-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PRgKZwPjpqLQy2JWkIUKCHB3C3U9/2gT5780kMWLhDTdypFL0mUeuQ8X4VBiaw15 N63+BQf8DiP9ysmBxMaQqQ== 0000892569-01-501304.txt : 20020413 0000892569-01-501304.hdr.sgml : 20020413 ACCESSION NUMBER: 0000892569-01-501304 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011031 FILED AS OF DATE: 20011217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMARCO INC CENTRAL INDEX KEY: 0000022252 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 952088894 STATE OF INCORPORATION: CA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-05449 FILM NUMBER: 1815401 BUSINESS ADDRESS: STREET 1: 1551 NORTH TUSTIN AVENUE STREET 2: SUITE 840 CITY: SANTA ANA STATE: CA ZIP: 92705 BUSINESS PHONE: 7147961808 MAIL ADDRESS: STREET 1: 8150 LEESBURG PIKE STREET 2: SUITE 500 CITY: VIENNA STATE: VA ZIP: 22182 10-Q 1 a77922e10-q.txt FORM 10-Q QUARTER ENDED OCTOBER 31, 2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ------------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended OCTOBER 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission file number 0-5449 COMARCO, INC. (Exact name of registrant as specified in its charter) -------------------- California 95-2088894 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 2 Cromwell, Irvine, California 92618 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (949) 599-7400 - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of December 13, 2001, there were 6,887,235 shares of Common Stock outstanding. ================================================================================ COMARCO, INC. AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q OCTOBER 31, 2001 TABLE OF CONTENTS
Page ---- PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS.......................................................... 3 Condensed Consolidated Balance Sheets as of October 31, 2001 and January 31, 2001...................................................................... 3 Condensed Consolidated Statements of Income for the Three and Nine Months Ended October 31, 2001 and 2000........................................... 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2001 and 2000........................................... 5 Notes to Condensed Consolidated Financial Statements.......................... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................................... 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................... 20 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS............................................................. 20 ITEM 2. CHANGES IN SECURITIES......................................................... 21 ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................... 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................... 21 ITEM 5. OTHER INFORMATION............................................................. 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................. 21 SIGNATURE................................................................................ 22
2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS COMARCO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
OCTOBER 31, JANUARY 31, 2001 2001 ----------- ----------- (UNAUDITED) Current Assets: Cash and cash equivalents ................ $19,765,000 $24,903,000 Short-term investments ................... 3,291,000 3,819,000 Accounts receivable, net ................. 10,838,000 8,418,000 Inventory ................................ 5,903,000 5,277,000 Deferred tax asset ....................... 1,683,000 2,133,000 Other current assets ..................... 841,000 1,746,000 ----------- ----------- Total current assets ................. 42,321,000 46,296,000 Property and equipment, net .................. 3,873,000 3,695,000 Software development costs, net .............. 9,594,000 7,249,000 Intangible assets, net ....................... 7,680,000 8,381,000 Other assets ................................. 1,146,000 430,000 ----------- ----------- $64,614,000 $66,051,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable ......................... $ 482,000 $ 1,050,000 Deferred revenue ......................... 4,894,000 6,786,000 Accrued liabilities ...................... 7,142,000 9,364,000 ----------- ----------- Total current liabilities ............ 12,518,000 17,200,000 Deferred compensation ........................ 3,291,000 3,918,000 Deferred income taxes ........................ 2,287,000 1,406,000 Minority interest ............................ 487,000 32,000 Stockholders' equity ......................... 46,031,000 43,495,000 ----------- ----------- $64,614,000 $66,051,000 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 COMARCO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED OCTOBER 31, OCTOBER 31, ------------------------------- ------------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Revenue ............................................ $ 12,320,000 $ 13,153,000 $ 38,372,000 $ 35,202,000 Cost of sales ...................................... 6,405,000 6,414,000 19,337,000 16,978,000 ------------ ------------ ------------ ------------ Gross profit ....................................... 5,915,000 6,739,000 19,035,000 18,224,000 Selling, general and administrative costs .......... 2,873,000 3,236,000 9,733,000 9,132,000 Engineering and support costs ...................... 1,630,000 1,239,000 4,287,000 3,568,000 ------------ ------------ ------------ ------------ Operating income before severance costs ............ 1,412,000 2,264,000 5,015,000 5,524,000 Severance costs .................................... -- -- -- 1,325,000 ------------ ------------ ------------ ------------ Operating income ................................... 1,412,000 2,264,000 5,015,000 4,199,000 Other income ....................................... 206,000 327,000 780,000 501,000 Minority interest .................................. (18,000) (2,000) (44,000) (4,000) ------------ ------------ ------------ ------------ Income before income taxes ......................... 1,600,000 2,589,000 5,751,000 4,696,000 Income tax expense ................................. 590,000 946,000 2,120,000 1,715,000 ------------ ------------ ------------ ------------ Net income from continuing operations .............. 1,010,000 1,643,000 3,631,000 2,981,000 Net income (loss) from discontinued operations ..... -- (121,000) -- 378,000 ------------ ------------ ------------ ------------ Net income ......................................... $ 1,010,000 $ 1,522,000 $ 3,631,000 $ 3,359,000 ============ ============ ============ ============ Earnings per share -- continuing operations: Basic .......................................... $ 0.14 $ 0.24 $ 0.52 $ 0.45 ============ ============ ============ ============ Diluted ........................................ $ 0.14 $ 0.22 $ 0.48 $ 0.40 ============ ============ ============ ============ Earnings (loss) per share -- discontinued operations: Basic .......................................... $ -- $ (0.02) $ -- $ 0.05 ============ ============ ============ ============ Diluted ........................................ $ -- $ (0.02) $ -- $ 0.05 ============ ============ ============ ============ Earnings per share: Basic .......................................... $ 0.14 $ 0.22 $ 0.52 $ 0.50 ============ ============ ============ ============ Diluted ........................................ $ 0.14 $ 0.20 $ 0.48 $ 0.45 ============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 COMARCO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED OCTOBER 31, ------------------------------- 2001 2000 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income from continuing operations ............................... $ 3,631,000 $ 2,981,000 Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: Depreciation and amortization ................................... 4,127,000 3,298,000 Gain on disposal of property and equipment ...................... (16,000) (2,000) Tax benefit from exercise of stock options ...................... 615,000 1,500,000 Deferred income taxes ........................................... 1,331,000 657,000 Provision for doubtful accounts receivable ...................... (31,000) 18,000 Provision for obsolete inventory ................................ 321,000 228,000 Minority interest in earnings of subsidiary ..................... 