWT are infringed by Xtend’s PowerXtender™ and AC Adapter power supply products as well as other power supply and power adapter products and related accessories. On July 15, 2002, Xtend and iGo answered the complaint denying the allegations in CWT’s complaint and asserting a number of affirmative defenses. Xtend and iGo have indicated in court filings that they will seek to have this case transferred to and consolidatedPurchase Commitments with the Mobility Action because this case involves two of the patents involved in the Mobility Action, and Mobility and iGo have recently merged into a single corporate entity. CWT believes that its case against Xtend and iGo is meritorious and that CWT has valid grounds for opposing any motion to consolidate this case with the Mobility Action that may be filed by Xtend and/or iGo.Suppliers
On January 31, 2003, CWT filed an actionWe generally issue purchase orders to our suppliers with delivery dates from four to six weeks from the purchase order date. In addition, we regularly provide significant suppliers with rolling six-month forecasts of material and finished goods requirements for patent infringement against Mobility Electronics, Inc., Hipro Electronics Co. Ltd.,planning and iGo Corporation with regardlong-lead time parts procurement purposes only. We are committed to a universal power adapter called “Juice.” Defendant Hipro manufactures Juice for Mobility,accept delivery of materials pursuant to our purchase orders subject to various contract provisions which in turn offers it for sale through its wholly owned subsidiary iGo Corporation. On February 27, 2003, Mobility and iGo answered the complaint while Hipro filed a motionallow us to dismiss based on lackdelay receipt of personal jurisdiction and improper service.
On March 4, 2003, CWT filed a Motion for Preliminary Injunction seekingsuch order or allow us to enjoin Mobility, Hipro, and iGo from making, using, sellingcancel orders beyond certain agreed lead times. Such cancellations may or offering for sale the “Juice” product. The Court has set a June 11, 2003 hearing date for both CWT’s Motion for Preliminary Injunction and Hipro’s Motion to Dismiss. The parties participated in a settlement conference before a United States Magistrate Judge on May 20, 2003 without reaching a settlement.
CWT believes that its case against Mobility, Hipro, and iGo Corp is meritorious. As described above, this action has been consolidated for purposes of discovery with the Mobility Arizona Action.
Los Angeles County Service Authority for Freeway Emergencies (“LASAFE”) filed an action against CWT on June 10, 2002, relating to two contracts between LASAFE and CWT concerning call box systems manufacturedmay not include cancellation costs payable by CWT, upgraded by CWT to comply with the Americans with Disabilities Act (“ADA”), and maintained by CWT until its contractual obligations to provide maintenance expired. On August 2, 2002, LASAFE filed a first amended complaint. The complaint includes eight counts.us. In the first five counts LASAFE alleges CWT breached its contractual obligationspast, we have been required to take delivery of materials from our suppliers that were in excess of our requirements and implied warranties by failing to properly maintain and repair the call box systems and failing to provide certain deliverables to LASAFE. In the last three counts LASAFE alleges that a patent owned by CWT should be assigned to LASAFE, and CWT should compensate LASAFE because an LASAFE employee is the true inventor of the invention claimed in the patent. The complaint seeks an unspecified amount of actual and punitive damages, ownership of the patent, an order that CWT specifically perform its obligations under the contracts, recovery of attorneys fees, and an audit to determine the number of allegedly infringing call boxes.we have previously recognized
COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(UNAUDITED)
On August 16, 2002, CWT filed an answercharges and expenses related to such excess material. If we are unable to adequately manage our suppliers and adjust such commitments for changes in demand, we may incur additional inventory expenses related to excess and obsolete inventory. Such expenses could have a motion to dismiss the first five counts founded in state contractmaterial adverse effect on our business, results of operations, and warranty law on the grounds that the Federal District Court lacks jurisdiction over the state law claims, which was subsequently granted. The Court has set a scheduling order and has set a trial date of February 3, 2004. CWT believes that it has meritorious defenses with respect to all of LASAFE’s claims.financial position.
On November 7, 2002, LASAFE filed a complaint in state court alleging the five causes of action that were dismissed in the federal court action referenced in the above paragraph. Specifically, LASAFE alleges that CWT breached its contractual obligations and implied warranties by failing to properly maintain and repair the call box systems and failing to provide certain deliverables to LASAFE, and seeks over $1 million in damages. On January 9, 2003, CWT filed its answer and a cross-complaint asserting causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing based on LASAFE’s failure to pay CWT all monies due under a contract with LASAFE and LASAFE’s conduct during the course of the contract. LASAFE has not yet responded to CWT’s cross-complaint. The Court has set a trial date of April 5, 2004. CWT believes that it has meritorious defenses to LASAFE’s claims and believes that LASAFE will have significant difficulties proving causation and damages on its claims for breach of implied warranties.Legal 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 results of operations and financial condition and operating results.position.
ITEM 2. | 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 contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms, or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Important factors which may cause actual results to differ materially from the forward-looking statements are described in the section entitled “Risk Factors” in Part I, Item 1 of the our report on Form 10-K for the year ended January 31, 2003, 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, Inc., through its subsidiary Comarco Wireless Technologies, Inc. (collectively, “Comarco,” or the “Company”), is a leading provider of field test applications for the wireless industry. Comarco also designs and manufactures emergency call box systems and mobile power products for notebook computers, cellular telephones, PDAs, and other handheld devices. 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 continuingOur operations consist solely of the operations of Comarco Wireless Technologies, Inc. (“CWT”).
Results of Operations – Continuing Operations
We have two reportable operating segments: wireless test solutions and wireless applications.
