================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
===============
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2003.
000-18122
----------------------
(Commission File Number)
ARC Wireless Solutions, Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Utah 87-0454148
---- ----------
(State or other jurisdiction of (IRS Employer
incorporation) Identification Number)
4860 Robb Street, Suite 101
Wheat Ridge, Colorado, 80033-2163
---------------------------------------------------------
(Address of principal executive offices including zip code)
(303) 421-4063
-------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former Name or Former Address, if Changed Since Last Report)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes __X__ No _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes __X__ No _____
As of May 1, 2003, the Registrant had 153,229,180 shares outstanding of its
$.0005 par value common stock.
================================================================================
ARC Wireless Solutions, Inc.
Quarterly Report on FORM 10-Q For The Period Ended
March 31, 2003
Table of Contents
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2003
(unaudited) and December 31, 2002........................ 3
Consolidated Statements of Operations for
the Three Months Ended
March 31, 2003 and 2002 (unaudited)..................... 4
Consolidated Statements of Cash Flows for
the Three Months Ended
March 31, 2003 and 2002 (unaudited)..................... 5
Notes to Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 13
Item 4. Controls and Procedures........................................ 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 14
Item 2. Changes in Securities and Use of Proceeds;
Recent Sales of Unregistered Securities........................ 14
Item 6. Exhibits and Reports on Form 8-K............................... 15
Signatures.............................................................. 15
Certifications Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002...................................... 16
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARC Wireless Solutions, Inc.
Consolidated Balance Sheets
March 31, December 31,
2003 2002
Assets (unaudited) *
Current assets:
Cash and equivalents $ 385,000 $ 265,000
Accounts receivable - customers, net 4,406,000 5,216,000
Accounts receivable - vendors, net 687,000 939,000
Inventory, net 6,165,000 5,397,000
Other current assets 100,000 131,000
---------------------------------------
Total current assets 11,743,000 11,948,000
---------------------------------------
Property and equipment, net 461,000 505,000
---------------------------------------
Other assets:
Intangible assets including goodwill, net 10,935,000 10,934,000
Deposits 71,000 68,000
---------------------------------------
Total assets $ 23,210,000 $ 23,455,000
=======================================
Liabilities and stockholders' equity
Current liabilities:
Bank line of credit $ 3,619,000 $ 3,718,000
Accounts payable 4,494,000 4,166,000
Current portion of capital lease obligations 12,000 14,000
Accrued expenses 468,000 548,000
---------------------------------------
Total current liabilities 8,593,000 8,446,000
Capital lease obligations, less current portion 2,000 5,000
Bank line of credit, less current portion -- --
---------------------------------------
Total liabilities 8,595,000 8,451,000
---------------------------------------
Commitments
Stockholders' equity:
Common stock 78,000 78,000
Preferred stock -- --
Treasury stock (1,195,000) (1,195,000)
Additional paid-in capital 21,649,000 21,649,000
Accumulated deficit (5,917,000) (5,528,000)
---------------------------------------
Total stockholders' equity 14,615,000 15,004,000
---------------------------------------
Total liabilities and stockholders' equity $ 23,210,000 $ 23,455,000
=======================================
* These numbers were derived from the audited financial statements for the year ended December 31, 2002.
See accompanying notes.
3
ARC Wireless Solutions, Inc.
Consolidated Statements of Operations
Three months ended March 31,
2003 2002
--------------------------------------
(unaudited)
Sales, net $ 6,115,000 $ 8,006,000
Cost of sales 5,018,000 6,204,000
--------------------------------------
Gross profit 1,097,000 1,802,000
--------------------------------------
Operating expenses:
Selling, general and administrative expenses 1,435,000 1,454,000
--------------------------------------
Total operating expenses 1,435,000 1,454,000
--------------------------------------
Income (loss) from operations (338,000) 348,000
Other income (expense):
Interest expense, net (45,000) (48,000)
Gain from debt cancellation -- 178,000
Other income 9,000 6,000
--------------------------------------
Total other income (expense) (36,000) 136,000
--------------------------------------
Income (loss) before income taxes (374,000) 484,000
Provision for income taxes (15,000) (20,000)
--------------------------------------
Net Income (loss) $ (389,000) $ 464,000
======================================
Net loss per share (basic and diluted) $ -- $ --
======================================
Net income (loss) per share - basic $ (.002) $ .003
======================================
Net income (loss) per share - diluted $ (.002) $ .003
======================================
See accompanying notes.
