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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10 - Q
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2003.
000-18122
(Commission File Number)
ARC Wireless Solutions, Inc.
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(Exact name of registrant as specified in its charter)
Utah 87-0454148
---- ----------
(State or other jurisdiction of (IRS Employer
incorporation) Identification Number)
10601 West 48th Ave, I-70 Frontage Rd. North
Wheat Ridge, Colorado, 80033-2163
---------------------------------
(Address of principal executive offices including zip code)
(303) 421-4063
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(Registrant's telephone number, including area code)
Not Applicable
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(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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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As of August 1, 2003, the Registrant had 153,229,180 shares outstanding of its
$.0005 par value common stock.
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ARC Wireless Solutions, Inc.
Quarterly Report on FORM 10-Q For The Period Ended
June 30, 2003
Table of Contents
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2003
(unaudited) and December 31, 2002......................... 3
Consolidated Statements of Operations for the
Three Months and Six Months Ended
June 30, 2003 and 2002 (unaudited)........................ 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 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............................................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 15
Item 4. Controls and Procedures.......................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 17
Item 6. Exhibits and Reports on Form 8-K................................. 17
Signatures................................................................ 17
Exhibit 31.1.............................................................. 18
Exhibit 32.1.............................................................. 20
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARC Wireless Solutions, Inc.
Consolidated Balance Sheets
June 30, December 31,
2003 2002
Assets (unaudited) *
Current assets:
Cash and equivalents $ 115,000 $ 265,000
Accounts receivable - customers, net 4,660,000 5,216,000
Accounts receivable - vendors, net 867,000 939,000
Inventory, net 7,171,000 5,397,000
Other current assets 351,000 131,000
---------------------------------------
Total current assets 13,164,000 11,948,000
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Property and equipment, net 471,000 505,000
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Other assets:
Intangible assets including goodwill, net 10,939,000 10,934,000
Deposits 74,000 68,000
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Total assets $ 24,648,000 $ 23,455,000
=======================================
Liabilities and stockholders' equity
Current liabilities:
Bank line of credit $ 3,899,000 $ 3,718,000
Accounts payable 5,669,000 4,166,000
Current portion of capital lease obligations 11,000 14,000
Accrued expenses 345,000 548,000
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Total current liabilities 9,924,000 8,446,000
Capital lease obligations, less current portion -- 5,000
Bank line of credit, less current portion -- --
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Total liabilities 9,924,000 8,451,000
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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 (5,808,000) (5,528,000)
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Total stockholders' equity 14,724,000 15,004,000
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Total liabilities and stockholders' equity $ 24,648,000 $ 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 June 30, Six months ended June 30,
2003 2002 2003 2002
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(unaudited) (unaudited)
Sales, net $ 6,877,000 $ 7,951,000 $ 12,992,000 $ 15,957,000
Cost of sales 5,532,000 6,352,000 10,550,000 12,556,000
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Gross profit 1,345,000 1,599,000 2,442,000 3,401,000
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Operating expenses:
Selling, general and administrative expenses 1,189,000 1,445,000 2,624,000 2,899,000
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Total operating expenses 1,189,000 1,445,000 2,624,000 2,899,000
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Income (loss) from operations 156,000 154,000 (182,000) 502,000
Other income (expense):
Interest expense, net (45,000) (53,000) (90,000) (101,000)
Gain from debt cancellation -- 48,000 -- 226,000
Other income 10,000 11,000 19,000 17,000
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Total other income (expense) (35,000) 6,000 (71,000) 142,000
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Income (loss) before income taxes 121,000 160,000 (253,000) 644,000
Provision for income taxes (12,000) (19,000) (27,000) (39,000)
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Net Income (loss) $ 109,000 $ 141,000 $ (280,000) $ 605,000
=====================================================================
Net loss per share (basic and diluted) -- -- $ (.002) --
=====================================================================
Net income (loss) per share - basic $ .001 $ .001 -- $ .004
=====================================================================
Net income (loss) per share - diluted $ .001 $ .001 -- $ .004
=====================================================================
See accompanying notes.
4
ARC Wireless Solutions, Inc.