Wireless Test Solutions
Our wireless test solutions business designs and manufactures hardware and software tools for use by wireless carriers, equipment vendors, and others. Radio frequency engineers, professional technicians, and others use these field test applications to design, deploy, and optimize wireless networks, and to verify the performance of the wireless networks once deployed. The downturn
During the first half of fiscal 2004, we completed the development of our Seven.Five hardware and various related software applications, and began shipping products to customers in Europe, North America and Latin America. Seven.Five is a mobile test platform that is adaptable to many test applications. It provides wireless infrastructure analysis, benchmarking and optimization for 2G, 2.5G and 3G network deployments. We expect to complete the wireless industry has reduced overall demand for our wireless test solutions products, and continues to make it difficult for us to forecast our wireless test solutions operations fordevelopment of additional Seven.Five software applications during the fourth quarter of fiscal 2004.
The Seven.Five family consists of the following members:
Wireless Applications
Our wireless applications business designs and manufactures emergency call box systems and mobile power products for notebook computers, cellular telephones, PDAs, and other handheld devices. Our call box products provide emergency communication over existing wireless networks. In addition to the call box products, we provide system installation and long-term maintenance services. Currently, we have approximately 14,000 call boxes installed, the majority of which are serviced and maintained under long-term agreements.agreements which expire at various dates through February 2011.
Approximately 75 percent of our call box revenue is derived from agencies of California’s state and local governments. The State of California is currently experiencing financial and political challenges. We believe these challenges have created uncertainty with respect to the spending patterns of our California-based customers. As a result, projects and the related contracts to upgrade and expand certain call box systems have been delayed. While we currently believe that these projects will move ahead, we are unable to forecast the timing of such events in the near-term.
The wireless applications business also includes the ChargeSource family of mobile power products. Our currentDuring the second quarter of fiscal 2004, our offering of ChargeSource products consistwas expanded with the release of a 70-wattthe 120-watt universal AC powerAC/DC adapter our second-generation mobile power system.and the 120-watt universal DC adapter. By simply changing the compact SmartTips connected to the end of the charging cable, the
universal AC power adapter isthese products are capable of charging and powering multiple target devices, including most notebook computers, cellular telephones, PDAs, and other handheld devices. During the third quarter of fiscal 2002, the ChargeSource product offering was expanded with the introduction of the 70-watt universal DC power adapter. This universal DC power adapter allows traveling professionals to use all their existing ChargeSource SmartTips on the road or in the air. This device connects to the in-seat power outlet available on most major airlines or the cigarette lighter plug found in automobiles. Targus Group International (“Targus”) currently distributes both of these products.
Until recently, most current notebook computers required no more than 70 watts of power to operate. However, the personal computer industry is currently transitioning to notebook computers with increasing power requirements. As the power requirement increases, so does the size of the original equipment of the manufacturer (“OEM”) AC charger sold with the notebook computer. To address this industry wide trend, we have developed a family of ChargeSource products that are compatible with all legacy and current and future notebook computers.computers, as well as those notebook computers expected to be available during the next 18 to 24 months. These new ChargeSource products are able to deliver up to 120 watts of power in a very small form factor. The new ChargeSource family of products which are expectedconsists of the following:
Our new 120-watt ChargeSource products, as well as the universal battery are compatible with existing Smart Tips and are backwards compatible with the 70-Watt adapters.adapters, which we continue to manufacture and sell based on the requirements of the retailers. Targus Group International (“Targus”) currently distributes our available products.
In cooperation with the Consumer Products Safety Commission, on March 20, 2003, Comarco voluntarily initiated a product safety recall of its legacy ChargeSource 70-watt AC power adapters. This product safety recall impacts approximately 125,000 units that were sold in fiscal 2003. Comarco and Targus entered into an agreement to address the impact of the recall action. Under the terms of the agreement Comarco issued a $3.2 million credit to Targus in fiscal 2003 in consideration of a full release. Additionally, the Company accrued $554,000 in costs related to the recall action.
Of the $3.2 million credit issued to Targus in the fourth quarter of fiscal 2003, qualifying product returns totaling $1.3$2.1 million have been madereceived from Targus through April 30,October 31, 2003. Additionally,During the third quarter, the remaining $1.1 million unused credit was recorded as revenue, consistent with the expiration of the right of return and the term of the agreement. Additionally, the Company accrued $554,000 in costs accrued related to the recall the Company has paid $39,000action in related costs through April 30, 2003.cost of revenue. The Company believes that the balance remaining as of April 30,October 31, 2003 of $270,000 is adequate to cover additional product recall costs expected to be incurred.
The following table sets forth certain items as a percentage of revenue from our condensed consolidated statements of operations for the three and nine months ended April 30,October 31, 2003 and 2002. The table and discussion that follows provides 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.
Three Months Ended April 30, | ||||||
2003 | 2002 | |||||
Revenue | 100.0 | % | 100.0 | % | ||
Cost of revenue | 61.3 | 64.1 | ||||
Gross profit | 38.7 | 35.9 | ||||
Selling, general and administrative costs | 35.9 | 30.1 | ||||
Engineering and support costs | 23.9 | 18.2 | ||||
Operating loss | (21.1 | ) | (12.4 | ) | ||
Other income, net | 1.7 | 1.4 | ||||
Minority interest in losses of subsidiary | 0.3 | — | ||||
Loss before income taxes | (19.1 | ) | (11.0 | ) | ||
Income tax benefit | (6.4 | ) | (4.0 | ) | ||
Net loss before cumulative effect of change in accounting principle | (12.7 | )% | (7.0 | )% | ||
Three Months Ended October 31, | Nine Months Ended October 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Revenue | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Cost of revenue | 55.5 | 51.4 | 62.4 | 61.3 | ||||||||||||
Gross margin | 44.5 | 48.6 | 37.6 | 38.7 | ||||||||||||
Selling, general and administrative costs | 18.8 | 18.2 | 33.9 | 23.0 | ||||||||||||
Asset impairment charge | — | — | — | 27.3 | ||||||||||||
Engineering and support costs | 12.1 | 13.0 | 18.7 | 14.4 | ||||||||||||
Operating income (loss) | 13.6 | 17.4 | (15.0 | ) | (26.0 | ) | ||||||||||
Other income, net | 0.4 | 0.7 | 0.9 | 1.0 | ||||||||||||
Minority interest | (0.1 | ) | (0.1 | ) | 0.2 | 0.2 | ||||||||||
Three Months October 31, Nine Months Ended October 31, Income (loss) before income taxes Income tax expense (benefit) Net income (loss) before cumulative effect of change in accounting principle
Ended 2003 2002 2003 2002 13.9 18.0 (13.9) (24.8) 5.1 6.6 (4.9) (6.1) 8.8 % 11.4 % (9.0) % (18.7) %
Comparison of the three months ended October 31, 2003 to the three months ended October 31, 2002
Consolidated
Revenue
Total revenue for the firstthird quarter of fiscal 2004, which ended April 30,October 31, 2003, was $6.5$11.2 million compared to $7.8$13.0 million for the firstthird quarter of fiscal 2003, a decrease of $1.3$1.8 million or 16.913.9 percent. As discussed below,in the wireless applications revenue section, the decrease is attributable to decreased sales of our wireless test solutionsapplications products, partially offset by a $1.1 million unused recall credit that expired under the terms of the agreement with Targus, recorded as well as our exit from our engineering services businessrevenue during the secondthird quarter of fiscal 2004.