4
ARC Wireless Solutions, Inc.
Consolidated Statements of Cash Flows
Three months ended March 31,
2003 2002
-------------------------------
(unaudited)
Operating activities
Net income (loss) $ (389,000) $ 464,000
Adjustments to reconcile net income (loss) to net cash provided by (used in)
Operating activities:
Depreciation and amortization 73,000 74,000
Debt cancellations -- (178,000)
Provision for doubtful accounts (158,000) 15,000
Non-cash expense for issuance of stock and options -- 34,000
Changes in operating assets and liabilities:
Accounts receivable, trade and vendor 1,220,000 (738,000)
Inventory (768,000) 516,000
Prepaids and other current assets 31,000 (162,000)
Other assets (3,000) (2,000)
Accounts payable and accrued expenses 248,000 (398,000)
-------------------------------
Net cash provided by (used in) operating activities 254,000 (375,000)
-------------------------------
Investing activities
Patent acquisition costs (7,000) (19,000)
Purchase of plant and equipment (23,000) (21,000)
-------------------------------
Net cash used in investing activities (30,000) (40,000)
-------------------------------
Financing activities
Repayment of line of credit and capital lease obligations (104,000) (3,000)
Net borrowings under lines of credit -- 169,000
Proceeds from private placement, net -- 125,000
Acquisition of treasury shares -- (75,000)
-------------------------------
Net cash provided by (used in) financing activities (104,000) 216,000
-------------------------------
Net increase (decrease) in cash 120,000 (199,000)
Cash, beginning of period 265,000 345,000
-------------------------------
Cash, end of period $ 385,000 $ 146,000
===============================
Supplemental cash flow information:
Cash paid for interest $ 73,000 $ 48,000
===============================
See accompanying notes.
5
ARC Wireless Solutions, Inc.
Notes to Consolidated Financial Statements
March 31, 2003
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation have
been included. For further information, refer to the financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2002.
The Company operates in three business segments which are identified as
distribution, manufacturing and cable offering a wide variety of wireless
component and network solutions to service providers, systems integrators, value
added resellers, businesses and consumers, primarily in the United States.
Operating results for the three months ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2003 or any future period.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates and such
differences may be material to the financial statements
Note 2. Consolidation Policy
The accompanying unaudited consolidated financial statements include the
accounts of ARC Wireless Solutions, Inc. ("ARC") and its wholly-owned subsidiary
corporations, Winncom Technologies Corp. ("Winncom") and Starworks Wireless Inc.
("Starworks"), since their respective acquisition dates, after elimination of
all material intercompany accounts, transactions, and profits.
Note 3. Earnings Per Share
As of December 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 provides for the
calculation of Basic and Dilutive earnings (loss) per share. Basic earnings
(loss) per share includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share reflect the
potential dilution of securities that could share in the earnings of the entity.
For the quarter ended March 31, 2003 the Company incurred a net loss and stock
options and stock warrants totaling 500,000 were not included in the computation
of diluted loss per share because their effect was anti-dilutive; therefore,
basic and fully diluted loss per share are the same for the quarter ended March
31, 2003.
6
The following table represents a reconciliation of the shares used to calculate
basic and diluted earnings per share for the respective periods indicated:
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
Numerator: Net Income (Loss) $(389,000) $ 464,000
==============================================
Denominator:
Denominator for basic earnings per share -
weighted average shares 153,223,000 152,530,000
Effect of dilutive securities
Employee stock options - 4,310,000
Common stock warrants - 1,938,000
----------------------------------------------
Denominator for diluted earnings per share
- adjusted weighted average shares and
assumed conversion 153,223,000 158,778,000
==============================================
Basic earnings (loss) per share $(.002) $.003
==============================================
Diluted earnings (loss) per share $(.002) $.003
==============================================
Note 4. Inventory
Inventory is valued at the lower of cost or market using standard costs that
approximate average cost. Inventories are reviewed periodically and items
considered to be slow moving or obsolete are reduced to estimated net realizable
value through an appropriate reserve. Inventory consists of the following:
March 31, December 31,
-------------------------------
2003 2002
-------------------------------
Raw materials $1,061,000 $ 984,000
Work in progress 123,000 100,000
Finished goods 5,379,000 4,695,000
-------------------------------
6,563,000 5,779,000
Inventory reserve (398,000) (382,000)
-------------------------------
Net inventory $6,165,000 $5,397,000
===============================
Note 5. Revolving Bank Loan
In conjunction with the acquisition of Winncom Technologies, Inc. on May 24,
2000, the Company assumed a $1,500,000 revolving line of credit from a bank
bearing an interest rate of prime plus 0.5% (4.75% at March 31, 2003 and
December 31, 2002). The line is collateralized by accounts receivable, inventory
and otherwise unencumbered fixed assets of Winncom. ARC is a general corporate
guarantor of this loan. On November 27, 2000, the line was increased to
$3,000,000. On October 29, 2002, this line of credit and the $1 million line of
credit discussed below were combined into a single $4 million revolving line of
credit due April 30, 2003, of which $3,619,000 was outstanding at March 31, 2003
and $3,718,000 was outstanding at December 31, 2002. On April 18, 2003, the bank
extended the due date deadline to July 31, 2003 while Winncom and the bank
negotiate the terms of a new line of credit facility.