Consolidated Statements of Cash Flows
Six months ended June 30,
2003 2002
------------------------------------
(unaudited)
Operating activities
Net income (loss) $ (280,000) $ 605,000
Adjustments to reconcile net income (loss) to net cash
provided (used in)
Operating activities:
Depreciation and amortization 135,000 151,000
Debt cancellations -- (226,000)
Provision for doubtful accounts (241,000) 84,000
Non-cash expense for issuance of stock and options -- 36,000
Changes in operating assets and liabilities:
Accounts receivable, trade and vendor 869,000 (476,000)
Inventory (1,774,000) (611,000)
Prepaids and other current assets (220,000) (140,000)
Other assets (6,000) (1,000)
Accounts payable and accrued expenses 1,300,000 58,000
------------------------------------
Net cash provided by (used in) operating activities (217,000) (520,000)
------------------------------------
Investing activities
Patent acquisition costs (14,000) (29,000)
Purchase of plant and equipment (92,000) (47,000)
------------------------------------
Net cash used in investing activities (106,000) (76,000)
------------------------------------
Financing activities
Repayment of line of credit and capital lease obligations (8,000) (6,000)
Net borrowings under lines of credit 181,000 319,000
Proceeds from private placement, net -- 121,000
Acquisition of treasury shares -- (75,000)
------------------------------------
Net cash provided by (used in) financing activities 173,000 359,000
------------------------------------
Net increase (decrease) in cash (150,000) (237,000)
Cash, beginning of period 265,000 345,000
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Cash, end of period $ 115,000 $ 108,000
====================================
Supplemental cash flow information:
Cash paid for interest $ 117,000 $ 99,000
====================================
See accompanying notes.
5
ARC Wireless Solutions, Inc.
Notes to Consolidated Financial Statements
June 30, 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, thereby 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 and six months ended June 30, 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 six months ended June 30, 2003 the Company incurred a net loss and stock
options and stock warrants totaling 250,000 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 six months ended
June 30, 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 Six Months Ended Six Months Ended
Ended Ended Ended Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
Numerator: Net Income (Loss) $ 109,000 $ 141,000 $ (280,000) $ 605,000
======================================================================
Denominator:
Denominator for basic earnings per
share - weighted average shares 153,226,000 153,298,000 153,226,000 152,916,000
Effect of dilutive securities
Employee stock options 250,000 532,000 401,000
Common stock warrants -- -- -- --
-----------------------------------------------------------------------
Denominator for diluted earnings
per share -- adjusted weighted
average shares and assumed conversion 153,476,000 153,830,000 153,226,000 153,317,000
=======================================================================
Basic earnings per share $ .001 $ .001 $ (.002) $ .004
=======================================================================
Diluted earnings per share $ .001 $ .001 $ (.002) $ .004
=======================================================================
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:
June 30, December 31,
---------------------------
2003 2002
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Raw materials $1,086,000 $ 984,000
Work in progress 123,000 100,000
Finished goods 6,416,000 4,695,000
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7,625,000 5,779,000
Inventory reserve (454,000) (382,000)
---------------------------
Net inventory $7,171,000 $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 June 30, 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 $3,899,000 was outstanding at June 30, 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 and on July 17, 2003 the bank
7
extended the due date to September 30, 2003 in order to allow time for Winncom
and the bank to negotiate the terms of a new line of credit facility. As of June
30, 2003 Winncom was in violation of two financial covenants but since the line
of credit is classified as a current liability there is no impact on the
consolidated financial statements.
In connection with the acquisition of 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
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:
June 30, December 31,
----------------------------
2003 2002
----------------------------
Bank line of credit - Winncom $3,899,000 $3,718,000
----------------------------
3,899,000 3,718,000
Less current portion (3,899,000) (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 June 30, 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 adoption of this statement did not have a material effect on its
financial position, results of operations, or cash flows.
8
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.
In November 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables." This issue addresses how revenue
arrangements with multiple deliverables should be divided into separate units of
accounting and how the arrangement consideration should be allocated to the
identified separate accounting units. EITF No. 00-21 is effective for fiscal
periods beginning after June 15, 2003. The Company is currently evaluating the
impact of adopting EITF No. 00-21 on its results of operations and financial
position
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 were
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.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS" or "Statement") No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," which amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts. SFAS No. 149 will be
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The provisions of SFAS No.
149 are to be applied prospectively and the Company is in the process of
evaluating what impact, if any, SFAS No. 149 may have on its consolidated
financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" which is
effective for financial instruments entered into or modified after May 31, 2003.