We track the geographic location of our sales based upon the location of our customers to which our products are shipped. Certain of our customers purchase products from us at central locations and then reship the product to locations throughout the world. Accordingly, we are unable to track the ultimate geographic location of our products. Sales to customers in North America and Europe accounted for approximately 86 percent and 4 percent of revenue, or $9.7 million and $0.5 million, respectively, for the third quarter ended October 31, 2003. For the comparable period of the prior fiscal year, sales to customers in North America and Europe accounted for approximately 82 percent and 14 percent of revenue, or $10.6 million and $1.8 million, respectively.
Cost of Revenue and Gross Margin
Total cost of revenue for the firstthird quarter of fiscal 2004 was $4.0$6.2 million compared to $5.0$6.7 million for the firstthird quarter of fiscal 2003, a decrease of approximately $1.0$0.5 million or 20.66.9 percent. As a percentage of revenue, gross margin increaseddecreased to 38.744.5 percent from 35.948.6 percent for the firstthird quarter of the prior fiscal year. The increasedecrease in gross margin is primarily due to maintaining a higher cost structure during the first quarterincreased amortization of fiscal 2003 in support of completing our remaining contractual obligationscapitalized software development costs related to our engineering services customers.wireless test solutions business which totaled $1.0 million and $0.3 million for the three months ended October 31, 2003 and 2002, respectively and additional costs of ramping-up production of our newly released 120-watt universal power adapters. The decrease in gross margin was partially offset by the $1.1 million unused recall credit.
Selling, General and Administrative Costs
Selling, general, and administrative costs for the firstthird quarter of fiscal 2004 were $2.1 million compared to $2.4 million for the third quarter of fiscal 2003, a decrease of $0.3 million or 10.8 percent. Approximately $0.2 million of the decrease relates to reduced legal fees incurred in the third quarter of fiscal 2004 compared to the corresponding period of the prior fiscal year. The Company settled ongoing litigation in the second quarter of fiscal 2004 and as a result our legal fees have decreased in the current quarter. Additionally, $0.1 million of the decrease is due to reduced employee benefits expense in the current year. We are using previously forfeited employer matching contributions to fund our current savings and retirement plan matching obligations. As a percentage of revenue, selling, general, and administrative costs were 18.8 percent and 18.2 percent for the quarters ended October 31, 2003 and 2002, respectively.
Engineering and Support Costs
The Company capitalizes costs incurred for the development of software embedded in our wireless test solutions products that will be sold when technological feasibility has been established. These capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenue and changes in hardware and software technologies. Costs that are capitalized include direct labor and related overhead. Engineering and support costs for the third quarter of fiscal 2004 and 2003 are as follows (in thousands):
Three Months Ended October 31, | ||||||||
2003 | 2002 | |||||||
Engineering | $ | 1,820 | $ | 1,793 | ||||
Less: Capitalized software development costs | (811 | ) | (712 | ) | ||||
Support costs | 343 | 622 | ||||||
$ | 1,352 | $ | 1,703 | |||||
Engineering and support costs, net of capitalized software development costs, for the third quarter of fiscal 2004 were $2.3 million. During$1.4 million compared to $1.7 million for the prior fiscal years, wequarter, a decrease of approximately $0.3 million. Gross engineering and support costs, before reduction for capitalized software development costs, decreased $0.2 million in comparison to the third quarter of fiscal 2003. This decrease is primarily due to reduced staffing of our indirect cost structure in responseproduct support function.
Other Income
Other income consists primarily of interest income.
Income Tax Benefit
The effective tax rates for the quarters ended October 31, 2003 and 2002 were constant at 36.7 percent.
Wireless Test Solutions
Three Months Ended October 31, | ||||||||
2003 | 2002 | |||||||
(In thousands) | ||||||||
Revenue | $ | 3,171 | $ | 2,909 | ||||
Cost of revenue | 1,981 | 1,110 | ||||||
Gross profit | $ | 1,190 | $ | 1,799 | ||||
Gross margin | 37.5 | % | 61.8 | % | ||||
Revenue
Wireless test solutions revenue for the third quarter of fiscal 2004 was $3.2 million compared to a broad downturn in$2.9 million for the wireless industrythird quarter of fiscal 2003, an increase of $0.3 million or 9.0 percent. This increase reflects customer orders for our newly released products developed under the Seven.Five platform.