In connection with the acquisition of the certain assets of Ball Aerospace and
Technology Corp. (BATC) in August 2001, Winncom established a new line of credit
in the amount of $1 million bearing an interest rate of prime plus 0.5%. This
line was collateralized by accounts receivable, inventory and otherwise
7
unencumbered fixed assets of Winncom. As described above, on October 29, 2002,
this line of credit was combined with Winncom's other line of credit into a
single $4 million facility.
Revolving bank lines of credit consist of:
March 31, December 31,
------------------------------
2003 2002
------------------------------
Bank line of credit - Winncom $ 3,619,000 3,718,000
------------------------------
3,619,000 3,718,000
Less current portion (3,619,000) (3,718,000)
------------------------------
Non-current portion $ - $ -
==============================
Note 6. Equity Transactions
The Company sold 754,545 shares of restricted common stock at $.165 per share in
a private placement offering in March 2002 from which it received gross cash
proceeds of $124,500. Offering costs associated with this private placement
offering were $6,600. Within 30 days following the filing with the SEC of the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2001, the
Company was obligated to file a registration statement covering the resale of
these shares. This registration statement was filed with the SEC on October 3,
2002 and registration costs were approximately $10,000.
In March 2002, the Company issued 200,000 shares of restricted common stock for
consulting services valued at $34,000. The consulting agreement provides that,
because it was cancelled in September 2002, 100,000 of these shares are required
to be returned to the Company. The consultant is claiming the right to retain
all 200,000 shares although the Company believes she has no legal basis to do
so.
For the year ended December 31, 2002, the Company recorded the issuance of
26,841 shares of common stock to directors for outstanding obligations for
accrued directors fees in the amount of $3,000.
In November 2002, the Company completed the purchase of odd lot shares of less
than 100 shares resulting in the purchase of 2,240 shares for approximately
$2,800.
For the quarter ended March 31, 2003, the Company recorded the issuance of 6,250
shares of common stock to directors for outstanding obligations for accrued
directors fees in the amount of $500.
Note 7. Recent Accounting Pronouncements
In June 2001, the FASB approved for issuance SFAS 143, "Asset Retirement
Obligations". SFAS 143 establishes accounting requirements for retirement
obligations associated with tangible long-lived assets, including (1) the timing
of the liability recognition, (2) initial measurement of the liability, (3)
allocation of asset retirement cost to expense, (4) subsequent measurement of
the liability and (5) financial statement disclosures. SFAS 143 requires that an
asset retirement cost should be capitalized as part of the cost of the related
long-lived asset and subsequently allocated to expense using a systematic and
rational method. The Company adopted the statement effective January 1, 2003, as
required. The transition adjustment resulting from the adoption of SFAS 143 will
be reported as a cumulative effect of a change in accounting principle. The
adoption of this statement did not have a material effect on its financial
position, results of operations, or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS 146 requires recording costs associated
with exit or disposal activities at their fair values when a liability has been
incurred. Under previous guidance, certain exit costs were accrued upon
management's commitment to an exit plan, which is generally before an actual
liability has been incurred. Adoption of SFAS 146 is required with the beginning
of fiscal year 2003. The Company does not anticipate a significant impact on its
results of operations from adopting this Statement.