For financial instruments created before the issuance of SFAS No. 150 and still
existing at August 1, 2003, it will be reported as a cumulative effect of a
change in accounting principle. This Statement establishes standards for how an
9
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The Company is currently
evaluating the impact SFAS No. 150 may have on its consolidated 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:
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
---------------------------------------------------------------
Net income (loss) as reported $ 109,000 $ 141,000 $(280,000) $ 605,000
Add: stock based compensation included in
reported net income (loss) -- -- -- --
Deduct: Stock-based compensation
cost under SFAS 123 (19,000) (58,000) (38,000) (102,000)
--------- --------- --------- ---------
Pro forma net income (loss) $ 90,000 $ 83,000 $(318,000) $ 503,000
========= ========= ========= =========
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 153,476,000 153,830,000 153,226,000 153,317,000
Reported net income (loss)
per common share - basic and diluted $.001 $.001 $(.002) $.004
Pro forma net income (loss)
per common share - basic and diluted $.001 $.001 $(.002) $.003
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 Six Months Ended
June 30, June 30,
- ----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------
Volatility 1.5 1.5 1.5 1.5
- ----------------------------------------------------------------------------------------------------------
Expected life of options (in years) 2 2 2 2
- ----------------------------------------------------------------------------------------------------------
Dividend Yield 0.00% 0.00% 0.00% 0.00%
- -----------------------------------------------------------------------------------------------------------
Risk free interest rate 2.50% 4.50% 2.50% 4.50%
- -----------------------------------------------------------------------------------------------------------
10
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 both
the three months and six months ended June 30, 2003 and 2002, respectively are
as follows:
Three Months Ended June 30,
Distribution Manufacturing Cable Corporate Total
----------------------------------------------------------------------------
Net Sales 2003 $ 5,260,000 $ 1,647,000 $ 1,000 $ (31,000) $ 6,877,000
2002 $ 6,082,000 $ 1,782,000 $ 91,000 $ (4,000) $ 7,951,000
Net Earnings (Loss) 2003 $ 102,000 $ 158,000 $ (5,000) $ (146,000) $ 109,000
2002 $ 51,000 $ 208,000 $ 9,000 $ (127,000) $ 141,000
Earnings (Loss)
before Income Taxes 2003 $ 114,000 $ 158,000 (5,000) $ (146,000) $ 121,000
2002 $ 70,000 $ 208,000 $ 9,000 $ (127,000) $ 160,000
Identifiable Assets 2003 $ 22,462,000 $ 3,667,000 $ 200,000 $ (1,681,000) $ 24,648,000
2002 $ 22,025,000 $ 4,242,000 $ 400,000 $ (1,834,000) $ 24,833,000
Six Months Ended June 30,
Distribution Manufacturing Cable Corporate Total
----------------------------------------------------------------------------
Net Sales 2003 $ 10,265,000 $ 2,830,000 $ 3,000 $ (106,000) $ 12,992,000
2002 $ 11,987,000 $ 3,741,000 $ 285,000 $ (56,000) $ 15,957,000
Net Earnings (Loss) 2003 $ 156,000 $ (23,000) $ (5,000) $ (408,000) $ (280,000)
2002 $ 123,000 $ 515,000 $ (54,000) $ 21,000 $ 605,000
Earnings (Loss)
before Income Taxes 2003 $ 183,000 $ (23,000) (5,000) $ (408,000) $ (253,000)
2002 $ 162,000 $ 515,000 $ (54,000) $ 21,000 $ 644,000
Identifiable Assets 2003 $ 22,462,000 $ 3,667,000 $ 200,000 $ (1,681,000) $ 24,648,000
2002 $ 22,025,000 $ 4,242,000 $ 400,000 $ (1,834,000) $ 24,833,000
The segment entitled "Corporate" represents the operations of the parent
Company, including segment eliminations.
11
Note 10. Leasing Activities
On April 3, 2003, the Company determined to move its offices and operations, and
executed a seven-year lease agreement for approximately 50,000 square feet of
office and warehouse space at a new location in Wheat Ridge, Colorado. The lease
commenced July 1, 2003.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations: Three Months Ended June 30, 2003 and 2002
Sales were $6.9 million and $8 million for the three-month periods ended June
30, 2003 and 2002, respectively. The decrease in revenues comparing the three
months ended June 30, 2003 with the three months ended June 30, 2002 is
attributable to three factors: 1) a $135,000 decrease in revenues from the
Wireless Communications Products Division, primarily revenues from base station
antennas which were $610,000 for the quarter ended June 30, 2003 and $730,000
for the quarter ended June 30, 2002; 2) a decrease in Starworks' revenues from
$91,000 for the quarter ended June 30, 2002 to $1,000 for the quarter ended June
30, 2003; and 3) a decrease in Winncom revenues from $6.1 million for the
quarter ended June 30, 2002 to $5.3 million for the quarter ended June 30, 2003.