44,000 4,000 Changes in operating assets and liabilities: Decrease (increase) in trading securities ................... 453,000 (665,000) Increase in accounts receivable ............................. (2,435,000) (4,211,000) Increase in inventory ....................................... (947,000) (884,000) Decrease in other assets .................................... 911,000 885,000 Deferred compensation ....................................... (627,000) 666,000 Increase (decrease) in current liabilities .................. (3,510,000) 4,291,000 ------------ ------------ Net cash provided by operating activities ........................... 3,867,000 8,766,000 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales and maturities of investments ............... 72,000 11,000 Purchases of property and equipment ............................. (1,675,000) (1,528,000) Proceeds from sales of property and equipment ................... 20,000 2,000 Investment in SwissQual ......................................... (1,073,000) -- Cash paid for acquisition of minority interest .................. (118,000) -- Software development costs ...................................... (4,193,000) (3,500,000) ------------ ------------ Net cash used in investing activities ............................... (6,967,000) (5,015,000) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock ...................... 283,000 1,592,000 Net proceeds from issuance of subsidiary common stock ........... 134,000 40,000 Purchase and retirement of common stock ......................... (1,680,000) -- ------------ ------------ Net cash provided by (used in) financing activities ................. (1,263,000) 1,632,000 ------------ ------------ Net increase (decrease) in cash and cash equivalents -- continuing operations ........................................... (4,363,000) 5,383,000 Net increase (decrease) in cash and cash equivalents -- discontinued operations ......................................... (775,000) 7,939,000 ------------ ------------ Net increase (decrease) in cash and cash equivalents ................ (5,138,000) 13,322,000 Cash and cash equivalents, beginning of period ...................... 24,903,000 5,064,000 ------------ ------------ Cash and cash equivalents, end of period ............................ $ 19,765,000 $ 18,386,000 ============ ============ Supplemental disclosures of cash flow information: Cash paid for interest .......................................... $ -- $ -- ============ ============ Cash paid for income taxes ...................................... $ 994,000 $ 500,000 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 COMARCO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION COMARCO, Inc., through its wireless technologies subsidiary Comarco Wireless Technologies, Inc. (collectively, "COMARCO" or the "Company"), is a leading provider of advanced technology products and services for the wireless Internet. COMARCO also designs and manufactures remote voice systems and mobile power products for notebook computers, cellular telephones, and personal organizers. COMARCO, Inc. is a California corporation that became a public company in 1971 when it was spun-off from Genge Industries, Inc. Comarco Wireless Technologies, Inc. ("CWT") 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The interim condensed consolidated financial statements of COMARCO included herein have been prepared without audit in accordance with accounting principles generally accepted in the United States of America 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, 2001 and the Company's Quarterly Reports on Form 10-Q for the prior quarters of the current fiscal year. The financial information presented herein reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results for the three and nine months ended October 31, 2001 are not necessarily indicative of the results to be expected for the year ended January 31, 2002. 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 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: Certain prior period balances have been reclassified to conform to the current period presentation. Stock Split: In October 2000, the Company effected a stock split of three shares for every two shares of common stock outstanding. All references in the condensed consolidated financial statements to the number of shares and to per share amounts have been retroactively restated to reflect this stock split. 6 COMARCO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recent Accounting Pronouncements: In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," which was effective upon issuance. This statement requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The adoption of this standard is not expected to have a material effect on the Company's financial condition, consolidated results of operations or cash flows. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which is effective January 1, 2002. This statement requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment. The Company has not yet completed its analysis of the effect this standard will have on the Company's financial condition, consolidated results of operations or cash flows. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement provides the accounting requirements for retirement obligations associated with long-lived assets. SFAS No. 143 is effective for fiscal years beginning after June 15, 2001, and early adoption is permitted. The adoption of this standard is not expected to have a material effect on the Company's financial condition, consolidated results of operations, or cash flows. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. For example, SFAS No. 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. SFAS No. 144 retains the basic provisions of APB Opinion No. 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under SFAS No. 142, "Goodwill and Other Intangible Assets." The Company is required to adopt SFAS No. 144 no later than the year beginning after December 15, 2001, and plans to adopt its provisions for the quarter ending April 30, 2002. Management does not expect the adoption of SFAS No. 144 for long-lived assets held for use to have a material impact on the Company's financial statements because the impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. The provisions of SFAS No. 144 pertaining to assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, management cannot determine the potential effects that adoption of SFAS No. 144 will have on the Company's financial condition, consolidated results of operations, or cash flows. 3. STOCKHOLDERS' EQUITY During 1992, the Company's Board of Directors authorized a stock repurchase program of up to 3.0 million shares of our common stock. From program inception through October 31, 2001, the Company has repurchased approximately 2.4 million shares for an average price of $8.08 per share. During the third quarter ended October 31, 2001, the Company repurchased 108,800 shares of common stock in the open market for an average price of $13.31 per share. For the nine months ending October 31, 2001, the Company repurchased 124,900 shares of common stock in the open market for an average price of $13.46 per share. 7 COMARCO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. EARNINGS PER SHARE The Company calculates net income per share in accordance with SFAS No. 128, "Earnings Per Share." Under this statement, basic net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted net income per share reflects the effects of potentially dilutive securities. The following tables present reconciliations of the numerators and denominators of the basic and diluted earnings per share computations for net income. In the tables below, "Income" represents the numerator and "Shares" represent the denominator:
THREE MONTHS ENDED NINE MONTHS ENDED OCTOBER 31, OCTOBER 31, ----------------------------- ----------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- BASIC: Net income from continuing operations ............... $ 1,010,000 $ 1,643,000 $ 3,631,000 $ 2,981,000 Weighted average shares outstanding ................. 7,002,000 6,831,000 7,040,000 6,677,000 ----------- ----------- ----------- ----------- Basic income per share from continuing operations ...................................... $ 0.14 $ 0.24 $ 0.52 $ 0.45 =========== =========== =========== =========== Net income (loss) from discontinued operations ...... $ -- $ (121,000) $ -- $ 378,000 Weighted average shares outstanding ................. 7,002,000 6,831,000 7,040,000 6,677,000 ----------- ----------- ----------- ----------- Basic income (loss) per share from discontinued operations ...................................... $ -- $ (0.02) $ -- $ 0.05 =========== =========== =========== =========== Net income .......................................... $ 1,010,000 $ 1,522,000 $ 3,631,000 $ 3,359,000 Weighted average shares outstanding ................. 7,002,000 6,831,000 7,040,000 6,677,000 ----------- ----------- ----------- ----------- Basic income per share .............................. $ 0.14 $ 0.22 $ 0.52 $ 0.50 =========== =========== =========== =========== DILUTED: Net income from continuing operations ............... $ 1,010,000 $ 1,643,000 $ 3,631,000 $ 2,981,000 Effect of subsidiary options ........................ (44,000) (95,000) (178,000) (211,000) ----------- ----------- ----------- ----------- Net income used in calculation of diluted income per share from continuing operations ...................................... $ 966,000 $ 1,548,000 $ 3,453,000 $ 2,770,000 =========== =========== =========== =========== Weighted average shares outstanding ................. 7,002,000 6,831,000 7,040,000 6,677,000 Effect of dilutive securities -- stock options ................................... 86,000 220,000 96,000 293,000 ----------- ----------- ----------- ----------- Weighted average shares used in calculation of diluted income per share from continuing operations ........................... 7,088,000 7,051,000 7,136,000 6,970,000 =========== =========== =========== =========== Diluted income per share from continuing operations ...................................... $ 0.14 $ 0.22 $ 0.48 $ 0.40 =========== =========== =========== ===========
8 COMARCO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. EARNINGS PER SHARE (CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED OCTOBER 31, OCTOBER 31, ----------------------------- ----------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Net income (loss) from discontinued operations .................................. $ -- $ (121,000) $ -- $ 378,000 Effect of subsidiary options .................... -- -- -- -- ----------- ----------- ----------- ----------- Net income (loss) used in calculation of diluted income per share from discontinued operations ..................... $ -- $ (121,000) $ -- $ 378,000 =========== =========== =========== =========== Weighted average shares outstanding ............. 7,002,000 6,831,000 7,040,000 6,677,000 Effect of dilutive securities -- stock options ............................... 86,000 220,000 96,000 293,000 ----------- ----------- ----------- ----------- Weighted average shares used in calculation of diluted income per share from discontinued operations ..................... 7,088,000 7,051,000 7,136,000 6,970,000 =========== =========== =========== =========== Diluted income (loss) per share from discontinued operations ..................... $ -- $ (0.02) $ -- $ 0.05 =========== =========== =========== =========== Net income ...................................... $ 1,010,000 $ 1,522,000 $ 3,631,000 $ 3,359,000 Effect of subsidiary options .................... (44,000) (95,000) (178,000) (211,000) ----------- ----------- ----------- ----------- Net income used in calculation of diluted income per share ............................ $ 966,000 $ 1,427,000 $ 3,453,000 $ 3,148,000 =========== =========== =========== =========== Weighted average shares outstanding ............. 7,002,000 6,831,000 7,040,000 6,677,000 Effect of dilutive securities -- stock options ............................... 86,000 220,000 96,000 293,000 ----------- ----------- ----------- ----------- Weighted average shares used in calculation of diluted income per share ................. 7,088,000 7,051,000 7,136,000 6,970,000 =========== =========== =========== =========== Diluted income per share ........................ $ 0.14 $ 0.20 $ 0.48 $ 0.45 =========== =========== =========== ===========
5. INVENTORY Inventory consists of the following (dollars in thousands):
OCTOBER 31, JANUARY 31, 2001 2001 ----------- ----------- Raw materials .......................... $4,477 $4,695 Work in progress ....................... 654 363 Finished goods ......................... 772 219 ------ ------ $5,903 $5,277 ====== ======
9 COMARCO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. SOFTWARE DEVELOPMENT COSTS, NET Software development costs consist of the following (dollars in thousands):
OCTOBER 31, JANUARY 31, 2001 2001 ----------- ----------- Capitalized software development costs ....... $ 16,778 $ 12,585 Less accumulated amortization ................ (7,184) (5,336) -------- -------- $ 9,594 $ 7,249 ======== ========
Capitalized software development costs for the three months ended October 31, 2001 and 2000 totaled $1.4 million and $1.2 million, respectively. Capitalized software development costs for the nine months ended October 31, 2001 and 2000 totaled $4.2 million and $3.5 million, respectively. Amortization of software development costs for the three months ended October 31, 2001 and 2000 totaled $680,000 and $916,000, respectively. For the nine months ended October 31, 2001 and 2000, amortization of software development costs totaled $1.8 million and $2.4 million, respectively. Amortization of software development costs has been reported in cost of sales in the accompanying condensed consolidated financial statements. 7. GOODWILL AND ACQUIRED INTANGIBLE ASSETS Goodwill and acquired intangible assets consist of the following (dollars in thousands):
OCTOBER 31, JANUARY 31, 2001 2001 ----------- ----------- Purchased technology ....................... $ 1,790 $ 1,790 Customer base .............................. 930 930 Goodwill ................................... 5,032 4,947 Other acquired intangible assets ........... 1,650 1,650 -------- -------- $ 9,402 $ 9,317 Less accumulated amortization .............. (1,722) (936) ======== ======== $ 7,680 $ 8,381 ======== ========
Amortization of intangible assets for the three months ended October 31, 2001 and 2000 totaled $262,000 and $79,000, respectively. For the nine months ended October 31, 2001 and 2000, amortization of intangibles totaled $786,000 and $236,000, respectively. 8. BUSINESS SEGMENT INFORMATION The Company has two operating segments: wireless infrastructure and wireless applications. Wireless infrastructure provides advanced technology products and services to the wireless Internet. Wireless applications designs and manufactures remote voice systems and mobile power products for notebook computers, cellular telephones, and personal organizers. 10 COMARCO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. BUSINESS SEGMENT INFORMATION (CONTINUED) Performance measurement and resource allocation for the reportable segments are based on many factors. The primary financial measures used are revenue and gross profit. The revenue, gross profit, and gross margin attributable to these segments are as follows (dollars in thousands):
THREE MONTHS ENDED OCTOBER 31, 2001 THREE MONTHS ENDED OCTOBER 31, 2000 ------------------------------------------- ------------------------------------------- WIRELESS WIRELESS WIRELESS WIRELESS INFRASTRUCTURE APPLICATIONS TOTAL INFRASTRUCTURE APPLICATIONS TOTAL -------------- ------------ -------- -------------- ------------ -------- Revenue ............ $ 6,931 $ 5,389 $ 12,320 $ 9,726 $ 3,427 $ 13,153 Cost of sales ...... 3,185 3,220 6,405 4,091 2,323 6,414 -------- -------- -------- -------- -------- -------- Gross profit ....... $ 3,746 $ 2,169 $ 5,915 $ 5,635 $ 1,104 $ 6,739 ======== ======== ======== ======== ======== ======== Gross margin ....... 54.0% 40.2% 48.0% 57.9% 32.2% 51.2% ======== ======== ======== ======== ======== ========
NINE MONTHS ENDED OCTOBER 31, 2001 NINE MONTHS ENDED OCTOBER 31, 2000 ------------------------------------------- ------------------------------------------- WIRELESS WIRELESS WIRELESS WIRELESS INFRASTRUCTURE APPLICATIONS TOTAL INFRASTRUCTURE APPLICATIONS TOTAL -------------- ------------ -------- -------------- ------------ -------- Revenue ............ $ 22,040 $ 16,332 $ 38,372 $ 25,210 $ 9,992 $ 35,202 Cost of sales ...... 9,487 9,850 19,337 10,132 6,846 16,978 -------- -------- -------- -------- -------- -------- Gross profit ....... $ 12,553 $ 6,482 $ 19,035 $ 15,078 $ 3,146 $ 18,224 ======== ======== ======== ======== ======== ======== Gross margin ....... 57.0% 39.7% 49.6% 59.8% 31.5% 51.8% ======== ======== ======== ======== ======== ========