Cost of Revenue and the resulting reduced demand forGross Margin
Cost of revenue from our wireless test solutions business for the third quarter of fiscal 2004 was $2.0 million compared to $1.1 million for the third quarter of fiscal 2003, an increase of approximately $0.9 million or 78.5 percent. Gross margin for the third quarter of fiscal 2004 decreased to 37.5 percent from 61.8 percent for the corresponding period of the prior fiscal year. The decrease in gross margin is primarily a result of higher rates of capitalized software development amortization expense. Software amortization expense, recorded in cost of sales, was $1.0 million for the third quarter of fiscal 2004 compared to $0.3 million for the third quarter of fiscal 2003, an increase of $0.7 million. This increase in software amortization is due to the development and release of our Seven.Five product platform in the current year.
Wireless Applications
Three Months Ended October 31, | ||||||||
2003 | 2002 | |||||||
(In thousands) | ||||||||
Revenue | $ | 8,051 | $ | 10,124 | ||||
Cost of revenue | 4,248 | 5,583 | ||||||
Gross profit | $ | 3,803 | $ | 4,541 | ||||
Gross margin | 47.2 | % | 44.9 | % | ||||
Revenue
Wireless applications revenue for the third quarter of fiscal 2004 was $8.0 million compared to $10.1 million for the third quarter of fiscal 2003, a decrease of approximately $2.1 million or 20.5 percent. This decrease was due to a $0.6 million decrease in sales of our ChargeSource products and a $1.5 million decrease in sales of our call box products.
As discussed previously, the ChargeSource revenue includes $1.1 million in revenue related to the unused portion of the product recall credit. Excluding this credit to revenue, ChargeSource revenue would have decreased $1.7 million or 25% compared to the third quarter of fiscal 2003. The decrease in sales of our ChargeSource products is due to the phase-out of our 70-watt products as our primary market offering and the transition to newly developed 120-watt products. We began shipping both the 120-watt universal AC/DC and 120-watt universal DC power adapters at the end of the second quarter of fiscal 2004, and increased production to expected monthly production levels in the middle of the third quarter.
The decrease in sales of our call box products relates to delays in receiving contracts to upgrade and expand several call systems based in California. As previously discussed, California is currently experiencing financial and political challenges. We believe these challenges have created uncertainty with respect to the spending patterns of our California based customers. As a result, projects and the related contracts to upgrade and expand certain call box systems have been delayed. Sales of call box products tend to fluctuate from quarter to quarter while revenue from the long-term maintenance contracts is relatively comparable quarter to quarter.
Cost of Revenue and Gross Margin
Wireless applications cost of revenue for the third quarter of fiscal 2004 was $4.2 million compared to $5.6 million for the third quarter of fiscal 2003, a decrease of approximately $1.4 million or 23.9 percent. The decrease in cost of revenue is consistent with the decreased revenue for the same period. As a percentage of revenue, gross margin was 47.2 percent versus 44.9 percent for the corresponding period of the prior fiscal year. Excluding the aforementioned $1.1 million credit to revenue, the gross margin for the third quarter of fiscal 2004
would have been 38.7 percent. Gross margin for the three months ended October 31, 2003 includes costs of ramping-up production of our newly released 120-watt universal power adapters, which began shipping at the end of the second quarter of fiscal 2004, and did not reach expected production levels until mid-third quarter.
Comparison of the Nine Months Ended October 31, 2003 to the Nine Months Ended October 31, 2002
Consolidated
Revenue
Total revenue for the nine months ended October 31, 2003, was $23.2 million compared to $30.8 million for the nine months ended October 31, 2002, a decrease of approximately $7.6 million or 24.7 percent. As discussed below, the decrease is attributable to a $5.7 million decrease in sales of our wireless applications products and a $1.9 million decrease in sales of our wireless test solutions products.
Sales to customers in North America and Europe accounted for approximately 83 percent and 10 percent of revenue, or $19.2 million and $2.3 million, respectively, for the nine months ended October 31, 2003. For the comparable period of the prior fiscal year, sales to customers in North America and Europe accounted for approximately 84 percent and 10 percent of revenue, or $26.0 million and $3.1 million, respectively.
Cost of Revenue and Gross Margin
Total cost of revenue for the nine months ended October 31, 2003, was $14.5 million compared to $18.9 million for the corresponding period of fiscal 2003, a decrease of approximately $4.4 million or 23.3 percent. During the nine months ended October 31, 2002, we recorded a non-cash inventory impairment charge totaling $1.2 million related to our wireless test solutions legacy 2G products. No such costs were incurred in the corresponding period of the current fiscal year. The remaining decrease in cost of revenue is consistent with the decrease in revenue for the current fiscal year. As a percentage of revenue, gross margin was 37.6 percent as compared to 38.7 percent for the nine months ended October 31, 2003 and 2002, respectively. As discussed below, the decrease in gross margin in the current period is primarily attributable to the costs of ramping up production of our newly released 120-watt universal power adapters.
Selling, General and Administrative Costs
Selling, general and administrative costs for the nine months ended October 31, 2003, were $7.9 million compared to $7.1 million for the corresponding period of the prior fiscal year, an increase of $0.8 million or 10.9 percent. The increase in selling, general and administrative expenses were flat in comparisonis attributable to the priorlegal settlements and related fees in the amount of $1.7 million incurred during the second quarter of fiscal 2004, partially offset by reductions in other indirect costs as well as markedly reduced legal fees incurred in the third quarter of the current fiscal year. As a percentage of revenue, selling, general and administrative costs were 35.933.9 percent and 30.123.0 percent for the quartersnine months ended April 30,October 31, 2003 and 2002, respectively, due to the relative fixed nature of our current cost structure and a reduced revenue base.
For at least the balance of fiscal 2004, quarterly selling, general, and administrative costs are expected to fluctuate due to increasing revenue levels and the timing of legal costs incurred in addressing the legal matters discussed in the section entitled “Legal Proceedings” in Part II, Item 1 of this report on Form 10-Q.respectively.