8
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." SFAS 148 amends SFAS 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure requirements are
effective for fiscal years ending after December 15, 2002. The Company has
adopted the disclosure provisions for this Form 10-Q (see Note 8 of the
Condensed Consolidated Financial Statements). The Company has continued to
account for stock-based compensation under the provisions of Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" using
the "intrinsic value" method. Accordingly, the adoption of SFAS 148 did not have
a material effect on our financial position, results of operations, or cash
flows.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). This interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements", addresses consolidation of
variable interest entities. FIN 46 requires certain variable interest entities
("VIEs") to be consolidated by the primary beneficiary if the entity does not
effectively disperse risks among the parties involved. The provisions of FIN 46
are effective immediately for those VIEs created after January 31, 2003. The
provisions are effective for the first period beginning after June 15, 2003 for
those variable interests held prior to February 1, 2003. The Company has no VIEs
and accordingly does not believe the adoption of this Interpretation will have a
material impact on the Company's financial position or results of operations.
Note 8. Stock Based Compensation
The Company has elected to follow APB Opinion No. 25 and related interpretations
in accounting for its stock options and grants since the alternative fair market
value accounting provided for under Statement of Financial Accounting Standards
(SFAS) No. 123 requires use of grant valuation models that were not developed
for use in valuing employee stock options and grants. Under APB Opinion No. 25,
if the exercise price of the Company's stock grants and options equals the fair
value of the underlying stock on the date of grant, no compensation expenses are
recognized.
If compensation cost for the Company's stock-based compensation plans had been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, then the Company's net loss
per share would have been adjusted to the pro forma amounts indicated below:
March 31,
2003 2002
---------------------------------
Net income (loss) as reported $ (389,000) $464,000
Add: stock based compensation included in reported net income
(loss) - -
Deduct: Stock-based compensation cost under SFAS 123 (62,000) (175,000)
---------------------------------
Pro forma net income (loss) $ (451,000) $289,000
=================================
Pro forma basic and diluted net income (loss) per share:
Pro forma shares used in the calculation of pro forma net
income (loss) per common share- basic and diluted 153,223,000 158,778,000
Reported net income (loss) per common share - basic and diluted
$(.002) $.003
Pro forma net income (loss) per common share - basic and
diluted $(.002) $.003
9
Pro forma information regarding net loss is required by SFAS 123, which also
requires that the information be determined as if the Company had accounted for
grants subsequent to December 31, 1994 under a method specified by SFAS 123.
Options granted were estimated using the Black-Scholes valuation model. The
following weighted average assumptions were used:
---------------------------------------- ------------------------------------------------
Three Months Ended March Three Months Ended
31, 2003 March 31, 2002
-----------------------------------------------------------------------------------------
Volatility 1.5 1.5
-----------------------------------------------------------------------------------------
Expected life of options (in years) 2 2
-----------------------------------------------------------------------------------------
Dividend Yield 0.00% 0.00%
-----------------------------------------------------------------------------------------
Risk free interest rate 2.50% 4.50%
-----------------------------------------------------------------------------------------
Note 9. Industry Segment Information
SFAS No. 131 "Disclosure about Segments of an Enterprise and Related
Information" requires that the Company disclose certain information about its
operating segments where operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments.
The Company has three reportable segments that are separate business units that
offer different products as follows: distribution of wireless communication
products, antenna manufacturing and cable products. Each segment consists of a
single operating unit and the accounting policies of the reporting segments are
the same as those described in the summary of significant accounting policies.
Intersegment sales and transfers are recorded at cost plus an agreed upon
intercompany profit on intersegment sales and transfers.
Financial information regarding the Company's three operating segments for the
quarters ended March 31, 2003 and 2002 are as follows:
Distribution Manufacturing Cable Corporate Total
--------------------------------------------------------------------------------------
Net Sales 2003 $ 5,006,000 $ 1,183,000 $ 2,000 $ (76,000) $ 6,115,000
2002 $ 5,905,000 $ 1,959,000 $ 193,000 $ (51,000) $ 8,006,000
Net Earnings (Loss) 2003 $ 54,000 $ (181,000) $ 1,000 $ (263,000) $ (389,000)
2002 $ 72,000 $ 307,000 $ (63,000) $ 148,000 $ 464,000
Earnings (Loss)
before Income Taxes 2003 $ 69,000 $ (181,000) $ 1,000 $ (263,000) $ (374,000)
2002 $ 92,000 $ 307,000 $ (63,000) $ 148,000 $ 484,000
Identifiable Assets 2003 $ 21,243,000 $ 3,446,000 $ 216,000 $ (1,695,000) $ 23,210,000
2002 $ 21,059,000 $ 4,553,000 $ 476,000 $ (1,949,000) $ 24,139,000
Corporate represents the operations of the parent Company, including segment
eliminations.