Revenue by geographic area consists of the following (dollars in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED OCTOBER 31, OCTOBER 31, ---------------------- ---------------------- 2001 2000 2001 2000 -------- -------- -------- -------- North America ......... $ 11,087 $ 11,152 $ 35,757 $ 31,622 Europe ................ -- 106 16 280 Asia .................. 116 307 970 314 Latin America ......... 1,117 1,588 1,629 2,986 -------- -------- -------- -------- $ 12,320 $ 13,153 $ 38,372 $ 35,202 ======== ======== ======== ========
9. CONTINGENCIES COMARCO was named as a defendant in two lawsuits filed by Mobility Electronics, Inc. ("Mobility"). Mobility v. Targus Group International, Inc. ("Targus") and CWT was filed on July 23, 2001. In addition to claims against Targus, the distributor of the Company's mobile power adapter products, the lawsuit alleges that the Company intentionally interfered with Mobility's rights under an exclusive manufacturing agreement with Targus and misappropriated Mobility's trade secrets. Targus markets and distributes the Company's 70-Watt AC ChargeSource universal power adapter. As previously announced, the Company received an $8.6 million purchase order from Targus covering the 70-Watt AC adapter and a new DC ChargeSource universal power adapter recently introduced by COMARCO. In its complaint, Mobility contends that it currently has an exclusive contract to manufacture DC power adapters for Targus. The Company understands that Targus purchased DC power adapter products from Mobility and that Targus used and sold 11 COMARCO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 9. CONTINGENCIES (CONTINUED) DC power adapter products from Mobility under a terminable, non-exclusive license agreement between the Company and Targus involving patented COMARCO technology. Prior to the filing of the lawsuit, the Company had terminated the license agreement with Targus in accordance with the provisions of the license agreement. During October 2001, the three parties to the lawsuit entered into a settlement agreement and, on November 26, 2001, the lawsuit was dismissed with prejudice. Mobility v. COMARCO No. CIV011489PHXMHM was filed on August 10, 2001. This lawsuit alleges that the Company, through the manufacture and sale of its 70-Watt AC ChargeSource universal power adapter, infringed upon a patent purchased by Mobility on August 6, 2001. COMARCO's management believes that Mobility's infringement claim against the Company is without merit and intends to vigorously defend the lawsuit. The Company is from time to time involved in various legal proceedings incidental to the conduct of our business. We believe that the outcome of all other such pending legal proceedings will not in the aggregate have a material adverse effect on our business, financial condition, or results of operations. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this quarterly report on Form 10-Q. This report includes "forward-looking statements" that are subject to risks, uncertainties, and other factors that could cause actual results or outcomes to differ materially from those contemplated by the forward-looking statements. Forward-looking statements in this release are generally identified by words such as "believes," "anticipates," "plans," "expects," "will," "would," and similar expressions that are intended to identify forward-looking statements. A number of important factors could cause our results to differ materially from those indicated by these forward-looking statements, including, among others, the impact of perceived or actual weakening of economic conditions on customers' and prospective customers' spending on our products and services; quarterly fluctuations in our revenue or other operating results; failure to meet financial expectations of analysts and investors, including failure from significant reductions in demand from earlier anticipated levels; potential difficulties in the assimilation of operations, strategies, technologies, personnel and products of acquired companies and technologies; risks related to market acceptance of our products and our ability to meet contractual and technical commitments with our customers; activities by us and others regarding protection of intellectual property; and competitors' release of competitive products and other actions. Further information on potential factors that could affect our financial results are included in risks detailed from time to time in our Securities and Exchange Commission filings, including without limitation our quarterly reports on Form 10-Q for the prior quarters of the current fiscal year and our annual report of Form 10-K for the year ended January 31, 2001. 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 wireless technologies subsidiary Comarco Wireless Technologies, Inc. (collectively, "COMARCO," or the "Company"), is a leading provider of advanced technology products and services for the wireless Internet. COMARCO also designs and manufactures remote voice systems and mobile power products for notebook computers, cellular telephones, and personal organizers. COMARCO, Inc. is a California corporation that became a public company in 1971 when it was spun-off from Genge Industries, Inc. Comarco Wireless Technologies, Inc. ("CWT") was incorporated in the State of Delaware in September 1993. During October 1999, we embarked on a plan to divest our non-wireless businesses, which included the defense and commercial staffing businesses. The divestiture plan was completed during November 2000. Accordingly, our continuing operations consist solely of the operations of CWT. RESULTS OF OPERATIONS -- CONTINUING OPERATIONS We have two reportable operating segments: wireless infrastructure and wireless applications. Wireless Infrastructure This operating segment designs and manufactures advanced technology hardware and software tools for use by wireless carriers, equipment vendors, and others. These tools are used by radio frequency ("RF") engineers, professional technicians, and others to design, deploy, and optimize wireless networks, and to test and measure the Quality of Service once the wireless networks are deployed. The wireless infrastructure segment is also a provider of engineering services that assist the wireless carriers, equipment vendors, and others in all phases of the wireless network lifecycle. 13 Wireless Applications This operating segment designs and manufactures remote voice systems and mobile power products for notebook computers, cellular telephones, and personal organizers. Remote voice systems currently include various call box products that provide emergency communication over existing wireless networks. In addition to the call box products, we provide system installation and long-term maintenance services. Currently, approximately 14,000 call boxes are installed, the majority of which are serviced and maintained under long-term agreements. The wireless applications segment also includes the ChargeSource 70-watt universal AC power adapter, our second-generation mobile power system that powers and charges most laptop computers, cellular telephones, handheld devices, and portable printers. This product is currently distributed by Targus Group International ("Targus"). The ChargeSource product offering has been expanded with the newly designed DC ChargeSource universal power adapter. The DC adapter allows the traveling professional to use all of their existing ChargeSource SmartTips on the road or in the air. The new device connects to the in-seat power outlet available on most major airlines or the cigarette lighter plug found in cars today. The new ChargeSource DC adapter began shipping during the third quarter of the current fiscal year. This new product is also being distributed by Targus. The following table sets forth certain items as a percentage of revenue from our condensed consolidated statements of income for the three and nine months ended October 31, 2001 and 2000. The table and discussion that follows provide information which management believes is relevant to an assessment and understanding of our condensed consolidated results of operations and financial condition. The discussion should be read in conjunction with the condensed consolidated financial statements and accompanying notes thereto included elsewhere herein.