Engineering and Support Costs
The Company capitalizes costs incurred for the development of software embedded in our wireless test solutions products that will be sold when technological feasibility has been established. These capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenue and changes in hardware and software technologies. Costs that are capitalized include direct labor and related overhead. Engineering and support costs for the first quarter of fiscal 2004nine months ended October 31, 2003 and 20032002, are as follows (in thousands):
Three Months Ended April 30, | ||||||||
2003 | 2002 | |||||||
Engineering | $ | 1,884 | $ | 1,842 | ||||
Less: Capitalized software development | (782 | ) | (1,100 | ) | ||||
Support Costs | 442 | 675 | ||||||
$ | 1,544 | $ | 1,417 | |||||
Nine Months Ended October 31, | ||||||||
2003 | 2002 | |||||||
Engineering | $ | 5,745 | $ | 5,237 | ||||
Less: Capitalized software development costs | (2,538 | ) | (2,727 | ) | ||||
Support costs | 1,120 | 1,913 | ||||||
$ | 4,327 | $ | 4,423 | |||||
Engineering and support costs, net of capitalized software development costs, for the first quarter of fiscal 2004nine months ended October 31, 2003 were $1.5$4.3 million compared to $1.4$4.4 million for the corresponding period of the prior fiscal quarter, an increaseyear, a decrease of approximately $0.1 million. Gross engineering and support costs, before reduction for capitalized software development costs, decreased $0.2$0.3 million in comparisoncompared to the first quarter of fiscalnine months ended October 31, 2003. This decrease is primarily due to increased product development costs offset by reduced staffing of our product support function. Capitalized software development costs decreased $0.3$0.2 million resultingfor the nine months ended October 31, 2003 in ancomparison to the comparable period of the prior fiscal year. The increase in engineering costs during fiscal 2004 is attributable to the development and support costs, netrelease of capitalized software development costs, of $0.1 million forSeven.Five products, including the firstSeven.Five Solo and Seven.Five Duo, during the second quarter of fiscal 2004, in comparison to the prior fiscal quarter. The reductionand release of capitalized software development costsSeven.Five 1X during the firstthird quarter of fiscal 2004 is consistent with our strategy of lowering the cost structure in support of our wireless test solutions business, whereby we discontinued certain software development projects and focused our available resources on the development of a single flexible product platform, Seven.Five.2004.
Other Income
Other income consists primarily of interest income.
Income Tax ExpenseBenefit
The effective tax ratesrate for the quartersnine months ended April 30,October 31, 2003 and 2002 were 33.6was 35.6 percent and 36.924.5 percent, respectively. The lower prior year effective tax rate used to compute the tax benefit of $1.9 million was caused primarily by permanent differences in our taxable loss for fiscal 2003 as a result of non-deductible intangible asset impairment charges recorded during the second quarter of fiscal 2003. No such non-deductible expenses were recorded in fiscal 2004.
Cumulative Effect of Accounting Change
The Company adopted SFAS No. 142 “Goodwill and Other Intangible Assets” effective February 1, 2002. During the second quarter of fiscal 2003, we completed the required transitional impairment test under the new rules and recorded a non-cash charge of $2.9 million to write down fully the carrying value of the goodwill related to our EDX software reporting unit. This reporting unit is included in our wireless test solutions segment for financial reporting purposes, and the related goodwill was generated through our acquisition of EDX Engineering, Inc. during December 2000. Such charge is reflected as a cumulative effect of change in accounting principle. In calculating the impairment charge, the fair value of the impaired reporting unit underlying the wireless infrastructure segment was estimated using a discounted cash flow methodology. This charge writes off the entire carrying value of the recorded goodwill for that reporting unit. No comparable charges were recorded during the nine months ended October 31, 2003.
Wireless Test Solutions
Three Months Ended April 30, | Nine Months Ended October 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
(In thousands) | (Dollars in thousands) | |||||||||||||||
Revenue | $ | 1,855 | $ | 3,108 | $ | 7,505 | $ | 9,394 | ||||||||
Cost of revenue | 1,189 | 2,177 | 4,360 | 6,732 | ||||||||||||
Gross profit | $ | 666 | $ | 931 | $ | 3,145 | $ | 2,662 | ||||||||
Gross margin | 35.9 | % | 29.9 | % | 41.9 | % | 28.3 | % | ||||||||
Revenue
WirelessRevenue from our wireless test solutions revenuesegment for the firstnine months ended October 31, 2003, was $7.5 million compared to $9.4 million for the nine months ended October 31, 2002, a decrease of 20.1 percent. Of the total decrease of $1.9 million, $0.9 million relates to the exiting of the engineering services business, which we ceased providing in the second quarter of fiscal 2004 was $1.9 million compared to $3.1 million for the first quarter of fiscal 2003, a2003. The remaining decrease of $1.3$1.0 million or 40.3 percent. This decrease reflectsrepresents the reduced demand forshifting of sales from our legacy 2G wireless test solutions products as well as engineering services, which we ceased providing duringcoupled with delays in receiving orders in anticipation of the second quarterrelease of fiscal 2003. Revenue from engineering services for the first quarter of fiscal 2003 totaled approximately $450,000.our Seven.Five products.
Cost of Revenue and Gross Margin
Cost of revenue from our wireless test solutions businesssegment for the first quarter of fiscal 2004nine months ended October 31, 2003, was $1.2$4.4 million compared to $2.2$6.7 million for the first quarter of fiscal 2003,nine months ended October 31, 2002, a decrease of approximately $1.0$2.4 million or 45.435.2 percent. Excluding the cost of revenue attributable to engineering services, which totaled approximately $0.7 million, the grossGross margin for the first quarter of fiscalnine months ended October 31, 2003 was 43.8 percent. Accordingly, as a percentage of revenue, gross margin for the first quarter of fiscal 2004 decreasedincreased to 35.941.9 percent from 43.828.3 percent for the corresponding period of the prior fiscal year. The decrease in cost of revenue was due to decreased sales volumes of our hardware and software tools, as well as decreased amortization of capitalized software development costs. Amortization of software development costs for the first quarter ended April 30, 2003 and 2002 totaled $0.5 million and $0.9 million, respectively. The decreaseincrease in gross margin was primarily due to decreased absorption of fixeda non-cash inventory impairment charge totaling $1.2 million that was recorded during the nine months ended October 31, 2002. No comparable costs attributable to lower product sales.were incurred during fiscal 2004.