The overall decline in revenues is primarily due to the continued sluggish
demand for base station antennas and reduced component selling prices at
Winncom, consistent with the continued softening of the U.S. economy. The
operations of Starworks are essentially dormant after the Company closed the
Atlanta, Georgia location in July 2002.
Gross profit margins were 19.6% and 20.1% for the three-months ended June 30,
2003 and June 30, 2002, respectively. The slight decrease in gross margin for
the quarter ended June 30, 2003 as compared with the quarter ended June 30, 2002
is primarily the result of a 1% decrease in margins from the Wireless
Communications Products Division. For the quarter ended June 30, 2003, the
Wireless Communications Products Division sales accounted for 24% of revenues
compared with the quarter ended June 30, 2002 in which the Wireless
Communications Products Division sales accounted for 22.4% 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 June 30, 2002, the Wireless Communications Products Division
benefited from the sale of portions of the inventory purchased from BATC
significantly more than in the quarter ended June 30, 2003, 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 continue to 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 June 30, 2003 and 2002,
the Company estimates that the benefit resulting from inventory purchased at
below-market costs was between $30,000 and $60,000 for the quarter ended June
30, 2003 and between $50,000 and $100,000 for the quarter ended June 30, 2002.
Selling, general and administrative expenses (SG&A) decreased by $256,000 for
the three months ended June 30, 2003 from the three months ended June 30, 2002,
despite incurring approximately $35,000 in costs moving to our new manufacturing
facility in Wheat Ridge, CO. The decrease in SG&A for the quarter ended June 30,
2003 is primarily due to a $126,000 decrease in bad debt expense and the
cessation of the operations of Starworks in Atlanta in July 2002 that has
reduced SG&A by an additional $42,000. SG&A as a percent of revenue decreased
from 18.2% for the three months ended June 30, 2002 to 17.3% for the three
months ended June 30, 2003. Salaries and wages, including sales based
commissions, remain the largest component of SG&A making up 59% of the total
SG&A for the quarter ended June 30, 2003 and 47% of the total SG&A for the
quarter ended June 30, 2002.. The total dollar amount of salaries and wages has
remained relatively the same comparing 2003 and 2002.
12
Net interest expense was $45,000 for the three months ended June 30, 2003
compared with $53,000 for the three months ended June 30, 2002. The average
balance outstanding on the lines of credit was $3.6 million for the quarter
ended June 30, 2003 and for the quarter ended June 30, 2002, but the interest
rate was 4.75% for the quarter ended June 30, 2003 as compared with 5.25% for
quarter ended June 30, 2002.
Included in other income for the three months ended June 30, 2002 is a gain from
debt settlements of $48,000. There was no gain from debt settlements for the
quarter ended June 30, 2003.
The Company had net income of $109,000 for the three months ended June 30, 2003
as compared with net income of $141,000 for the three months ended June 30,
2002. The difference is primarily due to the 13% decrease in sales from the
quarter ended June 30, 2003 to the quarter ended June 30, 2002 offset by a
reduction in SG&A of $256,000. In addition, 2002 included a gain on debt
settlements of $48,000 and there were no gains on debt settlements in 2003.
Results of Operations: Six Months Ended June 30, 2003 and 2002
Sales were $13 million and $16 million for the six-month periods ended June 30,
2003 and 2002, respectively. The decrease in revenues for the six months ended
June 30, 2003 compared with the six months ended June 30, 2002 is attributable
to three factors: 1) a decrease in the Wireless Communications Products
Division's revenues from base station antennas, which were $1 million for the
six months ended June 30, 2003 and $2 million for the six months ended June 30,
2002; 2) a decrease in Starworks' revenues from $284,000 for the six months
ended June 30, 2002 to $3,000 for the quarter ended June 30, 2003; and 3) a
decrease in Winncom revenues from $12 million for the six months ended June 30,
2002 to $10.3 million for the six months ended June 30, 2003. The overall
decline in revenues is primarily due to the continued sluggish demand for base
station antennas and reduced component selling prices at Winncom, consistent
with the continued softening of the U.S. economy. The operation of Starworks has
been essentially dormant since the Company closed the Atlanta, Georgia location
in July 2002.
Gross profit margins were 18.8% and 21.3% for the six-months ended June 30, 2003
and June 30, 2002, respectively. The decrease in gross margin for the six months
ended June 30, 2003 vs. the six months ended June 30, 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 six months ended June 30, 2003, the
Wireless Communications Products Division sales accounted for 21.8% of revenues
compared with the six months ended June 30, 2002 in which the Wireless
Communications Products Division sales accounted for 23.4% 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
six months ended June 30, 2002, the Wireless Communications Products Division
benefited from the sale of portions of the inventory purchased from BATC
significantly more than in the six months ended June 30, 2003, 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 respective six month periods ended June 30,
2003 and 2002, the Company estimates that the benefit resulting from inventory
purchased at below-market costs was between $35,000 and $70,000 for the six
months ended June 30, 2003 and between $200,000 and $300,000 for the six months
ended June 30, 2002.