10
Note 10. Subsequent Events
On April 3, 2003, the Company executed a new lease agreement for the lease of
approximately 50,000 square feet of office and warehouse space in Wheat Ridge,
Colorado. The lease commences July 1, 2003 and is for a period of 7 years.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Sales were $6.1 million and $8 million for the three-month periods ended March
31, 2003 and 2002, respectively. The decrease in revenues comparing the three
months ended March 31, 2003 to the three months ended March 31, 2002 is
attributable to three factors: 1) a decrease in revenues from the Wireless
Communications Products Division, primarily revenues from base station antennas
which were $500,000 for the quarter ended March 31, 2003 and $1.3 million for
the quarter ended March 31, 2002; 2) a decrease in Starworks' revenues from
$193,000 for the quarter ended March 31, 2002 to $2,000 for the quarter ended
March 31, 2003; and 3) a decrease in Winncom revenues from $5.9 million for the
quarter ended March 31, 2002 to $5.0 million for the quarter ended March 31,
2003. The decline in revenues is due to the overall general sluggishness of the
economy and a delay in the execution of a construction contract between a major
cell phone carrier and their contract construction contractor. The delay of the
execution of this contract resulted in reduced sales of base station antennas
until April 2003. The operations of Starworks are essentially dormant after the
Company closed the Atlanta, Georgia location in July 2002.
Gross profit margins were 17.9% and 22.5% for the three-months ended March 31,
2003 and March 31, 2002, respectively. The decrease in gross margin for the
quarter ended March 31, 2003 vs. the quarter ended March 31, 2002 is primarily
the result of the larger percentage decrease in revenues from the Wireless
Communications Products Division, whose products have a higher margin than the
products of Winncom or Starworks. For the quarter ended March 31, 2003, the
Wireless Communications Products Division sales accounted for 19.3% of revenues
compared to the quarter ended March 31, 2002 where the Wireless Communications
Products Division sales accounted for 24.5% of revenues. In August 2001, when
the Company purchased certain commercial assets of the wireless communications
products line of BATC, which consisted of raw materials and finished goods
inventory among other assets, these assets were purchased at a substantial
discount from their fair market or replacement value. During the quarter ended
March 31, 2003 , the Wireless Communications Products Division benefited from
the sale of portions of the inventory purchased from BATC significantly more
than in the quarter ended March 31, 2002 and this benefit is reflected in higher
gross margins. Depending on the product mix, the Company may realize additional
benefit from the below-market cost of the BATC inventory in the future, but the
benefit will diminish as the inventory is depleted and replaced with inventory
purchased at current market prices. Based on the Company's estimates of current
replacement costs for the BATC inventory included in cost of goods sold during
the quarters ended March 31, 2003 and 2002, the Company estimates that the
benefit resulting from inventory purchased at below-market costs was between
$10,000 and $20,000 for the quarter ended March 31, 2003 and between $150,000
and $200,000 for the quarter ended March 31, 2002.
Selling, general and administrative expenses (SG&A) decreased by $19,000 for the
three months ended March 31, 2003 compared to March 31, 2002. Although the
amount of SG&A remained relatively the same comparing 2003 and 2002, SG&A as a
percent of revenue increased from 18.2% for the three months ended March 31,
2002 to 23.5% for the three months ended March 31, 2003. Salaries and wages
remain the largest component of SG&A making up 47% of the total for the quarters
ended March 31, 2003 and 2002. The main reason for this increase in SG&A as a
percentage of revenues is not an increase in costs but a decline in revenues.
11
Net interest expense was $45,000 for the three months ended March 31, 2003
compared to $48,000 for the three months ended March 31, 2002. The average
balance outstanding on the lines of credit was $3.6 million for the quarter
ended March 31, 2003 and for the quarter ended March 31, 2002 but the interest
rate was 4.75% for the quarter ended March 31, 2003 as compared to 5.25% for
quarter ended March 31, 2002.