Wireless Applications
Three Months Ended April 30, | Nine Months Ended October 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
(In thousands) | (Dollars in thousands) | |||||||||||||||
Revenue | $ | 4,601 | $ | 4,657 | $ | 15,698 | $ | 21,414 | ||||||||
Cost of revenue | 2,765 | 2,803 | 10,131 | 12,159 | ||||||||||||
Gross profit | $ | 1,836 | $ | 1,854 | $ | 5,567 | $ | 9,255 | ||||||||
Gross margin | 39.9 | % | 39.8 | % | 35.5 | % | 43.2 | % | ||||||||
Revenue
WirelessRevenue from our wireless applications revenuesegment for the first quarter of 2004nine months ended October 31, 2003 was $4.6$15.7 million compared to $4.7$21.4 million for the first quarter of 2003,nine months ended October 31, 2002, a decrease of approximately $0.1$5.7 million or 1.226.7 percent. This decrease was due to a $0.3$3.2 million decrease in sales of our ChargeSource products and a $2.5 million decrease in sales of our call box products.
The decrease in sales of our ChargeSource products is due to the phase-out of our 70-watt products as our primary market offering and the transition to newly developed 120-watt products. We began shipping both the 120-watt universal AC/DC and 120-watt universal DC power adapters at the end of the second quarter of fiscal 2004. The decrease in sales during the current fiscal year is partially offset by a $0.2$1.1 million increaseunused recall credit that expired under the terms of the agreement with Targus. For the fourth quarter of fiscal 2004, we expect that our ChargeSource revenue will be approximately $5.5 million.
The decrease in sales of our call box products relates to delays in receiving contracts to upgrade and services. Forexpand several call systems based in California. As previously discussed, California is currently experiencing financial and political challenges. We believe these challenges have created uncertainty with respect to the first quarterspending patterns of fiscal 2004,our California based customers. As a result, projects and the related contracts to upgrade and expand certain call box revenue was generated from both the sales of products and providing maintenance services under long-term contracts and totaled $0.5 million and $1.2 million, respectively.systems have been delayed. Sales of call box products tend to fluctuate from quarter to quarter while revenue from the long-term maintenance contracts areis relatively comparable quarter to quarter.
Cost of Revenue and Gross Margin
Wireless applications costCost of revenue from our wireless applications segment for the first quarter of fiscal 2004 andnine months ended October 31, 2003 was $2.8 million.$10.1 million compared to $12.1 million for the nine months ended October 31, 2002, a decrease of $2.0 million or 16.7 percent. As a percentage of revenue, gross margin was comparable at 39.9decreased to 35.5 percent versus 39.8from 43.2 percent for the corresponding periodnine months ended October 31, 2002. The decrease in gross margin is attributable to production costs associated with the new 120-watt products, which began shipping at the end of the priorsecond quarter of fiscal year.2004.
Liquidity and Capital Resources
Our financial position remains strong, with cash and cash equivalents of $23.7$13.5 million at April 30, 2003.
The following table summarizes Comarco’s cash flows for the nine months ended October 31, 2003 and 2002:
Nine Months Ended October 31, | ||||||||
2003 | 2002 | |||||||
(In thousands) | ||||||||
Net cash provided by (used in): | ||||||||
Operating activities | $ | (7,055 | ) | $ | 7,576 | |||
Investing activities | (4,697 | ) | (4,716 | ) | ||||
Financing activities | (106 | ) | (98 | ) | ||||
Net increase (decrease) in cash and cash equivalents — continuing operations | $ | (11,858 | ) | $ | 2,762 | |||
Cash Flows from Operating Activities
WeCash used cash fromin operations of $0.1was $7.1 million for the first quarter of fiscal 2004nine months ended October 31, 2003 compared to $2.4$7.6 million of cash generated from operations for the corresponding period of the prior fiscal year. The net income from continuing operations before non-cash charges of depreciation and amortization was approximately $0.2$1.8 million. This cash generated was offsetAdditionally, the Company’s accounts receivable increased by an$7.4 million and our inventory increased by $1.2 million. The increase in accounts receivable reflects our higher sales revenue in the latter part of approximately $0.5 million,the third quarter primarily due to reduced collectionsshipments of our new 120-watt universal power adapters. Similarly, our increase in inventory reflects purchases made to fulfill our existing orders for the fourth quarter.
The $7.6 million in cash provided by operations for the nine months ended October 31, 2002 is primarily related to net income from Targus, our ChargeSource product distributor, asoperations before non-cash charges of depreciation and amortization, asset impairment charges, and cumulative effect of change in accounting principle of $7.9 million. Cash generated is further increased by a resultreduction in accounts receivable of $2.3 million and is offset primarily by a decrease in deferred revenue of $1.1 million and the $3.2$2.0 million credit issuedincrease in the fourth quarter of fiscal 2003. The increase in cash generation for the first quarter of fiscal 2003 was primarily due to significant collections of accounts receivable partially offset by the net loss for the quarter. Accounts receivable decreased $4.1 million to $5.6 million at April 30, 2002 from $9.7 million at January 31, 2002, primarily due to significantly lower revenue generated by our wireless test solutions business for the first quarter of fiscal 2003.deferred tax benefit.
Cash Flows from Investing Activities
Net cash used in investing activities was $1.4remained constant at $4.7 million for the first quarter of fiscal 2004nine months ended October 31, 2003 and 2003.2002. In both periods, capital expenditures for property and equipment and software development constituted substantially all of our cash used in investing activities. The development of software is critical to our products currently under development.