PERCENTAGE OF REVENUE ----------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED OCTOBER 31, OCTOBER 31, -------------------- -------------------- 2001 2000 2001 2000 ------ ------ ------ ------ Revenue ........................................ 100.0% 100.0% 100.0% 100.0% Cost of sales .................................. 52.0 48.8 50.4 48.2 ------ ------ ------ ------ Gross margin ................................... 48.0 51.2 49.6 51.8 Selling, general and administrative costs ...... 23.3 24.6 25.4 25.9 Engineering and support costs .................. 13.2 9.4 11.2 10.2 ------ ------ ------ ------ Operating income before severance costs ........ 11.5 17.2 13.0 15.7 Severance costs ................................ -- -- -- 3.8 ------ ------ ------ ------ Operating income ............................... 11.5 17.2 13.0 11.9 Other income ................................... 1.7 2.5 2.0 1.4 Minority interest .............................. (0.2) -- (0.1) -- ------ ------ ------ ------ Income before income taxes ..................... 13.0 19.7 14.9 13.3 Income tax expense ............................. 4.8 7.2 5.5 4.8 ------ ------ ------ ------ Net income from continuing operations .......... 8.2% 12.5% 9.4% 8.5% ====== ====== ====== ======
14 COMPARISON OF THE THREE MONTHS ENDED OCTOBER 31, 2001 TO THE THREE MONTHS ENDED OCTOBER 31, 2000 CONSOLIDATED Revenue Total revenue for the third quarter of fiscal 2002, which ended October 31, 2001, decreased 6.3 percent to $12.3 million compared to the third quarter of fiscal 2001. As discussed below, the decrease is attributable to decreased sales from our wireless infrastructure segment, partially offset by an increase in sales from our wireless applications segment. Cost of Sales and Gross Margin Total cost of sales was $6.4 million for the third quarters of both fiscal 2002 and 2001. As a percentage of revenue, gross margin for the third quarter of fiscal 2002 was 48.0 percent as compared to 51.2 percent for the third quarter of the prior fiscal year. As discussed below, the decrease in gross margin is attributable to lower sales from our wireless infrastructure segment partially offset by an improved contribution from increased sales from our wireless applications segment. Selling, General and Administrative Costs Selling, general and administrative costs for the third quarter of fiscal 2002 were $2.9 million compared to $3.2 million for the third quarter of fiscal 2001, a decrease of $0.4 million or 11.2 percent. Excluding costs attributable to EDX Engineering, Inc. ("EDX"), which was acquired on December 7, 2000, selling, general and administrative costs for the third quarter of 2002 decreased $0.7 million in comparison to the corresponding quarter of the prior fiscal year. This decrease was driven by lower third quarter sales in comparison to the prior fiscal year, as well as enterprise-wide cost reductions that were put in place during the preceding 12 months. These cost reductions include the elimination of direct sales and marketing efforts for our ChargeSource mobile power products, closing the sales and support office in London and reorganizing our call box business resulting in a significant reduction of indirect costs. As a percentage of revenue, selling, general and administrative costs decreased to 23.3 percent from 24.6 percent for the third quarter of the prior fiscal year. Engineering and Support Costs Engineering and support costs, net of capitalized software development costs, for the third quarter of fiscal 2002 were $1.6 million compared to $1.2 million for the third quarter of fiscal 2001, an increase of $0.4 million or 31.6 percent. Excluding costs attributable to EDX, gross engineering and support costs for the third quarter of fiscal 2002 were $2.8 million compared to $2.4 million for the third quarter of fiscal 2001, an increase of $0.4 million or 14.2 percent. This increase is primarily due to continued investment in our product development programs, which include GPRS and 1XRTT products (2.5G technologies), as well as 3G scanners. Capitalized software development costs, which totaled $1.4 million and $1.2 million for the three months ended October 31, 2001 and 2000, respectively, partially offsets the increase in gross engineering costs. The increase in capitalized software development costs is consistent with our ongoing development programs. Other Income Other income, consisting primarily of interest income, decreased $121,000 to $206,000 for the three months ended October 31, 2001 from $327,000 for the three months ended October 31, 2000. The decrease was primarily due to lower interest rates during the third quarter of fiscal 2002. Income Tax Expense The effective tax rate for the quarters ended October 31, 2001 and 2000 was 36.5 percent, applied on pre-tax income before minority interest expense. 15 WIRELESS INFRASTRUCTURE
THREE MONTHS ENDED OCTOBER 31, ------------------------- 2001 2000 -------- -------- (DOLLARS IN THOUSANDS) Revenue ...................................... $ 6,931 $ 9,726 Cost of sales ................................ 3,185 4,091 -------- -------- Gross profit ................................. $ 3,746 $ 5,635 ======== ======== Gross margin ................................. 54.0% 57.9% ======== ========
Revenue Revenue from our wireless infrastructure segment for the third quarter of fiscal 2002 was $6.9 million compared to $9.7 million for the third quarter of fiscal 2001, a decrease of $2.8 million or 28.7 percent. This decrease was attributable to decreased sales of our test and measurement products partially offset by increased sales of our engineering services. Our new order flow for test and measurement products was negatively impacted by the tragic events of September 11. Additionally, during fiscal 2001, a national wireless carrier purchased a significant number of baseLINE systems, our Quality of Service competitive benchmarking system. These sales were not expected to recur in the current fiscal year. In April 2001, we were awarded a $6.6 million contract to provide network optimization services. Revenue from this contract resulted in increased sales of engineering services in the third quarter of fiscal 2002 in comparison to the third quarter of fiscal 2001. Cost of Sales and Gross Margin Cost of sales from our wireless infrastructure segment in the third quarter of fiscal 2002 was $3.2 million compared to $4.1 million for the third quarter of fiscal 2001, a decrease of approximately $0.9 million or 22.1 percent. As a percentage of revenue, gross margin decreased to 54.0 percent from 57.9 percent in the third quarter of the prior fiscal year. The decrease in gross margin is attributable to decreased absorption of fixed costs due to lower sales of our test and measurement products. WIRELESS APPLICATIONS
THREE MONTHS ENDED OCTOBER 31, ------------------------- 2001 2000 -------- -------- (DOLLARS IN THOUSANDS) Revenue ...................................... $ 5,389 $ 3,427 Cost of sales ................................ 3,220 2,323 -------- -------- Gross profit ................................. $ 2,169 $ 1,104 ======== ======== Gross margin ................................. 40.2% 32.2% ======== ========