Included in other income for the three months ended March 31, 2002 is a gain
from debt settlements of $178,000. There was no gain from debt settlements for
the quarter ended March 31, 2003.
The Company had a net loss of $389,000 for the three months ended March 31, 2003
as compared to net income of $464,000 for the three months ended March 31, 2002.
The difference is primarily due to three factors, 1) a 24% decrease in sales
comparing 2003 to 2002, 2) a decrease in the gross margin from 22.5% to 17.9%
and 3) the gain from debt settlements of $178,000 recorded for the quarter ended
March 31, 2002 where none was recorded in 2003.
Financial Condition
The net cash provided by operating activities was $254,000 for the quarter ended
March 31, 2003 as compared to net used in operating activities of $375,000 for
the quarter ended March 31, 2002. Even though the Company had a loss of $389,000
for the quarter ended March 31, 2003, we were able to fund those losses through
accounts receivable collections, with accounts receivable decreasing from $6.2
million at December 31, 2002 to $5.1 million at March 31, 2003. Inventories
increased by approximately $800,000 from December 31, 2002 to March 31, 2003 and
part of that increase was funded by accounts payable increases, approximately
$250,000, and the remainder was funded by accounts receivable collections.
Even though the Company had net income of $464,000 in the quarter ended March
31, 2002 and had a reduction of inventory of approximately $516,000, the Company
had increases in accounts receivable and decreases in accounts payable of
approximately $1,136,000 resulting in net cash used in operations of $375,000.
The net cash used in investing activities was $30,000 for the quarter ended
March 31, 2003 compared to $40,000 for the quarter ended March 31, 2002,
primarily the result of expenditures for patents and equipment.
The net cash used in financing activities for the quarter ended March 31, 2003
is due to repayments under lines of credit of $104,000. The net cash provided by
financing activities in 2002 is primarily the result of increases in net
borrowings under lines of credit of $163,000 and proceeds from a private
placement of $125,000 offset by the purchase of treasury stock in the amount of
$75,000 in connection with the McConnell litigation settlement.
The Company's working capital at March 31, 2003 was $3.2 million compared to
$3.5 million at December 31, 2002.
In conjunction with the acquisition of Winncom Technologies, Inc. on May 24,
2000, the Company assumed a $1,500,000 revolving line of credit from a bank
bearing an interest rate of prime plus 0.5% (4.75% at March 31, 2003 and
December 31, 2002). The line is collateralized by accounts receivable, inventory
and otherwise unencumbered fixed assets of Winncom. ARC is a general corporate
guarantor of this loan. On November 27, 2000 the line was increased to
$3,000,000. On October 29, 2002, this line of credit and the $1 million line of
credit discussed below were combined into a single $4 million revolving line of
credit due April 30, 2003 of which $3,619,000 was outstanding at March 31, 2003
and $3,718,000 was outstanding at December 31, 2002. On April 18, 2003, the bank
extended the due date to July 31, 2003 while Winncom and the bank negotiate the
terms of a new line of credit facility.
12
In connection with the acquisition of the Ball Assets in August 2001, Winncom
established a new line of credit in the amount of $1 million bearing an interest
rate of prime plus 0.5%. This line was collateralized by accounts receivable,
inventory and otherwise unencumbered fixed assets of Winncom. On October 29,
2002 this line of credit was combined with Winncom's other line of credit into a
single $4 million facility.
Management believes that current working capital and available borrowings on
existing bank lines of credit, together with additional equity infusions that
management believes will be available, will be sufficient to allow the Company
to maintain its operations through December 31, 2003 and into the foreseeable
future.
Forward Looking Statements
This report contains forward-looking statements. Although the Company believes
that the expectations reflected in the forward looking statements and the
assumptions upon which the forward looking statements are based are reasonable,
it can give no assurance that such expectations and assumptions will prove to be
correct. See the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2002 for additional statements concerning important factors, such
as demand for products, manufacturing costs and competition that could cause
actual results to differ materially from the Company's expectations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our industry encounters rapid technological changes. We do business in the
wireless communications industries. This industry is characterized by rapidly
developing technology. Changes in technology could affect the market for our
products and necessitate additional improvements and developments to our
products. We cannot predict that our research and development activities will
lead to the successful introduction of new or improved products or that we will
not encounter delays or problems in these areas. The cost of completing new
technologies to satisfy minimum specification requirements and/or quality and
delivery expectations may exceed original estimates that could adversely affect
operating results during any financial period.