Selling, general and administrative expenses (SG&A) for the six months ended
June 30, 2003 decreased by $275,000 for the six months ended June 30, 2003 as
compared with the six months ended June 30, 2002, despite incurring
approximately $35,000 in costs moving to our new manufacturing facility in Wheat
Ridge, CO. The decrease in 2003 is primarily due to a decrease in bad debt
13
expense of $128,000 and the cessation of operations of Starworks in Atlanta in
July 2002 that has reduced SG&A expenses by approximately $112,000. Despite the
$275,000 reduction of SG&A between 2002 and 2003, SG&A as a percent of revenue
increased from 18.2% for the six months ended June 30, 2002 to 20.2% for the six
months ended June 30, 2003. Salaries and wages remain the largest component of
SG&A making up 54% of the total SG&A for the six months ended June 30, 2003 and
50% for the six months ended June 30, 2002. The main reason for the increase in
SG&A as a percentage of revenues is not an increase in SG&A but a decline in
revenues.
Net interest expense was $90,000 for the six months ended June 30, 2003 compared
with $101,000 for the six months ended June 30, 2002. The average balance
outstanding on the line of credit was $3.7 million for the six months ended June
30, 2003 and 2002 but the interest rate was 4.75% for the six months ended June
30, 2003 as compared with 5.25% for the six months ended June 30, 2002.
Included in other income for the six months ended June 30, 2002 is a gain from
debt settlements of $226,000. There was no gain from debt settlements for the
quarter ended June 30, 2003.
The Company had a net loss of $280,000 for the six months ended June 30, 2003 as
compared with net income of $605,000 for the six months ended June 30, 2002. The
difference is primarily due to three factors: 1) a 19% decrease in sales
comparing the six months ended June 30, 2003 with the six months ended June 30,
2002, 2) a decrease in gross margin from 21.3% to 18.8% and 3) the gain from
debt settlements of $226,000 recorded for the six months ended June 30, 2002
with no gains from debt settlements for the six months ended June 30, 2003.
Financial Condition
The net cash used in operating activities was $217,000 for the six months ended
June 30, 2003 as compared with net cash used in operating activities of $520,000
for the six months ended June 30, 2002. The primary reason for the decline in
net cash used in operating activities was improved collections of accounts
receivable. Even though the Company had a loss of $280,000 for the six months
ended June 30, 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 $5.5 million at June 30, 2003. Inventories increased by
approximately $1.8 million from December 31, 2002 to June 30, 2003 with the
increase funded by accounts payable increases of $1.3 million and advances under
the revolving line of credit of $200,000 and the remainder being funded by
accounts receivable collections. The increase in inventory is primarily due to
Winncom purchasing long lead-time inventory specifically geared for customers in
Eastern Europe. Winncom has seen an increase in international sales as a result
of being named as the only Master Distributor for Proxim's WiFi products in
Eastern Europe.
The net cash used in investing activities was $106,000 for the six months ended
June 30, 2003 compared with $76,000 for the six months ended June 30, 2002,
primarily the result of expenditures for patents and equipment.
The net cash provided by financing activities for the six months ended June 30,
2003 is due to net borrowings under lines of credit of $181,000. The net cash
provided by financing activities in 2002 is primarily the result of increases in
net borrowings under lines of credit of $319,000 and proceeds from a private
placement of $121,000 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 June 30, 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 June 30, 2003 and December
31, 2002). The line is collateralized by accounts receivable, inventory and
14
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 June 30, 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 and on July 17, 2003 the bank extended
the due date to September 30, 2003 while Winncom and the bank negotiate the
terms of a new line of credit facility.
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. As stated in the
preceding paragraph, 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 or new 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
15
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.
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
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation,
the principal executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. There was no change in the Company's internal control over financial
reporting during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
16
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 that portion of the accounts receivable it estimates will be
uncollectible.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits.
---------
31.1 Certifications of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certifications 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: August 14, 2003 By: /S/ Randall P. Marx
--------------------------------------
Randall P. Marx
Chief Executive Officer
Date: August 14, 2003 By: /S/ Monty R. Lamirato
--------------------------------------
Monty R. Lamirato
Chief Financial Officer
17