Revenue Revenue from our wireless applications segment for the third quarter of 2002 was $5.4 million compared to $3.4 million for the third quarter of 2001, an increase of approximately $2.0 million or 57.3 percent. The increase was attributable to increased sales of the ChargeSource 70-watt universal AC power adapter, our second-generation mobile power system that began shipping during the fourth quarter of fiscal 2001, and the introduction of the new ChargeSource DC adapter that began shipping during the third quarter of fiscal 2002. Cost of Sales and Gross Margin Cost of sales from our wireless applications segment for the third quarter of fiscal 2002 was $3.2 million compared to $2.3 million for the third quarter of fiscal 2001, an increase of $0.9 million or 38.6 percent. As a percentage of revenue, gross margin increased to 40.2 percent from 32.2 percent in the third quarter of the prior fiscal year. The 16 increases in cost of sales and gross margin are attributable to sales of the ChargeSource 70-watt universal AC power adapter, our second-generation mobile power system that went into production during the fourth quarter of fiscal 2001, as well as our newly developed ChargeSource DC adapter that went into production during the third quarter of the current fiscal year. COMPARISON OF THE NINE MONTHS ENDED OCTOBER 31, 2001 TO THE NINE MONTHS ENDED OCTOBER 31, 2000 CONSOLIDATED Revenue Total revenue for the nine months ended October 31, 2001, increased 9.0 percent to $38.4 million compared to the corresponding period of the prior fiscal year. As discussed below, the increase is attributable to increased sales from our wireless applications segment, partially offset by a decrease in sales from our wireless infrastructure segment. Cost of Sales and Gross Margin Total cost of sales for the nine months ended October 31, 2001 increased 13.9 percent to $19.3 million compared to the corresponding period of fiscal 2001. As a percentage of revenue, gross margin was 49.6 percent as compared to 51.8 percent for the nine months ended October 31, 2000. As discussed below, the decrease in gross margin is attributable to lower sales from our wireless infrastructure segment partially offset by an improved contribution from increased sales from our wireless applications segment. Selling, General, and Administrative Costs Selling, general, and administrative costs for the nine months ended October 31, 2001 were $9.7 million compared to $9.1 million for the corresponding period of the prior fiscal year, an increase of $0.6 million or 6.6 percent. Excluding costs attributable to EDX, selling, general, and administrative costs for the nine months ended October 31, 2001 decreased by $0.6 million in comparison to the corresponding period of the prior fiscal year. This decrease was driven by lower sales in the third quarter of fiscal 2002, as well as enterprise-wide cost reductions discussed above. As a percentage of revenue, total selling, general, and administrative costs were consistent at 25.4 percent and 25.9 percent for the nine months ended October 31, 2001 and 2000, respectively. Engineering and Support Costs Engineering and support costs, net of capitalized software development costs, for the nine months ended October 31, 2001 were $4.3 million compared to $3.6 million for the nine months ended October 31, 2000, an increase of $0.7 million or 20.2 percent. Excluding costs attributable to EDX, gross engineering and support costs for the nine months ended October 31, 2001 were $8.0 million compared to $7.0 million for the nine months ended October 31, 2000, an increase of $1.0 million or 12.2 percent. This increase is primarily due to continued investment in our product development programs, which include GPRS and 1XRTT products (2.5G technologies), as well as 3G scanners. Capitalized software development costs, which totaled $4.2 million and $3.5 million for the nine months ended October 31, 2001 and 2000, respectively, partially offset the increase in gross engineering costs. The increase in capitalized software development costs is consistent with our ongoing development programs. Severance Costs During the nine months ended October 31, 2000 and in conjunction with the disposition of the Company's non-wireless businesses, COMARCO was required to record a $1.3 million charge to continuing operations for costs related to severance agreements for the Company's outgoing corporate staff. No comparable costs were incurred during the nine months ended October 31, 2001. 17 Other Income Other income, consisting primarily of interest income, increased $279,000 to $780,000 for the nine months ending October 31, 2001 from $501,000 for the nine months ended October 31, 2000. The increase was primarily due to higher invested cash balances during the first half of fiscal 2002. Income Tax Expense The effective tax rate for the nine months ended October 31, 2001 and 2000 was 36.5 percent, applied on pre-tax income before minority interest expense. WIRELESS INFRASTRUCTURE
NINE MONTHS ENDED OCTOBER 31, ------------------------- 2001 2000 -------- -------- (DOLLARS IN THOUSANDS) Revenue ...................................... $ 22,040 $ 25,210 Cost of sales ................................ 9,487 10,132 -------- -------- Gross profit ................................. $ 12,553 $ 15,078 ======== ======== Gross margin ................................. 57.0% 59.8% ======== ========
Revenue Revenue from our wireless infrastructure segment for the nine months ended October 31, 2001 was $22.0 million compared to $25.2 million for the nine months ended October 31, 2000, a decrease of $3.2 million or 12.6 percent. Excluding revenue attributable to EDX, the decrease in revenue was $4.5 million or 17.7 percent. This decrease was attributable to decreased sales of our test and measurement products. As previously discussed, our business was disrupted during the third quarter of fiscal 2002 and our new order flow for test and measurement products was negatively impacted. Additionally, during fiscal 2001, a national wireless carrier purchased a significant number of baseLINE systems, our Quality of Service competitive benchmarking system. These sales were not expected to recur in the current fiscal year. Cost of Sales and Gross Margin Cost of sales from our wireless infrastructure segment in the nine months ended October 31, 2001 was $9.5 million compared to $10.1 million for the nine months ended October 31, 2000, a decrease of approximately $0.6 million or 6.4 percent. As a percentage of revenue, gross margin decreased to 57.0 percent from 59.8 percent for the nine months ended October 31, 2000. The decrease in gross margin is attributable to decreased absorption of fixed costs due to lower sales of our test and measurement products. WIRELESS APPLICATIONS
NINE MONTHS ENDED OCTOBER 31, ------------------------- 2001 2000 -------- -------- (DOLLARS IN THOUSANDS) Revenue ...................................... $ 16,332 $ 9,992 Cost of sales ................................ 9,850 6,846 -------- -------- Gross profit ................................. $ 6,482 $ 3,146 ======== ======== Gross margin ................................. 39.7% 31.5% ======== ========