Protection of product design. We attempt to protect our product designs by
obtaining patents, when available, and by manufacturing our products in a manner
that makes reverse engineering difficult. These protections may not be
sufficient to prevent our competitors from developing products that perform in a
manner that is similar to or better than our products. Competitors' successes
may result in decreased margins and sales of our products.
Limited financial resources. We have limited financial resources available that
may restrict our ability to grow. Additional capital from sources other than our
operating cash flow may be necessary to develop new products. We cannot predict
that this financing will be available from any source.
Intense competition. The communications and antenna industries are highly
competitive, and we compete with substantially larger companies. These
competitors have larger sales forces and more highly developed marketing
programs as well as larger administrative staffs and more available service
personnel. The larger competitors also have greater financial resources
available to develop and market competitive products. The presence of these
competitors could significantly affect any attempts to develop our business.
However, we believe that we will have certain advantages in attempting to
develop and market our products, including a more cost-effective technology, the
ability to undertake smaller projects, and the ability to respond to customer
requests more quickly than some larger competitors. We cannot be certain that
these conclusions will prove correct.
13
We depend on key employees. We are highly dependent on the services of our
executive management, including Randall P. Marx, our Chief Executive Officer.
The loss of the services of any of our executive management could have a
material adverse effect on us.
New government regulations. We are subject to government regulation of our
business operations in general. Certain of our products are subject to
regulation by the Federal Communications Commission ("FCC") because they are
designed to transmit signals. Because current regulations covering our
operations are subject to change at any time, and despite our belief that we are
in substantial compliance with government laws and regulations, we may incur
significant costs for compliance in the future.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
Based on an evaluation carried out under the supervision and with the
participation, of ARC management, including the Chief Executive Officer and the
Chief Financial Officer, during the 90 day period prior to the filing of this
report, the Companys Chief Executive Officer and Chief Financial Officer believe
ARC's disclosure controls and procedures, as defined in Securities Exchange Act
Rules 13a-14 and 15d-14, are to the best of their knowledge, effective.
(b) Changes in internal controls
Subsequent to the date of this evaluation, the Chief Executive Officer and
Chief Financial Officer are not aware of any significant changes in the Companys
internal controls, including any corrective actions with regard to significant
deficiencies and material weaknesses, or in other factors, that could
significantly affect these controls to ensure that information required to be
disclosed by ARC, in reports that it files or submits under the Securities Act
of 1934, is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and regulations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are involved in various legal proceedings of a
nature considered normal in the course of its operations, principally accounts
receivable collections. While it is not feasible to predict or determine the
final outcome of these proceedings, management has reserved as an allowance for
doubtful accounts for that portion of the accounts receivable it estimates will
be uncollectible.
Item 2. Changes in Securities and Use of Proceeds; Recent Sales of Unregistered
Securities
In March 2002, the Company sold 754,545 shares of restricted common stock at
$.165 per share to two accredited investors in a private placement transaction.
These sales resulted in gross proceeds to the Company of $124,500. The issuance
of these shares of common stock were made pursuant to exemptions from
registration in accordance with Rules 505 and/or 506 and/or Sections 3(b) and/or
4(2) of the Securities Act. The Company used the net proceeds from this offering
for working capital purposes. Pursuant to the terms of the private placement,
the Company was obligated to file with the SEC, within 30 days after the filing
with the SEC of the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2001, a registration statement covering resale of these shares.
This registration statement was filed with the SEC on October 3, 2002.
14
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits.
---------
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
-------------------
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ARC WIRELESS SOLUTIONS, INC.
Date: May 14, 2003 By: /S/ Randall P. Marx
---------------------------------
Randall P. Marx
Chief Executive Officer
Date: May 14, 2003 By: /S/ Monty R. Lamirato
---------------------------------
Monty R. Lamirato
Chief Financial Officer
15
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Randall P. Marx, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ARC Wireless Solutions,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, is made known to us by others within
those entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
May 14, 2003 /s/ Randall P. Marx
----------------------------
Randall P. Marx
Chief Executive Officer
16
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Monty R. Lamirato, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ARC Wireless Solutions,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, is made known to us by others within
those entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
May 14, 2003 /s/ Monty R. Lamirato
--------------------------------
Monty R. Lamirato
Chief Financial Officer
17