Cash Flows from Financing Activities
Net cash used in financing activities for the first quarternine months of fiscal 2004 consisted of $168,000$195,000 that was used to repurchase 22,20025,640 shares of the Company’s common stock in the open market for an average purchase price of $7.65.$7.61. From program inception in 1992 through April 30,October 31, 2003, the Company has repurchased approximately 2.6 million shares for an average price of $8.22 per share. The cash used was offset by $89,000 from the sale of common stock issued through the Company’s subsidiary option plan. Net cash used in financing activities for the first quarter of fiscal 2003nine months ended October 31, 2002 consisted of $278,000$402,000 that was used to repurchase 26,20043,943 shares of the Company’s common stock in the open market for an average price of $10.62$9.15 per share under our share repurchase program. ProceedsThe cash used was offset by proceeds of $78,000 received from the sales of common stock issued through the Company’s subsidiary stock option plan and proceeds from the sale of common stock issued through employee and director stock option plans generated $121,000 during the first quarter of fiscal 2003.$226,000.
We believe that our existing cash and cash equivalent balances and cash from operations will provide us sufficient funds to satisfy our cash requirements for at least the next twelve months. In addition to our cash and cash equivalent balances, we derive a portion of our liquidity from our cash flows from operations.
Critical Accounting Policies
We have identified the following critical accounting policies as critical policies tothe most significant for purposes of fully understanding and evaluating our company:reported financial results: 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, quartersecond, and third quarters of fiscal 2004 consistent with the prior periods and the year ended January 31, 2003.
For further information, refer to the discussion of 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, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Currency Risk
The Company is exposed to the risk of changes in currency exchange rates. As of April 30,October 31, 2003, we had no material accounts receivable denominated in foreign currencies. Our standard terms require customers to pay for our products and services in U.S. dollars. For those orders denominated in foreign currencies, we may limit our exposure
to losses from foreign currency transactions through forward foreign exchange 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.
ITEM 4. | CONTROLS AND PROCEDURES |
(a) | Evaluation of disclosure controls and procedures |
ITEM 4. CONTROLS AND PROCEDURES
WithinAs of the 90 days prior toend of the date ofperiod covered by this report, an evaluation was performed, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Securities Exchange Act of 1934, as amended, Rule 13a-14c. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
(b) | Changes in internal controlsover financial reporting |
There have been no significant changes in our internal controls over financial reporting or in other factors that could significantly affect the internal controls over financial reporting subsequent to the date the evaluation was performed.of our most recent evaluation.
PART II — OTHER INFORMATION
Mobility Electronics, Inc. v. Comarco, Inc. and Comarco Wireless Technologies, Inc.,
Case No. CIV-01-1489-PHX-MHM, U.S. District Court for the District of Arizona (“Mobility Arizona Action”):
Mobility Electronics, Inc. (“Mobility”) commenced proceedings as to U. S. Patent No. 5,347,211 (“the ‘211 Patent”) for patent infringement against the Company and Comarco Wireless Technologies, Inc. (“CWT”) with respect to CWT’s ChargeSource power supply products. The Company was first served with Mobility’s amended complaint filed August 10, 2001. In addition to asserting that the Company and CWT have infringed the ‘211 patent, the amended complaint seeks declaratory judgment that three of CWT’s power supply related patents are either invalid or not infringed by power supplies produced or to be produced by Mobility. The three CWT patents are U. S. Patent Nos. 6,091,611 (“the ‘611 Patent”), 6,172,884 (“the ‘884 patent”), and 5,838,554 (“the ‘554 patent”). The Company and CWT believe that they have meritorious defenses with respect to the ‘211 patent and Mobility’s declaratory judgment causes of actions.
A Scheduling Conference was held on December 18, 2002. Following that Conference, the Court entered its Scheduling Order granting the parties until June 15, 2004 to conduct discovery, and until June 30, 2004 to file dispositive motions. Following resolution of any dispositive motions, or following the deadline for filing if no such motions are filed, the Court will hold a status hearing for purposes of selecting a firm trial date and related pre-trial deadlines.
On October 28, 2002, the California District Court hearing the matter ofComarco Wireless Technologies, Inc. v. Xtend Micro Products, Inc. and iGo Corporation, former Case No. SACV 02-640 AHS (ANx) (discussed below), ordered the California Action transferred to the District of Arizona. The Arizona Court on January 31, 2003, further ordered the action consolidated with the Mobility Arizona Action for purposes of discovery.
Also, as discussed below, CWT recently filed a separate suit in Arizona against Mobility and two affiliated entities alleging infringement of Comarco’s ‘611 and ‘884 Patents (“CWT Arizona Action”). The CWT Arizona Action has been consolidated for purposes of discovery with the Mobility Arizona Action.
Comarco Wireless Technologies, Inc. v. Xtend Micro Products, Inc. and iGo Corporation,
Case No. 02:2201 PHX MHM, U.S. District Court for the District of Arizona (formerly, SACV 02-640 AHS (ANx), U.S. District Court for the Central District of California, Southern Division):
On June 21, 2002, CWT filed this action for patent infringement against Xtend Micro Products, Inc. (“Xtend”) and its parent entity, iGo Corporation (“iGo”). CWT alleges that its ‘611 and ‘884 patents are infringed by Xtend’s PowerXtender™ and AC Adapter power supply products as well as other power supply and power adapter products and related accessories. On July 15, 2002, Xtend and iGo answered the complaint denying the allegations in CWT’s complaint and asserting a number of affirmative defenses.
In September, 2002, Defendants moved to transfer this action to the Arizona District Court for purpose of consolidation with the Mobility Arizona Action because this case involved two overlapping patents, and because defendants iGo/Xtend were acquired by and merged into a wholly-owned subsidiary of Mobility. On October 28, 2002 the California District Court granted the Motion and Ordered that the case be transferred to the District of Arizona.