18 Revenue Revenue from our wireless applications segment for the nine months ended October 31, 2001 was $16.3 million compared to $10.0 million for the nine months ended October 31, 2000, an increase of approximately $6.3 million or 63.5 percent. The increase was attributable to increased sales of the ChargeSource 70-watt universal AC power adapter, our second-generation mobile power system that began shipping during the fourth quarter of fiscal 2001, and the introduction of the new ChargeSource DC adapter that began shipping during the third quarter of fiscal 2002. Cost of Sales and Gross Margin Cost of sales from our wireless applications segment for the nine months ended October 31, 2001 was $9.9 million compared to $6.8 million for the nine months ended October 31, 2000, an increase of $3.0 million or 43.9 percent. As a percentage of revenue, gross margin increased to 39.7 percent from 31.5 percent for the nine months ended October 31, 2001. The increases in cost of sales and gross margin are attributable to sales of the ChargeSource 70-watt universal AC power adapter, our second-generation mobile power system that went into production during the fourth quarter of fiscal 2001, as well as our newly developed ChargeSource DC adapter that went into production during the third quarter of fiscal 2002. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $19.8 million at October 31, 2001 compared to $24.9 million at January 31, 2001, a decrease of $5.1 million. The $5.1 million decrease is primarily due to investments made in software development, property and equipment, a minority interest in SwissQual AG ("SwissQual"), and the purchase and retirement of $1.7 million of common stock, partially offset by cash provided by operations. Cash Flows from Operating Activities Cash provided by operating activities is primarily derived from the sale of the Company's products and from providing engineering services. Cash provided by operating activities was $3.9 million and $8.8 million for the nine months ended October 31, 2001 and 2000, respectively. Cash provided by operating activities during the nine months ended October 31, 2001 was primarily a result of the Company's net income from continuing operations before non-cash charges, a tax benefit on stock options exercised of $0.6 million, and a net change in deferred income taxes of $1.3 million offset by a decrease in current liabilities and an increase in accounts receivable. The $3.5 million decrease in current liabilities was primarily due to $1.5 million in prepaid sales that were recognized as revenue during the nine months ended October 31, 2001, as well as income tax payments and the timing of payments of trade accounts payable. Cash provided by operating activities during the nine months ended October 31, 2000 was primarily a result of the Company's net income from continuing operations before non-cash charges, a tax benefit on stock options exercised of $1.5 million, a decrease in other assets, and an increase in current liabilities, offset by an increase in accounts receivable and inventory. Cash Flows from Investing Activities Cash used in investing activities was $7.0 million and $5.0 million for the nine months ended October 31, 2001 and 2000, respectively. Investing activities for the nine months ended October 31, 2001 and 2000 consisted primarily of cash paid for property and equipment in support of the Company's growth and for the development of software to be used in products currently under development. The Company intends to continue to invest aggressively in a software development program designed to bring new products and services for the wireless communications industry to market in a timely manner. This software development program is expected to be funded with current cash balances and cash provided by operating activities. On July 31, 2001, the Company acquired an 18% equity stake in SwissQual for $1.0 million in cash. Based in Zuchwil, Switzerland, SwissQual is a developer of Quality of Service ("QoS") systems and software for measuring, monitoring, and optimizing the quality of mobile, fixed, and IP based voice and data communications. Under this 19 alliance, COMARCO and SwissQual will jointly develop, sell and support wireless network QoS and optimization products and services for the European marketplace. In addition to expanding COMARCO's access to European wireless carriers, SwissQual will provide domain expertise and development guidance in the evolution of 2.5G and 3G system test solutions. Cash Flows from Financing Activities Cash provided by financing activities for the nine months ended October 31, 2001 consisted of $0.3 million from the sales of common stock issued through the Company's employee and director stock option plans, and $0.1 million from the sales of common stock issued through the Company's subsidiary stock option plan, offset by the repurchase of 124,900 shares of the Company's common stock in the open market for approximately $1.7 million. Cash provided by financing activities for the nine months ended October 31, 2000 consisted primarily of $1.6 million from sales of common stock issued through the Company's employee and director stock option plans. During 1992, the Company's Board of Directors authorized a stock repurchase program of up to three million shares of common stock. From program inception through October 31, 2001, the Company has repurchased approximately 2,400,000 shares for an average per share price of $8.08 per share. For the nine months ended October 31, 2001, 124,900 shares were repurchased. Subsequent to October 31, 2001, the Company repurchased an additional 78,800 shares in the open market, bringing the total number of shares repurchased to approximately 2,490,000 shares for an average per share price of $8.20 per share. The Company maintained a $10 million unsecured revolving credit facility ("Credit Facility"). The Credit Facility expired in June 2001 and was not renewed by the Company. The Company will negotiate new terms with the bank when deemed necessary. The Company believes that current cash balances and cash provided by operating activities will be sufficient to satisfy the Company's working capital and capital expenditure requirements for the next twelve months. Future acquisitions, if any, may be funded through the use of current cash balances or long-term borrowings and the issuance of additional equity or debt securities. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk, including changes in interest rates and currency exchange rates. As of October 31, 2001, the Company had no accounts receivable denominated in foreign currencies. The Company's standard terms require foreign customers to pay for the Company's products and services with U.S. dollars. For those orders denominated in foreign currencies, the Company may limit its exposure to losses from foreign currency transactions through the purchase of forward foreign exchange contract. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS COMARCO was named as a defendant in two lawsuits filed by Mobility Electronics, Inc. ("Mobility"). Mobility v. Targus Group International, Inc. ("Targus") and Comarco Wireless Technologies, Inc. ("CWT") No. CV2001-012640 was filed on July 23, 2001 in the Arizona Superior Court for Maricopa County, Arizona. In addition to claims against Targus, the distributor of the Company's mobile power adapter products, the lawsuit alleges that the Company intentionally interfered with Mobility's rights under an exclusive manufacturing agreement with Targus and misappropriated Mobility's trade secrets. Targus markets and distributes the Company's 70-Watt AC ChargeSource universal power adapter. As previously announced, the Company received an $8.6 million purchase order from Targus covering the 70-Watt AC 20 adapter and a new DC ChargeSource universal power adapter recently introduced by COMARCO. In its complaint, Mobility contends that it currently has an exclusive contract to manufacture DC power adapters for Targus. The Company understands that Targus purchased DC power adapter products from Mobility and that Targus used and sold DC power adapter products from Mobility under a terminable, non-exclusive license agreement between the Company and Targus involving patented COMARCO technology. Prior to the filing of the lawsuit, the Company had terminated the license agreement with Targus in accordance with the provisions of the license agreement. During October 2001, the three parties to the lawsuit entered into a settlement agreement and, on November 26, 2001, the lawsuit was dismissed with prejudice. Mobility v. COMARCO No. CIV011489PHXMHM was filed on August 10, 2001. This lawsuit alleges that the Company, through the manufacture and sale of its 70-Watt AC ChargeSource universal power adapter, infringed upon a patent purchased by Mobility on August 6, 2001. COMARCO's management believes that Mobility's infringement claim against the Company is without merit and intends to vigorously defend the lawsuit. The Company is from time to time involved in various legal proceedings incidental to the conduct of our business. We believe that the outcome of all other such pending legal proceedings will not in the aggregate have a material adverse effect on our business, financial condition, or results of operations. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 11 Schedule of Computation of Net Income Per Share (b) Report on Form 8-K: None. 21 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, State of California, on December 13, 2001. COMARCO, INC. By: /s/ Daniel R. Lutz ------------------------------- Daniel R. Lutz Vice President and Chief Financial Officer 22 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 11 Schedule of Computation of Net Income Per Share
EX-11 3 a77922ex11.txt EXHIBIT 11 EXHIBIT 11 SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
Three Months Ended Nine Months Ended October 31, October 31, ---------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- BASIC: Net income from continuing operations $ 1,010,000 $ 1,643,000 $ 3,631,000 $ 2,981,000 Weighted average shares outstanding 7,002,000 6,831,000 7,040,000 6,677,000 ----------- ----------- ----------- ----------- Basic income per share from continuing operations $ 0.14 $ 0.24 $ 0.52 $ 0.45 =========== =========== =========== =========== Net income (loss) from discontinued operations $ -- $ (121,000) $ -- $ 378,000 Weighted average shares outstanding 7,002,000 6,831,000 7,040,000 6,677,000 ----------- ----------- ----------- ----------- Basic income (loss) per share from discontinued operations $ -- $ (0.02) $ -- $ 0.05 =========== =========== =========== =========== Net income $ 1,010,000 $ 1,522,000 $ 3,631,000 $ 3,359,000 Weighted average shares outstanding 7,002,000 6,831,000 7,040,000 6,677,000 ----------- ----------- ----------- ----------- Basic income per share $ 0.14 $ 0.22 $ 0.52 $ 0.50 =========== =========== =========== ===========
1 SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
Three Months Ended Nine Months Ended October 31, October 31, ----------------------------- ----------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- DILUTED: Net income from continuing operations $ 1,010,000 $ 1,643,000 $ 3,631,000 $ 2,981,000 Effect of subsidiary options (44,000) (95,000) (178,000) (211,000) ----------- ----------- ----------- ----------- Net income used in calculation of diluted income per share from continuing operations $ 966,000 $ 1,548,000 $ 3,453,000 $ 2,770,000 =========== =========== =========== =========== Weighted average shares outstanding 7,002,000 6,831,000 7,040,000 6,677,000 Effect of dilutive securities -- stock options 86,000 220,000 96,000 293,000 ----------- ----------- ----------- ----------- Weighted average shares used in calculation of diluted income per share from continuing operations 7,088,000 7,051,000 7,136,000 6,970,000 =========== =========== =========== =========== Diluted income per share from continuing operations $ 0.14 $ 0.22 $ 0.48 $ 0.40 =========== =========== =========== =========== Net income (loss) from discontinued operations $ -- $ (121,000) $ -- $ 378,000 Effect of subsidiary options -- -- -- -- ----------- ----------- ----------- ----------- Net income (loss) used in calculation of diluted income per share from discontinued operations $ -- $ (121,000) $ -- $ 378,000 =========== =========== =========== =========== Weighted average shares outstanding 7,002,000 6,831,000 7,040,000 6,677,000 Effect of dilutive securities -- stock options 86,000 220,000 96,000 293,000 ----------- ----------- ----------- ----------- Weighted average shares used in calculation of diluted income per share from discontinued operations 7,088,000 7,051,000 7,136,000 6,970,000 =========== =========== =========== =========== Diluted income (loss) per share from discontinued operations $ -- $ (0.02) $ -- $ 0.05 =========== =========== =========== ===========
2 SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
Three Months Ended Nine Months Ended October 31, October 31, ----------------------------- ----------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Net income $ 1,010,000 $ 1,522,000 $ 3,631,000 $ 3,359,000 Effect of subsidiary options (44,000) (95,000) (178,000) (211,000) ----------- ----------- ----------- ----------- Net income used in calculation of diluted income per share $ 966,000 $ 1,427,000 $ 3,453,000 $ 3,148,000 =========== =========== =========== =========== Weighted average shares outstanding 7,002,000 6,831,000 7,040,000 6,677,000 Effect of dilutive securities -- stock options 86,000 220,000 96,000 293,000 ----------- ----------- ----------- ----------- Weighted average shares used in calculation of diluted income per share 7,088,000 7,051,000 7,136,000 6,970,000 =========== =========== =========== =========== Diluted income per share $ 0.14 $ 0.20 $ 0.48 $ 0.45 =========== =========== =========== ===========
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