On January 31, 2003, the Arizona Court adopted its Scheduling Order for the case and separately ordered that the case be consolidated for purposes of discovery with the Mobility Arizona Action. Pursuant to the Scheduling Order, the parties have until June 15, 2004 to conduct discovery, and dispositive motions are to be filed by June 30, 2004. The Court will hold a status conference following resolution of any dispositive motions or, if none are filed, following the passing of the June 30, 2004 deadline. At that time, the Court will adopt a firm trial date and set related pre-trial deadlines.
Comarco Wireless Technologies, Inc. v. Mobility Electronics, Inc., Hipro Electronics Co., Ltd., and iGo Corporation,
Case No. 03:202 PHX MHM, United States District Court, District of Arizona
On January 31, 2003, CWT filed this action for infringement of its ‘611 and ‘884 Patents with regard to a universal power adapter, called “Juice.” Defendant Hipro manufactures Juice for Mobility, which in turn offers it for sale through its wholly owned subsidiary, iGo Corp. On February 27, 2003, Mobility and iGo answered the complaint while Hipro filed a motion to dismiss based on lack of personal jurisdiction and improper service.
On March 4, 2003, CWT filed a Motion for Preliminary Injunction seeking to enjoin Mobility, Hipro, and iGo from making, using, selling or offering for sale the “Juice” product. The Court has set a June 11, 2003 hearing date for both CWT’s Motion for Preliminary Injunction and Hipro’s Motion to Dismiss. The parties participated in a settlement conference before a United States Magistrate Judge on May 20, 2003 without reaching a settlement.
CWT believes that its case against Mobility, Hipro and iGo Corp is meritorious. As described above, this action has been consolidated for purposes of discovery with the Mobility Arizona Action.
Los Angeles County Service Authority for Freeway Emergencies v. Comarco Wireless Technologies, Inc.,
Case No. SACV 02-567 AHS (ANx), U.S. District Court for the Central District of California, Southern Division:
Los Angeles County Service Authority for Freeway Emergencies (“LASAFE”) filed this action against CWT on June 10, 2002, relating to two contracts between LASAFE and CWT concerning Call Box Systems manufactured by CWT, upgraded by CWT to comply with the Americans with Disabilities Act (“ADA”) and maintained by CWT until its contractual obligations to provide maintenance expired. On August 2, 2002, LASAFE filed a first amended complaint (hereafter, “the complaint”). The complaint includes eight counts. In the first five counts LASAFE alleges CWT breached its contractual obligations and implied warranties by failing to properly maintain and repair the call box system and failing to provide certain deliverables to LASAFE. In the last three counts LASAFE alleges that U.S. Patent No. 6,035,187 owned by CWT and entitled “Apparatus and Method for Improved Emergency Call Box” (“the ‘187 Patent”) should be assigned to LASAFE, and CWT should compensate LASAFE, because an LASAFE employee is the true inventor of the invention claimed in the ‘187 Patent. The complaint seeks an unspecified amount of actual and punitive damages, ownership of the ‘187 patent, an order that CWT specifically perform its obligations under the contracts, recovery of attorneys fees, and an audit to determine the number of allegedly infringing call boxes.
On August 16, 2002, CWT filed an answer and a motion to dismiss the first five counts founded in state contract and warranty law on the grounds that the Federal District Court lacks jurisdiction over the state law claims, which was subsequently granted. The Court has set a scheduling order and has set a trial date of February 3, 2004. CWT believes that it has meritorious defenses with respect to all of LASAFE’s claims.
Los Angeles County Service Authority for Freeway Emergencies v. Comarco Wireless Technologies, Inc.,
Case No. No. BC 284897, California Superior Court for the County of Los Angeles:
On November 7, 2002, LASAFE filed a complaint in state court alleging the five causes of action that were dismissed in the federaal court action referenced in the above paragraph. Specifically, LASAFE alleges that CWT
breached its contractual obligations and implied warranties by failing to properly maintain and repair the call box systems and failing to provide certain deliverables to LASAFE, and seeks over $1 million in damages. On January 9, 2003, CWT filed its answer and a cross-complaint asserting causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing based on LASAFE’s failure to pay CWT all monies due under a contract with LASAFE and LASAFE’s conduct during the course of the contract. LASAFE has not yet responded to CWT’s cross-complaint. The Court has set a trial date of April 5, 2004. CWT believes that it has meritorious defenses to LASAFE’s claims and believes that LASAFE will have significant difficulties proving causation and damages on its claims for breach of implied warranties.
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 financial condition and operating results.
ITEM 1. | LEGAL PROCEEDINGS |
None.
ITEM 2. | CHANGES IN SECURITIES AND USE OF PROCEEDS |
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
ITEM 5. | OTHER INFORMATION |
None.
ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K |
(a) | Exhibits: |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(b) | Reports on Form 8-K: |
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11 Schedule of Computation of Net Loss Per Share
(b)The Registrant filed a Current Report on Form 8-K:8-K with the SEC on September 4, 2003 under Item 12, Results of Operations and Financial Condition, announcing financial results for the fiscal quarter ended July 31, 2003.
None.
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.
COMARCO, INC. | ||||||||
Date: | / | |||||||
Thomas A. Franza
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President and Chief Executive Officer |
Date: | / | |||||||
Daniel R. Lutz | ||||||||
Vice President and Chief Financial Officer |
Certification of Chief Executive Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
In connection with this quarterly report on Form 10-Q of Comarco, Inc. I, Thomas A. Franza, Chief Executive Officer of Comarco, Inc., certify, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, that:
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Certification of Chief Executive Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
In connection with this quarterly report on Form 10-Q of Comarco, Inc. I, Thomas A. Franza, Chief Executive Officer of Comarco, Inc., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
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Certification of Chief Financial Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
In connection with this quarterly report on Form 10-Q of Comarco, Inc. I, Daniel R. Lutz, Chief Financial Officer of Comarco, Inc., certify, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, that:
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|
Certification of Chief Financial Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
In connection with this quarterly report on Form 10-Q of Comarco, Inc. I, Daniel R. Lutz, Chief Financial Officer of Comarco, Inc., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
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